We need a New Brain Trust

While the U.S. economy sputters, France and Germany appear to have exited their recessions and returned to modest growth during the spring. There’s been a distinctly different approach to macroeconomic policy taken by Chancellor Angela Merkel and President Nicolas Sarkozy and their respective finance ministers that deserve elucidation.

The French and German economies both grew by 0.3% between April and June, bringing to an end year-long recessions in Europe’s largest economies.

Stronger exports and consumer spending, as well as government stimulus packages, contributed to the growth.

Germany is a manufacturer and exporter. Yes, that’s right. Germany has trade unions, good vacation packages, excellent schools, universal health care, lots of solar power and tough environmental regulations and they still have a manufacturing economy and they export. Their form of government is basically a type of democratic socialism. All the things we are taught to view with suspicion. Still, Germany manages to manufacture things and export to China the country to whom the U.S. has practically sold their collective soul so we can massively import junk on a rapidly decreasing credit line.

The latest figures showed German exports had grown at their fastest pace for nearly three years at 7%, with particularly strong growth in demand from rapidly-growing economies such as China.

The country’s Federal Statistics Office said that household and government expenditure had also boosted growth.

It added that imports had declined “far more sharply than exports, which had a positive effect on GDP growth”.

“These [GDP] figures should encourage us,” said Germany’s Economy Minister Karl-Theodor zu Guttenberg. “They show that the strongest decline in economic performance likely lies behind us.”

It’s the same story with France. Household consumption and export markets are improving. I don’t know if you’ve ever listened to Finance Minister Christine Lagarde but she’s undoubtedly one of the best in the world. Compare her to our Secretary of Treasury Timothy Geithner and you’ll see who comes up quite short. First, she’s a noted anti trust lawyer as compared to a noted monopoly enabler.

Ms Lagarde said that consumer spending and strong exports had helped to pull France out of recession.

“What we see is that consumption is holding up,” she said.

Official figures showed that household consumption rose by 0.4% in the second quarter.

She said government incentive schemes for trading in old cars, together with falling prices, were helping consumers.

Foreign trade contributed 0.9% to the GDP figure – a “very strong impact”, said Ms Lagarde.

We are daily fed this propaganda that other countries come up short when compared to the United States and our economic machine. We are told that countries with high union participation, with universal health care, with high standards for the work environment and tough regulations for business and standards for the environment come up short when compared to the U.S. These countries both undertook solid fiscal stimulus. Here is some information on the French package passed in February. The Obama stimulus package passed during February also.

France’s economic stimulus package encompasses a three-pronged plan: €11 billion ($14.5 billion) each to go to direct state investment and to inject capital into private-sector enterprises, plus €4 billion ($5.24 billion) for state-run companies to be applied toward improvements for the national postal service, energy supplies and the rail network. Of that amount, some €1.3 billion ($1.7 billion) is to go into refurbishment of higher educational institutions, prisons, monuments and court.

Here’s some information on the German package also passed in February.

Germany has approved a 50bn euro ($63bn, £44bn) stimulus plan aimed at boosting Europe’s largest economy.

The plan was approved by the upper house of parliament, which represents Germany’s 16 state governments.

It includes infrastructure investments, tax relief, reductions in health care contributions and money for families with children.

The package follows an earlier 23 bn-euro plan that was criticised for being too cautious.

U.S. News and World Report critiques the impact of the Obama stimulus in “Mixed, Incomplete Economic Results So Far on Obama’s Stimulus: There are signs of hope, but there’s a way to go“. Remember, we had $787 billion in fiscal stimulus signed into law on February 17, 2009. The stimulus has slowed the pace of decline in the economy. One of the primary impacts of the U.S. stimulus is that it has allowed states to maintain some services by replacing lost revenues. This is different, however, from boosting employment. You’ll also notice that many of the direct spending measures are still in the wings. This is unlike those of our two European friends who released funds immediately and directly.

For the most part, too few projects have been started and data are too scattered to indicate how many jobs the package has added. Only $73 billion of the act’s $499 billion in direct spending measures had been dispensed by the end of July. One employment sector that the stimulus has seemed to directly affect, though, is state and local governments. The American Recovery and Reinvestment Act funneled cash-strapped states $144 billion, helping to minimize layoffs or program cuts. The Center on Budget and Policy Priorities estimates that’s enough money to cover 30 to 40 percent of overall state budget shortfalls. According to today’s unemployment report, it seems to have helped. State governments lost 5,000 jobs—not as bad as it could be, considering states face budget shortfalls of more than $160 billion—while local governments didn’t see any change at all. “You don’t see the declines in employment at the state and local levels that would be associated with a real disaster,” says Gary Burtless, senior fellow of economic studies at the Brookings Institution. “Partly, I think, it’s because states are confident that the federal government is making a lot of aid directly available to them.”

