Classical Values :: Spain Is Depressed

January 20, 2009

Spain Is Depressed

Europe is hurting from the economic slow down but Spain is looking at a depression.

Falling exports will hit Germany hard. Europe's largest economy is also the world's biggest exporter and will likely shrink 2.3 percent this year, it said. German Finance Minister Peer Steinbrueck said this chimed with Berlin's own figures.

A sharp German slowdown will hit its nearest neighbors and trading partners.

The EU says the British economy will also shrink, about 2.8 percent this year, as the financial sector contracts and a housing bubble deflates, while France will contract by 1.8 percent.

Spain and Ireland will also suffer sharply as recent booms go bust and jobless queues lengthen -- with nearly one in five Spanish workers without a job by 2010.

Twenty percent unemployment is at depression levels. Spain is one of the Euro Group hardest hit by the housing bubble.

So what does the future hold? Some economists are predicting a bottom around the second quarter of 2009. Others say that the pick up will not start until well into 2010. And how will that effect the American scene? It depends. If the American Congress tries to spend the US economy out of the recession the economy will stagnate.

Alyssa A. Lappen agrees with me.

...cheap credit does not spur new investment or economic growth. In his 1993 study of more than 5,000 U.S. manufacturing companies from 1971 to 1990, economics professor Steven Fazari found that business invest based on overall economic health and the growth in their own sales and profits. "Weakness in the economy is more likely to reduce investment than lower interest rates are to stimulate it." But low rates can and will spring like a jack knife if and when investors find other outlets for their "easy" liquidity-induced cash.

Note that businesses invest based on sales and profits. And what is the fastest way to increase business profits? Lower business taxes. This allows business to decide the proper balance between lower prices and increased profits.

So how have countries fared that tried to spend their way out of financial difficulties? We have Japan as a sub prime example.

U.S. taxpayers still face the extraordinary deficit burden already heaped upon them---and only likely to grow under the Obama administration. As Melloan noted, in the 1990s, "Japan tried to spend its way out of its post bubble malaise," but merely accumulated "a mountain of debt" and lost a decade to "little or no economic growth."

Even if the national deficit increases no further, national debt would grow more onerous in the case of a Great Depression-like deflation tornado, such as shredded the U.S. economy and in 1933 raised unemployment to 24%. The debt will remain the same or even grow until it is paid off, while incomes and the tax base shrink. Keep in mind, as in 1933, interest rates and stocks have already declined steeply.

Moreover, to cover the U.S. deficit, taxes will certainly rise. In an inflationary environment, those new taxes could broadly pass to willing (or resigned) consumers. Now, however, in a contracting economy, they must be spread more narrowly to shrinking companies and a shrinking pool of workers. Companies are likely to respond by further slashing jobs, thus adding to the very grave potential for a deflationary spiral.

So are the Republicans starting to get it? If the economy needs stimulating what is the best way? Government direct spending or lowering government income while increasing business income? The Republicans have some ideas. Rep. David Dreier (R), of the San Gabriel Valley in California is one of those idea men.

Dreier outlined his priorities Thursday in an interview with the Tribune on Capital Hill for what, under Obama's plan, has ballooned to nearly a trillion-dollar economic stimulus package that Obama.

Obama's outline includes investments in infrastructure and public works improvements, investments in green technology and tax cuts and credits for working families and businesses.

All of which will cost about $800 billion, his economic team has said.

But while committing support to some kind of plan, Dreier and other Republicans this week stressed that increased government spending is no guarantee of bringing the nation out of its deep recession.

They urged care in crafting bipartisan legislation that balances government spending with incentives for business and tax cuts that they say will increase spending and revive the economy.

Dreier's ideas include:

Reducing marginal tax rates; Offering tax credits to homebuyers; and Getting consumers into auto dealerships' showrooms.

"We have found that throughout the history... marginal rate reduction stimulates economic growth and leads to an increase in the flow of revenues to the federal Treasury," Dreier said.

