Spain is a beautiful country with a long history, rich cultural heritage, and fine food. But its economy continues to look ugly.
The latest reminder is Spain’s latest official unemployment figure of 27.2%, up from 8.6% in 2007. Youth unemployment, for those aged between 18 and 25, is even worse. It’s a staggering 56%.
It that doesn’t qualify as a depression, then it should do.
Spain is not alone, although its unemployment figures are some of the worst. Greece also has an unemployment rate above 27% and youth unemployment approaching 60%. Italy claims a total unemployment rate of 11.6%, but youth unemployment is 39%. Portugal has 17% of its workforce out of work.
The rate of unemployment in the USA is much higher than the official 7.6%. Private estimates put the true US unemployment rate somewhere between 15% and 22%.
(US figures are particularly manipulated by government statisticians. For example if you are unlucky enough to be out of work for too long you are dropped from the numbers. You’re considered so unimportant by then that you’re not even a statistic!)
There are no embarrassing lines for soup kitchens these days, as during the Great Depression. But 48 million Americans receive food stamps, a subsidy for the poor to buy food. That’s over 15% of the population that can’t afford to feed themselves, in what is supposed to be a wealthy country!
What can be done to fix the situation in all these stagnant, bankrupt nations?
There is much debate about how they’ve all got into this mess. But we are where we are.
The priority should be working out how to fix things before economic, financial, social and political conditions deteriorate to a point of no return. Opinions differ about how to achieve that.
…“Stimulus” is about propping up GDP with continued high government borrowing and spending, manipulating asset prices with ultra low interest rates, and money printing…
Most people fall into either the “austerity” or “stimulus” camps. “Austerity” is about cutting government spending and raising taxes on the private sector. “Stimulus” is about propping up GDP with continued high government borrowing and spending, manipulating asset prices with ultra low interest rates, and money printing (so called “quantitative easing”).
In my opinion both approaches are wrong.
In general the Europeans have followed an austerity route, whereas the Japanese and Americans prefer stimulus. The British are doing a bit of both, and neither very convincingly.
In all cases, the ratio of government debt to GDP continues to grow. Either government spending remains out of control, or economies are flat or shrinking, or both. No one knows exactly when, but one day the limits will be reached. To avoid crisis, something needs to happen before that day of reckoning.
So what to do?
My starting point is that individuals and private companies are better at allocating their resources than vast government bureaucracies. We need private enterprise to grow the private part of the economy – not monolithic state policies designed by committees of bureaucrats.
So how do we get there?
First, cut regulations that are barriers to growth. In most developed countries there are masses of unnecessary licences, health and safety rules, employment laws, government inspections and other pointless things that could be cut out.
Second, significantly cut personal and corporate taxes, leaving more money in the private sector. This will boost private spending and leave more corporate profits to be reinvested in business growth. At the same time, simplify tax codes. This will leave more time for productive activity. Or even just more time to do something enjoyable!
Third, slash government spending. I’ve seen first hand the wastage in a large corporation with a profit motive. I can only imagine the size of the wastage in government departments where the only motive is “empire building”.
A reduction of total government spending by 20% would be a good start in my book. Something like 40% should be achievable within, say, five years.
Fourthly, the government will need to increase borrowing in the early years as taxes are cut and it takes time for the private sector to really get going. Government borrowing would provide the bridge allowing the private sector to receive stimulus through reduced taxes and simpler regulations.
In time, the private sector host that we all depend on would be on the mend. The public sector parasite would be tamed. Eventually governments could start running budget surpluses again (remember those?). Then the long process of paying down past debts could begin in earnest.
…austerity versus stimulus debate is a false one. The real debate is public sector versus private sector…
The austerity versus stimulus debate is a false one. The real debate is public sector versus private sector. Most countries need to slash the public sector while freeing up the private sector.
Surely this approach wouldn’t be so hard to achieve with some decent political leadership?
Oh…there’s the problem. There are no real political leaders these days. Just empty suits and wind bags, guided by focus groups and the media.
Probably we’ll have to keep watching this sad saga for a few more years, until the final meltdown. In the meantime, seek to invest elsewhere.
Until next time,