Dark Shadow Rising over Europe

This past weekend the French went to the ballot boxes in local elections. Recent pan-European polling has indicated that the socialists could become the largest group in the European Parliament, and that may very well happen. But if Sunday’s French local elections are any indication of what French voters think, perhaps the socialists in general should not get their hopes up too much. They were dealt a very serious blow by the electorate – and to make the defeat even more humiliating, the winners were of another, competing authoritarian brand:

The far-Right Front National (FN) was on course on Sunday night to make historic gains in France’s first nationwide elections since François Hollande became president. In what Marine Le Pen, the FN leader, described as a “breakthrough” and the “end of bipolarisation” of French politics, her party came out ahead in a string of French towns in the first round of municipal elections. The FN won an outright majority in the northern town of Henin-Beaumont and was first-placed in the eastern town of Forbach and the southern towns of Avignon, Perpignan and Béziers.

At the same time, the Telegraph reports, the socialist party…

was heading for heavy losses as voters appeared to punish his dithering and lack of results two years into his five-year mandate. These could trigger a re-shuffle of his cabinet, potentially seeing Ségolène Royal, his former partner and mother of four children, take up a ministerial post. … Almost 45 million French took to the ballot box to elect more than 36,000 mayors for the next six years in what was being seen as a test for the Socialist president, whose approval ratings have sunk below 20 per cent. While municipal elections are fought above all on local issues, disaffection with the main parties clearly bolstered the score of the anti-immigration, anti-EU Front National in the two-round contest.

The nationalists are the only political movement in Europe that can compete with the socialists in terms of authoritarianism. They are a less homogeneous crowd compared to the socialists, in part because Europe – at least right now – does not have that many strong outright communist parties. A notable exception is Syriza which essentially wants to turn Greece into a European version of Venezuela. However, the main reason for this is not that voters in Europe in general have turned their backs on collectivism – it is more a matter of socialists having pushed their ideological goals farther into the murky badlands of government expansionism. In some countries, like Italy, Portugal and Sweden, it is difficult to separate socialists from communists.

Alas, while the socialists are pretty well united around goals such as an even bigger welfare state, even more income redistribution and even more government interference with private businesses (and in some cases the nationalization of banks), the nationalists span a broader spectrum of views and visions. The “mild” version of the welfare state is represented by the Swedish Democrats and the Danish People’s Party in Scandinavia, the Pim Fortuyn List in the Netherlands and the Austrian People’s Party. A bit farther away are Vlaams Belang in Belgium, a separatist, nationalist party that basically wants to split Belgium in half and form an independent Flemish republic. Hungary’s ruling nationalists also belong in this category, as does Front National in France.

So far, the nationalists are essentially modern versions of reborn social-democrat parties from the 1920s and ’30s. Vigorously nationalist as those parties were, they drew a firm demarcation line between themselves and working-class imperialist communist parties of that time. The nationalism of the social-democrat movements were skillfully toned down and eventually removed after World War II and the atrocities committed by the National Socialists in Germany, leaving a vacuum that became even more glaring as Europe – in the middle of its long-term unemployment crisis – opened their doors to large scores of non-European, non-Christian immigrants.

Nationalists began alleging, in some instances correctly, that immigrants came and took jobs from Europe’s own young. They also alleged, even more correctly, that large segments of the immigrant population ended up living well off the welfare state. While the correct conclusion would have been to abolish the welfare state and respect each individual’s right to migrate if he can support himself, the nationalist conclusion was to reduce or even stop entirely any new immigration from outside the EU.

In some cases this sentiment has escalated to yet another level. Golden Dawn in Greece represents its most aggressive iteration, but the National Democrat Party in Germany are not far behind. In Sweden, the Party of the Swedes is capitalizing on rising but misguided frustration over high unemployment – especially among the young – and large immigration. Having their roots in now-defunct the National Socialist Front, the Party of the Swedes is not ashamed of calling for a fascist Sweden.

Some claim that this the outermost extreme of Europe’s new nationalist movement is out to build a unified, European fascist state. I would not be surprised if they are correct, but so far I have not found fully credible sources for this claim. Nevertheless, such an ambition goes well with traditional fascist ideology and would explain their keen interest in gaining a strong foothold in the EU parliament.

The big tragedy in all this is not that one of two collectivist, authoritarian flanks are competing for political power in Europe. The big tragedy is that less-collectivist segments of the European political spectrum are slowly imploding. Christian Democrats, Conservatives and Liberals have all been passionately pro-EU for decades, and now that the EU has basically turned into a power-grabbing behemoth voters quickly associate the power grab and the destruction of large parts of the European economy with the most EU-friendly parties. When they are now pushed to the edge of their own economic existence, and when they feel that their national governments are basically powerless vs. the EU, millions of voters turn to radical parties to find a “quick fix”.

Does this mean Europe’s fascism has been reborn? Eric Draitser over at the Boiling Frogs Blog seems to think so. He draws parallels between the nationalist movement in Ukraine and Syriza in Greece. I do not completely agree with him – I do not yet see a fully coherent fascist movement across Europe – but his article is well worth a read. I do agree that there is a dark shadow rising over Europe; the big question is just how big and ominous that shadow will become. And there is absolutely no doubt that it is growing, as shown in part by the very strong performance of Front National in France this past weekend.

Next Chief Eurocrat A Big Statist

Historically, elections to the European Parliament have not attracted much attention, neither from the media nor from voters. I know out of personal experience – 19 years ago I actually ran for the European Parliament for a small Swedish party that was critical of the EU and wanted some common-sense reforms to the welfare state. We did not get that many votes… But it gave me my first insights into EU-level politics, insights that I have built on over the years.

Since I moved to the United States 12 years ago I have gained yet another perspective on the EU. For each new angle I view the EU from, I see yet more reasons to be critical of it. My most profound criticism has to do with the striking differences between the United States and the EU: those who claim that the EU is evolving into a “United States of Europe” are profoundly wrong. The EU is built as a traditional European nation state, which primarily means no clear distinction between the three branches of government and a big democratic deficit in terms of accountability of elected officials.

Without fundamental reforms in these two dimensions – horizontally by splitting the three branches and vertically by giving voters real opportunities to hold their elected officials accountable – it is very dangerous to expand the EU. As has been demonstrated repeatedly during the Great Recession, the EU is fully capable of being a destructive governmental entity already as it is today; with even more powers transferred to the Brussels Eurocracy, Europe is in some pretty deep trouble.

