Five Lessons for America from the European Fiscal Crisis
I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.
But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.
I particularly like the five lessons she identifies.
1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.
2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.
3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.
4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.
5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.
If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.
This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.
Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.
Please share widely…before it’s too late.
Helping to Explain Greece’s Collapse in a Single Picture
Politicians in Europe have spent decades creating a fiscal crisis by violating Mitchell’s Golden Rule and letting government grow faster than the private sector.
As a result, government is far too big today, and nations such as Greece are in the process of fiscal collapse.
But that’s the good news — at least relatively speaking. Over the next few decades, the problems will get much worse because of demographic change and unsustainable promises to spend other people’s money.
(By the way, America will suffer the same fate in the absence of reforms.)
Here’s one stark indicator of why Greece is in the toilet.
Look at the skyrocketing number of people riding in the wagon of government dependency (and look at these cartoons to understand why this is so debilitating).
By the way, Greece’s population only increased by a bit more than 16 percent during this period. Yet the number of bureaucrats jumped by far more than 100 percent.
And don’t forget that this chart just looks at the number of bureaucrats, not their excessive pay and bloated pensions.
With this in mind, do you agree with President Obama and want to squander American tax dollars on a bailout for Greece?
Why Slovakia May Not Support Europe’s Bailout Plan
Slovakia is set to vote today on the European bailout plan and may well become a holdout. As my colleague David Boaz noted yesterday, this is due to Slovakia’s libertarian speaker of the house, Richard Sulik, who spoke at a Cato Institute conference in Bratislava last year, and who opposes bailouts of Greece and other EU countries based on sound ethical, political, and economic reasoning. Greece is already bankrupt and a bailout will only add to the country’s debt; an EU “rescue” will continue to create moral hazard, thus encouraging bad policies by reckless governments; relatively poorer and better behaved Slovakia should not be forced to support the irresponsible governments of richer European countries; the EU’s response to the Greek debt crisis has led to blatant violations of EU and European Central Bank rules, thus undermining democratic principles and the EU itself; the scare stories of not approving the bailout should not be believed; the best solution is for Greece is to declare bankruptcy once and for all.
In this document by his Freedom and Solidarity Party, Richard Sulik lays out his party’s opposition to the bailout fund. It is consistent with the views of other leading scholars including that of John Cochrane of the University of Chicago (and a Cato adjunct scholar) as expressed in his recent Wall Street Journal op-ed on how to save the Euro.
Sulik has tapped into popular sentiment among Europeans about the “democracy deficit,” or huge gap between the designs of Europe’s ruling elites and the desires of the region’s citizens. The widespread (and accurate) perception of Eurocrats imposing their agenda on Europe to the benefit of their cronies (e.g., big business, labor unions, and politicians in power) and at the expense of the majority is becoming increasingly difficult to ignore. The Slovak government, which supports the bailout, may well fall on account of this vote, but the prime minister has already indicated that the vote on the bailout fund will be held repeatedly until it is approved. (No doubt there will be little possibility of a repeat vote repealing the bill.)
On a related note, a new Finnish think tank, Libera, provides more evidence that Europeans are rethinking big government. It published a study today which reassesses the record of the Swedish welfare state and praises the numerous market reforms that country has introduced out of necessity since the 1990s.
New Video Shows the War on Poverty Is a Failure
The Center for Freedom and Prosperity has released another “Economics 101″ video, and this one has a very powerful message about the federal government’s so-called War on Poverty.
As explained by Hadley Heath of the Independent Women’s Forum, the various income redistribution schemes being imposed by Washington are bad for taxpayers — and bad for poor people.
The video has a plethora of useful information, but the data on the poverty rate is particularly compelling. Prior to the War on Poverty, the United States was getting more prosperous with each passing year and there were dramatic reductions in the level of destitution.
But once the federal government got involved in the mid-1960s, the good news evaporated. Indeed, the poverty rate has basically stagnated for the past 40-plus years, usually hovering around 13 percent depending on economic conditions.