That would include reducing the top rate on businesses from 35 percent to 25 percent, and reducing the capital gains tax to 15 percent, while eliminating the death tax, he said.

"There are so many business that have to be sold because of that tax," he said.

Now I don't agree with all the proposals, but you do have to get bills passed and a few stupid ideas help to insure passage. The essential thing is this: if the government is going to put a lot of money in the economy it has to do something that will increase production in order to keep inflation in check otherwise consumers will just bid up the price of goods and there will be a new bubble to deal with. Prices have to come down to what consumers are willing to spend. That means lowering the cost of doing business or increasing production. Lower taxes on business will give businesses the opportunity to decide in each case what the best policy is.

So will the new President and Congress do something totally stupid? Well Mark Twain had a handle on it:

"Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself."

My expectations are limited so that gives me an advantage right there. Any move in a useful direction will seem miraculous to me.

Cross Posted at Power and Control

posted by Simon on 01.20.09 at 07:22 AM

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Comments

But... Spain elected a socialist government, on al-Qaida's instructions! How could they be in trouble now?

Truly, the ways of Allah are impossible for men to comprehend.

Steve Skubinna · January 20, 2009 10:26 AM

So, how's that global economy workin' out for you?
I'm not being a protectionist when I say that this may be a good time to renew our economy by focusing our efforts at home. Perhaps when enough Americans are unemployed (like me), and our leaders finally understand the depth of despair brought about by their actions, we can return to the principles of limited government that caused our great success as a nation.

BackwardsBoy · January 20, 2009 10:40 AM

B.Boy,

The economy is global. If you want gasoline it will have to be paid for with exports.

The real deal is: learn how to compete.

And remember: every one's output is some one else's input. If you force people to buy the high priced inputs(protectionism) you then have two globally uncompetitive industries instead of one. A recipe for ruin.

M. Simon · January 20, 2009 11:21 AM

And you know: when politicians control what is bought and sold the first thing bought and sold is politicians.

M. Simon · January 20, 2009 11:26 AM

BackwardsBoy, you get it.
M. Simon does not.
It isn't theory when a factory is shut, thousands who worked there, and the many more thousands who supplied that factory are left without an income - their houses foreclosed, their cars repoed, and they line up for unemployment and food stamps.
There are indeed those of us who relish making something of value with our hands, and brains.
And then there are those who make their living by advancing unproven theories learned in the ivory towers of academia. That they end up destroying our lives never seems to hit them.

Frank · January 21, 2009 01:54 AM

Frank,

Yeah. I'm just so insensitive. However I have come around. I think paying high prices for things to keep people employed is just the ticket.

Why just yesterday I heard about all the unemployed farmers because food was too cheap. If we raised the cost of food by a factor of 10X we could employ a lot more farmers.

And if manufactured goods cost more companies would stop automating away jobs. New cars for $30,000 is a crime. They ought to cost $300,000.

And those cheap foreign computers at $500 are a crime. If they cost $5,000 a lot more Americans could be employed.

And how about those damn imported cell phones at $40 or less a pop. They should be selling for $4,000. More Americans would be employed and you wouldn't have all those folks yacking on a phone while walking down the street.

Yep. I finally get it. Protecting the uncompetitive will make us all richer and secure our jobs in perpetuity.

Them point headed academics just don't get it. Letting people sell us stuff for less than what it costs us to make it is a bad idea.

So what you need to do Frank is make your own car, make your own clothes, and grow your own food. Because buying that stuff for less than what it costs you to make it is a very bad idea. You could have a job for life if you made all your own stuff by your hand and brain. You would never be unemployed.

I'm going to have to tell all my friends about your wonderful economic discovery. Wait until I tell them that by paying $300,000 for a new car or better yet $3,000,000 they will be better off and America will be too. In fact if they paid $30,000,000 for a new car they would be doing even better. Think of all the unemployed workers who would have jobs if cars cost $30 mn a pop.

