Friday, December 31, 2010

New year thought

This next year, both Groundhog Day and the State of the Union address occur on the same day. It is an ironic juxtaposition of events: one involves a meaningless ritual in which we look to a creature of little intelligence for prognostication while the other involves a groundhog.


Northern Europe doing fine

Note that both Germany and Sweden are under conservative leadership

NORTHERN European countries, lead by Sweden, are providing a glimmer of hope to a continent savaged by a sovereign debt crisis.

In late November, as euro-zone leaders struggled to quell Dublin's debt maelstrom, something odd was happening farther north. In Stockholm, government statisticians reported the strongest economic growth in Sweden's modern history.

Having been torpedoed along with the rest of the West in the banking bust, the Nordic country was now riding on a high, with gross domestic product rising almost 7 per cent thanks to a potent rebound in domestic spending and strong exports.

Sweden was not alone. Germany, Europe's dominant economy, enjoyed its most powerful economic expansion since the country's reunification in 1990, borne aloft not only by its hyper-competitive manufacturers but by an acceleration in consumer spending and rising employment.

And further east, Poland was showing signs of shrugging off its own credit crunch hangover to report a growth spurt, with gross domestic product rising by an annual 4.7 per cent in July to September.

The figures defy the perception of a Europe that is drifting into economic somnolence, the only thrills coming from fiscal car wrecks in the single currency area.

Some of the region's key economies are enjoying remarkable success, in part thanks to their exporters' ability to cash in on demand from fast-growing emerging markets, but also because of strengthening household spending and confidence at home.

"It is a great divide; we have the best and worst in the world in this region," said Christopher Potts, head of economics and strategy at CA Cheuvreux. "We have countries in serious, serious difficulties, but we have other parts of Europe that are enjoying a period of prosperity."



The betrayal of the young

However misguided their slogans and questionable their tactics, it is difficult not to sympathise with the young protesters in London, Paris and Madrid whose street marches marked 2010. After all, their elders have left them a legacy of public debt that can only translate into future tax increases and spending cuts.

Pressures for fiscal retrenchment will doubtless be even stronger next year. Interest rates on government bonds are about 12 per cent in Greece, 8.6 per cent in Ireland and 6.4 per cent in Portugal, compared to a mere 2.6 per cent in Germany: clearly, markets have not found the European Financial Stability Facility as reassuring as all that.

And with the US and the European countries poised to borrow a historically high $3.5 trillion to fund fiscal deficits, interest rates are likely to rise, so that debt servicing will weigh even more heavily on public budgets. This will force greater tax increases and reductions in outlays if fiscal targets are to be achieved.

Whether those targets will indeed be met remains to be seen. With 21 per cent of the labour force out of work in Spain, 15 per cent in Greece and 13 per cent in Ireland, securing real improvements in budget deficits will test political systems that have long found fiscal discipline a struggle.

But the problems go far beyond the most egregious basket cases. And whatever the role of the euro, their origins predate the move to a common currency.

Rather, an important factor is that Europe's overall productivity performance has been poor for some time.

From 1973 to the early 1990s, European productivity increased to levels close to or even exceeding those in the US. After that, however, productivity growth in the European Union halved, just as US productivity levels surged. By 2007, gross domestic product per hour worked in the EU was about 12 percentage points below the US level. And partly as a result of high tax rates, Europeans now work 20 per cent fewer hours per head than Americans, so the gap in output per hour leads to an even greater gap in total output.

Slowing productivity growth constrained the tax base that could be used to fund public expenditure. But instead of cutting back on powerful constituencies, many European governments accumulated debt, shifting tax burdens to future generations.

Those burdens will prove all the more painful as, rather than leave assets that could help pay off debt, much of the public spending has gone to fund consumption or on white elephants.

And the pain is increased further by the widespread protection of labour market insiders through stringent unfair dismissal regulations. These have imposed high costs on Europe's young, who have struggled to gain secure jobs. The result has been a marked rise in income inequality between cohorts of working age.

The French case is symptomatic. In 1977, the earnings gap between 30 to 35-year-olds and 50 to 55-year-olds was 15 per cent; now, it is 40 per cent.