One way to find out just who bad things can get is to listen to the two men who are frontrunners for the job as chairman of the EU Commission. Some call it the “presidency” of the EU – but that would be to lend more democratic credence to the job than it deserves. Nevertheless, the chair of the EU Commission is a powerful position when it comes to determining what area of the European people’s lives the EU is going to barge into next. Therefore, let us take a listen to the debate between the two frontrunners, “conservative” Jean Claude Juncker and fanatically socialist Martin Schhulz. The debate was organized by Der Spiegel, the tragically anti-American German news magazine. Right off the bat, the debate actually gets into the issue of the EU’s glaring democratic deficit:

SPIEGEL: What would you do better as European Commission president than Jean-Claude Juncker?

Schulz: I would no longer seek political solutions solely through the EU’s institutional structures. I would open the Commission to the greatest degree possible. Brussels needs to stop interfering in every trifling detail. Whatever can be decided at the communal, regional or national level should be decided there. I am a man of parliament, a man of the people. Juncker is a representative of the executive.

Juncker: Nonsense. I am not a person who is only versed in the executive. I have always engaged extensively with the European Parliament and sought joint solutions on many issues. At the same time, it is in no way a disadvantage to understand the sensitivities and interests of the nation states on the European Council. I’m better at that than Martin Schulz.

Schulz, the socialist, has the backing of the socialist political momentum at the European national levels. After half a decade of crippling austerity policies, many Europeans truly feel the pain of welfare-state cutbacks. Since at the same time their taxes have gone up, they have been given no chance to move forward with their lives less dependent on government. Unfortunately, due to the complete incompetence of anything right of center in European politics, voters take the austerity policies behind the welfare-state cutbacks as a right-wing attack on the welfare state. This, together with the fact that austerity originates in Brussels and that the EU has strong-armed national governments into compliance, have driven scores of voters into the arms of the socialists.

Schulz the socialist knows what notes to play to capitalize on this surge. He knows that by portraying the Eurocrat establishment as out of touch with regular voters, he can come across as the man of the people. Whether or not he genuinely is that man, remains to be seen.

At the same time, riding on a wave of anti-EU sentiments is risky. The end result could be that the institutions that even leading socialists cherish, could be in jeopardy:

SPIEGEL: Europe is in a state of crisis. Turnout for the last election for the European Parliament was less than 50 percent. Why should people give you their votes?

Schulz: Election turnout will increase. The competition between Juncker and myself will help to ensure that. With the European Parliament in the past, voters had to cast ballots for an anonymous institution. Now, for the first time, it involves people. Personalization is the icing on the cake of democracy.

Juncker: It is true that Europe is currently in need of clarification and that EU detractors on both the left and the right are on the advance. People have to vote in order to prevent their breakthrough. It is great that Schulz and I are being supported as the main candidates for the largest parties in parliament in both the northern and southern part of the Continent. That is symbolic of European unity.

The most fundamentalist among Europe’s socialists, such as Greek Syriza or their Portuguese or Scandinavian peers, are staunchly against the EU – unless, of course, they can govern it and use it as a vehicle towards the advancement of socialism. This is the perspective in which to view what Schulz the Socialist says about increasing support for the EU.

This opens rather frightening perspectives on what the socialists could do with the EU if they got hold of its key power positions.

Speaking of democratic deficit, here is an interesting exchange on the design of what comes closest to being the executive branch of the EU:

SPIEGEL: In your opinion, should each EU member state be allowed to have a commissioner?

Schulz: This discussion is a thing of the past because EU leaders, including Mr. Juncker, decided on that in 2013, despite the fact that things had actually been envisioned differently. There are 28 commissioners and we have to live with that now. There are some European capitals that have even more ministers in their governments.

Juncker: I believe a smaller Commission would be more efficient, but I also understand the member states’ sensitivities. If you were, for example, to tell Ireland that it would no longer have a commissioner, then support for Europe would slip dramatically there.

SPIEGEL: So efficiency is being sacrificed for the sake of national sensitivities?

Juncker: It is not a question of sacrifice. We respect the interests of the individual member states, even if there are fewer people living in Ireland than in Germany. Nevertheless, I will continue to push for a more efficient Commission. We need reforms.

In  order to move the EU in a more democratic direction, voters must have the right to elect directly their executive-branch officials. Today the commissioners are appointed by the member state governments. It is as though the President of the United States was replaced with a board of 50 people, each one appointed by a state’s legislature or governor.

If there is ever going to be a chance to move the EU toward more democracy, there would have to be direct elections of an executive office. The question is if the national governments are willing to give up their control over who to appoint; being a Commissioner is a very, very well-paying job and so long as the national government controls the appointment, people who are craving the power and the money can sleaze their way through internal back-room deals and get the job.

And now for the toughest issue on the agenda:

SPIEGEL: The euro crisis showed that the coordination of budget and economic policies needs to be made a chief priority. Would the kind of European finance minister proposed by Germany’s Wolfgang Schäuble be the answer?

Juncker: At one point we intended to create the post of a European foreign minister. Everyone supported the idea, but when it came to committing, some governments were suddenly of the opinion that there are already enough foreign ministers. In the same way that the European foreign minister became the high representative for foreign affairs, after the election I would also like to see Schäuble’s idea of a full-time Euro Group president in the long term.

Schulz: I think Schäuble’s idea is good, but so far, a European finance minister is little more than a title. We don’t need a European Finance Ministry to assert fair taxation. There are large companies that make profits but pay no taxes. And when speculators make losses, taxpayers are forced to cover them. The consequence of this has been a dramatic loss of trust by the citizens. As president of the Commission, I would introduce a simple principle: The country where the profit is made is the country where the tax is paid.

Two revealing points made. Juncker says that he wants a full-time euro-group president. That is in effect the institution of a Treasury secretary for the euro zone. It sets the stage for euro-denominated bonds and other instruments of fiscal centralization for the euro zone. For practical reasons it would not work with countries that are not part of the euro zone, so this is as close as you will get to creating that coveted, centralized fiscal institution of a Treasury secretary.

On the ground, the consequences would be profound. Centralized fiscal policy for the entire EU, with 40-50 percent of the economy being run through government, means centralized austerity, centralized dictates on the design and generosity of entitlement programs… and centralized tax policy. That can only lead to bigger government.

The second point is made by Schulz who says that he wants to do away with the opportunity for businesses to base their operations in low-tax jurisdictions. This would basically eliminate large portions of the tax competition that currently takes place between states and other jurisdictions within the EU. The only winners are high-tax jurisdictions.

Notably, both Juncker’s idea of a Treasury secretary and Schulz’s desire to end tax competition will drive up taxes in the EU. Not a good outlook for an economy where GDP is barely crawling ahead.

