Government Spending: The European Experiment

I subscribe to Financial Advisor Roger L. Merrill's (CLU, ChFC, CRPS) newsletter and he recently provided this insightful insight into the false notion that government spending is good for the economy and that Europe is a good role model. It isn't and they arent. The proof is a comparison between Utah and Europe. Utah is the best managed because we are disciplined and frugal. Europe is a mess because you can't spend your way into prosperity. Utah is the example to follow. Investment Perspective "Thoughts on today's markets and economic trends"

Government Spending: The European Experiment Belief in Government Spending European politicians believe fervently that government spending and government jobs actually do create wealth. They are not alone in this belief. Many leading politicians here in the United States firmly believe it too, and use the 'multiplier effect' to support their position. 'Multipliers' - which show how much a dollar of government spending will boost GDP - are used to support government spending. Believers in the 'multiplier effect' argue that $1 spent extending unemployment benefits would increase GDP by $1.63, and $1 for infrastructure would add $1.59 to GDP. Supply Siders To a supply-sider, the talk of multipliers is ridiculous; however, proving that the 'multipliers' do not exist is problematic. There are so many moving parts in an economy that it is impossible to prove a multiplier does or does not exist by looking at short-term economic trends. The European Experiment The good news for those who are serious about finding an answer is that we do have a long-term experiment. It's called Europe. Europe has been the Economic Petri Dish for experiments in the 'multiplier' theory. And the results are spectacularly bad. Despite government spending of nearly 50% of GDP, European economies have been a mess. Unemployment, living standards and overall economic growth have lagged significantly. Between 1980 and 2008, unemployment rates in Europe rose well above unemployment in the US. Only recently, as the US has massively expanded the size of its government, have these unemployment rates converged again. Now, all of them are at very high levels. 'Happiness,' A Truer Measure Faced with these facts, what did European politicians do? They started talking about "happiness." They argued that growth rates and jobs were not the important measures of economic success...happiness was. And for a long time they got away with it. As long as they could borrow and make people happy, it worked. Unhappy Results Today, Europe is not growing...and it's not happy, either. The most disappointed person in the world is the 54-year old Italian or Greek who thought they were about to retire to a happy, upper-middle-class, worry-free existence. But there is no Santa Claus. The European welfare state is dead. European politicians and economists have borrowed just about everything they can and they have no more room in the back of closets or under the rug to hide or sweep government spending and debt. They can't devalue their currency and inflate to make things look better, they can't fool the bond markets anymore and the only people left who believe that they can possibly spend their way out of this are teaching in American classrooms. The Way Out There are only two ways out. Austerity - spend less than you take in and use the difference to pay down debt. Or default - like Greece. The stand-up thing to do is austerity. You borrowed the money, you should repay it. None of this is a surprise, or at least it shouldn't be. The USA Question The obvious question at this point is whether or not the US has reached this point? The answer is, "not yet." Government spending in the US is hurting growth, but underlying productivity is still able to create new wealth. Entrepreneurs are pulling a very heavy wagon, but they are still making progress. The US is still ten years away from facing the kinds of problems so prevalent in Europe. There is still time to avert disaster in the US. (taken from The Economic Antidote 11/30/2011)