Euro zone austerity shrinks economy

Count your blessing that the United States did not put deficit reduction over stimulating jobs as our solution to the Great Recession.  Europe’s austerity approach has given them no blessings to count.

 “The euro zone's…economy shrank in the second quarter, having flatlined in the first, despite continued German growth which economists said could soon be snuffed out,” read the first line of a Reuters story yesterday.  “The 17-nation currency bloc contracted by 0.2 percent on the quarter data showed on Tuesday.” 

Economists say it is likely to get worse.

While there was anemic growth of 0.3 percent or less in Germany, Austria and the Netherlands and France had zero growth for the third consecutive quarter, the news was very bad for the other European countries.

How much did some of these national economies drop.

Cyprus down 0.8 percent.

Finland down 0.7 percent.

Greece down 6.2 percent.

Italy down 0.7 percent.

Portugal down 1.2 percent.

Spain down 0.4 percent.

"Overall it confirms the idea that the euro zone is in a recession phase," Aline Schuiling, economist at ABN AMRO, said.  "What we see is a vicious circle of budget cuts, high interest rates in the periphery and sovereign debt rising…We expect another contraction in Q3."

According to the Reuter’s story there is a “growing debate inside and outside Europe about the sense of austerity drives.”

What definitely doesn’t make any sense is for there to be any debate about the U.S. following the austerity, cut-the-deficit-priority European model.

USA winning the economic Olympics

Small businesses again led the way with 44.8% of the 163,000 new jobs creating in July according to the ADP National Employment Report.  Compared to the sluggish new job growth of 75,000 average per month from April to June, the new data is a welcome sign of a still growing economy.  The European “austerity” countries still mired with failing economies must be envious.

While our friends across the Atlantic bought into the “slash government spending” approach to climbing out of the Great Recession, the U.S. took the government stimulus approach (even though a weak one) to save and create jobs.  Our plan is working and theirs is not.

“This increase marks two-and-half years of positive job growth. According to our data, businesses across the country have restored nearly 4 million jobs during this period with an average of 131,000 new positions a month,” said Carlos A. Rodriguez, president and chief executive officer of ADP.

Our government stimulus plan is working.  Europe’s austerity plan is not.  Why are we still even having this discussion?

Failed economic experiments

In the past 12 years we have witnessed two of the biggest failed experiments in how to improve the economy of countries.

The first experiment was here in our country. In the 2000s we went on a tax-cutting spree for the wealthiest Americans, allowed multinational corporations to drastically cut their income taxes through offshore tax havens and other loopholes, and allowed Wall Street to pursue financial gain with little regulation.

All this was done because our federal government bought into the proposition that if we just let the rich and big corporations have more after-tax income and got out of the way of the financial institutions, our nation’s free-market economy would take off and worries about job creation would be a thing of the past.

But instead we had the worst job creation record since 1939 and the birth of the Great Recession that spread around the world.

The Great Recession gave birth to the second experiment in Europe.

Many in the U.S. proposed that the path to recovery required massive cuts in government spending to cut the nation’s deficit in order for the business community to have the confidence to create jobs. Fortunately we mostly went with a government spending stimulus plan (even if it was too little) to grow and save jobs. But while the result has been consistent private sector job growth for over two years, the recovery hasn’t been robust enough possibly because state and local governments chose the austerity path and cut jobs.

In Europe it was a different story. Most nations chose the debt-cutting austerity path to recovery from the Great Recession. They slashed government spending by eliminating jobs and benefits for their citizens.

But businesses did not reward these countries with job creation even with smaller governments and less social programs. What the European countries got instead was less money flowing through their economies and worsening financial conditions. Their citizens turned on their governments and some of the governments have even turned on each other.

We’ve seen street protests and riots over economic conditions. Greece is near bankruptcy and its government is in crisis. France just threw out an incumbent president for the Socialist Party challenger. The economies of Britain, Italy and Spain are not recovering. The stability of the whole European Union and the euro are possibly in jeopardy and fingers are being pointed.

With this “improve the economy through austerity”experiment thoroughly failing, the European leaders at Camp David over the weekend shifted gears to support more pro-growth policies. Only Germany still thinks that austerity is still the best medicine but it too has seen the results.

The European countries are finally learning what small businesses instinctively know. Consumer demand is what drives job growth and consumers can’t spend if they don’t have the money. And when job growth is sustained, it produces more government revenue that can eventually be used to deal with the deficit when times are better.