Another remarkable finding in the video is that poor people in America rarely suffer from material deprivation. Indeed, they have wide access to consumer goods that used to be considered luxuries – and they also have more housing space than the average European (and with Europe falling apart, the comparisons presumably will become even more noteworthy).
The most important message of the video, however, is that small government and economic freedom are the best answers for poverty. As Hadley explains, poor people can be liberated to live meaningful, self-reliant lives if we can reduce the heavy burden of the federal government.
Last but not least, the video doesn’t address every issue in great detail, and there are three additional points that should be added to any discussion of poverty.
- The biggest beneficiaries of the current system are the army of bureaucrats that receive very comfortable salaries administering various programs.
- The Obama Administration is looking to re-define poverty in a way that would expand the welfare state and increase the burden of redistribution programs.
- The welfare reform legislation of the 1990s was a small step in the right direction because it eliminated a federal entitlement and shifted responsibility back to the state level. This success story should be replicated for programs such as Medicaid.
This last point is worth emphasizing because it is also one of the core messages of the video. The federal government has done a terrible job dealing with poverty. The time has come to get Washington out of the racket of income redistribution.
Dramatic Increase in Poverty Rate: One Small Step for Obama, One Giant Step for the So-Called War on Poverty
The Census Bureau has just released the 2010 poverty numbers, and the new data is terrible.
There are now a record number of poor people in America, and the poverty rate has jumped to 15.1 percent.
But I don’t really blame President Obama for these grim numbers. Yes, he’s increased the burden of government, which doubtlessly has hindered the economy’s performance and made things worse, but the White House crowd legitimately can argue that they inherited a crummy situation.
What’s really striking, if we look at the chart, is that the poverty rate in America was steadily declining. But then, once President Lyndon Johnson started a “War on Poverty,” that progress came to a halt.
As I’ve explained before, the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency. And this certainly is consistent with the data in the chart, which show that the poverty rate no longer is falling and instead bumps around between 12 percent and 15 percent.
This is bad news for poor people, of course, but it’s also bad news for taxpayers. The federal government, which shouldn’t have any role in the field of income redistribution, has squandered trillions of dollars on dozens of means-tested programs. And they’ve arguably made matters worse.
By the way, just in case you think I’m being too easy on Obama, read this post about how the Administration is considering a terrible plan to re-define poverty in order to justify ever-larger amounts of redistribution.
I fully agree that the president’s policies definitely have made—and will continue to make—matters worse. But the fundamental problem is 40-plus years of a misguided “War on Poverty” by the federal government.
Why Congressional Budget Office Estimates and Policy Options Are Taken Much Too Seriously
Coercive redistribution and diversity in the interests of its constituent groups are essential features of the modern welfare state. Disagreement over perceived consequences of social policy creates the demand for publicly justified “objective” evaluations. If there were no coercion, redistribution and intervention would be voluntary activities and there would be no need for public justification for voluntary trades.
−James J. Heckman (winner of the 2000 Nobel Prize in Economics), “Accounting for Heterogeneity, Diversity and General Equilibrium in Evaluating Social Programs,” National Bureau of Economic Research Working Paper No. 7230, July 1999.
English Riots, Moral Relativism, Gun Control, and the Welfare State
I wrote earlier this year about the connection between a morally corrupt welfare state and the riots in the United Kingdom.
But what’s happening now is not just some left-wing punks engaging in political street theater. Instead, the UK is dealing with a bigger problem of societal decay caused in part by a government’s failure to fulfill one of its few legitimate functions: protection of property.
To make matters worse, the political class has disarmed law-abiding people, thus exacerbating the risks. These two photos are a pretty good summary of what this means. On the left, we have Korean entrepreneurs using guns to defend themselves from murdering thugs during the 1992 LA riots. On the right, we have Turkish entrepreneurs reduced to using their fists (and some hidden knives, I hope) to protect themselves in London.
Which group do you think has a better chance of surviving when things spiral out of control? When the welfare state collapses, will the Koreans or the Turks be in a better position to protect themselves? And what does it say about the morality of a political class that wants innocent people to be vulnerable when bad government policies lead to chaos?
