There will be several narratives debated this week, but none are new and all are coming to a head of sorts. Last week the "Gang of Six" became the "Committee of Three" as Joe Biden's efforts have gotten nowhere, and so President Obama will join in talks on what to do with the debt ceiling. In Greece, new austerity measures will include higher taxes, $40.0 billion in spending cuts, and selling $70.0 billion in state-owned assets.
Over the weekend, Egypt said no thanks to money from the IMF and World Bank, and instead has revised its budget that will result in a deficit of 8.6% of GDP, down from a previous estimate of 11%, by raising taxes and lowering fuel subsidies. The great news is that America is not Greece or Egypt yet and can avoid those fates by not sabotaging its greatest asset with higher taxes and more spending.
Nonetheless, this is the compromise being pushed by the White House, higher taxes for what probably would be smoke and mirror budget cuts. A line in the sand has been drawn by Eric Cantor and others, but will it hold as GOP leader go head to head with the President? I do find it very telling that Greece has such an enormous black market (at least 25% of economy) due to higher taxes. Rich people in Athens have gone as far as to counter tax collectors' use of Google Maps and low-flying planes to survey ownership of swimming pools by camouflaging those pools. (Grass covered tarps for swimming pools might be a big business here in America if class warfare wins the next election.)
By the way, Egypt is raising taxes on firms and individuals earning a certain amount of money to 25% from 20%, and will probably take in much more money from raising cigarette taxes to 50% from 40%. An official said 25% is about the most that could be levied as past rates of 40% resulted in very little tax collection. I don't think Republicans will blink, but they will have to endure the typical pressure from media, Hollywood, and the White House. On that note, I do believe there will be some kind of compromise and the debt ceiling will be raised. So there will be another $2.5 trillion to borrow and spend...or as the White House likes to call it "invest." I think Egypt was smart not to take money from the IMF or World Bank, and those ridiculous strings that come along with it like investing in green projects.
It is unlikely Egypt will get its act together overnight, so it says it has "best relations" with those check-writing agencies. In the meantime, Greece has no choice in my mind but to agree to austerity tomorrow because it will not be long before it is back at the table asking for more. Over the weekend, it was reported bondholders of Greek debt ($155.0 billion due over the next three years) would be willing to reinvest 70% of proceeds back into Greece. Of that number, 50% would go into 30-year maturities instead of 5-years, and 20% into zero coupon funds focused on high-quality stock investments. If bondholders are on board and rating agencies give the scheme the ok then Greece goes on the backburner for now.
George Soros said it was "probably inevitable" a mechanism will be put in place to allow Euro-zone countries with faltering economies to exit the Euro. I rarely agree, but think countries will drop out of the Euro, if they're smart, with or without a mechanism.
In his weekly radio address, President Obama talked about our crumbling roads, railways, and runways which dovetail with the notion of more infrastructure spending. After the CBO raised its projections for U.S. debt levels, Nancy Pelosi came out the next day and said we need more infrastructure spending. (By now, most realize this is nothing more than a way to get billions of taxpayer funds into the coffers of unions and Democratic war chests.) But, I can tell you that while some roads are in bad shape, the notion that if we simply build it they will come is just not true. In China, there are empty towns waiting for inhabitants, and that economy is a juggernaut compared to America.
Perhaps the best cautionary tale for Americans thinking okay let's do it again and spend hundreds of billions of dollars on infrastructure simply for short-term gain should take a look at Spain and its empty airports.
Spain's economic boom was the envy of the world, and certainly Europe, until it hit a brick wall. The post mortem reveals the housing boom might have been more egregious than that in the United States, and government spending on infrastructure had no equal on the planet.
* From 1999 to 2009, Spain built 5,000 kilometers of highways
* The country built 43 international airports
* Spain operates the biggest high speed rail network in Europe at more than 2,000 kilometers (1,200 miles)
Recently, there has been a lot of attention about the trials and tribulations of Ciudad Real International Airport, also known as Don Quixote. The town only has 74,000 residences and has an airport that cost €1.1 billion. The airport is built next to a high speed railway line to Madrid which is still 250km away. The airport has filed for bankruptcy, and despite the fact it was a rare privately held airport it still cost taxpayers, whose funds were used to bailout one of the banks involved. Four airlines have tried to fly out of the airport but only one extremely small airline is left. The airport needs 10,000,000 passengers a year to make economic sense.