We are so lucky to have you around Frank in order to explain to us stupids how things really work.

Next thing we have to work on is interstate trade. If people in Michigan had to buy cars from Michigan and Michigan didn't have to compete with North Carolina the Detroit Auto Industry would be thriving.

M. Simon · January 21, 2009 04:12 AM

The economy is global, and has been for years before it became a buzzword. So blame it all you want, just as I'm sure you damn gravity when you fall. You want us to stop buying from overseas, the obverse of that coin is we also stop selling overseas.

There's a joke about two Jews (for some reason it's never two Yankee traders) shipwrecked on a desert island for ten years. When finally rescued, each has become fabulously wealthy - by selling their hats back and forth to each other.

See, it's a joke. The reason the punch line is funny is that economics is not a closed system. I can't explain it much better than that. You'll need a trained pedant for that.

But keep railing against those darned job snatching globalists and the corrupt politicians who somehow gain by impoverishing us all.

Steve Skubinna · January 21, 2009 12:08 PM

M. Simon, I didn't have you in mind when I made the reference to academia. I did have in mind people like Alan Greenspan, Bill Clinton, and of course, Milton Friedman. (Nothing personal there.)
My views about globalism are similar to those advocated by Sir James Goldsmith, the infamous corporate raider/turned environmentalist in his two books The Trap, and later The Response.

Summing up from Answers.com:
"In 1994 he published The Trap, setting forth the thesis that social stability was being destroyed by global free trade, intensive agriculture, and nuclear energy. Goldsmith continued to be concerned with trade issues, speaking out against GATT (General Agreement on Tariffs and Trade) in 1994. He argued that GATT could lead to social chaos because low-wage foreign workers, augmented by the collapse of communism, would displace workers in America and Europe. Competition for cheap labor, in his opinion, would enrich big corporations, dislocate people in poor countries, and deprive European (and American ) workers of needed jobs. Goldsmith suggested local continental trading blocs as an alternative. In 1995 Goldsmith self published The Response, which presented evidence to support his thesis in his first book."
While I don't agree with all of his points, he is now being proven right with a vengeance.

Frank · January 21, 2009 04:51 PM

M. Simon:
I should add that I generally don't agree with the protectionism now being advocated by labor unions. They're trying to close the barn door after the horse ran out, was caught and butchered, and is being served to us on a platter from China.
But the fact is that unless we want to lower our standard of living to that of China or India, we cannot compete in this country or the world.
Even if all those impediments to business efficiency were removed or scaled back here, like high taxes, the nightmare of regulatory abuse, environmental insanity, etc, we would STILL be at a competitive disadvantage given the near slave wages in places like China.
I think we'll see civil unrest if this hollowing out of production continues at the pace of the last 20 years.
Your sarcasm aside, the demise of Circuit City proves that the unemployed, broke retirees, and food stamp trailer trash can't afford those low cost produced gadgets made with slave wages overseas.
So, M. Simon, if a pair of shoes is now dirt cheap at $25.00, if you don't have the $25.00 because you're out of work, or working for minimum wage and can barely afford food & rent, then you don't buy the "affordable" shoes -- you get them repaired first, and then put cardboard in the soles, and finally you go barefoot. Get the point?

Frank · January 21, 2009 05:38 PM

Frank,

I like your attitude of defeatism:

we cannot compete in this country or the world.

My answer: more American slaves. They are called machines and will work 24/7 365 for the price of electricity.

But you know - either way the jobs are gone.

My prescription: invent shit faster than the world can copy it. Such an attitude has worked for 200+ years. I think it can work for 200 more.

What have you invented lately?

There has yet to be a law invented that can repeal reality. Deal with it or die.

===

And Frank - what put you out of work was a skill set that doesn't match the current environment. Time for CHANGE.

What would I go into if I was in your position? Biotech. Plasma physics. Control engineering.

The deal is Frank we have to import skills like engineering because it is too "hard" for Americans to learn all that hard math. So be it.