Speaking of chaos, let’s look at the “root causes” of the riots and looting in the United Kingdom.
Allister Heath is the editor of City A.M. in London, and normally I follow his economic insights, but his analysis of the turmoil is superb as well. Here’s an excerpt. But as Instapundit likes to say, read the whole article.
Debilitating, widespread fear. The country held to ransom by feckless youths. Thousands of shocked Londoners cowering in their homes, with many shops, banks and offices shutting early. …It no longer feels as if we live in a civilised country. The cause of the riots is the looters; opportunistic, greedy, arrogant and amoral young criminals who believe that they have the right to steal, burn and destroy other people’s property. There were no extenuating circumstances, no excuses. …decades of failed social, educational, family and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstream society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy. For this the establishment and the dominant politically correct ideology are to blame: they deemed it acceptable to permanently chuck welfare money… Criminals need to fear the possibility and consequence of arrest; if they do not, they suddenly realise that the emperor has no clothes. At some point, something was bound to happen to trigger both these forces and for consumerist thugs to let themselves loose on innocent bystanders. …the argument made by some that the riots were “caused” or “provoked” by cuts, university fees or unemployment is wrong-headed. …the state will spend 50.1 per cent of GDP this year; state spending has still been rising by 2 per cent year on year in cash terms. It has never been as high as it is today – in fact, it is squeezing out private sector growth and hence reducing opportunities and jobs. …This wasn’t a political protest, it was thievery. …We need to see New York style zero tolerance policing, with all offences, however minor, prosecuted. But what matters right now is to regain control, to stamp out the violence and to arrest, prosecute and jail as many thugs as possible. The law-abiding mainstream majority feels that it has been abandoned and betrayed by the establishment and is very, very angry.
Two Pictures that Perfectly Capture the Rise and Fall of the Welfare State
In my speeches, especially when talking about the fiscal crisis in Europe (or the future fiscal crisis in America), I often warn that the welfare state reaches a point of no return when the people riding in the welfare wagon begins to outnumber the people pulling the wagon.
To be more specific, if more than 50 percent of the population is dependent on government (employed in the bureaucracy, living off welfare, receiving public pensions, etc.), it becomes difficult for taxpayers to form a majority coalition to fix the mess. This may explain why Greek politicians have resisted significant reforms, even though the nation faces a fiscal death spiral.
But you don’t need me to explain this relationship. One of our Cato interns, Silvia Morandotti, used her artistic skills to create two images (click pictures for better resolution) that show what a welfare state looks like when it first begins and what it eventually becomes.
Nobel Prize Winner Analyzes the Obama Growth Gap
I’ve explained before that one of the most damning pieces of evidence against Obamanomics is that the economy is suffering from sub-par growth, something that is particularly damning since normally one expects to see faster-than-average growth following an economic downturn.
In a recent presentation, Robert Lucas of the University of Chicago included a couple of graphs that illustrate this phenomenon. This first chart shows the history of U.S. economic growth over the past 140 years. As you can see, the growth rate was remarkably constant over time, and there were always periods of rapid growth following economic downturns.
Lucas, who won the Nobel Prize in economics in 1995, then looks at the data for the recent downturn and recovery. As you can see, we have been struggling to get back to average growth rates and we have not enjoyed any of the above-average growth that normally follows a recession.
The key question, of course, is why growth has been anemic, resulting in (what seems to be) a permanent loss of output. In his presentation, Lucas warns that bad government policy is playing a big role. He says that “the problem is government is doing too much,” and he specifically highlights the “likelihood of much higher taxes, focused on ‘the rich’” and a “large increase in the role of government” in the healthcare sector.
In his conclusion, Professor Lucas is not overly optimistic about recovering lost output. He doesn’t make any flamboyant claims, but he does note that “European economies have larger government role and 20-30% lower income level than US.”
The obvious connection, as I’ve pointed out on many occasions, is that America is becoming a European-style welfare state and it is unavoidable that we will suffer from European-style economic malaise.
