Of all the countries around the world that have tried to embrace the European welfare state, Argentina is perhaps the most tragic example. From the 1920s through the 1950s the Argentine economy was one of the strongest in the world, and there were years when Argentina attracted more immigrants from Europe than the United States did. But what could have become a formidable economic powerhouse caved in to the ideas of the welfare state. As the economy began declining, social and economic stability evaporated and Argentina suffered decades of political turmoil.
The long-term suffering of the Argentine people, and of many other South American countries, is a stark warning to today’s Europeans: their continent could become the same tragedy in the 21st century that South America was in the last century. Unfortunately, the Europeans refuse to hear the warning bells from recent history, so we might just as well pile on yet another story, on top of the ones already published about the crumbling Argentine economy and what brought it down. This one is from Bloomberg.com:
Argentina reduced government subsidies on natural gas and water by an average 20 percent in a bid to narrow the largest fiscal deficit in more than a decade. The government could save as much as 13 billion pesos ($1.6 billion) and will use proceeds to cover utility company costs and finance social spending, Economy Minister Axel Kicillof and Planning Minister Julio De Vido said today at a press conference in Buenos Aires. The cuts won’t apply to industrial users.
And the reason for the big deficit?
President Cristina Fernandez de Kirchner has boosted social spending since taking office in 2007 and left utility rates largely unchanged amid average annual inflation of about 25 percent, straining the finances of power distribution companies and leading to periodic blackouts.
If you live in California (which, thank my tax God, I don’t) you recognize this behavior. Back in the ’90s the state of California wanted to compassionately make sure that everyone could always pay their utility bills. So they regulated the price that utility companies could sell power for to households, but imposed no price regulations on the market where utility companies buy power from power producers. As a fourth-grader could have figured out, if the regulated price in the retail end was too low, on average utility companies would be buying power at a market price that exceeded the retail price they could charge.
The result? Rolling black-outs, no investments to improve either power production or power delivery, and in the end mounting costs for everyone in the back end when the entire power infrastructure needed massive upgrades anyway. (It did not help that California at the time was falling for the global warming delusion and chasing low-cost, fossil-based fuel out of the state.)
Now, Argentina finds itself in the exact same situation. But even more importantly, the Argentine government’s focus on entitlement spending is a stark parallel to Europe. Utility price regulation, which varies from country to country in Europe, is just another form of welfare-state intervention into the private sector. When coupled with the general plethora of entitlement programs that normally comes with welfare states, the subsidy becomes just another entitlement.
As Argentina demonstrates, this has consequences when government runs into fiscal trouble. Just like every welfare state the Argentine version combines spending determined by political preferences with revenues determined by a private sector, i.e., struggling entrepreneurs and tax-burdened consumers. Entitlement spending has a strong tendency to outgrow its revenues – in fact, I am working on an article for an academic journal defining a law that shows that welfare-state entitlement programs inevitably outspend their revenue – but politicians favoring the welfare state never realize that this is actually happening. Inevitably, therefore, they run into deficit problems, but since the politicians do not see this coming they are caught by surprise and react with fiscal panic.
There are three ways that fiscally panicking politicians can respond:
1. Buy time. This means, borrowing as much as they can. When they cannot borrow any more money by flooding the world with their Treasury bonds, they print money and have the central bank buy the Treasury bonds instead. If this happens in an economy with a stable financial system and a limited system of cash entitlements, the money printing will not cause high inflation. If on the other hand cash entitlements are comparatively important for daily consumer spending, then printing money to fund them opens a dangerous transmission mechanism for the money supply to cause high inflation.
2. Raise taxes. No longer a viable option, other than marginally. There is a fair amount of research that shows that voters in both Europe and North America grew tired of constantly rising taxes already back in the 1970s. Since then, an increasing share of the growth in government spending has been deficit-funded. The same is true in Argentina.
3. Cut spending. Since most politicians in our modern welfare states want to preserve the welfare state one way or the other, they do not want to eliminate entitlement programs. But when tax revenues do not grow as fast as they would want it to they are forced to downsize the welfare state to fit within a tighter revenue framework. This means chipping away at entitlements that people have gotten used to and based on which they plan their family finances.
For common-sense minded economists and politicians this means a good opportunity to prudently reform away the welfare state. “Just cutting spending, damn it” is not the way forward, but a structurally sound phase-out model can do wonders.
Leftists, on the other hand, go even deeper into panic. Bloomberg.com again:
Argentina, which has subsidized utilities since 2003, wants to cut aid from about 5 percent of gross domestic product to 2 percent of GDP and make higher income earners pay more for their utilities, Cabinet Chief Jorge Capitanich said March 12. “In 2003 the need for subsidies was clear,” Kicillof said in reference to the period after the nation’s $95 billion default and economic crisis. “Argentina isn’t ending subsidies, just redistributing them.” For Argentine households, the increase in their gas bill may rise as much as 161 percent for the biggest consumers and 306 percent for water bills, according to a presentation distributed by the Planning Ministry.
“The Planning Ministry”… Why not just adopt the Soviet acronym GOSPLAN and get it over with? Humor aside, though, it is worth noting that the families who are now hit with enormous price increases still have to pay the same amount of taxes as before.
The way out, again, is not to restore the subsidies. The way out is to end the entitlement programs and return purchasing power to the private sector so that those who have grown dependent on government can actually support themselves. This, of course, won’t happen in Argentina. What will happen there instead is that consumers now will respond by cutting spending elsewhere, thus reducing economic activity in general. This has repercussions for the tax base, which again will take government by surprise. And the entire process is repeated, with the difference that it starts from an already lower level of economic activity.
Europe is not in as bad a shape as Argentina is. But if they continue down the current path of using spending cuts and tax increases to save the welfare state in tough times, they will perpetuate their own crisis – and thereby perpetuate the need for spending cuts and tax increases.
The end station? An economic wasteland where children grow up to be poorer than their parents. That is, in effect, where Argentina is today, and has been for a long time. Sweden has been there for a good two decades and other European countries are beginning to see that same economic wasteland on the horizon.
The welfare state crisis in Europe puts two acute problems on full display:
1. Big, redistributive government is killing prosperity in the developed world – it is high time to terminate it; and
2. That same big, redistributive government has trapped large segments of Europe’s population in a destructive dependency on government.
These two problems point to the same long-term solution, namely an end to the welfare state. At the same time, the wrong kind of termination will cause enormous harm to the hundreds of millions of Europeans who depend on government for their daily lives. The only way out is therefore to end the welfare state along a path to limited government that does not leave the poor behind.
Not everyone agrees on the need to follow that path. The idea that we should “just cut spending damn it” still has a large following, both among European economists of an Austrian slant and among American libertarians. This is surprising, especially since their slash-and-burn approach to the welfare state has already been tried in Europe. A couple of days ago the medical journal The Lancet reported on what this has meant to the Greek health care system:
Two main strategies can reduce [budget] deficits in the short term: cutting of spending and raising of revenue. The Greek Government used both at the behest of the Troika, albeit with an emphasis on reduction of public expenditure. … Cuts to public health spending Greece has been an outlier in the scale of cutbacks to the health sector across Europe. In health, the key objective of the reforms was to reduce, rapidly and drastically, public expenditure by capping it at 6% of GDP. To meet this threshold, stipulated in Greece’s bailout agreement, public spending for health is now less than any of the other pre-2004 European Union members.
