A Weak Case for Austerity

06/26/2012 10:43 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Canadian economist David Rosenberg has turned vaguely bullish for the weirdest of reasons, writes MoneyShow.com senior editor Igor Greenwald.

Bank runs, credit downgrades, and cabinet-level bickering about money aside, all has been more or less quiet on the European front. Which is to say that the whole miserable, misguided mess is a little worse than last week, but not enough to leave much hope for decisive action.

A week after giving the tottering experiment three months, George Soros downgraded its life expectancy to as little as three days, barring progress toward a banking and fiscal union. The market expects the latest summit to accomplish nothing so useful, with predictable consequences for risk assets.

Meanwhile, China and Brazil are no longer the global growth engines of three years ago, stalled by deflating real-estate bubbles and waning overseas demand.

Canada and Australia, riding leftover momentum from a commodity boom that has lately busted, are also bracing for pain and wondering how much it would take to topple sky-high house prices.

But cheer up, because Canadian-style austerity is coming to the US. At least that’s the “bullish” fodder recently dispensed by a widely read Canadian economist.

It’s a strange rationale for optimism, but then David Rosenberg of Gluskin Sheff has always aimed to stand out for the crowd. That was the case four years ago, when Rosenberg’s bearish warnings contradicted the misplaced optimism of higher-ups at Merrill Lynch.

And while he’s hardly jumping for joy about an economy that “is about to slow down even more,” Rosenberg also claims to “see the light at the end of the dark tunnel,” and all because voters in a couple of cities in California have put the squeeze on public employees, while Wisconsin refused to recall a governor who’s done the same.

Rosenberg has extended me every courtesy, and I have a great deal of respect for his insights. But his “bullish on austerity” opus works better as a political polemic than economic analysis.

Strip away the exhortations (“Resolve. Courage. Discipline. Shared sacrifice.”) and the fond reminiscences about the certainties of Ronald Reagan, and you’re left with Rosenberg’s assertion of “the timeworn link between profit and jobs.” As if we didn’t have two years of record corporate earnings coinciding with persistently high unemployment.

Rosenberg’s causality chain seems to lead from the reining in of public worker pay and benefits to a Republican election landslide, followed by virtuous tax reform and subsequent deployment of corporate hoardings into productive investment.

But treating public workers as increasingly powerless temps will not advance a corporate cornucopia. I’m a little fuzzy on how replacing Fred the fireman’s pension with a 401(k) will help Ford (F) sell him a carâ€"and so, it would seem, is Rosenberg.

State and local governments have cut 616,000 jobs over the last three years, a big factor in the economy’s current struggles. Any potential tax savings are highly likely to stay parked in savings accounts and bonds, while demand for goods and services drops alongside the income of the laid-off workers.

This recession-baiting austerity is trumped, for Rosenberg, by the predicted return of confidence and successful tax reform. The Toronto-based economist draws inspiration from the Canadian budget-cutting of the 1990s, but neglects to mention that Canada had a giant neighbor to the south vacuuming up its exports, while the US is stuck with mercantilist China and Germany.

In Rosenberg’s utopia (coming to a workplace near you right after that recession he won’t rule out), the US enjoys a trade surplus at long last, while China and Canada presumably run offsetting deficits. And all the retrained cops and social workers must be hydraulically fracturing rocks to extract natural gas for export.

Also, interest payments on mortgages aren’t tax-deductible anymore, and we have a national sales tax. So, basically, Canada without the free and universal health care.

It’s possible this vision isn’t as appealing to Americans as Rosenberg imagines. Or maybe we’ll opt for even more austerity, economic consequences be damned. If we do, investors are unlikely to end up happy.

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