P.S. It should be noted that America’s anemic economic performance in recent years is not solely Obama’s fault. As the White House repeatedly points out, he inherited a downturn. That is completely accurate. My complaint, however, is that Obama promised hope and change but instead has exacerbated the big government policies of his predecessor.
Support for the Eternal Federal Welfare State Is Bipartisan
George Will makes a good point in his latest column: Democrats maintain a peculiar “conviction that whatever government programs exist should forever exist because they always have existed.” Will’s observation centers around the shameless Democratic attacks on Rep. Paul Ryan’s (R-WI) proposal to reform Medicare and Medicaid.
According to Will, “Ryan’s plan would alter Medicare. But Medicare has existed in its current configuration for only 46 of the nation’s 235 years.” Actually, “current configuration” isn’t quite accurate. For example, Medicare’s prescription drug component added by Republicans, which Ryan voted for, went into effect only five years ago.
Regardless, I agree with Will that so-called “progressives” have a “constricted notion of the possibilities of progress”:
The hysteria and hyperbole about Ryan’s plan arise, in part, from a poverty of today’s liberal imagination, an inability to think beyond the straight-line continuation of programs from the second and third quarters of the last century. It is odd that “progressives,” as liberals now wish to be called, have such a constricted notion of the possibilities of progress.
Yes, Ryan’s plan displays “imagination” and I would add that it took political guts to suggest the reforms knowing that the left would nail him to the cross. However, let’s not forget that Ryan’s plan would also further cement these twin pillars of the federal welfare state. For all the silly accusations that Ryan is proposing to “privatize” Medicare, his plan repeatedly states that his aim is to “save” it:
Letting government break its promises to current seniors and to future generations is unacceptable. The reforms outlined in this budget protect and preserve Medicare for those in and near retirement, while saving and strengthening this critical program so that future generations can count on it to be there when they retire.
I wasn’t born yesterday, so I understand Ryan’s assurance to “those in and near retirement” that Medicare as they know it won’t be touched. However, I can’t square Ryan’s reference at the outset of his plan to the “timeless principles of American government enshrined in the U.S. Constitution – liberty, limited government, and equality under the rule of law” with his intention to strengthen “this critical program so that future generations can count on it be there when they retire.”
Now that Ryan’s plan has taken its inevitable beating from demagoguing Democrats, the GOP appears to be upping the “save Medicare for future generations” rhetoric.
Here’s tea party favorite Sen. Marco Rubio (R-FL) as reported by Politico:
‘I understand the benefits that Medicare brings to America. It should be a part of our country,’ Rubio added. ‘I want Medicare to exist in a way that is unchanged for people that are in Medicare now. I want Medicare to exist when I retire. I want Medicare to exist when my children retire. And I don’t want Medicare to bankrupt itself for our country. And Medicare, as it’s currently structured, will go bankrupt.’
If that’s what Rubio, Ryan, and the rest of the congressional Republicans desire, then thank you for being honest. But please stop wrapping the intention to maintain for eternity a gigantic federal welfare state in the mantle of individual liberty, limited government, and the Constitution.
Thursday Links
- DON’T FORGET: Our fiscal policy conference, “The Economic Impact of Government Spending,” featuring Senators Bob Corker (R-Tenn.) and Mike Lee (R-Utah), former Senator Phil Gramm (R-Tex.), Representative Kevin Brady (R-Tex.), and other distinguished guests, begins at 2:00 p.m. Eastern today. Please join us on the web–you can watch the conference LIVE here.
- Atlas Shrugged Motors presents the Chevy Volt.
- The parable of the Good Samaritan teaches us about the moral value of voluntary charity toward the needy–it says nothing about using coercive government programs of the modern welfare state.
- It is not the role of the Court to rewrite laws for Congress.
- The failed “war on drugs” has reshaped our budgets, politics, laws, and society–and for what?
The Value-Added Tax Must Be Stopped – Unless We Want America to Become Greece
Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.
I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.
Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.
You can see some amusing — but also painfully accurate — cartoons about the VAT by clicking here, here, and here.
For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.
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