It is time political leaders in Europe and the U.S. admit they don’t know what to do.  For three years we have endured promises of government stimulus, bailouts, and quantitative easing pushing us straight out of this recession.  Yet we are near the end of 2011 still dealing with the same problems.  This week, they discussed doing more bailouts for Europe while President Obama and Democrats in Congress believe raising taxes and printing money is the way to go here.  Both sides of the Atlantic are suffering from poor governance and are in desperate need of new leadership.

Americans and Europeans need to ask themselves why the current economic slowdown has lasted so long.  They also need to ask themselves why we are still talking about bailouts and loans more than three years after the banking meltdown.  The problems facing Europe and the U.S. in 2008 are still with us today.  It’s time to face facts, what we’ve done isn’t working.

Most recessions or economic downturns are fairly short, followed by a short lull in growth then an expansion.  However, there is a pattern noticeable among the longer and deeper recessions.  The longest include the recent one (18 months), the early 1980s recession (14 months), the 1973-1975 recession (16 months), and the Great Depression (55 months).  Nearly all include a period of high government spending combined with either a banking collapse or international crisis.  They also all include heavy government intervention in order to speed up recovery.  In nearly every case it failed.

The only success story was the economic expansion after the early 1980s recession.  There were two major differences in the government response in that case: first, taxes were cut, and second the Federal Reserve adopted a tight monetary policy (high interest rates).  Currently the federal government is doing the exact opposite, following in the pattern of the other long recessions.

Today, President Obama and Democrats in Congress are talking about tax increases, more government stimulus, and keeping Fed interest rates near zero.  These ideas have been tried before and failed miserably.  Even Republicans in Congress don’t seem ready to fight for sound policies.  Sens. Toomey and McConnell seemed ready to accept tax increases along with tiny spending cuts.

Bad governance certainly isn’t unique to the United States.  Many European countries decided to share the same currency with certain fiscal restrictions for member-states.  Sadly not a single country adhered to these restrictions.  Nearly all of them borrowed and borrowed and borrowed.  When the economy went on the fritz, countries like Greece, Portugal, Ireland, Spain, and Italy found themselves in serious trouble.  They had massive debts, huge deficits, and no way to pay them off.

The Euro solution was a major bailout combined with new austerity measures and tax increases.  Unfortunately it now seems they need more in bailout money.  The head of the European Central Bank (ECB) and other finance ministers now admit they will need major bailouts from the IMF (where the U.S. is a major stakeholder) and several foreign countries.  The other option is for Germany to bailout the other Euro countries – a historical irony given the events of the last century.

A wise man once said the definition of insanity is doing the same thing over and over while expecting a different result.

Bailouts and more borrowing rewards bad behavior and delays the tough decisions.  The U.S. and Europe have managed to delay the hard decisions for three years.  All the while the underlying problem has not been solved.  Few European countries have made the budget cuts necessary to return to solvency.  In the U.S., we are still heading toward adding $9 trillion in more debt over the next ten years.

Here is another famous quote: those who fail to learn history are doomed to repeat it.

What can we learn from history?  First, more spending only delays the inevitable and leads to even bigger problems down the road.  Second, printing and borrowing more money doesn’t work.  Third, it takes new leadership to make the necessary changes in policy.

Cutting spending to reduce the deficit and slowdown the accumulation of debt works.  Keeping taxes low, even cutting them if possible leads to growth.  However, they only work if the tax cuts are real and permanent (no gimmicks).  Sound monetary policy is also necessary in order to restore some sanity to credit markets.  It hurts in the short term but leads to big benefits in the long term.

Of all the political factions, only the Tea Party and hard-line conservatives in Congress appear ready to propose such solutions.  Rep. Paul Ryan’s budget proposal would’ve accomplished this effort.  Tea Partiers keep pushing for a reined in Federal Reserve, perhaps even abolishing it entirely in the near future.  Although that may not be necessary, at least they are thinking outside the box.  Meanwhile, Washington is hopelessly trapped in the box.

Among the Republican Presidential candidates it is hard to determine how serious they are about spending cuts, tax reform, and sound monetary policy.  Mitt Romney appears ready to make some cuts and simplify taxes but appears unwilling to go very far.  His plan would definitely improve the situation but may not be enough to get us out of the hole we have dug for ourselves.  Newt Gingrich and Herman Cain are ready to push for deeper cuts and more reforms but some I if they can pull it off.  Some of their ideas are highly controversial and may not fly even in the current political climate.

Among the lower tier candidates, there is agreement that major changes need to be made in the Federal Reserve and major spending cuts.  Rick Perry, Michele Bachmann, and Ron Paul all call for dramatic changes.  They also have solid records in voting for or implementing such changes.  However, at this point none of them appear close to winning the nomination.

Americans need to be ready for major changes in policy.  Minor adjustments will not get us out of economic stagnation and won’t resolve the debt crisis.  The federal government must find a way to close most of the $9 trillion budget gap over the next ten years.  The $1-$2 trillion reductions being discussed in Congress today are not enough.  President Obama is also clearly unserious about the problem.  His budget would’ve added $10 trillion in debt and increased taxes.  Fortunately Congress voted it down (the senate rejected it 0-97).

If the U.S. and Europe fail to change course, there could be a major shift in the balance of power.  China and India could rise much faster as the West falls.  The developing world will struggle through recession, forcing them to make a decision: on whether to continue their relationship with the West, or embrace China.  There is also the chronically high unemployment and poverty that will be inflicted upon the U.S. and Europe.  We need a change in course.  To accomplish this, we need new leadership.

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