The writers for The Lancet do not possess the expertise to realize that austerity as applied in Greece actually aims at saving the welfare state. The spending cuts and the tax increases are displays of a concerted – and very destructive – effort to slim-fit the welfare state into a smaller economy.
Nor do they seem to understand that in the short run it does not matter much whether austerity emphasizes tax hikes or spending cuts. (In the long run the balance between the two can make a notable difference. I elaborate on this point in my upcoming book Industrial Poverty.) At the massive scale that austerity has been put to work in Greece, a tax-hike laden policy strategy would have done at least as much damage to the Greek economy – and thereby to the government-run health care system – as the policies actually implemented.
But be that as it may. Let’s go back and listen to their story:
In 2012, in an effort to achieve specific targets, the Greek Government surpassed the Troika’s demands for cuts in hospital operating costs and pharmaceutical spending. The former Minister of Health, Andreas Loverdos, admitted that “the Greek public administration…uses butcher’s knives [to achieve the cuts].” The negative effects of these cuts are already beginning to manifest. Prevention and treatment programmes for illicit drug use faced large cuts, at a time of increasing need associated with economic hardship. In 2009–10, the first year of austerity, a third of the street work programmes were cut because of scarcity of funding, despite a documented rise in the prevalence of heroin use. At the same time, the number of syringes and condoms distributed to drug users fell by 10% and 24%, respectively. These events had the expected eff ects on the health of this vulnerable population; the number of new HIV infections among injecting drug users rose from 15 in 2009 to 484 in 2012 and preliminary data for 2013 suggest that the incidence of tuberculosis among this population has more than doubled compared with 2012.
This is an excellent example of why government should not be involved in the health care business in the first place. Legislators have taken over the responsibility for caring for drug addicts – and done so based on one particular ideology, namely that it is the right thing to do to give them free drug paraphernalia. By taking over the provision of said paraphernalia, government crowds out any initiative in the private sector to either provide the same products or to care for the drug addicts in some other way.
Then, when government runs into serious fiscal trouble and has to cut or terminate the programs it has put in place, there is nobody there to catch those who have become critically dependent on government.
Fortunately, there is a way out of this. We’ll get back to it in a minute. Now, more from The Lancet:
Additionally, drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito-spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years. Through a series of austerity measures, the public hospital budget was reduced by 26% between 2009 and 2011, a substantial drop in view of the fact that expenditure should have increased through automatic stabilisers. … Rural areas have particular difficulties, with shortages of medicines and medical equipment. Another key cost targeted by the Troika was publicly funded pharmaceutical expenditure … The stated aim was to reduce spending from €4·37 billion in 2010 to €2·88 billion in 2012 (this target was met), and to €2 billion by 2014. However, there have been many unintended results and some medicines have become unobtainable because of delays in reimbursement for pharmacies, which are building up unsustainable debts. Many patients must now pay up front and wait for subsequent reimbursement by the insurance fund.
It is very important to understand how the welfare state works. By providing entitlements such as the subsidies in Greece for prescription drugs, it makes people adjust their lives, their spending habits, their entire private finances, to the existence of these entitlements. Furthermore, the taxes needed to pay for these entitlements severely restrict their opportunities to set aside money for alternatives in the event the entitlements are terminated.
The more entitlements government offers, the more people adjust their lives to those entitlements – and to the taxes that pay for them. There comes a critical point where government, by means of its welfare state, essentially monopolizes the way of life people can have. This makes the damage done by austerity all the more widespread through the economy.
When people lose access to the entitlements they relied on, they have to cut spending elsewhere to get what government once provided for free or at a heavy subsidy. This reduces spending in the private sector, forcing small businesses in, e.g., retail to slash employees.
The key problem here is not the spending cut, but the fact that it is paired with either constant or higher taxes. In Greece, government raised taxes while slashing spending – the same recipe applied all over Europe as far back as Sweden in the early ‘90s and Denmark in the ‘80s – which effectively creates a big drainage of resources from the private sector into government coffers. However, since government is not spending more, but less, the net effect is a decline both in government spending and in private-sector activity.
If on the other hand spending cuts are combined with tax cuts, and if those tax cuts are targeted to maximize the benefit to those losing the most from entitlement cuts, then the private sector has a fighting chance to step in and replace government. Once they are out of government dependency, obviously people will be able to handle health care costs with the ups and downs in their private finances in the same way as they today handle the costs of housing, feeding, clothing and transporting themselves around.
But that is not what the Europeans have in mind. This kind of government rollback is nowhere on their horizon. For this reason, we are going to hear more stories out of Europe, like the one we are listening to from The Lancet:
Findings from a study in Achaia province showed that 70% of respondents said they had insufficient income to purchase the drugs prescribed by their doctors. Pharmaceutical companies have reduced supplies because of unpaid bills and low profits. Despite the rhetoric of “maintaining universal access and improving the quality of care delivery” in Greece’s bailout agreement, several policies shifted costs to patients, leading to reductions in health-care access. In 2011, user fees were increased from €3 to €5 for outpatient visits (with some exemptions for vulnerable groups), and co-payments for certain medicines have increased by 10% or more dependent on the disease. New fees for prescriptions (€1 per prescription) came into effect in 2014. An additional fee of €25 for inpatient admission was introduced in January 2014, but was rolled back within a week after mounting public and parliamentary pressure. Additional hidden costs—eg, increases in the price of telephone calls to schedule appointments with doctors—have also created barriers to access.
These fees may not sound like much, but we have to remember that they are imposed on an economy where people have lost 25 percent of their total gross incomes in five short years, where unemployment is three times the U.S. level and where other costs of living, primarily taxes, have gone up. Government is still claiming a monopoly on providing health care, trapping people in an ever more austere system with no way to get to the alternatives.
Then The Lancet makes an observation that, so far, this blog has been almost entirely the only voice for:
If the policies adopted had actually improved the economy, then the consequences for health might be a price worth paying. However, the deep cuts have actually had negative economic eff ects, as acknowledged by the International Monetary Fund. GDP fell sharply and unemployment skyrocketed as a result of the economic austerity measures, which posed additional health risks to the population through deterioration of socioeconomic factors.
In other words, if austerity was a good idea, the Greek economy should be rip-roaring by now instead of, as The Lancet notes in conclusion, having to suffer through yet more of the same policies:
At the time of writing, the Troika was in Athens to assess the implementation of the bailout conditions, and €2·66 billion in cuts were announced to the health and social security budget for the following year.
Austerity is nothing more than an attempt at saving the welfare state from a crisis it caused. Nothing short of a real government rollback – a structural phase-out of the welfare state – is going to work. That holds true for Europe as well as the United States.
As those Europeans who still have a job return after their summer vacation, they find a news feed that increasingly looks like it did before the summer – and last fall, and the spring before that…
In short: the European crisis continues. Today we get an update from deeply troubled Portugal, courtesy of EUBusiness.com:
Portugal’s creditors arrived back in Lisbon Monday to assess the country’s progress under its 78-billion-euro bailout as Brussels signals it will not cede to a request for the country’s fiscal targets to be relaxed. Payments of the next tranche of bailout loans to Lisbon will depend on a successful review by Portugal’s “troika” of lenders — the International Monetary Fund, the European Commission and the European Central Bank — of its progress in implementing economic reforms agreed in exchange for the financial aid.