Since we do not have a robust export sector, we must rely on consumer spending for much of our stimulus. This will have mixed results because much of our consumer spending is import-based which means it stimulates economies elsewhere. Much of the stimulus in the Obama plan was based on tax cuts rather than direct spending. This part of the plan is not having the desired effect as many folks are being frugal and holding on to what little extra money they’ve been given. I warned of this early this year (here and here)when we discussed the formation of the stimulus package.

So far, the package’s $288 billion in tax cuts and credits haven’t seemed to significantly affect consumer spending. Spending on goods and services, ranging from TV sets to T-shirts, decreased by 1.2 percent in the second quarter. That’s after they increased by 0.6 percent in the first. The Conference Board reported last week that its Consumer Confidence Index continued to decline in July for the second month in a row.

That’s partly, of course, because people are still losing their jobs or seeing paychecks slashed. And it’s partly because credit is still tight, making it difficult to go out and buy that computer even for those who want to. But it’s also because even those in relatively secure positions are changing their habits, experts say. “The recession has gotten to people,” says John Irons, research and policy director of the progressive Economic Policy Institute. “People have a generic anxiety about what’s going on, and rightfully so.” The response is to cut back on consumption.

Meanwhile, Dr. Doom (Nourielle Roubini) added his voice to the numbers of us that believe this will be a jobless recovery. He extended that analysis to include the label of wageless recovery. That’s not good. That means we can’t rely on the U.S. household to buy ourselves into prosperity.

Companies need a certain head count to run their businesses. After cutting jobs, companies are increasingly reducing compensation and work hours to keep a lid on labor costs. Labor compensation slowed significantly to 0.4% in Q2 2009, after slowing to 0.3% in Q1 2009. The slowdown in wages and salaries (0.4%) and benefits (0.3%) is significant, especially in the private sector (0.2%). Private sector labor compensation slowed to 1.5% in the 12 months ending June 2009, the smallest increase on record. Firms are reducing benefits significantly in the service sector while employers in manufacturing are largely cutting wages.

Nourielle considers the future for household spending to be “bleak”. Notice that companies are reducing compensation. This not only means wages and salaries but benefits. An increasing number of people will lose health care and any hope of a match towards retirement plans. After huge losses in any current savings, this can only cause people to retreat from any spending not completely necessary.

Any sustained and strong improvement in growth has to come from a revival in private demand, and not from temporary factors like inventory adjustment and policy measures. The U.S. consumer, who, as we’ve noted, still accounts for close to 70% of GDP, is pulling back. Investment, which still trails consumer spending at home, will be weak. Exports will be a source of growth only in the medium term. In the short term, the rest of the world will remain dependent on the U.S. to drive demand while consumption abroad will be unable to offset the decline in U.S. consumption.

These factors suggest a sluggish economic recovery for the U.S. in the coming years until new sources of growth emerge (such as exports to emerging markets, investment, new energy and technology). Factors such as unsustainable public debt, higher structural unemployment, lower credit growth and higher taxes in the future will also constrain growth.

This is some really eye opening analysis. Can we continue to live in denial that some of the industrial plans, export/import management strategies, and policy priorities of our European cousins may actually have viability? We need a Brain Trust, not unlike FDR’s, to determine what works and what doesn’t work for others. This is especially true for health care policy and something akin to a national industrial plan. There are many things (globalization, illegal immigration, lack of unions, outlandish executive compensations and return to capital, etc.) that are sapping the real wages of many workers. In an economy dependent on 70% spending by households, this is a zero sum game. If we continue on this path we will undoubtedly become the largest developing economy in the world. That’s right, not advanced economy, but developing economy. Something has to give. Something has to change.

If the President is truly interested in providing hope and change, then it is about time he quit relying on the advice and consent of the very people and industries that have led us down this garden path. In his campaign speeches, he reminded us that the same tired old solutions and people had brought us to edge of this abyss. Why then, does he continue to hold hands with the same enablers?

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