By Charles Payne, CEO & Principal Analyst
The economic model President Obama wants America to embark on has been tried many times in many places, and every time it’s failed. We are reminded of this when we look at Spain. Massive government spending on projects such as countless airports, which are never used, high speed rail, and new highways.
Sure, it looks fantastic, but there are no commercial trucks, there are no commuters, and the only mobility is downward. Three regions of Spain have requested emergency bailouts and more are lining up.
They are bogged down with gigantic debt for public projects that were ill-advised and have become costly white elephants.
> Murcia needs €1.0 billion (€200.0 million for a much-delayed airport that looks like a flop before it even opens).
> Valencia needs €3.5 billion just to cover current needs and help its army of homeless as a €26.0 million new hospital sits there gleaming with only 120 beds, but six operating theaters.
> Catalonia needs €5.0 billion after wasting money on things like an €150.0 million airport that gathers dust, but not birds because they pay a falconer €200,000 annually to keep them away.
As much as Spain stands today as a cautionary tale against mindless spending in the name of short-term glory (so many projects have grandiose statues, often in the image of local politicians) and temp jobs (and really redistribution of wealth from taxpayers to union workers), it was the Spain of the past that truly stands as the best example of how the greatest nation in the world can begin a descent into an also-ran nation with 25% unemployment (there was another glory period under King Charles III 1759 to 1788). The Spain of King Philip II.
End of Golden Age
When he became King Philip of Spain in 1556, at age 29, his nation was rising above all others in the world. His reign covered much of the world, but was marred by massive spending and borrowing. In the end, the empire went bankrupt 13 times from 1500 to 1900. The ball got rolling with an ambitious scheme to conquer the world including the Netherlands and Britain. What good is being in the midst of a Golden Age and not owning your largest rivals? But, wars are expensive, and it is not just the ones fought back then with swords and cannons. Wars on poverty, drugs, and these days success all take a toll on budgets.
Of course, it comes down to government spending and realizing when it’s time to reel it back. In Spain, the string of bankruptcies began with King Philip. Some scholars claim the first three (1557, 1560 and 1575) were simply liquidity shocks, but the nation continued to not be able to pay its debts and fell bankrupt again in 1596.
Instead of cutting back on ambition or spending, Spain had other ideas on how to tackle its fiscal problems-raise taxes.
In addition to being a famous painting by Peter Paul Rubens (see picture) in 1636, a series of new taxes introduced by King Philip II were also given the name “Three Graces.”
> Servico in 1561 was a poll tax that hit commoners
> Excusada tax hit income from church lands
> Crusada tax to fund the Holy War and Spanish Inquisition
From 1559 to 1598, taxes increased 430%, raising 1.4 million ducats and it still was not enough to offset government spending. Making matters worse was the fact Aristocracy was exempt from paying taxes. This created a real and legitimate war of envy across Europe and eventually led to a revolution in the New World. Speaking of the New World, not only was all that tax money pouring into the coffers, but Spain was raking in mounds of gold and silver from the Americas (demand was so intense that natives were broken and killed sparking the demand for slaves from Africa that could handle the heat and workload) .
In America, the taxes that are paid are the exact opposite from those paid in Spain during the late 1500s.
Top 1% pays 36.7%
Top 5% 58.7%
Top 10% 70.5%
Top 25% 87.0%
Top 50% 98.0%
Even with all that cash pouring in, spending remained out of control. In the meantime, Spain eventually lost a prolonged war in the Netherlands that saw the Dutch declare independence, and an ill-timed invasion of Britain saw the demise of the so-called “invincible armada.” There was also the suppression of the Moricos revolt, where 80% of the arms used by Spanish military and mercenaries were imported.
The Cautionary Tale
Because of Spain’s massive spending and series of bankruptcies, there was very little investment in the nation and in its private businesses. Like the United States today, lenders were willing to make investments in debt knowing defaults would only trigger much higher interest payments later. Moreover, Spain during its Golden Age, and America today, were cash machines. Yet, the underlying fundamentals were fading. The circumnavigation of the world brought in cheap products from China and India not only hurting taxes collected from Silk Road trade, but also harming domestic manufacturers.
Spain’s current situation after spending that kind of money on public works advocated by the left in America serves as a great example that simply building it doesn’t mean they will come. But, it’s the Spain that once ruled the world that truly underscores how government spending can destroy the greatest of empires.
By the way, the mainstream media is giddy over how well the levies held up this week. The fact that Isaac’s punch was to Katrina as a seven year old kid’s punch is to Mike Tyson in his prime, I’m giddy the levies held, too. But make no mistake; nobody is upset with the spending used to keep Americans safe. We want to be safe from nature, terrorists, and military threats (now and down the road). This is a lot different than pouring billions of dollars into making over-priced glass panels that can’t compete with cheaper versions from China. It’s different than taking money from taxpayers to pay off political donors. It’s different than punishing earnings of hardworking people and job creators out of uncontrollable envy.
It seems unlikely the Fed will do anything today, thus lessening the legend of Jackson Hole, an amazing place to visit, but no longer the place for interest rate surprises. Bernanke is between a rock and hard place, however. Consider GDP of 1.7%, and unemployment of 8.3%, after millions checked out of the jobs market. Sure, housing looks better, but its dual mandate is in trouble. Also in trouble is the mystic of the Fed and the ability to move markets with a wink and a nod. The fed has made things easier but mostly for banks. The big question is can the market rally without Fed intervention?