“Reforms” is a code word for draconian tax hikes and panic-driven spending cuts that are facing fierce legal challenges all the way up to the Portuguese Supreme Court. The higher taxes obviously won’t help the economy one iota – on the contrary, they add extra weight to the private sector and will very likely put the Portuguese GDP growth rate well below Eurostat’s predicted 0.9 percent, on average, for 2013 and 2014.
The efforts to cut spending are obviously failing under legal challenges. This tells us two things: they were ill designed and they were forced through under sheer fiscal panic. Cutting government spending is a very good idea, but it has to be done right. In addition to avoiding legal challenges, the cuts must be structural in kind and designed so that they easily and quickly let private entrepreneurs step in and replace terminated government programs. None of this has happened in Portugal, primarily because the Eurocrats pushing the Portuguese government into destructive austerity are not interested in structurally sound reforms. All they want to do is preserve the welfare state and make it fit a smaller, tighter tax base.
So long as the same motives are behind the same austerity measures, we should not expect any change in the outlook for the Portuguese economy. The big question is what happens next year when the current bailout program ends. It is very unlikely that Portugal has even come close to meeting the budgetary requirements under the current bailout program. As the EU Business article hints at, this may lead to a new bailout program in 2014:
The rescue programme is scheduled to expire in mid-2014. Portugal is struggling to meet its deficit target of 5.5 percent of gross domestic product for this year as government reforms aimed at streamlining the government repeatedly get bogged down by legal challenges. Portugal’s Constitutional Court last month struck down a reform allowing civil servants to be laid off if they fail to requalify for a new job. It was the third time that the court has restricted the scope of a government austerity measure. The ruling has helped push Portugal borrowing costs to levels near which it was forced to seek international aid two years ago. The yield on Portuguese government 10-year bonds stood at 7.4 percent on Monday.
This is the level that caused utter panic in Greece and Spain. And so for good reasons: if Portugal had to refinance its entire government debt at 7.4 percent interest, at the current debt level, then its annual payments on its debt would be equal to 9.1 percent of the country’s GDP!
This is not a road to serfdom. It is worse than that. This level of uncontrollable government paves the way to political chaos, economic instability, social turmoil and very likely the destruction of Portugal as a parliamentary democracy.
That point is closer in time than most people think. EU Business again:
Deputy Prime Minister Paulo Portas last week urged Portugal’s international lenders to ease its 2014 public deficit reduction target from 4.0 percent to 4.5 percent of GDP. The appeal got a cool response from Brussels, with the head of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, saying Lisbon should stick to the deficit reduction targets already agreed. … “Someone has to explain to us how we are going to be able to go from a deficit of 5.5 percent in 2013 to a deficit of 4.0 percent in 2014. We have never seen such a strong reduction in the deficit,” said Antonio Saraiva, the head of the Portuguese Industry Confederation, after meeting with Portas on Monday.
Since legal challenges successfully prohibit or reduce the amount of spending cuts, there is a growing risk that the Portuguese government will choose to rely on tax hikes instead. Tax increases earlier this year have already robbed Portugal’s taxpayers of a month’s salary, on average, in part through a rise in income taxes from 24.5 to 28.5 percent. More tax hikes would plunge the country’s economy into a full-blown depression.
Perhaps the current prime minister, Mr. Coelho, is aware of this. This would explain why he tries to push yet more austerity measures on the economy, including, EU Business reports…
an average 10 percent cut in the pensions of most government workers, which have been loudly opposed by unions.
Imagine the federal government slashing Social Security payments by ten percent across the board. That alone would be unthinkable in the United States, yet unless we start getting serious – very serious – about the federal debt, we are heading in that direction.
As for Portugal, the future is very uncertain except for one thing: we can surely expect the country’s tumultuous political climate to remain. Radical leftist parties hold a larger share of the parliamentary seats in Portugal than in most other European countries. Their strong presence in the legislature is a formidable hindrance to any effort at rolling back government, eliminating entitlements and massive tax cuts. As a result, political instability, economic decline and social stress will continue to escalate.
What will this lead to? I have said it before, and I will say it again – the one word that captures Europe’s fatal decline:
Australian voters have made their choice. A long stretch of politically correct social democracy has ended and a new conservative era is beginning. The incoming prime minister is quite a character. From British newspaper The Telegraph:
Conservative leader Tony Abbott has celebrated a landslide victory in Australia’s general election, after reducing the Labour Party to its worst result in a century with promises of tough action against immigrants and scrapping a tax on carbon emissions. The 55-year-old British-born former student boxer was long regarded as unelectable even by some of his own ranks and struggled to connect with voters, particularly women, thanks to sometimes abrasive style.
It might be a good idea for all politicians who aspire to be leaders to practice some sort of martial art. It helps build your character, makes you mentally better prepared to meet difficulties and challenges – and it vastly boosts your overall confidence. Best of all: it elevates self esteem over cockiness.
What today’s politically correct media perceive as “abrasive” character traits are often expressions of confidence and strong self esteem, nothing else.
With confidence and self esteem comes ideological fervor. Tony Abbott seems to have that:
Mr Abbott, an Oxford-educated father of three, delivered a solemn and restrained victory speech to a cheering crowd in Sydney, declaring that “Australia is under new management and once again open for business.” … Bob Hawke, Labour’s former popular prime minister, said the party had suffered “a devastating result”. … An outgoing Labour minister, Stephen Smith, admitted: “Tony has been very disciplined. He will now have members of the Liberal party who will want to see an ideological approach. He will have to be careful.”
Apparently he has already shown some ideological fortitude:
In opposition, Mr Abbott led four years of blistering attacks on Labour, deploying effective three-word slogans such as “great big tax” and “stop the boats” to target the government’s carbon tax, mining tax and its softer stance on asylum seekers. He has pledged to reduce foreign aid, to pay rewards to young unemployed people who find work and plans to travel to an Aboriginal community for a week each year to govern from the outback.
That is a very interesting idea. I’d like to see the U.S. president spend a week with a Native tribe on Alaska’s North Slope. That aside, though, he is the first political leader in a major industrialized country to seriously take on the ridiculous “green house” taxes that the falsified global warming “research” has given us. This could be a source of inspiration for other political vertebrates.
Back to The Telegraph:
With the economy beginning to slow after a minerals boom that defied the global recession, he has pledged to lower the deficit, cut red tape, lower taxes and reduce the size of government. Mr Abbott also intends to adopt a military approach to stem the flow of boat people, including using the navy to turnaround asylum seekers and expanding Labour’s plan to deport all boat people to remote Pacific islands. A staunch conservative and devout Catholic with a strong commitment to social justice, he opposes same sex marriage, supports the monarchy and has expressed concerns about abortion. But, as opposition leader, he has largely restrained his more conservative impulses and has instead demonstrated a willingness to confer with colleagues and to moderate his views.
Lead by example, not by dictate. That is a good principle for social issues. As for the economy, it is absolutely critical that Abbott’s administration combines tax cuts with spending cuts, or else he will end up in the European trap.
But even this liberty-minded man has been shaped by the machine that is modern politics. After appearing at a rally against a green-house tax where Australia’s former female prime minister was depicted as “the Bitch”, Tony Abbott has fallen for the temptation to bribe voters with taxpayers’ money:
Mr Abbott has sought to soften his image and has pledged to introduce one of the world’s most generous parental leave schemes. He has frequently appeared during the campaign alongside his wife, Margie, and two younger daughters, Frances, 22, and Bridget, 20.
