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Structural, Not Cyclical

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The terrifying and exciting basic fact of today is that the structural underpinnings of the world economy have shifted. The plates under the globalization of the post 1970s oil crises are heaving and buckling. The Anglo-American belief and experience with free market deregulation has come in for two rounds of battering attack since 2000. The Keynesian state intervention solutions to smooth and lessen the impact of undesirable market outcomes are fairing little better. Very rarely in history do we see the excesses of market fundamentalism and state intervention implode in near unison. 2007-2009 recorded a massive and destructive collapse of private debt and speculation. Borrowing and returns from speculative investment had become an essential free market coping strategy. 2010 is hosting a spectacular explosion in deficit driven state intervention in the economies of Greece, Portugal, Spain, California... Lower taxes and greater service provision has become the state led coping strategy for the stresses of global economic imbalance. It is a strange irony that we have seen so much in the way of earthquake and eruption in the natural world too.

These crises are not independent events. There are regular and large dislocations from our fast evolving global economy. Wages and employment opportunities have suffered for many over recent years. Local political and economic conditions vary widely. Different states and areas have developed coping strategies. In the US these strategies involved rising debt, returns from speculative investment and lowered tax payments. In many locales relatively modest tax burdens and generous state subsidies and benefits have plugged gaps and calmed political tensions. Market and state strategies are coming in for structural pressure today. This is unusual and portends political tension and change.

Huge and structural economic downturns always place state finances under enormous pressure. The rising unemployment and falling tax revenues that occur with recession have large and immediate impacts on state balances. The inadequacy of revenue streams to spending flows is stretched and exaggerated in any downturn. Struggling states undertake decisions and make cuts that stress private markets. We are now seeing the most precarious state finance arrangements succumb to fallout from recession. This in turn, is stressing private asset markets all over the world. This week's global market reaction to events in Greece and Portugal provides one dramatic example.

US budget problems are not entirely dissimilar to those ravaging Mediterranean nations. We are several years of present spending behind the afflicted in Europe in terms of deficit and debt to GDP ratio. Greece is a stand out leader in debt to GDP level, over 110%, and also in deficit to GDP terms, nearly 13%. It is also worthy of note that our Federal Government borrows more than the Greek national debt every 6 months these days. The crux of the problem in Greece, Portugal, Italy and Spain is the structural mismatch between tax receipts and spending. In all cases, the severity of falling revenues and rising unemployment have accelerated and deepened pre-existing problems. Much the way decades of stagnant real wages and rising borrowing came to an explosive head in US housing markets in 2007; state borrowing outran sustainability in several European nations.

America's private debt solution to structural economic problems worked until debt levels rose and faith ebbed. Greece followed a similar path, only in the European nations the state borrowed and spent while under-taxing. Unsustainable Keynesian payment streams were the order of the decades in Greece just as unsustainable reliance on borrowing and speculative returns were the order of the day under the Anglo-American model. Both worked until faith and further willingness to lend were exhausted.

All of this tells us that we are facing a requirement for structural change. State subsidy, ballooning debt and speculative return allowed imbalance to last and grow. This will not be possible in the future. Debt levels must fall, balance between state receipts and spending must be achieved, or at least approximated. This means more savings, higher taxes and less in the way of government subsidy. The particular forms, severity and political arrangements will vary greatly over time and place. The basic need for these structural changes will vary very little.

We find ourselves in a unique historical moment in which coping mechanisms for structural economic problems are proving inadequate. The great looming political and economic fights in the US and EU will be over who pays and who benefits as imbalances are slowly and painfully reduced. Across southern Europe unions and the young are taking to the streets. Austerity programs are being signed and readied. In the US new political movements are forming as households and individuals struggle to make their way forward under changed rules. Tensions are already high as American politicians debate new taxes, programs and regulations. We are furloughing state workers, raising tuition at colleges and universities, letting teachers go and cutting services. We have not started to restrict Federal Government spending yet. We have not begun the painful process of debating where and what to cut. There will have to be more difficult decision making to come as America wrestles with her sizable imbalances. Today's struggles in Europe and tomorrow's conflicts here are related.