Obama Lectures Europe on Deficit Reduction

This is no joke, folks. The man who has raked up more debt as president than all his 43 precedessors combined is telling the Europeans, who have been fighting their government deficits a lot harder in one year than Obama has in four, on how to handle their debt:

U.S. President Barack Obama pledged at a summit on Saturday to work with Europe on a package that balances growth with debt reduction as world leaders try to prevent the worsening euro zone crisis from destabilizing the global economy. At the wooded Camp David retreat in Maryland’s Catoctin Mountains, Obama and leaders from other major economic powers are seeking ways to soothe financial markets after worries about Spain’s banking problems and the risk of a Greek exit from the euro zone sent world stocks to their lowest levels this year.

And there is not a single thing these guys can cook up in a couple of hours of scripted talks that has already not been tried and failed. What Europe needs is far more complicated than, quite frankly, president Obama is capable of comprehending. And I seriously doubt that any of the European leaders are willing to consider dismantling the welfare state – which is the only sustainable solution to this debt crisis.

A shirt-sleeved Obama opened the morning session on the global economy at a rustic lodge, promising to seek ways to restore healthy growth and jobs and address concerns in Europe. “All of us are absolutely committed to making sure that both growth and stability, and fiscal consolidation, are part of an overall package in order to achieve the kind of prosperity for our citizens we all are looking for,” Obama said.

What does Obama know about “fiscal consolidation”? Let’s remember that this man convinced his (very compliant) party buddies in U.S. Congress to pass a trillion-dollar “stimulus” package, and borrowed every dime for it. As we all know, the effectiveness of that “stimulus” package in terms of improving the American economy was comparable to a mouse trying to move a rock by pushing it with its nose.

A better definition of the stimulus bill is a “bailout bill” for the states. In that it has eerie parallels to the European attempts at bailing out Greece. But Greece refuses to recover, as do the U.S. states, and there is a very simple reason for that. A bailout is an entirely defensive policy strategy that in essence extends the credit line for governments who are already having terrible problems paying their bills. The extended credit line does not change the cost structure of the troubled government’s budget.

Obama sold the stimulus bill as an offensive rescue operation for the U.S. economy. The only conclusion we can draw from this is that the man has no idea what it means to get an economy going again. And now he wants to share his macroeconomic ignorance with Europe.

Back to the Reuters story:

After an early morning meeting with Obama, British Prime Minister David Cameron said he detected a “growing sense of urgency that action needs to be taken” on the euro zone crisis. “Contingency plans need to be put in place and the strengthening of banks, governance, firewalls – all of those things need to take place very fast,” he told reporters.

The “strengthening of banks” is already being forced upon our financial institutions. It is being done in a way that will very likely aggravate the already emerging global recession.

As for strengthening governments, that is precisely what the current austerity policies aim for. As I explained in my recent working paper, this is also the wrong recipe for an economy in trouble. What Europe needs is less government, not more. But as the Reuters report shows, that insight is conspicuously absent in the Camp David talks:

European Union leaders seemed keen to stress on Friday that they would stand firm in protecting their banks, after news of escalating bad loans raised the specter that rescuing Spain’s banks would crash the euro zone’s fourth largest economy. “We will do whatever is needed to guarantee the financial stability of the euro zone,” EU President Herman Van Rompuy said. Earlier French President Francois Hollande suggested using European funds to inject capital into Spain’s banks, which would mark a significant acceleration of EU rescue efforts.

A large part of the bank trouble in Europe is related to the EU’s government debt problems: they have been lending money to Greece, Spain, Portugal and other shaky governments under the auspices that euro-denominated government bonds are as rock-solid safe as a Swiss treasury bond. As they have learned over the past couple of years, that is nowhere near the truth. Since they bought government bonds to balance their riskier investments in real estate, they now have nowhere else to go. As I explained the other day, Spanish government bond rates are closing in on seven percent! Hardly a sign that investors have confidence in the Spanish government’s ability to pay its bills.

And now for the almost comical finale of the Reuters article:

Balancing a growth agenda with efforts to lower government debt through fiscal belt tightening is a crucial part of the G8 discussions. Obama has aligned himself with Italy’s Prime Minister Mario Monti and the new French president in putting more emphasis on growth. That places pressure on German Chancellor Angela Merkel, who has pushed fiscal austerity as a the prime means of bringing down huge debt levels that are burdening European economies.

As we already know, the “emphasis on growth” touted by new French President Francois Hollande consists of spending more money on public education. The problem is that this increase in government spending comes at a time when both the French government and other governments are in deep debt trouble. To avoid adding even more to their debts, Europe’s governments (and the American, once we have an economically literate president) will therefore raise taxes on high-income earners. Since high income earners are often small business owners and therefore crucial job creators, you cannot afford losing them. But this is precisely what is happening in France, which means that when Hollande has spent even more money on public education, there won’t be anyone there to hire the graduates that his schools are supposed to churn out.

In other words, there won’t be a dime’s worth of growth coming out of this “emphasis on growth”. A far better strategy is to roll back entitlements and combine the reduction in government spending with lower taxes. But that would mean, ultimately, an end to the welfare state, and Europe’s statist politicians are no more willing to give up the welfare state than America’s statist president. Therefore, that item is off the agenda.

Obama’s lack of macroeconomic competence is a problem for America, but quite frankly I don’t think there is a very big risk that he is going to succeed in exporting his erroneous insights to Europe. Those guys are too busy messing things up on their own to listen to another ignoramus.

The only problem in this – aside the fact that America and Europe are both led by people of remarkable economic ineptitude – is that Obama might be influenced by European austerity. So far it looks like he is trying to reject that idea, but when someone is guided by political strategery rather than good judgment, he will accept and endorse new policy ideas if he thinks they can benefit his own political agenda. If Obama sees austerity as a winning strategy for America, he is going to adopt it.

For the sake of the American economy, it is worth hoping that he won’t get that opportunity but will instead lose the November election.