That said, I still like this guy:
Many Australians appear to accept that Mr Abbott has changed – or grown up. “In Abbott’s younger days, even by his own admission, he wasn’t always a gentleman,” wrote a political commentator, Peter van Onselen, in The Australian. … He later confessed that he once pleaded guilty after being caught trying to “bend over a street sign in a test of strength with a fellow student” – a conviction was not recorded. He proceeded as a Rhodes Scholar to Queen’s College, Oxford, where he was persuaded after a heavy drinking session to take up boxing. He won all four of his heavyweight bouts. His boxing style, according to a sparring partner, was neither attractive nor predictable but it reveals much of the tenacity and discipline which has helped him to Australia’s top job. “Tony used to club them into submission,” a fellow boxer recalled years later. “He waded in and just kept punching until the point of exhaustion.” As opposition leader, Mr Abbott never flinched as his pugnacious style helped bring successive leaders to their knees.
In short: it’s cool to be a man again. And conservative.
While Europe in general remains stuck in a structural recession, there are signs of hope on the horizon. Some political leaders are beginning to think outside the box to find a way out of the economic wasteland created by the austerity hurricane.
One of these new promising leaders is Finance Minister Georgiades of Cyprus. In a recent speech he pledge allegiance to austerity – a political must for a European – but his ambitions actually go beyond that. From Cyprus Mail:
The [Cyprus] government aims to reduce state spending by 10 per cent in 2014, and reduce the public deficit without imposing new taxes, Finance Minister Harris Georgiades told an audience of overseas Cypriots yesterday. Speaking at the 17th annual conference of Greek and Cypriot organisations abroad, Georgiades said this amounted to savings of around €700 million. The aim is to reduce the public deficit to around €500m next year and ensure a primary surplus by 2016, a step closer towards Cyprus returning to international markets for capital. He assured overseas Cypriots that the government’s policy focused on curbing spending, not imposing new taxes, adding: “We will secure taxation stability.”
Before we get to the good news in what Georgiades has in mind, let us first get a little bit of a background. The Cypriot government debt increased rapidly during the first four years of the crisis, from 48.9 percent of GDP in 2008 to 84.2 percent in 2012. One reason was that the nation’s banks were in struggling after having invested heavily in Greek treasury bonds. Partly as a result of the losses the Cypriot banks took on its loans to the Greek government, in the spring of this year the Cypriot government was strong-armed by the EU-ECB-IMF troika into stealing deposits from customers of the country’s banks. The Cyprus Bank Heist was sold as a rescue plan for the entire banking industry. In reality, there was never a need for that egregious an assault on private property rights, especially not when it came to helping the Cypriot government avoid yet more debt. The banks were, simply put, never in as bad of a situation as the EU-ECB-IMF troika suggested.
Back to Cyprus Mail:
“We lived beyond our means” both in the public and private sector, he told the audience. The Cypriot state was spending more than it earned, and not on development projects, creating continual deficits and a growing debt, said the minister. At the same time, banks were lending money beyond the means of the real economy, with the money directed towards consumption. “In just three years from 2005 to 2007, private lending doubled.”
Again, this sounds more like politically mandated rhetoric than anything else. From 2005 to 2009 private consumption in Cyprus grew by an average of 3.9 percent per year, adjusted for inflation. That is a healthy rate, though not exceptional. Poland experienced 4.1 percent consumption growth during that same period. Other countries saw even higher growth rates, such as Romania (5.8 percent per year), Slovakia (5.0) or Serbia (4.6). It is worth noticing that all these countries are emerging European economies, which during the years after 2000 reaped the harvests of deregulation and still having a relatively limited government. It is hardly surprising that Cyprus would be in the same group.
In other words, whatever consumption boom that generous bank lending could have led to, it did not cause any exceptional growth in private consumption. The prime minister’s point is therefore a moot one unless he can specify what the lending went to, if it created a mortgage crisis, etc.
The problem is if the Cypriot government now resorts to sustained austerity measures. It is understandable that they try to focus entirely on spending cuts: there are suggestions in current public policy literature that austerity packages with at least two-to-one spending cuts are much more successful than packages with more tax hikes in them. However, the evidence that such suggestions rest on is shaky in some cases and in other cases very limited in policy application. Overall, the current experience from Greece, Spain, Italy and Portugal (as well as Sweden in the ’90s) is that austerity in general is actually quite bad for the private sector.
This is not an argument for keeping big government. It is an argument for doing away with it entirely, not trying to save it by means of austerity.
And now for the good news. Attached to his pledge to austerity, Finance Minister Georgiades, according to the Cyprus Mail, made promises to match spending cuts with tax cuts down the road. This is a first on the European scene since the austerity assault began:
Once government got a grip on public finances and reduced expenditures it would also lower the tax burden, he said. The government also planned to make significant structural changes, referring to the new social welfare policy, new healthcare plan and “ambitious” reform of the public sector. Regarding Cyprus’ battered banking sector, the minister argued that it was stabilising day by day.
If the Cypriots do indeed move beyond mere austerity, there is a brighter tomorrow on the horizon for them. Let’s keep an eye on them and see what they come up with.
Europe’s austerity battle continues. The latest skirmish took place in Portugal’s Supreme Court, which, according to Reuters…
on Friday rejected four out of nine contested austerity measures in this year’s budget in a ruling that deals a blow to government finances but is unlikely to derail reforms two years after the country’s bailout. The measures rejected by the court should deprive the country of at least 900 million euros ($1.17 billion) in net revenues and savings, according to preliminary estimates by economists.
Obviously, “net revenues” means tax increases and “savings” means spending cuts. The curious part of this is how a supreme court of a country can find it within its jurisdiction to pass judgment on individual spending items in a government budget, as well as individual taxes. That, however, is a topic for a separate story. This one from Reuters is primarily concentrated on the policy battle over austerity, and the amazing thing about this story is that it is completely void of context. Greek context, that is:
Debt-ridden Portugal agreed to a 78 billion euro bailout in 2011 from the European Union and International Monetary Fund. The entire package of austerity measures introduced by the 2013 budget is worth about 5 billion euros and includes the largest tax hikes in living memory, which were mostly upheld.
Back in January I explained the draconian nature of those tax hikes. What is unfolding now in Portugal is essentially the sequel to Greece.
However, as Reuters reports, not everyone seems to understand this:
“It’s a lesser evil. … Putting it into perspective, a good manager and leader should not have difficulty finding room in a budget to accommodate this cut,” said Joao Cantiga Esteves, economist at the Lisbon Technical University. “We are talking about an impact of only 1.2 to 1.3 percent of Portugal’s total spending,” he added.
That’s what they said in Greece, too. But 1.3 percent three years in a row accumulates to more than four percent of GDP, with compound interest in the form of negative multiplier effects. Apparently, Mr. Esteves has not kept up to speed with either the events in Greece or the IMF’s new research on the accelerated negative effects of austerity (he might also want to read my paper on austerity to get the rationale behind the IMF’s findings). Government spending cuts cause a faster multiplier reaction than government spending increases. This is a major piece of the puzzle in explaining why austerity has been such a nightmare for Europe’s debt-ridden economies.
It is notable how this perspective is entirely absent in the reporting on Portugal. Reuters is no exception:
The government … has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed the goal but was still lauded by its EU and IMF lenders for its austerity efforts. Analysts consider the outcome manageable and say the government should be able to cover the shortfall with additional spending cuts it has been working on at the request of lenders. Analysts say the lenders could also give Portugal more leeway in terms of budget targets. Earlier in the day, Bank of America Merrill Lynch analysts wrote in a research note that even a negative ruling was likely to be “in line with our muddling through outlook,” expecting Lisbon to resume negotiations with its lenders as a result.
