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Tuesday, August 14, 2012

Without Adequate Economic Growth, There's No Solution to the World's Economic Woes, Including Ours

The U.S. election season has begun. President Obama tells us that he wants to hire more public sector workers, help the farmers, raise taxes on the fat cats and that Romney-Ryan want to shove Granny off the cliff, cut taxes for the rich, and inflict great harm on the middle class.

And lest I forget, that Romney kills people by causing cancer while paying no taxes at all. What an awful guy!

But let's skip that important stuff and instead talk about what our President may consider as some minutia today --- solid economic growth.

We'll begin with Europe, evidently the new role model for many Americans, including our President. Of course, we could pick states like California or Illinois, but Europe isn't so close to home --- at least not yet --- so we'll stick with that example for now.

Germany can't stave off euro-zone recession leads off this way:

"Markets found something to cheer about after data Tuesday showed Germany managed to grow slightly more than expected in the second quarter while France avoided a downturn, but the figures won’t make easy beach reading for vacationing European policy makers.

“It shows just how dire things have become in the single currency area when the markets take comfort from figures that show the French and German economies are pretty much flat on their backs,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.

German gross domestic grew at a quarterly pace of 0.3% in the April-June period, outpacing forecasts for Europe’s largest economy to grow by 0.2%. France, the region’s No. 2 economy, posted a flat performance in the second quarter.

That wasn’t enough to keep overall euro-zone GDP from shrinking 0.2%, in line with forecasts, after a flat performance in the first three months of the year and a contraction in the final quarter of 2011. Without Germany, GDP would have shrunk at a 0.3% quarterly pace, according to Commerzbank.

Data so far indicate euro-zone GDP will continue to shrink in the current quarter.

And next up is Euro Zone Shrinking Again which has this to say about the worsening economic situation in Europe:

"The euro zone's two largest economies avoided shrinking between April and June, but the resilience of Germany and France wasn't enough to prevent the currency bloc's economy as a whole from falling back into contraction. . . .


The decline, which follows zero growth in the first three months of the year, is likely to make it harder for euro-zone leaders to end the fiscal crisis which has forced several member states to request financial aid and raised questions about the bloc's ability to survive in its current form. Rising unemployment and falling consumer and business confidence could worsen public finances in many countries, pushing back debt-reduction targets and heightening concern among investors"

And finally, Euro-Zone Rot Keeps Spreading states the case bluntly:

"Man cannot live on bread alone—and nor can the euro zone rely on German growth alone.

The euro-zone economy contracted 0.2% in the second quarter, and was only saved from worse by resilient growth of 0.3% in Germany. But countries accounting for 60% of euro-area GDP are stagnant or contracting. The outlook remains bleak.

 The woes of southern Europe are still deepening: Greece is in its third year of recession, while Portugal's economy has contracted for seven straight quarters, Italy's for four and Spain's for three. Given fiscal tightening and the need to overhaul economies to boost competitiveness via policies that are likely to depress growth in the short term, there is little hope of any quick recovery.

But northern Europe isn't immune to the shocks from the crisis: Finland surprised with a 1% quarter-on-quarter contraction, Belgium's economy shrank 0.6% and France registered zero growth for the third quarter running.

Worryingly in France, the economy was buoyed by a 0.9% increase in government spending, while imports outweighed exports to drag on growth. That provides little comfort that France under President Fran├žois Hollande is undertaking the necessary economic rebalancing.

In Germany, domestic consumption did contribute to growth, a vital development if the country is to diversify its export-led model. Low unemployment means consumer spending can continue to support growth, although cracks in confidence are appearing."

Discussion

Europe is in deep financial trouble with no end in sight. In fact, things are going to get worse there before they get better. And when they will get better, nobody knows.

What we do know, however, is that good times won't return until economic growth resumes at a substantial pace. There is no obvious way to foresee that anytime soon.

In the U.S., we may have a similar situation developing. While everybody recognizes the needs for economic growth, there has been very little real discussion about how to go about achieving it.

President Obama evidently believes treading water is about all we can hope to achieve without more government borrowing, trillion dollar fiscal deficits and new stimulus spending programs concentrated in the public sector.

He's wrong, of course, but that's his "plan." He hasn't bothered to predict what impact that all that government spending and borrowing would have on economic growth. I guess we're just supposed to trust his judgment in that regard, since he's done such an outstanding job with the economy, our fiscal affairs and employment these past 3 1/2 years.

On the other hand, Romney and Ryan have a plan designed to get the economy growing again at a 4% annual rate. Some people may not agree with the specifics of their plan, but at least they have one --- and a specific one at that. And it relies on the private sector.

They also have a plan to bring entitlements spending under control. Many people may not agree with that plan either, but at least they have one.

To me, the most important discussion we need to have and undoubtedly won't have, would center around economic growth and how to achieve it. We won't have that national and needed conversation, because the President doesn't want to have it.  If he got into specifics and told the truth, his voting base would rebel and if he stayed with the Democratic party line while getting into specifics, he'd look foolish to the American people. Like a southern European or even a French politician, for instance.

In other words, the President doesn't want to have a serious grow-the-economy conversation, because he simply can't make the case that constantly delivering a bigger government will ever lead to solid economic growth. It will only and inevitably lead to higher taxes, and not only on the greedy bad guy fat cats.

Neither can he make the case that controlling government or entitlement spending is unnecessary or not fundamentally essential to our nation's future economic health and prosperity.

Summing Up

Here's my take; 4% growth isn't optional; its a necessity.

Meanwhile, the public sector unions and employees want bigger government, and many other government dependents, including oldsters, want to keep entitlements just as they are. That's sad but true.

Accordingly, the fact that more government spending, higher taxes and maintaining the status quo for entitlements spending won't create the conditions for 4% economic growth means just one thing to this fall's elections.

Don't look for the Obama-Biden ticket or the rest of the Democrats to engage in any serious two way conversation with Romney-Ryan or the Republicans (at least those who are serious) about how to get us back on the track to solid economic growth. To do so would be harmful to their re-election chances.

Instead get ready to hear from the Democrats more distractions about throwing Granny off the cliff, keeping the greedy fat cats from screwing the middle class and so forth.

Meanwhile, for the next few months at least, we'll continue down the European road to failure.  Hopefully, 2013 will be a different story.

Thanks. Bob.

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