Moreover, while earnings continue to rise for the baby-boomer cohorts, cohorts born since the mid-60s have experienced stagnant incomes, a far greater risk of unemployment and slow rates of job advancement.

This is all the more striking as periods of rapid technological change typically increase the relative income of younger cohorts, who have more up-to-date skills. In other words, the between-cohort income spread usually narrows, even if the within-cohort spread rises, as has occurred in the US.

Overall, young Europeans face a double whammy: they will have to make good years of wasteful spending and do so out of incomes lower and more uncertain than those of older generations. Little wonder they are referred to as the iPod generation: Insecure, Pressured, Over-taxed and Debt-ridden.

The politics this gives rise to are made poisonous by the widespread loss of credibility of European political elites.

In many countries, those elites are increasingly a gerontocracy: in 1981, for example, the typical French parliamentarian was 40; today, he or she is 60. And that the elites are embroiled in scandals further undermines their legitimacy.

So does the fact the elites have no credible answers to European society's challenges, most obviously immigration. Here too, protecting labour market insiders has imposed high costs, compounding the many other problems of integration.

A recent French government report finds that adjusting for factors such as age and education, the unemployment rate for migrants is 1.5 to 2 percentage points greater than for the native born, with an even greater gap for migrants from Africa. While that may be unsurprising, the study also finds that second generation migrants are even more disadvantaged than their parents were.

It concludes that despite substantial public spending, the social problems of areas with a high proportion of migrants are worsening, including in terms of violent crime. And the evidence it surveys suggests the French situation, while hardly satisfactory, is no worse than that in The Netherlands and Sweden.

To all this, neither the social democrats nor the traditional conservative parties have any sensible response. And neither is capable of channelling popular discontent. As a result, Europe's Tea Party movement has taken forms far more virulent than its US counterpart, including xenophobic, at times overtly racist, organisations such as the Swiss Union of the Democratic Centre, the New Flemish Alliance in Belgium and Geert Wilders's Party For Freedom in The Netherlands.

This is not to say nothing good has come from the current crisis. Some madcap projects, such as Greece's national broadband network, have been shelved. And fiscal accountability has been enhanced, including by strengthening independent review of budget proposals



Making 2011 the Year of Economic Growth

The liberal media has been heralding all the grand achievements of the 111th Congress, especially the legislation pushed through during the lame duck session. The Congress which took its last vote on Dec. 22 added $3.2 trillion to the national debt, setting a record for red ink that exceeded the $2.0 trillion in deficits run up during the 110th Congress. Since the Democrats took control of both houses after the 2006 election, the national debt has grown by $5.2 trillion, or by 30 percent. The deficits are mainly the result of the 2008 recession, which reduced revenue and spurred the use of stimulus spending to speed recovery. Yet, with unemployment at 9.8 percent, it would seem that the fiscal programs were poorly devised and accomplished little for the huge sums spent.

The best anti-recession policy was something Congress did not do. It did not enact the so-called "cap and trade" initiative to limit greenhouse gas (GHG) emissions by raising costs for energy production and use. Had such legislation been implemented, there would have been no chance for an economic recovery. The new burdens envisioned for the core activities of America's modern, affluent society would have made the lapse of the Bush tax cuts pale in comparison. The misnamed American Clean Energy and Security Act of 2009 (H.R. 2454) just barely passed in the House or Representatives by a vote of 219 to 212. Only eight Republicans voted in favor and 44 Democrats opposed it. The bill then stalled in the Senate in the face of a bipartisan coalition worried about the recession. GOP gains in the 112th Congress should render its re-introduction futile.

Yet, sending the United States not just into another Great Depression, but turning the clock back several generations in living standards is the aim of the Left-wing Green movement. Groups like Climate Justice Action want to “ensure that large-scale, destructive corporate-controlled false solutions to climate change are eliminated. This includes so-called ‘clean coal,’ agrofuels (industrial scale biofuels), nuclear power, and large-scale hydropower.” And “we should not build electric cars or trucks running on biofuels but massively reduce their numbers through the radical development of public transportation." To them, there is no way forward, only backwards.