The analysts at Merrill Lynch, the university professors interviewed, and the journalists reporting, all take an attitude of business as usual. It is as though the Greek disaster, with one quarter of GDP being wiped out in four short years, has nothing to do with austerity.
Perhaps the parties involved are turning a blind eye to Greece because they don’t want to see the repercussions for the cost of the government debt. Zerohedge notes this:
…the government warning that the court’s decision would put into question the country’s ability to fulfill its €78 billion international bailout program … would send bondholders of Portuguese sovereign debt scrambling for the exits as suddenly the country may find itself in the ECB’s “dunce” corner, with Draghi preparing to pull a “Berlusconi” on a government which can’t even whip its judicial branch in line.
Then comes this comment:
However, of more immediate concern is how will the government now plug a hole of up to €1.3 billion in its €5.3 billion 2013 budget. A solution has, luckily, presented itself: bypass the unconstitutional provisions by paying government workers not in cash, but in government bills!
This is a startling statement, but Zerohedge has a source, namely none other than the Wall Street Journal (subscription required):
The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday. “This is one of the ideas being considered,” the person said. By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.
In all honesty, is this really what the defense of the welfare state has come down to – paying employees in IOUs? Is the Portuguese government so desperate that it is ready to resort to this kind of accounting trickeries??
The California state government has from time to time resorted to “paying” some bills with IOUs, which has caused little more than grumbling among those whom the state owed money. I doubt that the same would be the case in Portugal – especially if they are going to pay their government employees with promises instead of cash. This could contribute to a further destabilization of the country’s economy and, even more so, political landscape.
All, again, caused by austerity in an attempt to defend an indefensible welfare state.
The welfare state is the most dangerous socio-economic invention in the history of mankind. Unlike openly totalitarian ideologies it presents itself as deceitfully benevolent; unlike religious sects, its appearance is rational; and unlike war, its destruction is quiet and concealed under layers of bureaucratic, government budget practices.
The destructive forces of the welfare state will inevitably destroy every country that is seduced by its benevolent smile. In my book Remaking America: Welcome to the Dark Side of the Welfare State, I explained at length how Sweden is succumbing to the unavoidable fiscal tyranny that the welfare state brings about.
This fiscal tyranny is brought about when the taxes that pay for the welfare state have eroded the private-sector tax base to a point where neither new nor higher taxes can pay for the welfare state anymore. At this point, legislators who have invested their political careers in the welfare state will try to save it by means of austerity. This, in turn, opens a dangerous, very destructive path that every country with a welfare state will inevitably have to enter.
We can look at Sweden in the ’90s, or Greece today, to see what the end station of that path looks like.
Among the most devastating features of austerity is that it recreates the need for itself. When government cuts spending and raises taxes, it increases its net drainage from the economy: it takes more yet gives less back. As a result the pressure on the private sector increases, which accelerates the shrinking of the tax base – out of which government is supposed to fund the welfare state.
This is a technical argument, which I have outlined analytically in this paper. But the technical analysis has its counterpart in the lives that are being destroyed by austerity. The destruction is financial, psychological – and sometimes literal. In a powerful article in The Lancet, eight researchers analyze the consequences of the austerity policies in Europe over the past few years. Before we get to the actual article, let us listen to Der Spiegel and their presentation of it:
As the euro crisis wears on, the tough austerity measures implemented in ailing member states are resulting in serious health issues, a study revealed on Wednesday. Mental illness, suicide rates and epidemics are on the rise, while access to care has dwindled.
These are countries with socialized health care systems, where government is a single payer and often also a single provider. When their budget goes into deficit and politicians try to balance it by means of austerity, the result is less health care to all. But government still promises everything to everyone.
Der Spiegel again:
The rigid austerity measures brought on by the euro crisis are having catastrophic effects on the health of people in stricken countries, health experts reported on Wednesday. Not only have the fiscal austerity policies failed to improve the economic situation in these countries…
See, I told you so. What bothers me the most about this is that there are still ill-educated Austrian-theory economists who endorse this kind of destructive austerity, claiming that some time in the future it will somehow bring about prosperity for all. It never does, and no one except the Austrian armchair theoreticians should be surprised.
Back to Der Spiegel:
…but they have also put a serious strain on their health care systems, according to an analysis of European health by medical journal The Lancet. Major cuts to public spending and health services have brought on drastic deterioration in the overall health of residents, the journal reported, citing the outbreak of epidemics and a spike in suicides. In addition to crippling public health care budgets, the deep austerity measures implemented since the economic crisis began in 2008 have increased unemployment and lowered incomes, causing depression and prompting sick people to wait longer before seeking help or medication, the study found.
Says The Lancet (free subscription needed):
Greece, Spain, and Portugal adopted strict fiscal austerity; their economies continue to recede and strain on their health-care systems is growing. Suicides and outbreaks of infectious diseases are becoming more common in these countries, and budget cuts have restricted access to health care. By contrast, Iceland rejected austerity through a popular vote, and the financial crisis seems to have had few or no discernible effects on health. Although there are many potentially confounding differences between countries, our analysis suggests that, although recessions pose risks to health, the interaction of fi scal austerity with economic shocks and weak social protection is what ultimately seems to escalate health and social crises in Europe. Policy decisions about how to respond to economic crises have pronounced and unintended eff ects on public health, yet public health voices have remained largely silent during the economic crisis.
In all honesty, what can they do? Demand that health care be excluded from austerity measures? Who should take bigger beating instead? Whose taxes should go up even more?
A more interesting passage in the article reports on what exact measures EU member states have taken as part of austerity:
Initially no major changes were made to the scope (ie, statutory benefits package and services provided to the population that are covered by the state) or the breadth (ie, the population covered by the state) of health coverage, although some reductions were made (usually minor). Thus, in a few countries, some services were removed from the benefits package (eg, in-vitro fertilisation and physiotherapy in the Netherlands). In some countries, benefits for low-income groups were expanded (eg, Moldova). However, some countries—specifically, the Czech Republic, Denmark, Estonia, Finland, France, Greece, Ireland, Italy, Latvia, the Netherlands, Portugal, Romania, and Slovenia—decreased the extent of coverage by instituting or increasing user charges for some health services in response to the crisis.
These are, again, single-payer health care systems run by benevolent governments whose only goal is to make everyone well. Right?
Of course not. Under austerity, the purpose of every entitlement program changes from providing an entitlement to reducing its cost. A single-payer health care system is no longer operating under the auspices of providing all sorts of health care to everyone. Its MO is instead changed into reducing its costs – even at the expense of patients’ health, even lives:
Rises in user charges are a particular cause of concern, because they increase the financial burden on households and probably reduce the use of high-value and low-value care equally, especially by people with low incomes and high users of health care, even when user charges are low. Introduction or increases of user charges in primary or ambulatory specialist care might worsen health outcomes and lead to increased use of free but resource-intensive services— eg emergency care. Thus, cost savings and enhanced efficiency are scarce.
No one should be surprised. If you increase the price of a product (in this case taxes or user charges) people can afford less of it. That is why health professionals are so fond of higher tobacco taxes.
The incidence of mental disorders has increased in Greece and Spain,60,61 and self-reported general health and access to health-care services have worsened in Greece.60 The number of suicides in people younger than 65 years has grown in the EU since 2007, reversing a steady decrease in many countries.
