Will U.S. Follow Europe Back Into Recession?

While the news that Europe is back in recession is not surprising, it is still troubling.

This week, Britain's Office for National Statistics reported that in the first quarter of this year Britain's economy shrank 0.2 percent, after having contracted 0.3 percent in the fourth quarter of 2011. That makes this Britain's first double-dip recession since the 1970s.

Officially, two consecutive quarters of shrinking GDP indicates a nation is in recession.

It's been four years since Britain's real GDP peaked in the first quarter of 2008. At the end of the first quarter of 2012, its GDP was still 4.3 percent below its pre-recession high. That's telling. It indicates that Britain never truly recovered at all.

On Monday Spain officially fell into recession, for the second time in three years. This means the Iberian nation is now grappling with a rather rapid double-dip recession. The Spanish economy is projected to contract 1.8% this year, according to the International Monetary Fund. Bad news.

Naturally, the credit ratings agencies have taken notice.

Standard & Poors downgraded Spain by two notches on Thursday, from "A" to "BBB+", saying the country's budget problems are likely to worsen due to economic weakness. The contracting economy will ultimately expand the nation's debt. S&P also assigned a negative outlook, meaning it may downgrade Spain again in the near future. The lower rating will likely raise Spain's borrowing costs, which is the last thing it needs right now. Moody's had previously cut Spain's credit rating by two notches back in February.

The pain in Spain is widespread. The Spanish unemployment rate is a whopping 23.6%, with youth unemployment at a stunning 49%. That's akin to a full-on depression. Spanish home prices dropped more than 11% in the fourth quarter, year-over-year. And in December, mortgages collapsed 39%. That's also akin to a depression.

Amidst all of this gloom, the Spanish government is following other European nations in trying to reduce its deficit through painful austerity measures. Many doubt that this will do anything but shrink the country's GDP, making it even harder to repay its debts.

"Austerity itself will almost surely be disastrous," said Nobel Prize-winning economist Joseph Stiglitz. "It is leading to a double-dip recession that could be quite serious. It will probably make the Euro crisis worse. The short-term consequences are going to be very bad for Europe."

The fear is that Spain may eventually follow in the footsteps of its smaller euro-zone partners — Greece, Ireland and Portugal — and need its own financial rescue. The problem is that there is no mechanism in place to bail out Spain. It's simply too big to save and there isn't enough money to rescue it.

Like Spain, Italy is another economic zombie, shouldering a Greek-like debt-to-GDP ratio of 121 percent. And, like Spain, it is also too big to save.

Data released earlier this month showed no growth in France's economy in the first quarter. It seems highly likely that France is now contracting as well. Europe is so interconnected that these things have a tendency to spread. If Germany — the continent's economic powerhouse — follows, it would be a most ominous outcome.

These are huge economies we're talking about here. A European recession will have global consequences. Germany has the world's sixth biggest economy; the UK is ninth biggest; France is 10th; Italy is 11th and Spain is 14th.

As a whole, the European Union has the world's biggest economy. When Europe gets sick, the rest of the world can get sick along with it. Recessions can be contagious and are often global.

Even China's massive economy is slowing from its torrid double-digit growth rate. The global demand for goods is declining and this will affect all exporters, including the U.S. That could result in higher unemployment here and elsewhere.

Yes, this could get ugly.

Due to widespread deficit and debt problems, European governments have been making large budget cuts. But the private sectors in most of these economies have been struggling for years. The only thing keeping most of them afloat has been government spending. That's where all the debt came from.

So, cutting spending, while seemingly necessary, will have the unintended consequence of cutting into GDP as well. That will hurt the European economies and cut tax receipts, which will only make the debt problems worse. It's a downward spiral in which the medicine only makes the patient sicker.

While the ratio of a nation's debt relative to the size of its economy is often viewed as critical, what is more important is the size of a nation's revenues. That's what allows a country to pay its debts.

Which brings us to the U.S.

