Over the Thanksgiving weekend, data for shopping activity in the US blew away the forecasts of most economic prognosticators. Sales for the full weekend (from Thursday to Sunday) were up 16.4% over the previous year -- an astonishing increase and an all-time record in terms of dollar value spent during the period.
This data should indicate that the US is not in the middle of a Great Depression, in spite of the constant pessimism on display throughout the financial media and the confident predictions by numerous pundits over the past six months that a double-dip recession was on the way. We have been on record opposing the pessimistic conventional wisdom about the economy for some time now see here and here for example), so we were not at all surprised by the strength of the numbers.
We'd like to go out on a limb a bit and suggest that the conventional wisdom over the European debt crisis may be overlooking some positive angles there as well.
One of the most consistent themes among commentators on the European debt crisis is the refrain that Europe is a preview of America's future -- that the US is resembling Europe more and more, and that if we're not careful, we will end up like Greece or Italy (in some cases, the argument is made that the US will end up like Europe no matter what -- it's too late to avoid the fate of Greece, and the only question is how long it will take).
For example, here is an article published earlier this month by Dan Mitchell of the Cato Institute and the Center for Freedom and Prosperity, entitled "US should learn from Europe's Welfare State Mistakes."
We agree with Dan Mitchell on just about everything he says or writes (you can see previous posts stretching back for many years in which we have cited his work or embedded his videos, for example here or here). We even agree with the arguments he makes in this article, to the degree that entitlement programs in the US (particularly Medicare but including a host of others as well) are unsustainable, and that planned entitlement program expansions will bankrupt the country if they are not fixed.
However, we do not agree that the only important lesson of the European debt crisis is that the US needs to learn from Europe's woes. In fact, we would be so bold as to suggest that this crisis has been beneficial in revealing that Europe needs to learn from the US, and that some of the early indications appear to show that Europe is learning from the US model and may be moving in the right direction! How's that for an opinion you aren't hearing in any other financial commentaries or analyses?
For starters, Europe created a common currency (the euro) in order to try to have the same kind of commonality enjoyed within the US (a worthy goal -- can you imagine how difficult and expensive business would be if California, Virginia and Alabama were each able to print their own money and pursued different monetary strategy regarding the strength or weakness of their currencies?).
However, they created that common currency without any sort of fiscal unity, so that member states were left to their own devices on questions of how much they could spend on welfare programs and other budget items, as well as on questions of how to raise taxes to pay for that spending. Predictably, some member states were more responsible than others, and they have started to get upset about the fact that they are now having to bail out the irresponsible parties without any mechanism for changing the profligate behavior of their more irresponsible neighbors.
In the US, there is a governing body that is capable of imposing a unified tax-raising policy on all the member states -- it's called the federal government. The unified tax-raising policy may be inefficient and byzantine (as we have argued in other previous posts, such as this one and this one), but that is a very different problem than the one that the more financially responsible European states are currently facing as they prepare to bail out their less responsible neighbors.
Even more importantly, one of the most important lessons of the European crisis is the need to enable innovation and economic growth within an economy. The countries in Europe that are having the biggest problems paying their debts are those which make very little money, because they have built economic systems that stifle innovation and make business difficult. Those that are in better shape -- and Germany is in the best shape of all of them -- are the countries that have boosted production and economic growth by getting out of the way of businesses.
In other words, it is true that if you have too much credit card debt, one thing you should do is start spending less (and America certainly falls into this category). But the other solution is to start making more money, and the way to do that is to create an environment that allows for innovation and business growth.
In this regard, our assertion that Europe can learn from the US is perhaps most telling. Even Germany's economic growth is somewhat anemic by US standards. Even with the increased regulations and government intrusions that have blighted the US economic landscape over the past eleven years (starting with Sarbanes-Oxley and accelerating through Dodd-Frank), the US remains an easier place to start a business or pursue a new innovation than almost any one of the European nations. We may have compared California's self-inflicted economic woes to those of Greece in previous blog posts such as this one (and they are similar), but the difference is that Greece does not have a Silicon Valley that produces much of the world's most innovative technologies, nor does it have a Hollywood that produces much of the world's entertainment content, nor does it have a Great Central Valley that produces much of the world's food.
So, we would argue that the lessons of the current European crisis do include the warning that many have sounded, about the dangers of the US heading further in the European direction. But, we would also argue that an important lesson, and one that many appear to have overlooked, is that Europe really needs to move more in the direction of the US.
If Europe really wants to foster the kind of economic growth and innovation that it needs to get out from under the credit problems some of its member states have created, it should look at steps that will create a uniform business-friendly environment throughout the continent, with relatively lower levels of government spending, lower levels of regulation, lower barriers to the ability to start a company, and more fiscal unity providing methods to impose discipline on countries that don't play by the rules.
We realize that Europe is an incredibly complex region and that getting to such a state of affairs may be impossible, and would certainly be extremely difficult even if all the member states decided that it would be a good idea.
The good news is that some in Europe appear to have gotten this message, and are making some real steps in that direction.
