Obama's Nuclear Option on Economy

John Ransom
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Posted: Jun 02, 2011 12:01 AM

In the latest surpirse regarding the economy, Wednesday's job report from ADP showed that private employers added only 38,000 jobs in May.

Surprise!

Economist expected private companies to add about 175,000 jobs for the month.

The report is the next in a series of disappointments on the economic front.

Home sales have continued to lag, GDP has been revised sharply downward, and inflation has taken a larger bite out of corporate and family budgets.

When economists are this far off, one has to start looking at their underlying assumptions.

Perhaps it's because they all went to the same schools and continue to use the same stimulus-addled math.  

On Friday, the Bureau of Labor Statistics will release its nonfarm payroll report which includes government jobs in addition to private job data. With state and local governments juggling to balance their budgets, government employment is expected to shrink as they lay off workers.

The public has become increasingly skeptical of public stimulus spending, which means that the government is, mercifully, running out of its preferred policy means of spurring the economy.

From here on out, Obama has only two options left to address the job creation crisis:

  1. Cut taxes across the board
  2. Suspended regulations that stifle business

Of course Obama will do neither of those things. His party would go nuclear if he did. So, instead he'll go play golf.  

The most relevant question you can ask the president today is: "How's that back swing?"   

As I observed last week in This is What Stagflation Looks Like, even as world equity markets move down with signs pointing to slowing global economic growth, a European Central Bank member is warning about inflation, caused in large part by monetary policy in the US .

"We have to take seriously the April rise in long-term inflation expectations and take it as a sign of increasing price perspectives when monetary policy is expansive," said Jens Weidmann, the head of Germany's Bundesbank.

Translation: We need to tighten up money to combat inflation because the Americans won't face their own fiscal crisis.

Tighter money supply means slower growth, fewer jobs.

This really is what stagflation looks like: No growth, no jobs, rising prices.   

In the markets we've become slightly immune to such disappointments because the markets are always just a measure of expectations; economists expectations, analysts expectations; shareholder expectations. 

But the difference between 179,000 and 38,000 is stil pretty big even with diminished expectations that the market has been rationalizing.

By that measure, however, there is nothing truly unexpected about any of the bad news on the economic front. 

Politicians, progressive wonks and J-school business writers seem to be the only ones who are really surprised.

For the rest of us, we can take grim satisfaction in saying that we told you so.

In Europe, by contrast, they seem to have gotten religion about how to jump start an ailing economy.

Greece has been loosening regulatory burdens on business and even agreed to cut taxes.    

International lenders known as "the troika" have agreed to another bailout of Greece as long as Greece's socialist government agrees to...wait for it...cut taxes to stimulate economic growth. 

It's amazing the lengths socialist will go when pressed. 

We now know empirically that Socialist Greece and Communist China are both more dedicated to capitalist-based reforms than our current adminstration in Washington, DC.  

Cut taxes? What a novel idea. Wonder if anyone has thought of that before?

"ATHENS (Reuters) - Greece appears to have agreed a tax cut with its international lenders, aimed at forging a broad consensus for more austerity to avoid a debt default, but the opposition said on Tuesday this would still not win its support."

With Greece teetering on the brink of financial ruin, the socialist government has agreed to cut the VAT according to reports by Reuters. The VAT cut comes in an effort to restart the Greek economy, which has been in a free fall, burdened by entitlement debts it can not pay. 

"Greece's conservative opposition leader Antonis Samaras," reports Reuters, "has demanded tax cuts -- including a 15 percent flat rate for corporate tax -- as the price for a deal with the government, which the EU has insisted on as a condition for more funds."

In the U.S., which has one of the highest corporate taxes in the world, Republicans have proposed a corporate tax cut to 25 percent from 35 percent. 25 percent is the current standard corporate tax in Greece  today. 

"If correct, it is a good step but not good enough, not sufficient to restart the economy," an official at the [Greek conservative] New Democracy party said on condition of anonymity.

The Greek version of SEIU still has the "Hey, Hey, Ho, Ho" crowd out in force however:

"Meanwhile, about 50,000 people gathered in central Athens, in a seventh consecutive day of anti-austerity protests. Banging cooking pots, protesters held a banner in front of parliament reading: 'We won't go away until the government, the troika and the debt leave.'"

This really is what stagflation looks like: People fighting over shrinking public revenues, while politicians figure out how to promise more revenues, thereby again shrinking public revenues .

And it will be a long hot summer of stagflation until November of 2012.    


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