http://finance.yahoo.com/news/Americans ... 1.html?x=0On Thanksgiving, Americans sit down to watch football, prepare for Black Friday and pay homage to the hardy band of settlers that fled the Old World and its stifling orthodoxies, pinched vistas and penury.
Ever since the Pilgrims landed in Massachusetts in the 17th century, millions of people have fled the tyrannies of the European landmass (the Russian Empire, the Austro-Hungarian Empire and the Ottoman Empire, in the case of my forebears) for the relative freedom and abundance of America.
The difference between the Old World and New World remains on stark display this week. It might not be Morning in America, but the U.S. economy is waking up from the long national nightmare of a deep recession and expensive, traumatic bailouts. Outside of housing, the data flow is generally positive. The economy is now in the sixth quarter of growth -- not rapid enough to bring unemployment down rapidly enough -- but moving in the right direction.
Significant issues remain. The U.S. has plenty of troubled banks, and states and the federal government face large deficits. The U.S. bailouts came at an extremely high cost to politicians, a very high cost to our self-esteem, a high indirect cost to savers and a less-high direct cost to taxpayers. But with the General Motors IPO, the continued sales of Citigroup stock and AIG's successful transaction, an end to most of the 2008-vintage bailouts is in sight. The U.S. economy is much better off than it was in the fall of 2008.
In Europe, where policy makers, politicians and economists smugly tut-tutted at America's subprime problems in 2007 and 2008, it's another story. The bailouts are just beginning, and the entire system seems to be falling apart. This headline says it all: "Gloom, anger spreads as European economies teeter."
How is it that in November 2010, Europe is where the U.S. was in September 2008? The travails of Greece, Ireland, Spain, Portugal, the U.K. -- ok, ok, all of Europe -- have the same root as the debacle in the U.S.: arrogant, reckless private and public bankers and the policymakers, politicians and investors that enabled their behavior. But in Europe, the agony is being compounded by the persistence of an Old World idea. The tyranny afflicting Ireland today isn't political, it's intellectual.
What we're witnessing in Europe, above all, is a failure of austerity as a means of combating deficits and bond market anxiety. From the outset, European countries, led by Germany, believed that problems in the government bond markets -- even those problems precipitated by problems in the banking sectors -- could be averted through aggressive fiscal contraction. Forget Keynes. Ignore the fact that growth is the only known miracle deficit cure. Slash spending and raise taxes, and bond markets will be less freaked out about the possibility of a government defaulting on its debt. Oh, and the banks in Germany and France that hold the debt of Greece, Spain and Ireland can avoid the pain of having to mark down the value of the bonds they hold.
What could go wrong? Everything. When a country slashes spending and raises taxes at a time of already-weak growth, it tends to reduce domestic demand. Austerity programs are prodding Greek, Irish and Spanish citizens to spend and invest less. That leads to fewer tax collections and more problem loans. Worse, the austerity-enacting European countries lack the ability to reduce the value of their common currency. The upshot: foreign demand for Greek, Irish and Spanish goods and services won't rise sharply because the Euro hasn't weakened significantly. (Greece didn't get any cheaper for U.S. tourists last summer because the Euro remained buoyant against the dollar). Austerity without a flexible currency and a stimulative monetary policy is a recipe for contraction.
This is not a trick question: Ireland and Greece's policy of huge wage cuts, public layoffs and tax increases will make it: (a) more likely that Irish and Greek mortgage holders will stay current; or (b) less likely that Irish and Greek mortgage holders will stay current? The answer, of course, is (b). And when defaults rise, lenders start to freak out, interest rates rise and the powers that be call for another round of austerity. Wash, rinse, repeat. Which is why Ireland on Wednesday unveiled another austerity plan and an expensive bailout -- just months after stress tests gave many large Irish banks a clean bill of health.
Bold prediction: this round of austerity measures will work about as well as the prior rounds did. Meanwhile, the austerity meme is spreading to Portugal and Spain, who, like Ireland and Greece, are tethered to the tough-to-devalue Euro. And it's spreading to the U.K., which is trying to get ahead of bond market problems by enacting its own austerity program.
With apologies to South Park, it's like the underpants gnome theory of economic growth:
Phase 1: Big budget cuts/tax increases.
Phase 2: ?
Phase 3: Economic growth.
In the U.S., thankfully, politicians and central bankers (and consumers) give only lip service to austerity. Yes, states and cities are slashing spending and raising some fees. But the stimulus package, the Federal Reserve's extraordinary efforts, and the likelihood of a deal that will avert tax increases on most taxpayers all show a huge bias against austerity measures. After saving and cutting back spending for two years, those who can afford to are spending again -- buying cars, appliances and holiday gifts. As the economy grinds its way out from the deep recession of 2008-2009, we can start to see the beginnings of a virtuous circle. Higher employment and economic growth support more spending, saving and investing, which produce more tax revenues and help banks repair their balance sheets. (Federal tax collections for October and November 2010 are running about 7 percent higher than for the same period in 2009).
The U.S., its policymakers and its bankers are far from perfect -- especially its bankers. And it's very easy to find fault with the choices made surrounding fiscal and monetary policy in recent years. But this Thanksgiving, I'm grateful that the New World's economic thinking isn't subject to the doctrines that are causing so much angst in the Old World.
Wasn't the United Kingdom the one that started to bail their banks before the US?