This is a very big topic and cannot be completely addressed in a short blog post, so stay tuned for more discussion on the subject in future posts.
This data should indicate that the US is not in the middle of a Great Depression, in spite of the constant pessimism on display throughout the financial media and the confident predictions by numerous pundits over the past six months that a double-dip recession was on the way. We have been on record opposing the pessimistic conventional wisdom about the economy for some time now see here and here for example), so we were not at all surprised by the strength of the numbers.
We'd like to go out on a limb a bit and suggest that the conventional wisdom over the European debt crisis may be overlooking some positive angles there as well.
One of the most consistent themes among commentators on the European debt crisis is the refrain that Europe is a preview of America's future -- that the US is resembling Europe more and more, and that if we're not careful, we will end up like Greece or Italy (in some cases, the argument is made that the US will end up like Europe no matter what -- it's too late to avoid the fate of Greece, and the only question is how long it will take).
For example, here is an article published earlier this month by Dan Mitchell of the Cato Institute and the Center for Freedom and Prosperity, entitled "US should learn from Europe's Welfare State Mistakes."
We agree with Dan Mitchell on just about everything he says or writes (you can see previous posts stretching back for many years in which we have cited his work or embedded his videos, for example here or here). We even agree with the arguments he makes in this article, to the degree that entitlement programs in the US (particularly Medicare but including a host of others as well) are unsustainable, and that planned entitlement program expansions will bankrupt the country if they are not fixed.
However, we do not agree that the only important lesson of the European debt crisis is that the US needs to learn from Europe's woes. In fact, we would be so bold as to suggest that this crisis has been beneficial in revealing that Europe needs to learn from the US, and that some of the early indications appear to show that Europe is learning from the US model and may be moving in the right direction! How's that for an opinion you aren't hearing in any other financial commentaries or analyses?
For starters, Europe created a common currency (the euro) in order to try to have the same kind of commonality enjoyed within the US (a worthy goal -- can you imagine how difficult and expensive business would be if California, Virginia and Alabama were each able to print their own money and pursued different monetary strategy regarding the strength or weakness of their currencies?).
However, they created that common currency without any sort of fiscal unity, so that member states were left to their own devices on questions of how much they could spend on welfare programs and other budget items, as well as on questions of how to raise taxes to pay for that spending. Predictably, some member states were more responsible than others, and they have started to get upset about the fact that they are now having to bail out the irresponsible parties without any mechanism for changing the profligate behavior of their more irresponsible neighbors.
In the US, there is a governing body that is capable of imposing a unified tax-raising policy on all the member states -- it's called the federal government. The unified tax-raising policy may be inefficient and byzantine (as we have argued in other previous posts, such as this one and this one), but that is a very different problem than the one that the more financially responsible European states are currently facing as they prepare to bail out their less responsible neighbors.
Even more importantly, one of the most important lessons of the European crisis is the need to enable innovation and economic growth within an economy. The countries in Europe that are having the biggest problems paying their debts are those which make very little money, because they have built economic systems that stifle innovation and make business difficult. Those that are in better shape -- and Germany is in the best shape of all of them -- are the countries that have boosted production and economic growth by getting out of the way of businesses.
In other words, it is true that if you have too much credit card debt, one thing you should do is start spending less (and America certainly falls into this category). But the other solution is to start making more money, and the way to do that is to create an environment that allows for innovation and business growth.
In this regard, our assertion that Europe can learn from the US is perhaps most telling. Even Germany's economic growth is somewhat anemic by US standards. Even with the increased regulations and government intrusions that have blighted the US economic landscape over the past eleven years (starting with Sarbanes-Oxley and accelerating through Dodd-Frank), the US remains an easier place to start a business or pursue a new innovation than almost any one of the European nations. We may have compared California's self-inflicted economic woes to those of Greece in previous blog posts such as this one (and they are similar), but the difference is that Greece does not have a Silicon Valley that produces much of the world's most innovative technologies, nor does it have a Hollywood that produces much of the world's entertainment content, nor does it have a Great Central Valley that produces much of the world's food.
So, we would argue that the lessons of the current European crisis do include the warning that many have sounded, about the dangers of the US heading further in the European direction. But, we would also argue that an important lesson, and one that many appear to have overlooked, is that Europe really needs to move more in the direction of the US.
If Europe really wants to foster the kind of economic growth and innovation that it needs to get out from under the credit problems some of its member states have created, it should look at steps that will create a uniform business-friendly environment throughout the continent, with relatively lower levels of government spending, lower levels of regulation, lower barriers to the ability to start a company, and more fiscal unity providing methods to impose discipline on countries that don't play by the rules.
We realize that Europe is an incredibly complex region and that getting to such a state of affairs may be impossible, and would certainly be extremely difficult even if all the member states decided that it would be a good idea.
The good news is that some in Europe appear to have gotten this message, and are making some real steps in that direction.
This is a very big topic and cannot be completely addressed in a short blog post, so stay tuned for more discussion on the subject in future posts.