Absent the government's deficit spending, real GDP has been flat for 15 years. Without the growth in government debt, the U.S. would be in a depression. Perhaps the deficit spending was the lesser of two evils, but now the government has an absolutely massive debt problem on its hands.

After the November elections, Congress will have nine weeks to make a whopping $5 trillion in tax and budget decisions. Even if it weren't for all of the ugly partisan politics the process will surely involve, it would still pose an incredibly difficult challenge and be very unpopular with voters. There is a whole lot less money to fund the government these days, yet there are even greater needs.

The U.S. is still dealing with the hangover from the Great Recession. During any recession, GDP and revenue invariably decline, while safety net payments increase.

In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

According to the Congressional Budget Office (CBO), automatic stabilizer payments (such as unemployment and food stamps) are adding significantly to the budget deficit. And with 22% of the workforce either unemployed or underemployed, GDP cannot reach its full potential.

The CBO estimates that automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit in 2010, an amount somewhat greater than the 2.1 percent added in 2009.

Millions of Americans remain in dire straights and this is adding to the deficit. These people are not contributing to government revenues, but are instead relying on them. This is not about to change any time soon. In fact, if the U.S. drifts back into recession, the ranks of the needy are certain to grow.

Since the financial crisis, only about 15 percent of the total debt increase was due to the 2008 bank bailout (Bush) and the 2009 stimulus (Obama), according to the CBO. The rest was the result of a huge drop in federal revenues. Absent a rather immediate and significant reduction in unemployment, revenues will not improve.

As it stands, revenues haven't rebounded much and that's a bad sign for the government, the annual deficit and the total debt — now $15.6 trillion, and climbing.

Though the U.S. has added nearly two million jobs over the past two years, the economy is still down about five million jobs since the recession. The unemployment rate has been falling because so many people have dropped out of the work force. That tends to lower the total percentage of those officially defined as unemployed.

The labor participation rate fell steadily after the recession began in 2007, yet it has continued to fall ever since the economy started its 'recovery' in 2009.

An alternate measure of the jobless rate is the employment-to-population ratio, which paints a more sobering picture of the employment outlook.

After peaking at the end of 2006 at 63.4 percent, the portion of the 16-and-over population holding a job (excluding those in prison, the military, or long-term care) fell to 58.2 percent by the end of 2009. Since then, the ratio has barely budged — rising by less than half a percentage point.

That's not good for the revenue side of the equation.

While a solid argument can be made that the U.S. government needs to reduce spending, such action will result in some very heavy consequences. What the government really needs, above all else, is more revenue. Without it, the U.S. will be attempting to bail out a sinking ship.

I'm not arguing that the U.S. doesn't have to reduce its deficits, and eventually its debt. It clearly needs to do both. The country's debt burden is massive and potentially crippling. What I am saying is that the U.S. is caught between a rock and a hard place, with no good choices any more. We're damed if we do, and damned if we don't.

The U.S. will surely follow Europe's lead and initiate its own round of austerity measures in 2013. The budget cuts will shrink GDP, thereby shrinking revenues. Even if those cuts result in a lower deficit (they will by no means eliminate it), they will not reduce the underlying debt. Consequently, the smaller GDP and lower revenues will only raise the debt-to-GDP ratio.

The ratings agencies won't like that one bit. You can expect the U.S. to be downgraded yet again, probably next year.

Congress should have cut the government's budget when unemployment was low and wages were stronger. But cutting spending during this time of high unemployment and stagnant (or declining) wages will only cause unemployment to rise even further, which will reduce revenues even further.

Cutting the safety net payments that millions of Americans rely on will also increase the chances of social unrest. Desperate people do desperate things. It could ultimately result in the kind of social upheaval not seen in the U.S. since the 1960s.

Such unrest has already begun in Europe. Will the U.S. follow Europe down that road?

Healthcare Costs Could Overwhelm U.S. Economy

The U.S. Supreme Court is expected to rule in June on the Constitutionality of the Affordable Care Act, also know as 'Obamacare'. The latter name is either used pejoratively by the President's adversaries or in complimentary fashion by his supporters.

