Tag Archives: double dip recession

We got to control spending or we will end up like Europe

Great article below:

Europe’s Disaster Is Headed Our Way

Nov 14, 2011 12:00 AM EST

 

As an author who has just published a book on the crisis of Western civilization, I couldn’t really have asked for more: simultaneous crises in Athens and Rome, the cradles of the West’s law, languages, politics, and philosophy.

So why should Americans care about any of this? The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.

Until March, it seemed as if exports to Europe were on an upward trajectory. But the euro-zone crisis has stopped that. Governments that ran up excessive debts have seen their borrowing costs explode. Unable to devalue their currencies, they’ve been forced to adopt austerity measures—cutting spending or hiking taxes—in a vain effort to reduce their deficits. The result has been Depression economics: shrinking economies and unemployment rates approaching 20 percent.

As a result, according to the new president of the European Central Bank, Mario Draghi, a “double dip” recession in Europe is now all but inevitable. And that’s lousy news for U.S. exporters targeting the EU market.

But there’s more. Europe’s problem is not just that governments are overborrowed. There are an unknown number of European banks that are effectively insolvent if their holdings of government bonds are “marked to market”—in other words, valued at their current rock-bottom market prices. In our interconnected financial world, it would be very odd indeed if no U.S. institutions were affected by this. Just as European institutions once loaded up on assets backed with subprime U.S. mortgages, so most big U.S. banks have at least some exposure to euro-zone bonds or banks. One institution—MF Global, run by former Goldman Sachs CEO Jon Corzine—just blew up because of its highly levered euro bets. Others are biting their fingernails because it is suddenly far from clear that the credit-default swaps they have bought as insurance against, say, a Greek default are worth the paper they are written on.

But the third reason Americans should care about Europe is more important even than the risk of a renewed financial crisis. It is the danger that what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.

Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of … higher rates.

Athens, Rome, Washington … The shortest route from imperial capital to tourist destination is precisely this death spiral of debt.

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Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University, and a senior fellow at the Hoover Institution, Stanford University. His Latest book, Civilization: The West and the Rest, will be published in November.

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Liberals like Krugman and Brantley want another stimulus

Max Brantley posted on the Arkansas Times Blog the words of Paul Krugman, “As the stimulus has faded out, so have hopes of strong economic recovery…” (Arkansas Times Blog, June 3, 2011).

The video clip above by Dan Mitchell goes over some of the past attempted stimulus plans as does the article below. Every stimulus plan in the history of man has failed but we keep on TRYING TO MOVE MONEY FROM THE PRIVATE SECTOR TO THE PUBLIC SECTOR AND SOMEHOW WE THINK IT WILL NEXT TIME. IT ALWAYS FAILS.

Stay on Vacation

by Michael D. Tanner

Michael Tanner is a senior fellow at the Cato Institute and coauthor of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

Added to cato.org on August 24, 2011

This article appeared on National Review (Online) on August 24, 2011.

As the economy continues to teeter on the precipice of a double-dip recession, there is a growing demand for the president and Congress to rush back from their vacations and do something. But why?

What is it that we really think the president can do?

While the president’s latest economic plan remains a deeply held secret until after his vacation, pretty much everyone in Washington expects him to call for … drumroll please … a stimulus plan.

Now why haven’t we thought of that before? Oh, that’s right. We have.

We’re not the first country to rely on this stale brew of Keynesian economics.

In fact, we have now had at least five — or is it six? — stimulus plans since this recession started.

The first of these came back in February 2008 under the Bush administration: a $152 billion measure, featuring a $600 tax rebate, several incentives for businesses, and loan guarantees for the housing industry. Then, as the recession picked up steam in September 2008, Congress passed the $61 billion Job Creation and Unemployment Relief Act of 2008. This bill pumped money into federal “infrastructure projects” and extended unemployment insurance.

And of course, immediately after taking office, President Obama pushed through the giant $787 billion stimulus. He followed that up with an additional $26 billion bill in August of 2010, aimed at helping states retain teachers and make Medicaid payments. On top of that, in September 2010, Congress created a $30 billion fund to provide small businesses with low-interest loans. Finally, the December compromise that extended the Bush tax cuts included another extension of unemployment benefits and a reduction in the Social Security payroll tax, both heralded at the time as stimulus measures.

We’re not the first country to rely on this stale brew of Keynesian economics. When Japan’s asset bubble collapsed in the late 1980s, its economy went into freefall. In response, Japan pursued three major fiscal-stimulus packages, totaling 6 percent of GDP, between August 1992 and September 1993. When those failed, Japan tried still more stimulus, a total of eight different packages over eight years. The Japanese government has spent $6.3 trillion on construction-related projects alone. It also increased subsidies and social-welfare payments.

Japan began the 1990s with a budget surplus. A decade later it had a budget deficit equal to 7.9 percent of GDP. Today, its budget deficit is 8.3 percent, and its debt exceeds 200 percent of GDP. The result has been minimal economic growth. For all this spending, Japan’s industrial production in 2008 was only 2.9 percent larger than it had been in 1991. Over the past decade, Japan’s economy has grown by less than a quarter of one percent.

Now President Obama prepares to call for another extension of unemployment benefits, more infrastructure spending, and an extension of the payroll-tax cut.

The real drags on our economy have nothing to do with the failure of government to spend enough. The federal government is now spending roughly 24 percent of GDP. State and local governments are spending another 10 to 15 percent, meaning government at all levels is spending around 40 percent of GDP. If government spending brought about prosperity, we should be experiencing a golden age.

The reasons we are not growing are simple and clear:

Debt: Several studies show that high levels of government debt slow economic growth. The seminal study by Carmen Reinhardt of the University of Maryland and Kenneth Rogoff of Harvard concluded that countries with a debt totaling more than 90 percent of GDP have median growth rates 1 percent lower than countries with a lower debt, and average growth rates nearly 4 percent lower. Our national debt now tops 102 percent of GDP.

Taxes: Businesses are forward-looking. They hear the president and congressional Democrats calling for tax hikes, and they become worried about taking the risks inherent in investing, expanding, and hiring. Even if the president doesn’t sock them with any new taxes, they are facing some $569 billion in new taxes by the end of the decade as a result of Obamacare. And virtually everyone acknowledges that our corporate tax rates, the second highest in the developed world, are putting American businesses at a competitive disadvantage.

Regulation: Obamacare is coming, including a mandate for businesses to provide workers with health insurance. Making hiring more expensive is not an inducement to increased employment. The EPA is planning new carbon-emission regulations. The NLRB is telling Boeing where to locate its plants. This is not a pro-jobs agenda.

Here’s a different idea. More than two centuries ago, Adam Smith wrote that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

President Obama could try that approach — and he wouldn’t even have to come back from vacation.