The economic model President Obama wants America to embark on has been tried many times in many places and every time its failed. We are reminded of this when we look at Spain. Massive government spending on projects like countless airports 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.
Ø Murcia needs 1.0 billion (200.0 million for a much-delayed airport that looks like a flop before it even opens)
Ø 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 theater.
Ø Catalonia need 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 euros annual 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 decent 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 in 1556 at age 29 King Philip II of Spain 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 own your largest rivals? But wars are expensive and not just the ones fought back then with swords and cannons. Wars on poverty, drugs, and these days success all take on budgets.
Of course it comes down to government spending and realizing when it's time to reel it back. The string of bankruptcies began. 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 their 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."
Ø Servico in 1561 was a poll tax that hit commoners.
Ø Excusada tax hit income from church lands.
Ø Crusada tax to fund the Holy War and Spanish Inquisition .
In America taxes are paid exact opposite from Spain in late 1500s.
Top 1% pay 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 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 manufactures.
Spain's current situation after spending the 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 governments 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 Irene's punch was to Katrina what a seven year old kid's punch was to a Mike Tyson in his prime I'm giddy the levies held, too. But make no mistake nobody is upset with 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. Its different than punishing earnings of hardworking people and job creators out of uncontrollable envy.
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for July 25th, 2014 | John Ransom