For better or for worse (and since the law won't fully go into effect until 2014, it may be too soon to tell), crediting or discrediting the President for the law is misleading. After all, the 2,700-page law was crafted by Congress, in conjunction with the healthcare, insurance and pharmaceutical industries.

However, the final bill was passed with no Republican votes, which made it immediately controversial.

A reasonable argument can be made that the law is too long, too complex and had far too much input from the private industries that stand to benefit from the law's existence.

The one thing that most Americans — conservatives and progressives alike — seem to dislike about the law is the mandate requiring every American to carry health insurance coverage. Conservatives see it as a direct assault on their freedom and progressives see it as a generous gift to the private health insurance industry.

No matter how one views the law, there is no denying the litany of problems with the current U.S. health care system.

Health care spending now accounts for 18% of the US economy — the highest proportion ever, according to the government. As recently as 1980, health care expenditures were just 4.2% of gross domestic product.

By comparison, in 2009, industrialized nations spent an average of 8.9% of GDP for healthcare expenditures, according to the OECD. If the U.S. spent 9% instead of 18%, the annual savings to the nation would be roughly $1 trillion annually. That's stirring when your consider that Americans spent $2.6 trillion on health care in 2010.

The saddest thing is how little Americans get for their health care dollars.

The United States spends more on health care than any other country. But, at 78.2 years, American life expectancy is just 27th in the world. On the other hand, Japan spends $2,878 per person — about $5,000 less than the U.S. — and has the highest life expectancy among developed nations.

In most of the OECD countries, health care expenses come to more than $2,000 per person each year. In the 10 countries with the highest costs, expenses are roughly twice that.

However, in the U.S., spending on health care per capita comes to nearly $8,000 per person, approximately $2,600 more per person annually than Norway, the second-highest spender.

In four of the countries with the most expensive health care, pharmaceutical expenses come to at least $600 per person per year. In the U.S., those costs are more than $950 per capita, the highest in the world.

Even if the health care system ultimately saves lives, attempting to pay off all its associated debt is destroying many others.

From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over that period. The increases in health insurance costs are not relative to anything else in the economy. They exist in a world of their own, driven by profit, high executive pay, advertising and marketing.

A recent study by the American Journal of Medicine found that 62 percent of all bankruptcies filed in 2007 were tied to medical expenses. The more striking thing is that three-quarters of those who filed for bankruptcies in 2007 had health insurance. This is further evidence of a truly broken system.

However, last year, roughly 50 million Americans were without health insurance, according to Census Bureau data. This amounted to 17% of the population in 2011. A report by the Kaiser Family Foundation found that three-quarters of the 50 million uninsured in the US are actually employed. Again, more evidence of just how broken the existing system is.

Sadly, things are moving in the wrong direction. Due to the struggling economy, more Americans lack healthcare today than just four years ago. In 2010, the total number of Americans with health insurance fell for the first time in decades.

Yet, the nature of many accidents and illnesses is that they are unpredictable and often unpreventable. Invariably, the uninsured end up in the emergency room with no means to pay the bill. Hospitals still treat them, but the ensuing costs are passed along to the Americans who are insured in the form of higher prices.

For this and other reasons, the unfortunate reality is that the U.S. has an exceptionally expensive healthcare system that doesn't deliver much value for all of its massive costs. As previously noted, this is largely attributable to the fact that the system is profit-driven and bloated by expensive marketing and advertising costs. The system is also inflated by generous executive compensation packages and the need to satisfy Wall St expectations.

For example, the U.S accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales, followed by the EU and Japan. For years, the pharmaceutical industry has been the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue.

The profit motive is clearly one of the primary drivers of costs. But perhaps the most worrisome issue is how little we get in return for what we spend.

According to a 2007 report issued by the Commonwealth Fund (a non-profit group that studies healthcare issues), America has the most expensive, least efficient healthcare system compared to five other industrialized nations.