Despite their overarching agreement that the EU needs higher taxes, the two gentlemen get into a bit of a squabble over details:

Schulz: I do not expect that the former prime minister and long-time finance minister of Luxembourg will subscribe to my tax policy beliefs. Luxembourg is an important financial center, but that cannot mean that we should have to continue making concessions.

Juncker: I have never given any more support to Luxembourg as a financial center than the German chancellors have to their automobile industry. However, I do agree that we need rules against tax dumping just as we do against social dumping. Europe needs to have a minimum basis of workers’ rights.

Schulz: But the Greek bailout wasn’t very social. As president of the Euro Group, you had significant influence on it, Mr. Juncker. If you travel to Southern Europe, you will notice that the people consider the EU to have been extremely unfair on this issue. On the initiative of the Social Democrats, the European Parliament voted by a broad majority last week to criticize the work of the troika in the crisis countries.

Juncker: I warned from the beginning of the Greek crisis about the kind of dramatic social consequences excessive austerity policies would have. It wasn’t just conservative governments that disagreed. When I fought against a lowering of Greece’s minimum wage in the Euro Group, it was ironically a few Social Democratic finance ministers who opposed me. That considered, I am very pleased about the fact that my nomination as the leading candidate for the European People’s Party has been supported not only by a Northern European party, Germany’s Christian Democratic Union, but also by a Southern European one, Greece’s Nea Dimokratia.

Well, if Mr. Juncker was so vehemently against the austerity policies, why was he unable to stop them?

A rhetorical question, for sure. But add together what these two gentlemen have said, and we get a very interesting scenario for Europe’s future. Regardless of who becomes the next chair of the EU Commission, it is going to be someone who wants to continue to centralize economic power, with in one case someone who wants to give the impression that he is doing the opposite. When the next recession hits, the two candidates would differ only in details how they would execute the next round of austerity policies to save the welfare state.

Kind of the fiscal-policy version of the difference between Communist and Nazi democracy: Communists execute dissidents with a bullet to the left temple while Nazis execute dissidents with a bullet to the right temple.

The bottom line, jokes about Communists and Nazis aside, is that very little is going to change in Europe after the May elections. Whatever changes will happen will favor more government and thus be at the expense of the private sector.

Caution: Economic Wasteland Ahead. Exit Now for The Route Back to Prosperity.

Slow Consumer Spending in EU

As the talks of a recovery in Europe continue, the search for tangible evidence of that recovery intensifies. So far, the evidence is that the recovery is basically limited to wishful thinking. But since I am an economist and a scholar, not a pundit, I always prefer to rely on facts, theory, experience and methodologically good analysis in a prudent combination. Therefore, when people persistently claim something I disagree with, I take the opportunity from time to time to question my own position.

Today is one of those days. Alas, the question: is there really no recovery under way in Europe?

Since we have already, in vain, looked at GDP growth to try to find any signs of better times ahead, let us broaden the search a little bit. The largest share of GDP – in a healthy economy – is private consumption. It should constitute 70-80 percent of GDP, though because of the heavy reliance among European countries on exporting their production (rather than satisfying needs at home) many EU states tend to have gross exports that exceed private consumption.

But even when consumption is smaller than gross exports, it is still a good indicator of how strong the domestic economy is. Therefore, it also serves as a good indicator for where the economy is heading in general.

To find out more about how (un-)willing European consumers are to spend money, we turn to Eurostat’s national accounts data. While annual numbers are usually the most solid base for long-term trends, in this case quarterly data can serve us better. We can concentrate on a short period of time, 2008-2013, and still get a relatively large series of observations (24 in all).

Here is what we find:

1. In order to build a bridge back to the previous analysis of GDP growth we need data of the same quality that covers both GDP growth and growth in private consumption. A total of 19 EU member states report such data, which happens to be not seasonally adjusted but adjusted for inflation.

2. Growth is measured over the same quarter in the previous year. This minimizes the influence of artificial swings caused by the political whims of lawmakers during a fiscal year. Also, the reported numbers are unweighted averages for these 19 states. A weighted average would of course be better, but for the purpose of a blog it is not worth the extra time to add weights.

3. Last year, 2013, was not a particularly strong growth year. Of all the 24 quarters studied, eight quarters were better than any of the quarters of 2013. The fourth quarter of that year saw consumption grow by 0.74 percent, half as good as the third best quarter of the perioid (Q2, 2011, 1.5 percent). The remaining three quarters of 2013 rank 13th, 14th and 20th. Not exactly screaming of a recovery.

4. Every quarter in 2011 saw stronger growth than any quarter of 2013, with growth rates ranging from 0.96 percent to 1.32 percent.

5. In fairness, it is worth comparing to 2009, which was an absolutely abysmal year. Consumption contracted between 2.42 and 3.83 percent. In other words, while 2013 was not exactly a year to be jubilant about, it also wasn’t a disastrous year. Just an average year of economic stagnation: the average quarterly growth rate for private consumption in 2013, for the reporting 19 EU states, was -0.12 percent.

Long story short: no recovery under way. As a reinforcement of this point, consider the following chart:

GDP C 19 EU

The close correlation between the growth rates of consumption and GDP has an obvious explanation in the fact that, again, private consumption is its largest domestic spending item. But there is an important point buried in this correlation: consumer spending is a large driver of GDP growth. This means that prosperity in general depends heavily on consumer sentiment.

As reported above, 2013 was by no means a remarkable year for consumer spending. While each quarter saw a slightly higher rate of growth, this does by no means constitute a recovery. The upswing during 2010 was notably stronger, and led to a top growth rate of 1.5 percent in the second quarter of 2011. After that peak, growth turned negative again for four consecutive quarters and has not yet reached one meager percent since then.

Until consumer spending reaches the levels it had before the Great Recession (at least 2.5-3 percent per year) there will be no recovery in the EU. Consumer spending, in turn, is held back by high taxes and unpredictable entitlement programs. A stable, confidence-inspiring fiscal policy is the first step toward a recovery. Beyond that, there is a lot Europe’s governments need to do, but that is a story we can get back to once we actually see a recovery in Europe.

Reality vs. Socialism

Since the ANC got into power in South Africa two decades ago, the majority of the population is, legally speaking, no longer held back as second-class citizens. There were many of us who wished South Africa well on that symbolic day when Nelson Mandela took office as the country’s first black president.

Since then, the ANC has failed miserably. From practically every measurable economic angle, South Africa is in worse shape today than it was under Apartheid. This is terrible for many reasons, one being that nobody should have any reason to wish for a return to the days of oppression just because they had bread and peace back then. But instead of creating a truly free South Africa where everyone could pursue prosperity on the free markets of Capitalism, the ANC has built one of the most corrupt welfare states in the world. For my analysis of the ANC failure, see these three articles:

South Africa’s Stubborn Socialists

Socialism Fails at Socialism

ANC: Man Up or Destroy South Africa?

