After concerns over the bailout of Greece initiated a collapse in the futures market and prices last week, an angry cattle feeder opined to me how ridiculous it was that a country like Greece, with an economy similar in size and scope to the Dallas/Ft. Worth metro area, could cause such bloodletting.
He was correct about the size of the Greece economy, but that isn’t the point. No offense to the Greeks, but the world could watch Greece fail and it wouldn’t cause a ripple, but the failure of the Greek system would have far-reaching effects.
Recent events have shown just how fragile our banking system is. Why did Germany respond with billions to bail out a neighbor that’s been living well beyond its means for decades and exhibiting more than just a little reluctance to change? It’s because Germany’s economy is dependent upon Europe’s economy.
I won’t get into all the arcane details, but countries like Spain and Portugal held lots of Greece’s debts; if they defaulted, it would have put pressure on those countries whose debt is held by countries like France, whose debt is held by somebody else. It becomes such a convoluted mess that nobody can afford to let anyone fail.
It’s like a row of dominoes, and it totally distorts the role of the market in keeping fiscal sanity in place. If no one can fail, then everyone must bail everyone out. Thus, only foolish governments live within their means; at least from a political viewpoint, the race becomes one of who can live farthest beyond their means.
Of course, similar things are happening in America where the too-big-to-fail mantra links government and big business in a marriage of convenience that forces each to rely on the other to sustain itself, and ultimately removes accountability.
The question is: will government deficits and spending self-correct on their own or will it take a cataclysmic financial disruption to force it to happen?
We know what we have to do but how to get there isn’t as clear. Rich Karlgaard, Forbes publisher, recently penned an interesting piece entitled “Let’s have a Boom!” I’ve distilled his thoughts into a five-step program:
- Bring the size of government back in line. History tells us the economy is the most vibrant when government is 18% of GDP or less. Under George W. Bush, that ballooned up to 20%; Barack Obama has taken that percentage to 25% and it is still moving higher.
Even Obama talks about the need of reducing the deficit, but it will take serious measures to rein in spending, perhaps even a constitutional amendment, as we certainly don’t show any signs of having the will to curtail spending let alone stop its growth. Taxes will be looked at as the salvation, but history also tells us increased taxes lead to decreased productivity.
- Stabilize the value of the dollar. The necessity for the Fed is real, but it should have one objective, the one that it truly can address—and that’s a stable money policy.
- Embrace trade and entrepreneurship. Fair trade is under attack by both the left and right of the political spectrum, and support is dwindling in general. We must either embrace the global economy or slink back into an isolationist approach. The marketplace will serve as an engine of growth if allowed to function without excessive taxes and regulation. Success isn’t something to be punished but rewarded.
- Energy costs are crucial to growth and we have to develop sources for the future that are feasible.
- Education reform. The U.S. university system is still the envy of the world and where the world comes to get educated. Unfortunately our K-12 system has and continues to lose ground; by any subjective standard, we no longer rate in the top 10 and, by many measures, don’t even rank in the top 20. Down the road, education along with freedom and opportunity will dictate how competitive we will be in the global marketplace.