Economic stagnation or decline is vital to the sustainability of socialism. Marxists have always assumed they would be taking over a capitalist system that had already solved the economic problem of producing all that society needed. Their mission was simply to run the system more "fairly" by eliminating "profits" and "the wealthy" who had more than their proper share. There was no understanding that the modern age was only dawning when the core doctrines of the Left were being formulated in the 19th century. Without a capitalist system with its financial incentives for material advancement, economic progress comes to an end. For many on the Left, this is an acceptable outcome, but it cannot be sold to the general public which expects living standards to continually rise. The fear that their children may not be better off than they are is driving middle class angst.

The solution for the Left is to convince the public that economic progress is bad. Several attempts have been made to sell this idea since it was spawned by the New Left in the 1960s. The early "tree hugger" approach extolling the "simple life" never got beyond the hippie communes, where its application was quickly found to be appalling. Then came the "limits to growth" argument that there aren't enough "resources" to maintain middle class standards as populations increase. Capitalism and technology, however, keep finding new ways to do things, using resources more efficiently and finding new resources. The Greens have had to devote time to denying access to resources to starve progress (such as restrictions on oil drilling and mining, and even to building wind mills and dams) so they could artificially create shortages.

Finally, unable to persuade people to go backward, the Greens invoked their own version of the "voice of god" to command regression on pain of universal death. Hence, the birth of the "global warming" notion. Progress is not good, for it will kill us all. That socialism cannot create progress ceases to be a failing; it becomes the movement's central platform plank. Material advancement will be "capped" and what benefits are available will be "traded" under socialist administration to assure "fairness" and a minimum standard for all---but not more than a minimum or the planet's future will be in peril. Nature requires socialism, end of the debate.

This argument has reached further than the hippie communes, but not much further. The vast majority of the world's people and their governments have not bought it, as evidenced by the continued failure of the UN climate conferences to find any general support for imposing restrictions on national economies (as opposed to the purely political battle by some groups of states to impose limits on rival states). The "right to develop" which has been at the core of human nature since before recorded history continues to be the rallying cry of those who live in the real world. The embrace of retrogression is a sickness unique to the cloistered halls of Western liberalism.

Unfortunately, the death of "cap and trade" legislation does not mean the battle is over. The race in domestic policy will continue between those who are pushing expanded energy production from nuclear, wind, solar, natural gas and domestic oil against those who are trying to close down energy sources like coal, oil (from anywhere) and nuclear. Securing funding for one side while denying it to the other will decide the contest.

On Dec. 23, the Environmental Protection Agency issued its plan for establishing GHG standards in 2011. Its press release said, "The agency looked at a number of sectors and is moving forward on GHG standards for fossil fuel power plants and petroleum refineries—two of the largest industrial sources, representing nearly 40 percent of the GHG pollution in the United States. EPA will propose standards for power plants in July 2011 and for refineries in December 2011 and will issue final standards in May 2012 and November 2012, respectively." The EPA claimed it would hold "listening sessions with the business community, states and other stakeholders in early 2011, well before the rulemaking process begins."

Among the "other stakeholders" are all Americans who want to keep their country moving forward, which cannot happen if energy costs are driven upward by EPA fiat. As one Greenwebsite put it, "the ultimate regulations, which will apply to factories, oil refineries, and power plants, including many of the oldest, dirtiest coal plants, is a huge deal." Concerned citizens and their representatives in the new Congress must make sure the "deal" works in the national interest, which is assuredly won't if the Green Luddites stack the deck.
Meanwhile, California's Air Resources Board approved its own state-wide cap-and-trade system on Dec. 16. After 2015, refiners and distributors of gasoline, diesel, natural gas and other fuels will be required to buy emissions permits at auctions or purchase them from other companies. Gradually, the state will reduce the number of permits available, squeezing companies that do not reduce their GHG emissions. Again, the cost of producing or using energy will go up. The California authorities seem bent on blasting holes in a ship that has already run aground to make sure it can never be refloated to sail again as the vanguard of American affluence.

California's impending bankruptcy is rooted in the same liberal doctrines that triggered the national rebuke of the 111th Congress. Too much spending on non-productive programs while the foundations of the economy are being undermined; making any spending for any purpose (even on the basic duties of government) impossible to sustain. Society requires growth, end of the debate.



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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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