An article in BusinessWeek describes tote boards with panels sporting flights to places like New York and Stockholm so technicians can make sure the equipment is operational.
Not only are these white elephants outrageous, but until recently air traffic controllers in Spain were paid even more outrageous salaries.
* 135 air traffic controllers were paid €600,000 or $830,000 a year
* 713 air traffic controllers were paid more than $500,000
Needless to say because the average salary in Spain is €18,000 and the Prime Minister's €92,000 there was shock and anger when Spain's public discovered the rich salaries of air traffic controllers. One newspaper called it "scandalous." It didn't help that these same air traffic controllers could retire at age 52.
Those same air traffic controllers reacted to calls for pay cuts with a Christmas strike in 2009 -2010. These strikes were not new as the group also held strikes in 2002 and 2003. The height of entitlement thinking!
More Empty Airport Horror Stories
Burgos Airport: Finished in 2008, it cost Spanish taxpayers €45.6 million to build a new terminal building, parking facilities, multi-service building, new runway, and aircraft apron.
Logrono-Agoncillo: Airport finished in 2003, and it cost Spanish taxpayers €40.0 million. Another former military airport reopened with much fanfare, and once saw 56,000 passengers come through in 2007 (still woefully below the amount needed to make this an economically viable endeavor); now it's 20,000. The airport loses €4.42 million annually and cost taxpayers €220.0 per passenger. Then there is the €52.0 million in debt.
Leon Airport: Finished in 1999, it cost Spanish taxpayers €80.0 million and was expected to attract 500,000 passengers a year. The number peaked at 160,000 in 2007, and is now 94,282 (258 a day). This is yet another former military airport, but is located in Jose Rodriquez Zapatero's hometown so it got the full infrastructure treatment. There is a brand new modern highway and soon a high speed rail will link it to Madrid, in only two hours.
Huesca Airport: It had 3,900 passengers in 2008 so it must have seemed like a good idea to convert it to a commercial facility. Right now, the 30-employees at the airport are still waiting for their first commercial passengers.
Castellon Airport: It was conceived in 1997, saw its first stone laid in 2004, and after a series of delays finally opened in March. The airport cost Spanish taxpayers €155.0 million, but has yet to see a plane. Many are hoping the inclusion of a future theme park will spark interest. In the meantime, there is a tourist attraction of dubious distinction. The 79 foot statue of Carlos Fabrc, president of the region, has been investigated several times for corruption.
Alguaire Lleida: Built in the Catalan region of Spain, it cost taxpayers €95.0 million to attract airlines by offers of free landing, free charging, and annual payments of €1.6 million. According to its website, the airport has 16 weekly flights, but a local report could only find 10 actual flights.
There are numerous more airports on drawing boards, and some will be half an hour away from existing airports. During the go-go period Spain built more homes than all of Europe combined. It was a fun time for all as money sloshed around like crazy. Perhaps it seemed reasonable that the government would go nuts with high speed rail, highways, and airports. Now, Spain has unemployment lurching toward 20% and many believe its fate is not unlike that of Greece. Sure, we need infrastructure spending but not the scam we got before with redistribution of wealth to unions. The fact is the economic cure has to be unlocked by tapping into the greatness of Main Street, not unnecessary paving projects.
By the way, in his radio address this past Saturday President Obama talked about a company called Red Zone Robotics and how it was creating robots to explore water and sewer pipes and "working with unions creating jobs to operate robots." Really? You have to be in a union to work a robot? Or is this new initiative, Advanced Manufacturing Partnership (another public-private plan to payoff certain industries with taxpayer funds), also an advertisement for union membership?
The market was poised for a bounce this morning, but that's iffy now as the personal income and spending numbers came in below consensus. It's not that the Street was looking for anything robust, but what it got was really anemic. Moreover, I thought there could be a chance for a surprise on spending considering gas has been decreasing (maybe next month), but it was flat versus an estimate of 0.1%. NASDAQ stocks act like they're ready to bounce, but this could be a long day for stocks in general unless scuttlebutt on Greece coalesces into some kind of positive consensus.