The report found that — in order — Germany, Britain, Australia, New Zealand and Canada all provide better care for less money.

The reports’ issuers said, “The U.S. healthcare system ranks last compared with five other nations on measures of quality, access, efficiency, equity and outcomes.”

The report also studied convenience, such as waiting more than four months for elective, non-emergency surgery. The U.S. didn’t fare as well as Germany, but was better than the other countries.

The Commonwealth Fund has consistently found that the U.S. — the only one of the six nations surveyed that does not provide universal healthcare — is inferior to the other nations in many measures of healthcare.

Though the Affordable Health Care Act has yet to be fully implemented, things haven't improved in recent years.

If the U.S. wants to continue thinking of itself as a world leader, then it has to be able to do better than other industrialized nations. Like education, the health of the nation's citizens is not just critical, but fundamental.

Unquestionably, the U.S. has a highly advanced, highly technological healthcare system. If you are in crisis and in need of intensive care, or some form of life-saving surgery, the U.S. is among the very best. The problem is that the U.S. system focuses very little on prevention and health maintenance, both of which mitigate future costs.

As of 2008, 80% of all healthcare dollars were spent on chronic conditions. As the old saying goes, an ounce of prevention is worth a pound of cure — and it could also be worth billions in savings. Quite simply, prevention is a lot cheaper than treatment.

However, cost will not be part of the equation in the Supreme Court's decision-making. The Justices will simply determine whether or not it is Constitutional for the government to mandate that the American people purchase health insurance.

If the Court rules that it is not Constitutional, it could call into question the government's ability to mandate many things. After all, laws are supposed to be compulsory, not optional.

Would the overturning of the mandate invalidate the Massachusetts healthcare law signed by Mitt Romney in 2006?

While conservatives now vehemently oppose the Affordable Care Act, the concept of an individual health insurance mandate originated at the Heritage Foundation, a conservative think tank, in 1989. Republicans also introduced health care bills that contained an individual health insurance mandate twice in 1993. And of course Republican Mitt Romney championed and signed such a mandate into law as Massachusetts' governor.

The conservative approach has been to create a truly national health insurance market, allowing people to purchase insurance from any of the 50 states. This seems logical. The larger and more competitive a market is, the lower prices tend to be.

However, the U.S. problem is a matter of high costs, which ultimately drive end-prices for consumers.

The other long-time conservative solution to soaring costs is tort reform. However, the 15 leading insurance companies had a 5.7% increase in malpractice payouts from 2000 to 2004, while increasing premiums by 120% during that period. Since malpractice lawsuits don't appear to be the problem, tort reform is not the solution.

That said, a solution must be arrived at soon because health care spending will eventually strangle the economy.

The U.S. healthcare system encourages hospitals and doctors to perform unnecessary medical procedures on people who don't need them, while denying procedures to those who do.

According to a 2005 report by researchers at the Boston University School of Public Health, about 10% of the U.S. population is responsible for 70% of its health care costs. That group consists primarily of the elderly and the chronically sick.

While we can’t stop the aging process, we can do more to avoid lifestyle diseases such as heart disease, hypertension and diabetes. We can also stop spending so much on end-of-life care, which simply prolongs the inevitability of death.

The health care costs related to our aging population are poised to worsen. The health care system is on a collision course with reality.

The U.S. is on the threshold of becoming the first-ever mass-geriatric society. For the first time in history, people 85 and older are the fastest growing segment of the population. Over the next 20 years, the number of people over the age of 65 will double to more than 70 million, or 20% of the population.

Ultimately, America needs to spend more money preventing disease than treating it. In order to regain control of spiraling costs, the focus must shift to prevention. It's the chronic conditions that people ignore for so long — usually because they don't have insurance — that are so expensive to treat.

However, the government, doctors, hospitals, and insurance companies can only do so much. Ultimately, we need to do a better job of taking care of ourselves.