Perhaps it was naive to believe that the ANC would ever do anything different than what they have done. After all, their leaders during Apartheid were trained, funded and schooled by radical Swedish socialists like Olof Palme, Pierre Schori and Sten Andersson. (There have been unsubstantiated speculations that the 1986 assassination of Prime Minister Palme was the work of Operation Longreach, a project by South African military intelligence, and that the motive was his unrelenting support for the ANC.) But if it is naive to believe that even a fervent socialist some day will see the light and become a friend of freedom, then maybe it is not that bad after all to be a bit naive.

In fact, reality offers socialists ample opportunities to learn. The latest example from South Africa is the botched plans to attract new car manufacturing investments to the country. Business Day reports:

Strikes and a turbulent labour situation may have cost South Africa the chance to manufacture the new Datsun. This was one of only four countries which the Japanese motor giant had identified as a market in which to relaunch a brand that disappeared years ago.

This is a major failure by the South African government. To see why, let me walk you through a background story. Nissan bought Datsun more than three decades ago. Back in the ’70s Datsun cars were very popular in many Western markets for their combination of durability, affordability and performance. Since then Nissan has gone through some turbulent ups and downs, with the initially successful launch of premium brand Infiniti in North America, a launch that led to cars like the excellent Q45 and right-sized, well appointed QX4.

However, past the Millennium Recession Nissan were not very good stewards of their success. They turned Infiniti into some tech geek outfit and their cars began losing their soul. An exception: the third generation M45, a performance-luxury combination on par with its German competitors.

With Infiniti losing ground to primarily Lexus, BMW, AUDI and Mercedes, Nissan saw margins decline from its vast North American operations. The same happened in Australia and many other markets around the world. It needed a revival plan, but instead of focusing on reinventing its products Nissan threw itself into the arms of French crap-car maker Renault. The government-appointed bizocrats in charge of Renault have since transformed most Nissan-branded cars into weird modes of not entirely reliable transportation. A couple of notable exceptions, the hugely capable Xterra and the perennial Frontier, can’t fend off the impression that Nissan has lost its way completely. Infiniti has succumbed to accounting dictates and geeky electronic engineering, now building cars that are more transportation pods than automobiles. (A Kia is more attractive these days than an Infiniti. A Kia!)

This long background story is important, because it explains why Nissan is re-launching its Datsun brand. It wants to regain a foothold in the global auto market with vehicles that reflect its now distant past: cars that are simple, reliable, affordable and fun. The new Datsun brand is primarily aimed at non-Western markets where consumer purchasing power is not very strong but cars are increasingly a part of every family’s life.

South Africa is a good example of a market where Datsun can become strong. With Africa becoming the new growth continent it would make perfect sense to build Datsun cars in South Africa. All the more reason to mourn the stupidity of the South African government in botching the deal.

Business Day again:

Speaking to Business Times in Chennai, India, this week at the launch of the new Datsun GO model, Datsun’s global head, Vincent Cobee, said that labour uncertainty was one reason why Datsun would now produce the new version of the iconic brand in India and then export it to South Africa. Sources say Nissan representatives and suppliers held high-level talks with the Department of Trade and Industry in November. They expressed concern about the impact of the strikes on foreign investment, and emphasised that the subsidies intended to expand the vehicle market would not work if labour remained unreliable.

Unions in South Africa are closely tied to the ANC. This is the case in every country where socialist parties are strong – they have a political branch that goes after legislative power and a union branch that organizes labor, uses the member masses as a political tool and funds party operations by means of membership dues. This is the case all over Europe, especially in Sweden, the country whose socialist leaders mentored ANC politicians for decades, and it is certainly the case in South Africa, too.

This means that it is foolish to believe that the ANC has nothing to do with strikes and labor market unrest. South Africa’s economy has been doing poorly in recent years, with high inflation and high unemployment. On top of that the ANC has done its best to tax and regulate the productive sector of the economy to a point where it no longer provides a fully reliable tax base for all the entitlement programs that a socialist welfare state always offers.

As a result, political tensions have grown within the ANC conglomerate, and the ANC has lost a fair amount of credibility among its black voter base. To divert focus from the failed promises of the ANC’s political branch, its leadership has launched a campaign of labor unrest.

To an outside observer this may seem illogical, especially Americans who have only scant ideas of what socialist activism really looks like. However, it is perfectly logical to anyone who has seen close-up how Europe’s socialist political machines operate.

Unrest on the labor market is aimed at pinning the blame for low wages, high unemployment and high inflation on the evil capitalists who have the audacity to build businesses and create jobs for people. There is no doubt in my mind that the ANC has deliberately allowed labor-market unrest to proliferate for precisely this reason, in hopes that it will allow them to perpetuate their hold on political power.

Too bad, then, that the chickens decided to come home to roost. Business Day again:

This is yet further evidence of how the labour standoff is costing South Africa much-needed foreign investment. It comes while the world’s top three platinum producers are being battered by strikes costing nearly R200m a day, according to the Chamber of Mines. Last month, members of the Association of Mineworkers and Construction Union downed tools at Anglo American Platinum, Impala Platinum and Lonmin, demanding that pay be more than doubled. Nissan’s decision comes months after German manufacturer BMW scrapped plans to build an additional model in South Africa for worldwide export after a crippling strike that cost the industry an estimated R20bn.

How many times must a man look up before he can see they sky…

Although the Cosatu-affiliated Metal and Allied Workers Union announced on September 11 last year that it had obtained a three-year agreement of 10%, 8.5% and 8.5% increases, the deterrent effect on new vehicle investors meant it was something of a pyrrhic victory.

Of course it is a pyrrhic victory. You cannot have labor costs rise at those rates year in and year out unless that same labor force is upping productivity by matching numbers. That could happen in Japan or China; it could happen in Thailand or India, and it is happening here in the United States (where, for example, Hyundai has shown the way to excellent productivity in automotive manufacturing).

The way these wage contracts were forced upon the South African auto industry is eerily reminiscent of how the United Auto Workers here in America brought down the Big Three in the ’90s and 2000s. You would expect that socialists in South Africa had learned from that lesson.

But no…

Business Day again:

Nissan said in 2010 it planned to sell its new Datsun in Russia, India, Indonesia and South Africa, targeting people with new-found disposable income. ’’We know that every three years there are negotiations in South Africa in the motor industry,” said Cobee. ’’But it was the duration and strength of the strike that was cause for concern.” The timing of the strike, Cobee said diplomatically, was ‘’not ideal”. The company will still launch its new Datsun GO brand -a five-door entry-launch hatch -in South Africa during the fourth quarter this year, but the vehicles will probably be built at the Renault-Nissan plant in Chennai, India. It has hired 700 extra workers and created an extra shift to build the new cars.

