7/07/2012

The US Can Learn A Lot From Europe

1. Higher taxes lead to higher spending, not lower deficits. Evidence from Europe shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. 

2. A value-added tax would be a disaster. 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.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. The welfare state, unchecked, inevitably leads to fiscal collapse. One need only look to Greece to see this in action.

5. Bailouts don’t work.   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.

European Central Bank Research Shows that Government Spending Undermines Economic Performance

Europe is in the midst of a fiscal crisis caused by too much government spending, yet many of the continent’s politicians want the European Central Bank to purchase the questionable debt of reckless welfare states such as Spain, Italy, Greece, and Portugal in order to prop up these big government policies.

So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings:

“…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).”

The evidence shows that the problem is government spending, and that problem exists regardless of whether the budget is financed by taxes or borrowing. Unfortunately, too many supposedly conservative policy makers fail to grasp this key distinction and mistakenly focus on the symptom (deficits) rather than the underlying disease (big government).

The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case where one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.

The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.

The key lesson here is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.  The number one message from this new ECB research is that lawmakers – at the very least – need to  make sure government spending grows slower than the private sector. Fortunately, that is quite possible to do.

In the early 1960s a young Roman Polanski made a short experimental film behind the Iron Curtain that perfectly expressed the problems of communism and socialism. Two tramps are running through a snow-covered forest headed for somewhere that never becomes clear. They are traveling by taking turns carrying each other. One jumps on the other's back and trots for a couple of hundred yards. Then he hops down and they very formally switch places. They go on for another hundred yards or so and then switch places again. And so it goes.

What happens in the space of the four-minute film is that the distance the one tramp carries the other keeps getting shorter. After four or five exchanges, the carrying tramp only carries the other a few short yards before he quits and wants to be carried again. Finally one tramp jumps on the other's back and they go nowhere. He gets down and they stand mute looking at each other for a moment. End of film.

It is a perfect critique. This is what happens under socialism and Communism. When everybody becomes convinced that everybody else is taking care of things, everybody ends up doing nothing and the economy comes to a stop. Take a look at Greece now to see it in action.