Economic Outlook: Oceans apart

By ANTHONY HALL, United Press International  |  June 24, 2011 at 9:34 AM
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In Washington and Brussels, solutions that don't work seem to be the common denominator.

Republicans announced they were pulling out of budget negotiations led by Vice President Joseph Biden that were billed as on course and going well, cutting trillions of dollars in spending over the next decade.

House Majority Leader Eric Cantor, R-Va., however, pulled out of the talks, The Washington Post reported, because of an allergic reaction to raising taxes, which Senate Minority Leader Mitch McConnell called "a poison pill to any debt-reduction proposal."

Staged, predictable, grandstanding, ideological … however it is described, both parties must now go through the public relations loop of declaring Republicans the party that protects the rich and Democrats the party that protects the poor, and never the twain shall meet. In truth, the Post presents, in a separate article, the ill-advised George W. Bush era tax cuts derailed the nation's surplus path in 2003, switching to a track that led to massive deficits with a swing of about $15 trillion from black ink to red. The only way to save face is to pretend otherwise and proceed with the delusion.

If memory serves, the Post said, Bush's Treasury Secretary Paul O'Neill resigned over the tax cuts, saying the purpose was not financial prudence at all but "to make sure," he said, that "economic conditions were great going into the president's re-election."

In hindsight, said Pete Domenici, R-N.M., who was chairman of the Senate Budget Committee when the tax-cut proposals became vogue in Washington, "Nobody would have thought that all these things would have happened after you cut taxes … That you'd have two wars and not pay for them. That you'd have another recession."

"You would pause before you did it, if you knew," he said.

Never mind this seems to imply the nation was being run by leaders who had never read a history book … Republicans are now holding the nation hostage with their demand that taxes be left alone, threatening to vote no on raising the debt ceiling before the Aug. 2 deadline.

In Brussels, financial leaders have drawn a line in the sand, demanding Greek leaders push the most recent austerity program through Parliament in its entirety.

This closes a $7.9 billion budget gap in Athens and allows the European Union to release the next tranche in a $155 billion bailout package and contemplate a second international loan.

The loudest opposition to this comes from protesters in the street, but an increasingly urgent number of economists and writers are advocating for Plan B, which would be for Greece to walk away from the euro.

Resorting to its own currency, Greece can allow its currency rate to fluctuate on the open market, which would begin to reset the value of the country's goods and services at a competitive level. If done with prudence, Greece can also initiate a program of printing money to reduce its deficit.

What's elegant about this solution is that it cuts to the quick: It makes Greece's fiscal problems a matter of revaluing the value of its exports and imports. After that, Greece can pull itself out of its hole by earning, rather than borrowing.

Otherwise, "Welcome to the New Imperialism!" writes economics Professor Peter Morici at the University of Maryland.

"The euro is undervalued for strong economies like Germany and France, boosting their exports and growth, and overvalued for poorer debt laden countries like Greece and Portugal," Morici wrote.

This revisits the proposals that begin with the argument that the eurozone has stacked the deck in favor of export economies, such as Germany and France, which are now dictating the terms of the bailout the imbalance has created. They are not sharing the pain, they are protecting their taxpayers and their banks. The popular complaint in Germany -- and elsewhere -- is that workers in Greece could retire at an early age … how does that compare to factory workers in Germany earning a living at 32.5 hours of work a week?

In international markets Friday, the Nikkei 225 index in Japan rose 0.85 percent and the Shanghai composite index in China gained 2.16 percent. The Hang Seng index in Hong Kong added 1.9 percent and the Sensex in India soared 2.89 percent.

In Australia, the S&P/ASX 200 rose 0.17 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.99 percent while the DAX 30 in Germany rose 0.59 percent. The CAC 40 in France rose 0.75 percent and the Stoxx Europe 600 gained 0.33 percent.

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