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Leaders of the Developed World Need to Focus on Growth, Not Rhetoric

Michael Trinkle - 10/14/2010

Another earnings season has come and gone, and another is quickly approaching. While corporate leaders will surely espouse their prowess at cutting costs and producing after tax earnings like never before, their track record in the developed countries of the world will most likely remain lackluster. Corporations, at least the multi-national ones, are not too terribly bothered by domestic issues when it comes to producing profits for their shareholders. Most all have gravitated in the direction of Asia and Brazil because that is where the growth is these days.

When quizzed about domestic hiring plans, their styles quickly resemble slick politicians as they proclaim that hiring is up at their firms, but not domestically, since they are waiting for the U.S. consumer to start spending again. What they do not communicate is that two decades of outsourcing and cost cutting have decimated our middle-class economy to the extent that disposable earnings per capita have actually declined in this country over the past ten years. This cruel reality is not confined to our nation. Other developed countries of the world are also buckling under to this long-term trend.

You need only look back as far as May to remember the turmoil that was caused when one European member state, Greece, was pilloried for its deficit and sovereign debt problems. Markets were swift to react to the crisis. The Euro, a formidable trendsetter and popular on every forex demo account, was suddenly lambasted in the global forex market as news spread that the malaise may not be confined to Greece alone. A new anagram entered the public lexicon, PIIGS, which stood for Portugal, Ireland, Italy, Greece and Spain. Each of these countries was dealing with similar, though different, cash flow issues, and European banks held the majority of these national debt securities.

Our political leaders need to focus on the real problem on the global stage. Far too many are focused on surveys of the populace and whether they can muddle through another national election. The U.K. went the conservative route, and its citizens are now bracing for a round of austerity measures based on the budget submitted by the new controlling government. The popular theme is to cut government spending, pay down the national deficit, and hold out in a bunker somewhere waiting for the storm to pass.

Paying down deficits will do nothing to raise per capita disposable income. Rising incomes produce rising tax revenues, the proper way to pay down deficits. The developed countries of the world are mired in a “balance-sheet recession” where monetary policy is ineffective and government stimulus is the only bridge available to stable ground for a real economic recovery that lasts more than a few months.

However, the political climate today is one of hopeless “gridlock”. While the debate rages on before the next election day, major policy initiatives are all on hold. In the meantime the developing countries of the planet continue to experience growth, many at the double-digit rate level. Growth is the answer for most economic ills, a lesson we have preached to the underdeveloped for longer than they have liked. They have learned their lesson well and are now feeding it back to us.

The International Monetary Fund recently published their annual tome on the topic of global growth entitled the “World Economic Outlook”.

GDP growth in advanced economies has been cut in half over the period, and with luck, we may eke out 2% growth over the next five years, barely enough to create jobs for those new entrants into the workforce. As for the 8.1 million jobs lost in the U.S. during the recession, compete, relocate or retire may be the only options.

“BRIC” is another popular anagram that demands respect. It stands for Brazil, Russia, India and China, the countries experiencing high-level growth under the banner of emerging and developing economies. China’s growth engine has powered the world’s economy with stratospheric growth, but recent plans are to gear back to 9.7% due to the global slowdown.

Our leaders need to focus on what worked in these locales, and then find a way to replicate those results back home. President Obama stated publicly today that expanding our economy and employment is his primary mission. Tax cuts for the wealthy will not help. They will only invest the funds in Asia. Capital flows to where the growth is. Tax incentives for local hiring may be a way to start, and a few restrictions on outsourcing might help out, too. If not, perhaps Harvard has a refresher course in its Shanghai extension that will prove effective.