There are opportunities out there only limited by your imagination and your clinging to a job. Why not start something and have a job?

What you mean when you say "I can't compete" is that some one out there is hungrier than you are. Well fine. When you get hungry enough you will be able to compete.

What it means is that when times were good you didn't prepare for the lean years. You bought more house than you could afford. Whatever.

Adapt or die.

M. Simon · January 21, 2009 07:31 PM

And Frank,

Eight years ago I decided I wanted a different career. For four years I spent my time commenting on blogs.

Then I started writing a blog. Then I got invited to write on team blogs.

Now I get paid for writing. Not much, but the trend is upwards. And you know what? I can compete.

I'm also considered one of the top amateur experts in Polywell Fusion. Why? Because I spent all my spare time learning new stuff. Something I have done all my life. Turn off the damn TV and educate yourself.

M. Simon · January 21, 2009 07:38 PM

"Instead of conducting vastly expensive actual experiments, such as nuclear tests, the United States simulates tests using supercomputers. And computer software technology acquired during this process has emerged as one of the United States' core strengths."

http://english.chosun.com/w21data/html/news/200901/200901220003.html

Got a clue yet Frank?

M. Simon · January 21, 2009 07:50 PM

M. Simon:
Yes, there will always be those who can quickly adapt and change. The areas you speak of like biotech, will undoubtedly offer great opportunities.
I'm glad you have the capacity to compete on that level.
If you haven't read The Trap, however, you should. Goldsmith was a capitalist in the extreme. He was a member of the European Parliament elected from France, with dual citizenship in the UK and France.
You seem to want to put anyone who opposes globalization into the category of a Luddite.
Is that how you win arguments, by falsely painting your opponent, and then arguing against those positions you ascribed to him?

Let's for a minute concede every argument made for total worldwide free trade. I've read Mises, Hayek, & Hazlitt. The Austrian School is correct. I've also read Benjamin Anderson's Economic History of The United States, and Reisman's Capitalism: A Treatise on Economics. You and they are right, in theory. But then look at the actual practice of free trade.

First, the Austrian School advocates a gold standard, that is, a worldwide monetary system independent of the whims of politicians. This is a prerequisite.
Do we have that? And just what kind of a god-awful monetary & credit mess are we in right now?

Second, these free market economists assume a free, or mostly free society with government intervention into the markets absent. Do we have that? And isn't it getting worse by the day?

You think that technology will bail us out, that there will always be another Bill Gates around the corner. You're dreaming. The spark is quickly being extinguished by the statism descending on us all.

Frank · January 21, 2009 10:14 PM

Frank,

We currently have a problem: job loss. You attribute it to global trade. I attribute it to a secular down turn i.e. current technology has run out of gas (high profit opportunities).

If we are permanently out of high profit opportunities then incomes around the globe will equilibrate and there is not a damn thing you can do about it.

If we want to keep our standard of living above the rest of the globe we have to be more profitable. I don't see any other way. Raising the costs of inputs (shoes, steel, copper) is no way to increase profitability.

You see a problem. I see it too. One diagnosis suggests solution A. A different diagnosis suggests solution B.

There are 92 natural chemical elements (not exactly but for purposes of analysis we will assume that). All are required for an advanced technological society. Not all of them are found in the USA in economic deposits or sufficient quantities. Now what?

So do we stop importing oil?

BTW Hong Kong was in a sea of cheap labor. How did they manage to raise their economic conditions above that of the sea they lived in? By decreeing that cheap shoes from China were off limits?

What you are complaining about is the pain of change. What I say is that putting off the pain makes the pain more severe when you finally have no choice.

What you keep leaving out is comparative advantage or to put it another way: every one's output is some one else's input.

Here are a couple of pieces that explain how global trade makes all involved richer:

Decline and Fall
Desolation Row

Short reads with links.

M. Simon · January 21, 2009 10:45 PM