Maybe they should call the car Sayonara in South Africa, especially since Nissan has found other countries to build its low-cost cars:

Cobee said that South Africa’s opportunity to compete against the big four car manufacturing countries — Mexico, China, India and Morocco — would disappear unless it fixed the problem. ’’In China, the car industry has the backing of the government. In India, the private sector funds it. But in South Africa it is not clear who is laying the foundation to make that country the desired choice in Africa to serve Africa,” he said. ’’This is a massive opportunity for South Africa. If it is missed, it will not come back.” Nissan already has plants elsewhere in Africa — Algeria, Morocco and Egypt, with a new one opening in Nigeria next month.

And, directly to the point:

While the local labour force becomes increasingly unreliable, these countries are fast-replacing South Africa as viable alternatives.

How many times must reality poke a socialist in the side before he wakes up?

Stiglitz Performs Inflation Raindance

Here is yet another sign that the socialists are increasingly confident about winning the European elections in May. From EU Observer:

The European Central Bank (ECB) should scrap its target to keep price inflation at 2 percent, Nobel prize winning economist Joseph Stiglitz said on Thursday (6 March). Speaking at an event organised by the European Parliament’s Socialist group, Stiglitz said central banks should look to strike a balance between controlling inflation and supporting job creation. “The ECB’s mandate needs to be changed,” he noted.

They spend money on inviting Stiglitz, who probably cost them north of $25,000 including travel, accommodations and honorarium. He is not only a well-known economist but also a fervent supporter of the Venezuelan version of socialism that has sent a formerly prosperous nation into an economic tailspin of runaway inflation and reckless statism.

This alone is probably reason enough for Europe’s parliamentary socialists to invite him. But more important is Stiglitz’s recent recommendation that Europe should continue to grow government. Here is where he really appeals to an emboldened left, determined to restore the welfare-state spending cuts during years of austerity.

When Stiglitz tops off his praise of government with a jab or two at the ECB, there is no stopping the socialists from giving him all the money he wants in order to come over and talk to them. The EU Observer again:

Stiglitz is a long-standing critic of inflation-targeting by central banks, believing instead that monetary policy should be used to stimulate employment.

That is what both the ECB and the Federal Reserve have been doing. The Fed has been printing $85 billion per month for several years now to fund the U.S. government’s deficit. ECB still stands by its pledge to buy any amount of bonds from any “troubled” euro-zone country, any time. Both these monetary policy strategies aim precisely at what Stiglitz is after, namely rock-bottom interest rates to stimulate private-sector activity.

In other words, Stiglitz is breaking through open doors. But as the EU Observer reports continues, so does Stiglitz. Through the open doors, that is:

Stiglitz’s remarks came as ECB president Mario Draghi kept the bank’s headline rates, including its main interest rate, at the record low of 0.25 percent, following a meeting of the bank’s governing council the same day. Draghi said the bank decided to leave the rate unchanged because of continued signs the eurozone economy is slowly recovering. “We saw our baseline by and large confirmed. There is a continuation of a modest recovery,” he told reporters in Frankfurt.

Yes, the recovery

It is unlikely that Stiglitz is really flying all the way from New York to Strasbourg to talk propose a monetary policy that is already in place. More likely, he is on a crusade to pave the way for higher inflation. A faster rise in prices is a wet dream for many statists, as it would inflate tax revenues and close budget gaps without either a need for spending cuts or a pesky fight with those who think taxes should go down, not up.

If this is what Stiglitz is really after, then as the EU Observer reports he has a staunch ally in EU Commissioner Olli Rehn – also known as the Grand Master of European Austerity:

New forecasts published by ECB staff estimate that inflation will stay at 1.0 percent this year, 1.3 percent in 2015, and 1.5 percent in 2016 – comfortably below its 2 percent target all the way through the projection. Last month, the bloc’s economic affairs commissioner, Olli Rehn, warned that low inflation is making price cuts in the peripheral economies less effective at boosting their competitiveness, making it harder to geographically rebalance the economy.

The EU Observer notes that the ECB is not allowed to let inflation rise past two percent…

However, the ECB’s main mandate under the EU treaty is tightly restricted to the maintenance of ‘price stability’ across the eurozone at a rate of around 2 percent per year.

…which explains what Stiglitz really flew over to Europe for: to give the socialists some fuel for pursuing a constitutional change to the ECB mandate.

It is regrettable that anyone is arguing for inflation. It is even more regrettable when that anyone is a reputable economist. And the whole matter gets a bit scary when you consider that the Inflation Raindancer from Columbia University may just have spoken to the people who will actually govern Europe over the next five years. Where is the concern for the standard of living of hundreds of millions of Europeans? Where is the concern for real wages, the value of savings, the predictability of contracts?

So long as inflation stays within 3-5 percent the economy is not going to run away (although five percent is beginning to smell macroeconomic mismanagement). The problem is that politicians who think they can cause inflation won’t know how to rein it in once they have created it.

None of this is apparently of any consequence to Stiglitz. But before he flies over to Europe again, perhaps someone should ask him if he thinks inflation in his beloved Venezuela – reported to be up to 35 percent now – is something for Europe to strive for.

Wishful Recovery Thinking in Europe

Don’t get me wrong – I would be thrilled if Europe could enter a phase of solid growth and sustained recovery. But having studied the European crisis in depth over the past two years (with a book due out in July) I also know what it takes for that economy to recover. So far I do not see anything that tells me it is happening, and I certainly do not see the political open-mindedness needed for the Eurocrats to enable a recovery. On the contrary, I see Europe’s political leaders play “Where’s Waldo?” with the economic recovery. On February 25, the EU Observer declared:

The EU’s economic recovery will gather speed in 2014 and 2015, the European Commission predicted on Tuesday (25 February), indicating that the worst of the economic storm which hit Europe is over. “Recovery is gaining ground in Europe,” economic affairs commissioner Olli Rehn told reporters at the European Parliament in Strasbourg, saying that the EU economy would grow by 1.5 percent in 2014 and 2 percent in 2015. The recovery would be driven, in the main, by increased domestic demand and consumption, as Europeans and businesses become more confident about their economic prospects, he added.