The Lancet also offers a good country-by-country summary. Overall, it is a chilling read (though hardly surprising if you know the history of austerity policies in Europe in the past quarter-century) that is well worth the time.
Back now to Der Spiegel and their somewhat pointed summary of the Lancet article:
The countries most affected by this have been Portugal, Spain and Greece, the latter of which saw outbreaks of both malaria and HIV after programs for mosquito spraying and needle exchanges for intravenous drug users were axed. There were also outbreaks of West Nile virus and dengue fever. “Austerity measures haven’t solved the economic problems and they have also created big health problems,” Martin McKee, a professor of European Public Health at the London School of Hygiene and Tropical Medicine, who led the research, told news agency AP. … In Greece, the Ministry of Health reported a 40 percent jump in suicides between January and May 2011, compared to the same period the year before. While budget cuts have restricted health care access with increased costs for patients in these three nations, Greece has also seen shortages in medication, hospital staff and supplies, according to the study, commissioned in part by the European Observatory on Health Systems and Policies, a partner of the World Health Organization.
And some Austrian economists think that the Greek government has not done enough budget cutting.
The study authors also accuse European officials of failing to address these issues, writing that “public health experts have remained largely silent during this crisis.” “There is a clear problem of denial of the health effects of the crisis, even though they are very apparent,” lead researcher McKee told Reuters, comparing their response to the “obfuscation” of the tobacco industry.
There is a very clear, obvious reason for this silence. Most health officials in Europe are completely absorbed by the mythology of the benevolent single-payer system. In their world view private insurance companies are evil, while government is always good. Now that austerity has come to town, this world view is suddenly turned upside down. Government is doing irreparable harm to the lives of millions and millions of people, a fact that just does not compute with Europe’s big-government do-gooders.
Europe has gone too far down the road of austerity to ever recover from this crisis. It is doomed to become an economic wasteland with an entire continent living in industrial poverty. Fortunately, America still has a choice, but time is running out.
The more the federal deficit grows, the closer we get to an untenable situation where panic will drive policy and stabilizing, long-term solutions will fall of the political radar screen. We still have time to design a pathway out of our costly welfare state without paying the price of panic and austerity that the Europeans are currently dealing with.
However, time is running out fast. As the awareness of the looming “point of panic and no return” grows stronger, the calls for desperate policy measures will grow louder. One of those calls will be very likely be to cut benefits in welfare, a controversial measure that wins supporters and enemies of equal passion on both sides of the ideological divide. Opponents make the case that it is cruel to cut benefits, but they also claim that people on welfare somehow have a right to what they are receiving, a right that is as untouchable as any of the rights spelled out in our constitutional amendments.
Proponents of welfare cuts, on the other hand, often make the case that lower welfare levels will encourage people to go out and get a job. They have a compelling case, at least if we immediately disregard the job market situation. The challenge for slash-benefits proponents grows stronger the harder it is to find a job for someone who is currently on welfare.
A good example of a welfare reductionist facing this challenge is British Member of the European Parliament, Roger Helmer of the United Kingdom Independence Party. He is also worth listening to because he is a libertarian, a staunch supporter of limited government. A few days ago he wrote about welfare in the Libertarian Press:
I must recently have made some passing comment about welfare, because a certain @DocHackenbush replied: “Memo to Helmer: Unless you’ve lived on social security, you don’t get to have an opinion on it”. That’s about as sensible as saying “Unless you’ve been hooked on cocaine, you can’t mention drugs”.
Mr. Helmer had a well-worded comeback, pointing to the tax-funded nature of welfare, or “social security” as the Brits call it:
“I’m entitled to an opinion on social security because, like most of us, I pay for it”. This response was felt by a close family member (of mine) to be somewhat lacking in compassion. Yet is seems to chime with public opinion. I was rather surprised to find in a recent opinion poll that 62% of respondents agreed that “unemployment benefit is too high and discourages work”. The public understands that the welfare budget is out of control, and that we cannot solve the country’s fiscal and debt problems without dealing with the welfare issue.
This is true indeed. So called social protection programs – bundled together as “welfare” in America – cost about 28 percent of the British GDP. Sweden and the Netherlands are at higher levels, 30 percent, while France and Denmark top out at 32 percent. In almost every EU member state the share has risen considerably during the recession.
American estimates, of which there are several, do not come close to these numbers. The comparison is somewhat difficult to make, though, primarily because the United States still has a large private welfare sector. Another reason is that there are different types of programs here than in Europe, producing different incentives structures among the recipients. The American habit of handing out tax-funded food stamp cards does not exist in the same form in Europe, where instead general cash entitlements are more common. Furthermore, in many European countries people can qualify for general income security, a deplorable form of welfare that thankfully does not exist in the United States.
Overall, and partly because of the restrictions on the American welfare state, the U.S. economy is in better shape than the European economy. As a result, Americans can still support themselves to a larger degree. The high share of private welfare also means that there is still a large presence of charity, voluntary contributions and private compassion here – the true basis for any kind of care for the poor and needy. This makes welfare more efficient, and the personal ties between donor and recipient tend to create motivations for self sufficiency to a larger degree than tax-paid welfare does.
Another major problem with tax-funded welfare is that government makes a promise it can’t keep (it eventually runs out of taxpayers’ money). As is abundantly evident around Europe, governments cannot pay for their spending commitments without having to max out taxes and then still run deficits. (Here in America we just run deficits…)
Back to Roger Helmer:
Compassion is all very well, but if we allow the costs of compassion to run out of control, it can do more harm than good. You don’t eliminate poverty by bankrupting the country. I was particularly struck by the case of the single mother of eleven, Heather Frost, who has a new £400,000 house being built for her and her eleven children, all living on benefits. Hard-working tax-payers who couldn’t dream of having such a house built are paying for Ms. Frost’s house — and have every reason to be angry. They will be asking “Why do we have to pay? Where are the men who fathered those children? Why don’t they pay?”.
This is a lesson for America as well. The ’90s welfare reform was designed to end the opportunities for people to make a career out of living on welfare. It was a relatively successful reform, though the Obama administration has eroded key parts of it. They are handing out food stamp cards like they were invitations to a Wednesday party with Mrs. Obama. There have also been some attacks on the workfare component. So far though the foundations of PRWORA still stand, and the urgent fiscal crisis of the federal government is in itself a mandate on Congress to pursue another welfare reform in the same restrictive direction.
We’ll see where that goes. For now, back to Mr. Helmer, who now turns to the problems of reining in welfare spending:
This point, however, seems to have escaped our new Archbishop Welby, who has written to the papers saying that the government’s welfare policy will have a negative social impact on children. Of course in the short term, and assuming a static view of the economy, he has a point. Take money from a family, and if nothing else changes, that family will be worse off. But the good prelate ignores the positive impact on the wider economy from getting debt and government spending under control.
The theory behind this argument is that it is so easy to live on welfare that recipients see no reason to go out and find a low-paying job. Therefore, the story goes, government should reduce welfare to a point where it barely offers subsistence.
There is an implicit assumption in this argument that there is a job out there for every welfare recipient. That is not true, especially not in high-tax jurisdictions (European countries or U.S. states like New York, Illinois or California). Any effort at incentivizing welfare recipients through benefits cuts must be combined with dramatic tax cuts. Such cuts are not possible simply through welfare benefits cuts. It is important to keep in mind that the high share of GDP that goes to welfare, in Britain as well as in America, is not primarily caused by lavish benefits – the serial British mom’s half-million-dollar house being an exception – but by the fact that a very large number of people have been enticed into becoming dependent on welfare.
