By Paolo von Schirach
August 5, 2011
WASHINGTON – Whatever the mini stock market crash, ( minus 512 point for the Dow Jones), of Thursday August 4 was, it was not a sign of confidence in the economic foundations of worn out, short of breath Western countries. Who knows what exactly caused a moment of panic and this significant stock market sell off. But one thing is clear: neither in Europe nor in the US the economic and economic policy fundamentals look particularly inspiring. On both sides of the Atlantic we have now a nasty combination of slow economies and huge entitlement obligations, accumulated over decades, that created an enormous debt burden, suffocating public finances.
Vote of no confidence, Italy weak link
In an emotional, panicky, moment markets simply expressed a vote of no confidence in Western public policy as currently structured. Their verdict: No way that anybody can sustain, let alone pay back, this kind of (growing) debt without any significant economic expansion. In Europe now it looks as if Italy, (the world’s 8th largest economy), is the new weak link –and a big one, compared to tiny Greece that has been making headlines for months. And concern is with cause.
While the yearly budget deficits are not staggering, (thanks to the efforts of Economics Minister Giulio Tremonti), Italy’s total debt, at about 125% of GDP is huge –and the economy is not growing. So investors started wondering how will Italy manage to carry this enormous debt burden without the ability of generating the extra revenue that could allow debt repayment, while also meeting ordinary expenses. Their skepticism is expressed first of all in asking for higher interest rates when lending new money. And this is of course very bad, as it increases the debt service cost of the existing national debt, increasing the strain on already strapped public finances.
Needed: a new course
What markets –and Western societies– badly need now is bold new leadership that would admit failure of this model and propose a radical change of course, away from more and more welfare and focused on growth. But I would not count on it. Politics in both Europe and the US is about giving things to people who have come to expect hand outs in the form of entitlement programs as civil rights. All well and good if these hand outs were free. But they are not. Hence the disconnect between large promises made and revenue shortfalls that manifests itself in mountains of debt. Without changing course, it is obvious that governments will be unable to keep their promises, while the economies will be crushed by debt.
US: dismal growth, no debt reduction plan
In the US, we just had a puny mini August 2 debt deal that means nothing, while new data indicate dismal economic growth, (less than 1% so far this year), and only modest employment growth: 117,000 new jobs in July. The general consensus is that we would need sustained 2 to 3% growth and 200,000 new jobs every month to get more revenue and start mopping up the 9.1% unemployment rate. And the US, while not in desperate conditions when it comes to servicing its debt, has yet to put together any credible plan that would convince markets as to its determination and ability to really reduce federal spending, if not now, at some point.
While it is extremely difficult for Washington to engineer an economic growth strategy in a country in which tens of millions of people are laboring to get out of debt and thus are unable to fuel demand through their very modest spending, there is absolutely no action plan to do anything worthwhile.
Do something: promote domestic energy exploration
One idea? Start by focusing on boosting supply of domestic energy. Make it easy to have more exploration for oil and gas. Create more downstream opportunities for new sources. America is lucky enough to have found out how to exploit huge reserves of shale gas. Well, let’s use this gas for transportation as well as electric power generation and feed stock for the chemical industry. Let’s create a new domestic truck and auto industry of gas powered vehicles. T. Boone Pickens has been promoting this idea for years.
Exploit all natural gas opportunities
The economics are good. Natural gas is much cheaper than gasoline. And gas is domestic, not imported. We keep our money here and we invest it here, this way creating new jobs in America both in energy production and in the vast supply chain that feeds the industry. This is bound to be good for new employment and growth, while it would improve our balance of payments, as we would end up importing less oil.
Infrastructure maintenance plan
Look, this is just one idea. We have also heard about a massive national plan to hire people to execute badly needed infrastructure maintenance. This is not about new projects that would need time consuming vetting and permits. This is ordinary stuff: highway repairs and the like. But these are essential interventions, absolutely necessary just to keep the integrity of our national physical plant. Former Pennsylvania Governor Ed Rendell talks about it on TV. It may not be panacea. But it will put people to work, while performing repairs that are needed anyway, with obvious benefits for commerce and overall economic productivity.
This is urgent
But president Barack Obama, while proposing the creation of a National Infrastructure Bank, is not providing the leadership needed here. There is urgency about doing whatever is reasonable to get the economy moving. And the White House is not conveying this urgency. No wonder markets are pessimistic.