Then today, EUBusiness.com reports:

The European Central Bank on Thursday raised slightly its growth forecast for the euro area this year, but trimmed its forecast for inflation. ECB president Mario Draghi told a news conference that the central bank is pencilling in economic growth of 1.2 percent in 2014, 1.5 percent in 2015 and 1.8 percent in 2016. That represent a fractional upward revision of 0.1 percentage point for 2014, compared with the ECB’s previous projections published in December, Draghi said.

Of these two sources, it would be wise to trust neither. They have both presented spiced-up growth forecasts more times in the past few years than anyone cares to keep track of. But there is no doubt that of these two institutions the ECB possesses the better tools to be fairly accurate.

That said, there are a few items in the way of a recovery, even at the very modest numbers that the ECB foresees. According to the EU Business article, the central bank predicts that

External demand would benefit from the global recovery gradually gaining strength. Domestic demand was expected to benefit from improving confidence, the accommodative monetary policy stance and falling oil prices which should lift real disposable incomes. “Domestic demand should also benefit from a less restrictive fiscal policy stance in the coming years and from gradually improving credit supply conditions,” the ECB said.

The phrase “in the coming years” is critical. So far there has not really been any change in fiscal-policy preferences in the EU generally. Greece is still under austerity pressure, and the French government has gone on a fiscal rampage through the economy, spearheaded by outright confiscatory income taxes. If the EU declared an unequivocal austerity cease-fire, then the member states would stand a chance of getting somewhere down the road of a recovery.

As things are now, it is simply not credible to forecast a recovery. Unemployment numbers point toward a state of stagnation at best, and as I explained on February 17, a more comprehensive look at the European economy suggests stagnation, not recovery.

Since then, Eurostat has released quarterly GDP growth rates for the last quarter of 2013. For the EU-28 there is a little bit of good news: growth was 1.1 percent, adjusted for inflation, over the fourth quarter in 2012. It is the highest quarterly growth rate in more than two years, but it does not give us a full picture of what is actually happening on the ground. Eurostat has so far only released state-specific data for 18 of the EU’s 28 member states, but practically every one of those states reports an increase in year-to-year growth for the fourth quarter of 2013 compared to the third quarter of 2013.

Taken together with the less-disastrous numbers for the third quarter, the fourth-quarter numbers could be interpreted as an emerging recovery trend. However, as this figure shows, EU GDP growth has fluctuated rather violently over the past few years, and even sustained above two percent for a while, without any trend emerging toward an economic recovery:

qwerty

If, as the ECB says, the recovery depends primarily on a better global economy, then we are back to the case of an exports-driven turnaround for the European economy. As I explained last summer, it is practically impossible for exports to pull a modern economy out of its slump.

But even more important than this is the fact that the Europeans have re-calibrated their welfare states. The in-depth meaning of this will have to wait until another article; the short story is that government budgets in many European countries now balance at a lower activity level. As a result, it takes less growth in GDP to generate a budget surplus, a surplus that constitutes a net drainage of money from the private sector to government – where it is not spent. This puts a dampener on GDP growth, and it also leaves more workers idle as it takes fewer workers to produce the taxes that government needs.

The re-calibration of the welfare state is a result of austerity and an important reason why Europe is facing stagnation, not a recovery.

Europe Turns to Socialism

On February 19 I explained:

There is an important reason for my projection that the European crisis is moving into a long-term stagnation phase: the Europeans are not willing to give up their welfare state. The welfare state caused the crisis, primarily by using taxes to deplete margins in the private sector and by using entitlements to discourage work and entrepreneurship. Eventually, all it took was a regular recession spiced up with some speculative losses in the financial industry, and the entire Western world was hurled into a deep and very persistent crisis. Unfortunately, the Europeans have not yet seen the light. (Perhaps they will when my book is out this summer.) Especially European voters are very persistent in demanding that the welfare state remains in place. This is particularly evident in a pan-European poll predicting the results in the May elections for the European Parliament.

That poll showed strong socialist gains among European voters. This is hardly surprising, given that the majority of Europe’s voters apparently believe that the last few years’ worth of austerity policies have been an ideological attack on the welfare state. In reality, it was a warped, economically stupid attempt to save the welfare state by making it fit inside a smaller, crisis-burdened economy. Higher taxes combined with spending cuts – in any combination – has the result of raising the burden of government on the private sector, hence to preserve the welfare state under tougher economic conditions.

As is well known, Europe has long history of fascination with socialism in various forms, from the light versions applied in assorted iterations of the welfare state to the full-blown totalitarian variant that plagued the Soviet sphere for decades. Generations of Europeans have grown up to a life in deep dependency on government. This is unhealthy anytime, anywhere, but it becomes economically dangerous in a crisis like the one Europe is now stuck in.

As if to compound the prospect of a collectivist victory in the May EU elections, the French socialists have launched a bold campaign to win a majority of their country’s delegation to the European Parliament. From Euractiv.com:

France’s ruling Socialist Party (PS) kicked off its European election campaign on Monday (3 March) with the ambition of securing the majority of French seats in the European Parliament, which is currently held by the country’s centre-right party, EurActiv France reports. At a press conference, the French Socialist Party’s first secretary, Harlem Désir, confirmed the Party of European Socialists’ (PES) ambition to take over the majority of seats in the EU Parliament and the job of EU Commission president. Europe, Désir said, “must turn the page of Liberal and Conservative governments, which for years have harmed the European dream. Their blind support to deregulation, widespread competition, fiscal and social dumping, has only led to austerity, unemployment and soaring populism across the continent.”

Yes, how horrible to deregulate markets so people and businesses have more choices. What a horrifying thought to let businesses compete with each other so the best one wins… I can’t wait until the socialists take over the Olympics. Imagine…

  • In the 100 meter sprint, everyone has to get to the finishing line at exactly the same time. If someone gets ahead, the distance by which he won is taxed away and given to those who were last in the race.
  • To assure there is no gender discrimination, the race has to perfectly represent the 50-something different genders that apparently exist in this world (of course, you’d have to expand the width of the race track accordingly…)
  • In hockey, if a player scores a goal for his team he will immediately have to place the puck in his own team’s goal.
  • Gymnasts can no longer be very thin and small. All sorts of women of all sizes must be given the exact same chance to participate, not to mention the same points, regardless of their performance.

Socialist Olympics – where everyone’s a winner!

Now back to the EU election and the Euractiv story, which reports that the socialists are eagerly trying to engage other parties in a debate between the candidates for the presidency of the EU Commission:

For the Socialists, the “presidential” debate is also an opportunity to equate the [liberal] EPP with the incumbent Commission’s results, notably on issues such as social dumping and crisis management. “We are starting in a European climate of sanction towards the outgoing team on the right wing, which led a policy of austerity, recession and stagnation on the economic and social plan,” said Jean-Christophe Cambadélis, the campaign director for the EU elections.