The main problem with welfare dependency is that welfare dependency makes people lazy. Regardless of the job situation, after a certain period of time the automatic replenishment of your bank account becomes a pacifier that can turn people with normal work ethic into lazy couch potatoes.
This effect is reinforced when politicians and bureaucrats preach that “you have the right to this money”, a right for which there is no credible support in the literature on moral or political philosophy.
This does not mean that we can disregard the job situation. In fact, high unemployment adds insult to injury in this case. Back in the last century welfare dependency and poverty was, for the most part, a transitional problem at the individual level. It was still relatively easy – and culturally mandated – for individuals on the dole to become self sufficient. A fair amount of academic research published back in the ’90s confirmed this.
Today, we are looking back at a recession that seems to be transforming people’s attitude to welfare, in particular in notoriously unemployed Europe. This is a warning signal to America, which is a few steps behind Europe but still risks sliding into the same dungeon of irreparable damage from a morbidly obese welfare state. When the “right to welfare” conspires with the pacifier effect and high unemployment, we have a situation where the solution no longer is as simple as cutting benefts.
That is not to say we should disregard cuts altogether. However, to be effective such cuts must be part of a package with a fiscal policy for limiting government (see the economic benefits of limiting government, parts one, two and three). On the structural front, a welfare reform that reduces the benefits people get must be combined with active measures to open pathways for individuals into self sufficiency.
Mr. Helmer raises a very important question. His simple answer – cut welfare benefits – may not be enough to solve the problem he is tackling, but he deserves credit for bringing it up and for pointing right at the heart of the issue. Being from Britain he has experience of a welfare state that exceeds the American in size and “generosity”, which makes his questioning of the nature of tax-paid welfare all the more relevant for the American debate. He gives us a hint of how tense the issue will get if we allow our welfare state to continue to grow.
There seems to be a growing awareness among Europe’s political leaders that austerity has wreaked havoc on their continent. Yet very little is being done to end this reckless fiscal practice, and the reason is more than likely that those same politicians are ideologically committed to preserving the welfare state. The only purpose of austerity is, namely, to try to squeeze the big, unsustainable welfare state into an ever smaller economy.
This creates a contradiction between economic policy goals. On the one hand, “everyone” is dedicated to generating more GDP growth in Europe; on the other hand, “everyone” is equally dedicated to maintaining austerity. Since austerity is a very strong contributing factor behind the recession, Europe’s political leaders will have to make a choice: save the welfare state, or save the prosperity of the European people.
I, for one, am increasingly convinced that they have already made up their mind: it’s the welfare state, come Scylla or Charybdis. This has put Europe on a path of permanent decline, with devastating effects for the young.
Sadly, we get almost daily evidence of this. The latest story is from Italy, where according to the EU Observer finance minister Vittorio Grilli is trying to make the impossible case that austerity will be over once austerity has brought the economy back to full employment:
The Italian economy will run a balanced budget in 2013 before returning to growth the following year, the country’s outgoing finance minister has told the European Parliament. Speaking with MEPs on the Parliament’s Economic committee on Monday (21 January), Finance Minister Vittorio Grilli said that “we expect to have a current account surplus by 2014”.
Something must have gotten lost in translation here. Are we talking about the government budget or foreign trade?
That aside, take note of the following:
Grilli added that the Italian economy would grow by over 1 percent in 2014 after two consecutive years of recession, but described this projection as “not really adequate” adding that “the country needs to enact a series of structural reforms.” However, he said that once the structural deficit had been eliminated there was “no reason to go any further with austerity.”
There are two definitions of a structural budget. The first one says that it is the deficit that remains when the economy is in full employment. According to the second definition, the structural deficit is what averages out over one business cycle. Since no two business cycles are the same, it is pointless to use the second definition, which leaves us with the full-employment definition.
This, in turn, raises a pertinent question: if Grilli wants to eliminate the structural deficit before he ends his austerity programs, then how is Italy going to get to the full employment point where we will know whether or not the structural deficit has been eliminated?
My question is not just a theoretical exercise. There is plenty of evidence that Italy is deep into a recession, and as has been very well established, you don’t get a country out of recession by hammering it with austerity policies.
Consider the following data. On each point the Italian economy has to return to its 2005 levels before we can safely say that it is out of its recession:
- Social benefits as share of GDP: 25.4 percent in 2005; 28.4 percent in 2009 (latest year available);
- Youth unemployment: 24 percent in 2005; 29.1 percent in 2011;
- Real GDP growth: Average 2004-2008 was 1.06 percent per year; average 2009-2013 including forecast is -0.86 percent per year;
- Government as share of GDP: 47.9 percent in 2005; 51.4 percent in 2010.
The last number is particularly important. When viewed in the context of the meager – to say the least – GDP growth rates, the growth in the relative size of government tells us two things.
First, there have been no real efforts at reforming away government spending programs in Italy. On the contrary, the austerity policies that have been in place over the past few years have served the purpose of preserving the welfare state and its big spending programs. As a result, the burden that government places on the private sector will not get lighter in the next few years. That alone basically rules out an economic recovery.
Secondly, the GDP share of government in Italy was down to 49.9 percent in 2011, a 0.5-percent reduction over 2010. In 2010 the Italian economy grew by 1.8 percent, but growth fell back to 0.4 percent in 2011 with a preliminary -1.4 percent in 2012. These numbers clearly indicate that the reduction in government GDP share in 2011 was not caused by a sustained trend in GDP growth, but instead the result of austerity-driven spending cuts executed in 2010. In 2011 and 2012 those cuts took effect and turned the economy downward again after the “growth spurt” in 2010.
A further indication that the Italian government is not retreating from the economy is that general government revenue as share of GDP is slowly trending upward. It was 43.4 percent in 2005 and 46.1 percent in 2011. When government revenue as share of GDP is growing, and government spending as share of GDP is falling, then government is taking more from the economy while giving less back.
This organized net drainage of resources from the private sector into government is also known as austerity.
The bottom line, then, is that:
a) the Italian finance minister has set a policy goal that means “full employment first, then a stop to austerity”;
b) every conceivable indicator shows that Italy is neither near nor on a trajectory toward full employment; and that
c) austerity will continue to stifle any economic recovery in the Italian economy.
Since austerity serves the purpose of preserving the welfare state, one has to ask: is this ideological behemoth so important to Europe’s politicians that they are willing to drive their economies into the deepest of depression ditches just in order to be able to say “I saved the welfare state”?
After having been steaming toward the fiscal cliff for some 507 days, on New Year’s Eve the U.S. economy was shifted over into a somewhat less irresponsible track. The deal now signed by President Obama keeps current income tax rates in place for most Americans, basically limiting the tax increase for Mr. and Mrs. Jones to the expiration of a temporary social security tax cut and the new Obamacare taxes.
These tax increases are not insignificant and will slim down the margins for regular families who are struggling to get back on track after a long, hard and deep recession. Squeezing consumers with higher taxes is always a bad idea, and this tax hike is particularly poorly timed. It comes just as the economy seems to be gaining a little bit of growth momentum, with even some signs that the housing market is recovering. When people are more willing to buy homes, they have stronger confidence in the future. Consumers also exhibited improving confidence in that car sales were notably strong in December.