Two-thirds of Americans are overweight or obese, and that is the public health issue of this generation. The CDC has reported that obesity is now overtaking smoking as the leading cause of preventable deaths.

Additionally, diabetes is now viewed as an American epidemic and is projected to become this nation's most costly disease. Incredibly, 90% of diabetes cases are Type II, meaning they are almost entirely preventable.

Yet, Americans refuse to change their behaviors and their lifestyles.

Our physical well being is largely in our own hands. Until we start taking better care of ourselves, the personal and economic costs will become increasingly burdensome to our nation as a whole.

U.S. Corporate Tax Rate Quite Deceiving

Much has been made of the fact that, at 35 percent, the U.S. has the highest marginal corporate tax rate in the developed world.

However, to fully understand this story you have to read between the lines and look past the political posturing.

Few U.S. corporations actually pay the 35 percent rate because the loophole-riddled tax code gives them a lower "effective" rate.

The effective corporate income-tax rate — what corporations actually pay after all deductions, credits, and loopholes — is 27.7%.

The tax code has not been thoroughly overhauled in 25 years, and it is in desperate need of fixing. Corporate lobbyists worked hard at putting all those loopholes in place, and they are determined to keep them there.

However, due to a shrunken tax base, a signifiant revision may be on the way.

In February, President Obama proposed a corporate tax reform blueprint that included a 28 percent top rate. Such an idea seems like one that Republicans would love, and it provides an opportunity for genuine consensus and true bipartisanship.

The problems with the tax code are egregious, and they are robbing the Treasury of much needed revenue.

In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

Much of that is due to the effects of the Great Recession. But corporations are also taking advantage of the tax code and paying lower rates than most individual taxpayers, or avoiding taxes altogether.

Of the 30 companies in the Dow Jones industrial average, 19 told shareholders their effective rate for their 2011 fiscal years (most of which ended on December 31) was below Obama's proposed new tax rate, according to a Reuters analysis of securities filings.

Verizon, for example, paid an effective rate of just 2.7 percent. Even more remarkable, AT&T, Bank of America and Travelers Insurance actually posted a tax gain.

From 2007 to 2009, accounting tricks helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.

Those relaxed rates are well below the rates paid in other industrialized nations.

The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development. The Obama plan would put the U.S. just above that average.

The key to reform is to fully eliminate all deductions, exemptions and loopholes. The code must create a level playing field that is fair, straightforward and incorruptible. Presently, U.S. corporations are making a mockery of the tax code.

A 2008 report by the Government Accountability Office (GAO) found that approximately two-thirds of all corporations paid no federal income tax in 2005. However, it was part of a longer trend.

The GAO — the investigative arm of Congress — also found that two out of three US corporations paid no federal income taxes from 1998 through 2005. The study covered 1.3 million corporations of all sizes, with a collective $2.5 trillion in sales. It also included foreign corporations that do business in the U.S.

The Wall Street Journal reported that 69 percent of U.S. corporations were organized as nontaxable businesses in 2008, up from 24 percent in 1986.

Last year, 30 of the biggest corporations spent more on lobbying than taxes. How crazy is that?

Corporations have gamed the system in their favor. So assertions about how punitive and restrictive the corporate tax code is are plainly absurd.

A government report shows that last year total corporate federal taxes paid fell to 12.1 percent of profits — a level not seen since 1972.

Things weren't always this way. In the 1950s, US corporations contributed a 30 percent share to the federal tax base. Today it's down to 6.6 percent.

Corporations paid a higher share of revenues in the past and the economy was a whole lot healthier.

Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s.

However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010, down from 2.7 percent in 2006.

The lobbyists did what they were paid to do, and they did a really good job. Congress, ever the loyal servants to their corporate masters and benefactors, did what was asked of them and rigged the tax code.

The consumer group Citizens for Tax Justice said it surveyed major U.S. companies and found that 26 on average paid no net federal income taxes between 2008 and 2011, among them General Electric and Duke Energy.