This is actually an important point. By focusing so intensely on austerity throughout the crisis years, the incumbent EU Commission has indeed added fiscal insult to Europe’s macroeconomic injury. Ironically, their policies have expanded the presence of government throughout the economy by taking more from the private sector (higher taxes), giving less back (spending cuts) and depressing private consumption and business investments (higher taxes). In doing so, the commission has gone squarely against the purported ideological foundations of the conservative and liberal parties that have held a majority in the European Parliament since the 2009 elections.

In a matter of speaking, their deviation from their own ideological platform – their endeavor into statist territory – is now paving the way for “real” statists to take over.

And take over they will, says Euractiv:

According to estimates from the website Pollwatch 2014, the European Socialists and Democrats (S&D) would get 217 seats, while the EPP would get 200. The PS secretary general stressed that employment would be at the heart of the European campaign. “Jobs will be our priority,” said socialist MEP

Sounds good when you first hear it. So what do they want to do?

Catherine Trautmann, who took part in the press conference, mentioning the fight for a minimum wage at European level. To curb youth unemployment in particular, the PS secretary general has announced plans to strengthen the budget for the Youth Guarantee Scheme.

A minimum wage across Europe?? This is as ludicrous an idea as anything I have seen recently. What is it going to be measured against? Reasonably, it would have to be against some sort of benchmark, such as a fixed percentage of mean household income.

The problem with that – well, one of the problems with it – is that the benchmark would vary enormously from country to country. The way the European socialist party puts this idea it would be based on the same benchmark across the EU, which, using mean net household income would be 17,475 euros. Let’s say now that the minimum wage is 40 percent of that (a fraction sometimes used when calculating poverty ratios). This means that an average European household living on minimum wages would earn 6,990 euros.

Sounds fine and dandy, right? The problem is that the mean household income in seven EU member states are actually below this level. In Bulgaria and Romania the the minimum-wage level household income would be more than twice the mean household income.

In other words, an exquisite recipe for crashing the labor markets – the entire economies – of Europe’s poorer countries.

Apparently, this is not a problem for Europe’s socialists. Their next suggestion, as per the quote above, is more tax money to a government-run artificial-employment program they so aptly call “Youth Guarantee Scheme”.

It’s a scheme alright… But humor aside, the last thing Europe needs is more regulatory incursions, higher taxes and more people dependent on government. It will only cement the continent as an economic wasteland, stuck in permanent stagnation and industrial poverty.

No Recovery in EU Unemployment

Eurostat, the EU statistics agency, has released new unemployment numbers for Europe. The EU Observer notes that in January the unemployment rate for the euro zone was 12 percent, unchanged from a year ago, while unemployment in the EU as a whole was down by two tenths of a percent to 10.8 percent.

This is the short story of European unemployment, giving the impression that the crisis has stagnated and that there is a small, slow turnaround happening, at least outside the euro zone. But is this true? I recently reported macroeconomic data that show that the European economy is in a state of stagnation, not a recovery. I have also pointed to Greece as an example of how the crisis over the past few years is morphing into a depressive state of economic stagnation.

If I am correct, we should see evidence of a permanent stagnation in Eurostat’s unemployment numbers.

Before we get to the month-to-month numbers, let us take a bigger view of annual numbers which are now reported through 2013. For the European Union as a whole, unemployment has increased almost every year since it was 7.1 percent in 2008. In 2009 it reached nine percent; in 2010 it was 9.7, remaining at that level in 2011. In 2012 it rose again to 10.5 percent.

In 2013 it was up again, to 10.9 percent.

The euro area follows a similar pattern: 7.6 percent in 2008, 9.6 in 2009, 10.2 in 2010 and 2011, sharply up to 11.4 percent in 2012 and up again last year, to 12.1 percent.

This big-picture view shows an unrelenting economic crisis. Before we leave this level, it might be worth pointing to the plateau in unemployment in 2011. After that year, in 2012, the EU joined the ECB and the IMF in subjecting several euro-zone states to economically destructive austerity policies. Precisely as macroeconomic theory would suggest, the effects of those policies spread throughout the euro zone, sending unemployment up another couple of notches.

Thus, annual data show no sign whatsoever of a recovery. At best, we might hope that the jump in unemployment in the last two years is going to be followed by the same kind of plateau that occurred in 2010-11. The only way Europe can enter a trend of shrinking unemployment is if there is new spending going into the economy on a sustained basis. That, in turn, requires structural reforms to the European economy that I do not see any support for at this point.

Moving to a more detailed time scale, quarterly data can be sliced different ways. Looking first at the last quarter of every year back to 2010, we once again see no sign of a recovery. EU unemployment was 9.6 percent in the fourth quarter of 2009, ten percent in 2011 and has been 10.8 the fourth quarter of the past two years. Euro-zone unemployment, in turn, has been inching up all the way: 10.2 in ’09, then 10.6, 11.8 and 12.0.

Again, notice the austerity-driven bump from 2011 to 2012.

If we look at quarterly data as a series of quarters, we get a more detailed view. Here we can actually find the a weak sign of something that could turn into a recovery:

  • For the EU as a whole, unemployment increased seven quarters in a row, from 9.5 percent in the second quarter 2011 to eleven percent in the first quarter of 2013;
  • In 2013 unemployment fell marginally to 10.9 percent in the second quarter and 10.8 percent in the fourth.

The euro zone, on the other hand, saw an eight-straight-quarter rise, topping out in the second quarter of 2013 at 12.1 percent. The drop by a tenth of a percent since then is not the beginning of a trend.

The fact that the euro zone does not exhibit the same minor decline that the EU as a whole can show, is an indication that there is no emerging recovery in the EU as a whole. Instead, this is a matter of isolated reductions in non-euro zone countries such as Lithuania (-2.1 percent in 2013) and Hungary (-1.8 percent).

Moving, lastly, to monthly numbers, we start with the first month of every year back through 2009:

2009M01 2010M01 2011M01 2012M01 2013M01 2014M01
EU 8.1 9.6 9.5 10.1 11.0 10.8
Euro zone 8.7 10.2 10.0 10.8 12.0 12.0

See any downward trend? Nope. Just yet more evidence of stagnation.