Higher taxes will no doubt harm the recovery, but these tax hikes won’t harm the economy by nearly as much as if we had been forced over the edge of the fiscal cliff.
Another side to the deal now signed into law is that it stops the automatic execution of a package of austere spending cuts. There is no doubt that the federal government’s fiscal problems are driven by rampant Congressional spendoholism, but panic-cutting spending as was planned in the “fiscal cliff” alternative is a safe way to destroy our fledgling economic recovery. Anyone who doubts this is welcome to study up on the macroeconomic underpinnings of austerity, or just browse through the pile of evidence from Europe.
So all in all, this is what we could – and should – expect from a government that is split between Democrats and Republicans, with a fiscally incompetent president and an ideological chasm running through Capitol Hill. Things will get a little tougher in 2013, but not by much. (But do keep an eye on what is happening in your state and your local community – they may very well have plans for higher income, sales, gasoline and property taxes.)
With this in mind, it would make sense to expect Republicans, Conservatives and Libertarians to show a little bit of patience. Not so. Take, e.g., the latest from Tucker Carlson and Neil Patel over at the Daily Caller:
If someone had woken you from a dead sleep 20 years ago and asked what the Republican Party stood for, you would’ve had no trouble answering: Fiscal restraint, a strong national defense and lower taxes. Those were the three pillars of the GOP. The party’s brand was clear. Voters understood it, and many approved. In the days before Obama, Republicans won seven out of ten presidential elections.
And in seven out of ten cases those Republican presidents signed bills that increased spending. Actually, they signed spending increases a lot more often than that. In fact, Ronaldus Magnus signed one of the most important expansions of pre-SCHIP Medicaid. George Bush Sr. ran away from his promise not to raise taxes and George Bush Jr. chose to grow Medicare over free-market health care reforms.
The question, alas, is really what those presidential victories were all about. Of course, Carlson and Patel don’t answer it. They accelerate their anti-GOP rant:
Things have changed for the muddier. Scratch the surface and you’ll find there is no longer a consensus among Republicans on foreign policy. Fiscal restraint? Years of earmarks, record deficits and at least one new federal entitlement under Republican congresses make that idea a bitter joke. Of the three principles that have united the party since Reagan, only taxes remain.
Federal Aid to States, an umbrella name for one thousand spending programs jointly funded by the federal and state governments, helps pay for core welfare-state functions such as Medicaid, public education, welfare, child care and public housing. These programs have expanded by 6-8 percent per year over the past two decades. It has not made a dime’s worth of difference who controls the White House or Congress.
Today Federal Aid to States sends more than half-a-trillion dollars to the states each year, a sizeable portion of total federal spending. In fact, I never hear Tucker Carlson demand a phase-out of these monstrous welfare-state programs. Who is he to criticize mainstream Republicans for just continuing to make the same old deals with Democrats?
And what with this romanticism around the Reagan presidency? Yes, he was an incredibly inspiring conservative leader, and yes, he represented unabashed patriotism and strength on foreign policy. But he made the monumental mistake of cutting taxes without structurally cutting spending. In doing so he laid the groundwork for future tax hikes – or an unprecedented accumulation of government debt.
Carlson and Patel refuse to address these issues. Instead they lament to high heaven that Republicans committed sacrilege and agreed to limited tax increases in a deal with a Democrat-controlled Senate and a Democrat-controlled White House:
Republicans have been able to claim — sincerely, and with continuing success at the ballot box — that they are for lower taxes. Until Tuesday. Here’s what happened: For reasons that aren’t entirely clear but are probably related to panic and a basic lack of principle, the Speaker of the House and other Republicans in Congress signed on to Democratic calls for “balance” between tax hikes and spending cuts — this despite the overwhelming evidence that spending is the real problem. So, even before the negotiation began, they abandoned decades of principle on taxes.
I agree that no tax hikes is better than some tax hikes. But let’s not get carried away here. If this was such an unprecedented event, then why did not the Republican-led Congress, joined by a Republican president, make the Bush tax cuts permanent? Why did they agree to have them expire after ten years, so you now basically have to pass annual extension bills?
More importantly – and again back to my point about Reagan: if you want to cut taxes permanently you have to cut spending permanently. You start with that; a pledge to not raise taxes becomes hollow if you try to restrain or cut spending as an afterthought.
Carlson and Patel do acknowledge that Republicans have not worked hard enough on the spending side, but again they put the tax-cut carriage before the spending-cut horse, and tie their rhetoric to the fiscal cliff issue:
The result: Two months later, we have a deal, but no balance. It’s all tax hikes. … Many contended Republicans had no choice. The effects of the fiscal cliff were so severe, they said, that a deal — any deal — was imperative. Republicans would be blamed if negotiations fell through. Recognize this argument? It’s common on Wall Street, where nothing matters but the next fiscal quarter. It pretty much sums up why America is in such steep decline.
Exactly what is their point? That if you only control the House you pout if you don’t get everything you want? Or that the fiscal cliff would have been better for the country than half-measure of a deal we got now?
[When] it comes to our country’s finances, it’s considered wild, even reckless, to think about anything but the few months ahead. Nobody’s surprised that politicians make shortsighted decisions. They have elections to win. Voters often claim to want limited government, but the evidence suggests they love government largess even more, and this puts elected officials in a tough spot.
That’s actually not true. Opinion polls consistently show that Americans want smaller government with fewer programs. Furthermore, I don’t think Carlson and Patel understand the mechanics of government spending: you don’t have to do anything as a legislator to grow government. All you have to do is sit around and protect baseline budgeting and the growth parameters that are built in to most of our entitlement programs.
In other words, no one has to want a bigger government. All big government needs to become even bigger is people who aren’t actively working to end its growth. This gives a bit of a bad taste to Carlson’s and Patel’s cynicism.
[Virtually] everyone in this country with the power to persuade has lost the willingness to look beyond next Tuesday. Nobody liked the spending cuts wrapped into the fiscal cliff. Democrats don’t like spending cuts in general, and Republicans were rightly upset that most of the cutting came from defense and none from entitlements. But at least Congress would have been forced to reduce federal spending, the one thing we really need. According to CBO projections, going over the cliff would have hurt in the short term, but within a year would have left the economy stronger, bringing unemployment down to 5.5 percent by 2018.
This is the same CBO that said Obamacare was fiscally neutral. That aside, though, will someone please wake Tucker Carlson from his wet fiscal cliff dream? There is no way on God’s Green Earth that the fiscal cliff would have been a better deal for America. I find it entirely inconceivable that a sober, straightforward, unbiased macroeconomic analysis would show that higher taxes and spending cuts could improve the U.S. economy at any point in time.
Then again, that’s what they have been saying about Greece. Yet five years of macroeconomic evidence shows that the combination of higher taxes and spending cuts depresses the economy – and, let’s not forget, the longer that combination is allowed to dictate fiscal policy, the depression will continue and get deeper.
Carlson and Patel finish with a quip about how we are now heading for the Greek situation. But this is not just uninformed – it is a downright stupid comment. The evidence is overwhelmingly to the contrary: the current deal puts more distance between us and Greece than the fiscal cliff would have done. In case anyone is in doubt, here is the pile of evidence.
Again: it is not very fun to have to sit here and defend a bill in Congress that raises taxes for anyone. But at the end of the day the Republicans who voted for the deal did the right thing. The alternative was to let the country be hurled into an austerity abyss so deep we’d probably never see the light of day again.
In the choice between the stupid and the downright stupid, I prefer stupid.