Let’s hope that it’s not too late to turn the economy of Europe around with a growth strategy that has been successful here.

And let’s also hope that the “austerity first/don’t tax the wealthy and big corporations/deregulate Wall Street” politicians here can set their partisanship aside and learn from both of these failed experiments.

Crowdfunding to the rescue for small investors

The Great Recession has apparently changed the way individual Americans view investing.  Buying stocks is no longer seen as safe for long or short-term investment and trading is way down.  Credit Suisse Trading Strategy reports that daily trading in American stocks continues to fall and is down almost 50% from the peak in 2008.

The lesson learned from the Great Recession is that Wall Street cannot be trusted.  While the market might be reaching new highs, it is doing it without individual investors who, unlike high-speed traders, can feel that something is wrong.

You would think that with this stock market crisis the financial institutions would welcome regulations to inspire investor confidence.  But instead of looking at Dodd-Frank—the financial reform passed to protect our economy from the practices that collapsed the market—as their vehicle to return to pre-Great Recession trading volume, Wall Street is doing everything it can to undercut and roll back the new rules.

And while the experienced Wall Street investors are walking away from trading, mom and pop small investors are looking for something else entirely.  Fortunately, Congress has recently opened the door to a dramatically different type of equity investment. Investments that Americans know the country needs—investments in their own communities.

Soon all of us will be able to invest, not in some faceless symbol on our computer screen, but in a tangible business we can see, touch and even taste in some cases. 

The new crowdfunding Security and Exchange Commission (SEC) rules will allow small, long-term investments in businesses not only in your community but in every community.   It is this sense of community that will give regular Americans more investment confidence.

Last Friday the American Sustainable Business Council held a webinar on crowdfunding, “Crowdfunding is the law, now what?” 

The webinar featured Andy Green, Legislative Counsel to Senator Jeff Merkley (OR) who was the prime sponsor of the crowdfunding provisions signed into law.  Also participating was Jenny Kassan, who launched the equity crowdfunding effort in 2010 with a petition to the SEC, and Mary Rick, a crowdfunding consultant and former director of the crowdfunding portal The Hoop Fund.

Get up to speed on this exciting new small investment opportunity and vehicle for small businesses to have more access to capital.  You can listen to the audio of the webinar here.  Be patient in opening the link since it is a large file.

Groundhog says....

The economy is getting better.  I don’t have to rely on the monthly jobs reports, the next being this Friday, to tell me that.  I can just look at my fax machine.

Prior to the Great Recession, I would receive probably 1 or 2 unsolicited faxes a day promoting vacations, loans, insurance, etc.  When the economy went into the tank, that all stopped.  Those hawking these mostly shady offers weren’t getting a return on their investment.  The gullible or desperate couldn’t be enticed with these “too good to be true” offers.

But several months ago I started getting one of these fax offers a week.  Then more recently two would come in per week. 

This morning I had two great opportunities waiting for me on my fax, one for affordable life insurance and the other for health insurance.  The economy is picking up speed. 

Want another grass roots economic indicator?  Yesterday I was talking to a guy who works in the rent-to-own car business.  He told me that he now has to recover about 5 cars a month from customers not paying.  Last year he was having twice as many cars recovered. 

I’ll let the experts give us their economic forecasts.  But my “groundhog” indicators are predicting an earlier than expected economic recovery.

NYC jobs we can do without

The investment banking firms on Wall Street are predicted to cut up to 10,000 jobs in 2012 on top of the 1800 jobs eliminated since April of this year.  The industry lost about $3 billion in the third quarter of 2011 and total forecasted profits will be lower than expected.

While New York City will feel some pain from losing these highly paid jobs, the rest of the country and our nation’s economy will probably be better off.

It takes a lot of profits to pay the big salaries and bonuses of these Wall Street paper-pushers who make a living from cutting deals and promoting investments.  That means the products they market have to offer higher and higher returns—translated that means riskier and riskier investments. 

The securities industry could afford all these employees because they promoted greed and created unsound investment products that made them easy money.  The result was the collapse of our economy and the Great Recession.

Every one of us paid the price for the fast and loose Wall Street deals.  So we shouldn’t cry any tears for the investment banking jobs New York will lose.  If the city follows the advice of the New York Times, “developing more and different status jobs would be better for New York”. 

For the rest of us who worry about Wall Street resuming its irresponsible ways, we should be grateful if the investment banking firms have fewer mouths to feed.