But what about month-to-month? Let’s go back through 2012 and 2013 to find out:

EU Euro zone
2012M01 10.1 10.8
2012M02 10.2 10.9
2012M03 10.3 11.0
2012M04 10.4 11.2
2012M05 10.4 11.3
2012M06 10.5 11.4
2012M07 10.5 11.5
2012M08 10.6 11.5
2012M09 10.6 11.6
2012M10 10.7 11.8
2012M11 10.8 11.8
2012M12 10.9 11.9
2013M01 11.0 12.0
2013M02 11.0 12.0
2013M03 11.0 12.0
2013M04 11.0 12.1
2013M05 10.9 12.1
2013M06 10.9 12.1
2013M07 10.9 12.1
2013M08 10.9 12.1
2013M09 10.9 12.1
2013M10 10.8 12.0
2013M11 10.8 12.0
2013M12 10.8 12.0
2014M01 10.8 12.0

Long story short: unemployment numbers for the EU and the euro zone firmly establish that the European economy is in a state of stagnation. This is, again, not the least bit surprising to anyone who knows his macroeconomics: so long as there is no new spending injected into the private sector, on a sustained basis, there will be no sustained reduction in unemployment.

As depressing as that conclusion is, it is not surprising. It is the predictable fallout of the fiscal and monetary policy package in Europe over the past several years.

Obama Spends Less than Reagan

While European politicians are busy declaring the end of the economic crisis in Europe, Americans have seen their economy pick up speed for a good year now. Inflation-adjusted quarterly growth figures during 2013 actually looked encouraging: compared to the same quarter a year earlier, U.S. GDP grew, respectively, 1.3 percent, 1.6 percent, 2.0 percent and 2.7 percent.

It remains to be seen if the upward trend in growth continues through 2014. We should keep in mind that these growth numbers are from a year when Obamacare had not yet gone into effect. That law is still hanging like a Damocles sword over businesses and households, though more and more point to the entire law slowly withering away. There is also the problem with the federal government’s regulatory assembly line, which continues to fire off artillery round after artillery round of regulations at America’s businesses and entrepreneurs.

My impression is that businesses are beginning to bet on the Obamacare law to eventually go away, or at least be reduced to somewhat of an expanded Medicaid program. This would partly explain the slow but visible growth in private-sector activity in most corners of the great country. If the federal government could declare regulatory cease-fire – and chances are they will if the Republicans take the Senate in the fall – then things could get pretty good.

But there is one variable that contributes even more to the recovery – no matter how weak it is – namely the remarkable restraint in federal spending.

If you ask the next guy you meet in the mall parking lot what American president is the biggest spender of them all, chances are the answer will be “Obama”. Conventional wisdom says that Obama is a major spender of other people’s money, regardless of whether it is taxes or debt. It is easy to understand this when Obama declares that the era of austerity is over:

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

When you demand more government spending, and when that spending is of the classical entitlement kind, you should not be surprised if you are characterized as the biggest spender.

Chances are, though, that Obama will not get to spend all the extra money he wants to. Once the budget gets to Congress it will meet solid resistance from Republicans, and this time around they will find lots of allies among reelection-minded Democrats.

It is entirely possible that the president knows this, and that his spending rhetoric is little more than the same kind of hot air we hear so much of in election years. In fact, it would be better for the president if his spending proposals fell flat to the ground in Congress than if he got what he wanted. So far he has a pretty good track record for federal spending: after the big mistake we all know as the American Recovery and Reinvestment Act, or the Stimulus Bill, which increased federal spending by 17.9 percent in one year, the average growth rate for Uncle Sam’s outlays has been 1.2 percent per year. (It is 4.8 percent per year if we include the stimulus year of 2009.)

Some, like Dan Mitchell over at the Cato Institute, rightly make the point that the restraint in spending coincides with the Tea Party movement making inroads into the Republican caucus on Capitol Hill. But in addition to that Obama seems to have been fine with almost flat spending. Whatever his reasons, he deserves recognition for having shown this restraint.

One possibility is that the president knows that if he would allow the federal deficit to spin completely out of control, as it was beginning to do back in 2009 and 2010, his entire legacy would be overshadowed by that. More importantly, it is easier to get Congress to focus on other issues than the deficit if the deficit is shrinking.

According to the Office of the Management of the Budget, 2013 represents the first year under Obama when the federal deficit will be less than a trillion dollars. So far that is only an estimate, but if the current trend continues, then by 2018 the deficit will be back at 2005-2006 levels.

In all, this positive deficit trend helps reinforce confidence in the U.S. economy. It also helps ease the pressure on interest rates that in 2013 pushed U.S. Treasury Bonds higher than some European countries. As the budget deficit declines, Federal Reserve chairwoman Janet Yellen will get a good opportunity to phase out the Quantitative Easing program. Some people already expect this to happen, which contributes to a reduction in inflation expectations and strengthened confidence in the U.S. dollar.

All this together helps the economy continue its slow but visible recovery.

However, even if Obama works with Congress to keep a tight leash on federal spending we are eventually going to see federal spending increase again. In fairness, it is already happening to some degree: the OMB estimate for 2013 is that spending went up by 4.2 percent; for the remaining three years of Obama’s presidency the OMB predicts an average of 3.5 percent per year.

For his entire presidency, Obama would then average 4.2 percent per year in spending increases. Deducted the one-time spike in 2009 his average would fall to an exceptionally good 2.2 percent, but even with that included – as it should be – he will retire with a far better spending record than his predecessor. Over his eight years in office, George W Bush presided over a budget that grew, on average, by 6.6 percent per year, with the second term seeing faster spending increases than the first (6.8 vs. 6.4).

Bill Clinton beats them both. Working as he did with a Republican-controlled Congress, he kept the federal budget growing at a respectably low 3.3 percent per year. Reagan, by contrast, joined the Democrat majority in Congress and expanded spending by an annual average of 7.7 percent per year.

Based on these historical numbers, the best outlook for federal spending restraint is therefore that the Republicans take the Senate in November and Obama drops his demands for more entitlement spending. If he kept spending completely flat in his last two years in office he would actually beat Clinton by a tiny margin for the most spending-frugal president in recent history.

The chances of that happening are not good, though. The federal budget is driven by an enormous system of entitlement programs. Some are entirely federally funded, costing taxpayers $1.8 trillion per year; other programs are co-funded with the states and add almost half a trillion dollars in federal spending. These programs not only cost a lot as they are, but they often have spending parameters built into them that cause spending to rise automatically.

Consider this chart:

BOspendChart1 Source: Financial Accounts of the United States, Federal Reserve; and the Office of the Management of the Budget.

Take a look at the blue spending trajectory from 1995 to 2010. It illustrates the accelerating average annual spending during the Clinton and Bush presidencies.

In five out of Bush’s eight years in office, federal spending grew at more than seven percent per year. Even if some of the spending increases under Bush were related to the military build-up, the underlying trend of faster growing spending was driven by ever costlier, ever more generous entitlement programs.

Obama is not the big spending problem in Washington, DC. The big spender is the welfare state.