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Tue June 19, 2012
Weekly Standard: The Buck Stops Over There
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
Barack Obama doesn't have George W. Bush to kick around anymore. At least not credibly. Sure, he will continue to argue that he inherited such a mess that his own policies can only be regarded as a smashing success. But it's been four years since the patient was turned over to the new president for treatment, and the economy's stubborn failure to recover its robustness tells us something about the efficacy of the Obama medicine. Which makes it increasingly difficult for him to continue to play the blame-GWB game. So Obama has found a new cause of falling growth and stubbornly high unemployment: Europe.
Now, no one can argue that our European friends are paragons. They have fiddled while Athens burned; done too little too late to save Spain's financial system; forced an exodus of talent such as Ireland hasn't seen since the potato famine (I exaggerate); replaced democratically elected governments in Greece and Italy with "technocrats"; issued a plethora of communiqués that amused but did not calm the markets; and adopted policies that have driven deficits up by stifling growth. Plenty of stuff to warrant a presidential j'accuse. Except for two things: The American pot is ill-placed to call the European kettle black, and the president's lack of personal support from his colleagues at the G7, G20, and other meetings makes him a less-than-ideal policy salesman. More important, the president's attempt to set Europe up as the new fall guy for his failed policies — besides Bush, other alibis have included supply chain interruptions due to Japan's tsunami — seems, shall we say, lacking in empirical support.
Europeans are disinclined to accept American advice for two reasons. First, our deficit exceeds that of the eurozone as a whole, and according to the latest studies by the Congressional Budget Office, we are in danger of incurring so much debt that economic growth will be well-nigh impossible. Hardly a model to which Europe should aspire. When Treasury Secretary Timothy Geithner tried to advise Europeans to step up borrow-and-spend, he was met with scorn. "It's always much easier to give advice to others than to decide for yourself," German finance minister Wolfgang Schäuble announced to the press, a thought usually expressed in the privacy of a conference room. Second, our political gridlock makes the slow-moving decision process of the eurocracy seem speedy, and our partisan feuding the acrimonious Germany-versus-everyone-else circus in Europe a lovefest. Obama's pleas to the Europeans to speed up decision-making are, to put it mildly, lacking in credibility.
On a more personal level, Obama has trouble getting a hearing from his European counterparts, I am told by attendees at various G7, G8, G20, and G-whatever meetings. He stands aloof from them, a man apart in gatherings of politicians who are by instinct flesh-pressers. Reliable informants tell me that his colleagues at these meetings would at times do George W. Bush a favor when he needed one for domestic political purposes — they liked him even if they found some of his policies insufficiently pacific.
Obama enjoys no such advantage. This is the man who couldn't get the Olympics for his hometown of Chicago, and who was treated with contempt by China, and ignored by other nations at a meeting in Denmark when he sought some progress on global warming to advertise to his green constituents. This is also the man whose partner in a diplomatic reset, Vladimir Putin, said he was too busy to attend the G8 and NATO meetings at which President Obama served as host, and then found time between harassing dissidents to hop over to Beijing for a round of meetings.
The president's lack of standing with his European counterparts is unfortunate. With Germany so far sticking to its austerity über alles policy, an American voice calling for more emphasis on pro-growth policies would be an important counterweight. Never mind: The Europeans will have to work that out with German chancellor Angela Merkel, and persuade her that hardworking Germans should transfer more of their income and wealth to the rest of Europe — a task made more difficult by French president François Hollande's decision to roll back one of Nicolas Sarkozy's reforms and lower the retirement age for many workers from 62 to 60 years, while Germans are expected to remain in the traces until 65-67 years of age.
So much for where we are. Now for where we are going. Economists are uncertain, but the consensus seems to be that such growth as our economy will chalk up between now and the election will be insufficient to create enough jobs to make his stimulus program a talking point for the president and his supporters, especially if the recent slowdown in consumer buying persists. No surprise, says the White House: The European contagion has hit our shores. Why, just look at the devastating effect of Europe's unfolding recession on our exports. Well, let's look.
While exports have been contributing to our recovery, we remain a nation not highly dependent on peddling stuff to foreigners. To the extent that we do, our leading customers are Canada and Mexico, not widely considered European countries. Last year, total exports accounted for a bit less than 14 percent of our GDP, 22 percent of which went to the EU — or 3.1 percent of GDP. Last month, the month of the miserable jobs report that the president wants to pin on the EU, our exports to that troubled area dropped by some 11 percent, or 0.3 percent of our GDP. If anyone outside of the White House believes that such a trivial drop in shipments to Europe caused job creation here to slow, he has yet to emerge.
Indeed, the mechanism by which Europe's troubles will reach our shores is, to put it mildly, unclear. Our mutual funds have greatly reduced their exposure to Europe's banks, and our own banks are in far better shape and less linked to their European counterparts than ever. In fact, it can be argued that Europe's difficulties have made America more of a safe haven for flight capital, thereby helping to keep both interest rates and inflation here low as the strong dollar puts downward pressure on commodity prices.
There is one contagion mechanism that might, only might, fit the president's narrative as he attempts to divert attention from his failed policies by pinning blame on Europe — and most especially on Frau Merkel, who continues to link aid to her less fortunate eurozone colleagues to their willingness to rein in their trade unions, reform their labor markets, and take an ax to their public sector payrolls. Wall Streeters, or some of them, contend that a worsening of the situation in Europe, especially a Grexit — Greek exit from the eurozone — will rattle stock markets here, cause a flight from shares, and hit investors in their pocketbooks, with knock-on effects on consumer spending and business investments. But as the estimable Bret Stephens pointed out last week in the Wall Street Journal, previous overseas financial upheavals have had no such effects on the U.S. economy. Do not confuse the instantaneous response of the stock market with a fundamental change in the economy. After the 1997 collapse of Asian currencies, the Dow plunged, but the economy did not, growing at better than 4 percent, a feat it repeated after the Russian ruble crisis. "Bear this not-so-ancient history in mind," writes Stephens, "as the Excuse-Maker-in-Chief cites another imploding region to explain 1.9 percent growth and 8.2 percent unemployment."
None of this is to deny that some U.S. companies will find life a bit less pleasant should the European recession deepen and lengthen. They will: Starbucks is already seeing a slight drop in sales in Europe. Nor should we be as confident that we will escape any fallout from a European financial upset and its ripple effects as the president is that we will be hit hard by such an event. If we learned anything from the aftermath of the demise of Lehman Brothers it is that we should not be overly confident in our ability to understand all of the interconnections in global financial markets. So it is not inappropriate to worry. But neither is it appropriate to excuse the president's inability to cope with our economy's weakness by a serial hunt for some outside force on which to place the blame. Or the Republicans' willingness to make it easy for the president to avoid a grand compromise on fiscal policy by elevating a desire for lower taxes on high earners to the sole, or at least the primary goal of economic policy.
In the end the course of the American economy will be determined not in Berlin, but in the voting booths of America, where voters face a choice, not an echo — a choice between a candidate who believes, really believes, that America's future prosperity depends on an expansion of the public sector, and one who seems more likely to see our salvation in unleashing the private sector by reducing regulations and reforming the tax system. So far, Europe's voters have been denied a voice in their economic future by a eurocracy skilled at avoiding the ballot box. We are luckier here in America.