This nation is essentially broke. In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent. Fiscally, the country is teetering on the edge of a cliff. The government simply cannot allow huge, profitable corporations to continue paying zero taxes or, worse, post tax gains.

It's also time for corporations and their Congressional cronies to drop the act; they are not burdened by high or punitive taxes. Quite the contrary. Further, U.S. corporations are fortunate to be subject to the rule of law and all of the protections that this allows.

If the tax code is rewritten, it would benefit the corporations that don't get the special sanctions and the generous tax benefits. Ultimately, the playing field should be leveled and made equal for all.

Moreover, the tax code doesn't need to be rewritten for the benefit of corporations; it needs to be rewritten for the benefit of the rest of the nation. More revenue is desperately needed by the Treasury, which is presently being swindled by corporations.

U.S. Debt Crisis, Straight Ahead!

Within the next five years, $5.9 trillion — or 71 percent — of the U.S. government's privately held marketable debt will come due.

This means the government will somehow have to roll over nearly three-quarters of its debt by 2017 — almost certainly at higher interest rates than at present.

Simply put, an enormous amount of debt — perhaps too much — will come due in a very narrow time frame.

The U.S. has become overly reliant on short-term funding; only 10 percent of the public debt matures beyond ten years. This creates constant pressure to issue new debt and get debt holders to roll over existing debt with the promise of even more interest payments down the road.

The U.S. paid $454 billion in interest on its publicly held debt in fiscal 2011, which ended September 30. For perspective, the entire U.S. budget deficit in 2007 was $161 billion. The current interest payments, alone, now exceed that figure.

The scary thing is that even if Congress manages to balance spending with revenues, it would still have roughly half-a-trillion dollars in interest payments to make this fiscal year. And the situation can get even worse.

As interest rates rise — and they surely will — the interest payments will become even more cumbersome. Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, according to Lawrence Goodman, president of the Center for Financial Stability. Goodman is an expert in such matters; he previously served at the U.S. Treasury.

When rates return to historic norms, the interest payments will become unmanageable.

In 1970 the yield on a 10-year Treasury averaged 7.35 percent; in 1980 it was 11.43 percent; in 1990 it was 8.55 percent; in 2000 it was 6.03 percent; and in 2010 it was 3.22 percent. You can see the long term downward trend. But rates can just as easily trend upward instead.

It is reasonable to ask how the government will convince foreign governments and sovereign wealth funds to roll over their existing debt, rather than taking their money and going home.

After all, the U.S. private sector — namely banks, mutual funds, corporations and individuals — reduced its purchases of U.S. government debt to a meager 0.9 percent of GDP in 2011, from a peak of more than 6 percent in 2009. That's because they're all chasing higher yields in riskier markets.

Buyers of U.S. debt have become scarce enough that last year the Federal Reserve purchased a stunning 61 percent of the total net Treasury issuance. That is simply insane. It is also patently unsustainable.

The Fed is effectively subsidizing U.S. government spending and borrowing. This masks the reduced demand for U.S. debt by sovereign entities and the U.S. private sector.

Simply put, the U.S. government would cease to function without the absolutely massive intervention of the central bank. But there are limits to all of the Fed's money-printing schemes.

At present, the U.S. government's demand on the credit markets for its annual interest and principal payments is equivalent to 25 percent of GDP, according to Goodman, which is 10 percentage points higher than the norm.

This level of indebtedness cannot continue. Interest payments on the debt steal from more productive uses, whether its infrastructure, research & development or education.

More importantly, at some point large interest payments can force some rather unfortunate social choices and even the potential of default. Never in the history of the Republic has that happened. But there is a first time for everything.

The likely outcomes are a debt crisis, spiking interest rates, and spiraling inflation due to all of the Fed's monetization of the debt (meaning, printing money backed by nothing so that the government can maintain its deficit spending).

One needs only to look at the European sovereign-debt crisis to see how this all ends. Things can seem just fine for many years, until there is a sudden shock to the system.

In other words, everything can seem just fine until, quite suddenly, it isn't.