The May 12 Economist made a bold statement about François Hollande's growth plans for France:
"that growth fairy does not exist."
Really? Even the "confidence fairy" exists if you know how to coax her (or in this age of gender equality, him) out of hiding - and the "confidence" fairy only comes out to play with its friend, the growth fairy.
As PIMCO's Bill Gross, the manager of the largest bond fund on the planet, said about why bond prices keep trying to plunge in the Eurozone despite efforts to cut deficits,
"We do look at the debt levels. It matters. But a bond investor has to look at economic growth, too. If a country can't grow its way out of its predicament, we won't go there. That's why we've stayed out of Europe for the most part."
One of the facts that you need to embed deeply in your mind is that economists, politicians and voters are not businessmen. They think that most businessmen want something such as lower taxes instead of growth - business owners don't pay taxes if they don't sell anything so growth is king in business. Low taxes are nice - if you can have your cake and eat it too.
If business owners were given the choice of current slow growth and current tax rates or changing taxes to the level of the Reagan Administration in order to get the type of growth we had in the late 1980's, they'd vote for higher taxes and growth.
It's a trick question: Taxes are lower today than under Reagan as shown in the chart below. Today receipts (taxes, more or less) are only 17% of GDP, compared to a low of 17.8% in Reagan's 8 years.
How are those low taxes working out for you?
The "confidence fairy" wants absolutely guaranteed growth - not some Rube Goldberg promise that austerity (aka the Expansionary Fiscal Contraction hypothesis) will reduce overall debt and generate growth during a recession when basic economic theory and experience shows this is impossible.
As Gross said,
"…we avoid the bad boys and girls because there doesn't appear to be a growth solution to these countries' problems."
Perhaps the confidence fairy's secret identity is as a mild mannered bond fund manager known as Bill Gross?
When you look at confidence, there is a clear correlation with accelerating government spending and increasing confidence. First, here's a chart of absolute spending and revenues to show that the reason we have a deficit of 24% of GDP is due to tax cuts that did not inspire confidence or growth. Spending (the blue line) has grown a little below trend since 2007, 3.3% vs. 3.4% 2000-07 to present, but revenue dropped resulting in a deficit of 11% of GDP. Note that there were no sudden drops in revenue or spending during the Reagan tax revisions of the 1980's while there has been jagged up and down movements in both since 2007.
Does this inspire confidence? Better yet, does it generate growth?
Comparing GDP growth and expenditures for the last 4 recessions shows that since the Great Recession ended in 2nd quarter 2009, the USA has had the slowest government expenditure growth and the slowest GDP growth since 1982. The charts below have GDP growth and government expenditures index to 100 at the recession trough.
Now let's look at the NFIB Small Business Optimism Index. Business optimism or "confidence", while rising, has just gotten back to 1991's recession levels. Every other recession recovery has had much greater "confidence" at this point in the recovery.
Now the specter of automatic budget cuts has business people stating:
"It's almost a unique moment in government because there's so much at stake. And there's nothing that inspires confidence that this (averting budget cuts) will get done."
Want to bet that budget cuts in the USA will not work any better at inspiring confidence than they did in Europe?
The one thing about a rapidly expanding economy that seems to have been forgotten since 2009 is that the deficit shrinks when there is rapid growth. Even Bush the Younger understands this:
"The pie grows, the debt relative to the pie shrinks, and with fiscal discipline, you can better solve your current account deficits and your entitlements."
There is nothing on the horizon that will prevent a major slowdown going into the 4th quarter if the automatic cuts in taxes and spending are allowed to happen. Even if Congress passes a simple extension of everything (the most likely event) existing spending reductions are very negative for the economic growth in 2012.
Yes, Virginia, the Growth Fairy exists - but budget cuts will kill it.