Sarkozy is out in France. Anti-bailout politicians surged into office in Greece. Merkel is under pressure in Germany. Voters in Europe have spoken loud and clear: Bone-deep austerity cuts will not be tolerated, and the electorate is all to happy to tighten the noose around politicians who tighten the belt.
Some say the populist backlash is off base and the real risks are that Greece will return to its profligate ways and the broader eurozone will not be able to break the downward spiral of “debt contagion” as countries simply don’t have enough money to make ends meet.
But Ireland was first to the austerity party, and the fact that the Emerald Isle slipped back into recession in Q4 2011 proves cutting alone isn’t going to cut it.
Finding the middle ground certainly is not going to be an easy task, if it’s even possible given the urgency of the EU crisis and the vitriol that voters just showed. But what should be most interesting to American investors right now isn’t the drama playing out in European parliaments as it relates to the solvency of the eurozone or even to the stock market. No, what is most important about these events is how they will inform actions in Washington — and ultimately at the ballot box this November.
Let’s chew things over for a bit, shall we?
Click to Enlarge First, consider government employees are almost an endangered species. You hear the snarky comments about how plush a government job is, but that’s hardly the case under President Barack Obama. Barring a brief spike due to the Census and earlier from the $787 billion stimulus package, government jobs have been disappearing at a rapid rate.
At a time of high unemployment, that doesn’t make a whole lot of sense. Cutting all the government employees will never close the budget gap and seems poorly timed.
So what’s the election outcome? Not good for politicians doing the cutting, you would think. Even if we overlook the sheer number of unemployed public servants who vote, it’s also worth noting that cost-cutting also eliminates services — sometimes popular services, too. Just consider the plan to close some “unprofitable” rural post offices as one area where those personally affected by the cuts are furious.
However, it’s not like Americans are willing to ignore the problem of yawning deficits. On the other side of the austerity argument, it seems like a majority of Americans favor closing the budget gap via some form of higher taxes.
An April Gallup poll finds that roughly six in 10 Americans support the idea of a law that would require households that earn $1 million or more a year to pay a minimum 30% tax rate, closing loopholes that allow people like Warren Buffett to pay a lower effective tax rate than his secretary. The so-called “Buffett Rule” has just 37% opposition, according to the poll. So clearly it’s not like all belt-tightening is off the table.
So where does this leave us?
Unfortunately … nowhere. Because the bottom line is that the lion’s share of the U.S. budget woes stem from the massive costs of those ballooning entitlements Medicare, Medicaid and Social Security.
If we learned anything from the recent elections in Europe, it’s that voters are keen on knee-jerk reactions to legislation and cost-cutting rather than lucid and measured debate on the topic.
You can be sure that type of mentality will reign supreme here in the U.S., too, and that makes any true entitlement reform an impossibility unless one party winds up controlling both the White House and a supermajority of Congress.
In short, despite the advance warning of our debt crisis and the cautionary tale of Europe, we will continue to kick the can down the road until we share the same fate. Expect a whole lot of nothing in 2012.
But maybe by 2016 the problem will be just too big to ignore, and we will embarrass ourselves with riots and protests and name-calling just like our friends across the Atlantic.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP.
The opinions contained in this column are solely those of the writer.
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