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Archive for May 5th, 2011

We have two completely unrelated topics from Germany and France, but both fit in the broader theme of Europe’s gradual, self-inflicted suicide.

Let’s start with the Germans. I’m not a big fan of the country’s Chancellor, Angela Merkel. She is supposedly a conservative, but she certainly hasn’t done much to reduce the burden of government. But I give her credit for making the rational and moral observation that, “I’m glad that killing bin Laden was successful.”

Based on the reaction, however, you would think she had come out in favor of torturing puppies. Here are some excerpts from a story on a German news site.

Katrin Göring-Eckardt, Green party MP, Bundestag vice president and leading member of the Evangelical Church of Germany, told the Berliner Zeitung she was glad bin Laden was no longer leading a terrorist group. “But you can’t be happy about his death,” she said. On Monday, Merkel told reporters that bin Laden’s death at the hands of US forces was “good news.” “I’m glad that killing bin Laden was successful,” she said. The criticism of Merkel’s comments came not only from political opposition, but from her own party, echoing discomfort expressed by some observers at the emotional, celebratory reaction of many Americans and foreign politicians around the world after bin Laden’s killing. Siegfried Kauder, a member of Merkel’s conservative Christian Democratic Union (CDU), slammed her remarks, calling them reminiscent of something a person would say in the “middle ages.”

I’m not an expert on Germany’s political system and I’m certainly not a close observer of the nation’s various political figures, so I have no idea if these critics really believe the things they said. But does that really matter? It’s a bad sign if you have a nation where the political elite actually feel sadness that a monster is dead. And it’s a bad sign if you have a nation where the political elite think they should act like it’s unfortunate that a monster is dead.

Let’s now shift to the French. There’s been a lot of attention paid to bailouts of Greece, Ireland, and Portugal, which certainly is appropriate since all of us should be outraged that we are paying (via the IMF) to reward profligate politicians and special-interest groups.

Unfortunately, there are more nations in fiscal trouble, which probably means even more bailouts. Most people think Spain, Italy, and Belgium are next in line, but France is a dark-horse contender in the race to fiscal crisis. Read some of what Matthew Lynn wrote in his Bloomberg column.

It is increasingly politically unstable, its debt position is getting worse all the time, it is losing competitiveness against Germany, and it shows little willingness to change. Those are all good reasons for the bond markets to make France the next battleground. …France’s debt position is getting worse all the time. In 2010, the nation ran the fifth-biggest budget deficit in the euro area, at 7 percent of GDP. It was beaten only by Greece, Portugal, Ireland and Spain — hardly great company. Its stock of outstanding government debt hit 81 percent of GDP in 2010. That figure will reach 90 percent this year and 95 percent in 2012, according to London-based consulting firm Capital Economics. Italy has more outstanding debt — 119 percent of GDP in 2010 — but it isn’t adding to the pile the same way France is. What the markets really look at is the direction you are traveling in — and in the case of France, it isn’t good. …Sarkozy came to power promising to shake up the economy. He delivered little. …it is hard to believe that the euro crisis will end with the bailout of Portugal. Other countries are going to get caught in the crossfire. When you look around for the next candidate, France has what it takes to be the next blowup.

I still think Spain goes bust first, but Lynn makes a compelling case. Bad things are bound to happen when politicians expand the burden of government, increase tax burdens, and expand dependency. And that’s been the pattern in France, regardless of who’s in charge.

Notwithstanding my snarky title, the purpose of this post is not mock the Germans and the French. I’m certainly not averse to some good-natured ribbing of foreigners, but there’s a serious point to be made. Moral relativism and big government are signs of societal decay, and my real concern is that America is slowly heading down the same path as Western Europe.

Let’s learn from Germany and France and avoid making the same mistakes.

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Martin Feldstein’s on a roll, but not in a good way. Earlier this week in the Wall Street Journal, he advocated throwing in the towel on reforming Social Security into a system of personal retirement accounts. Today, in the New York Times, he endorses big tax increases.

Rather odd positions for someone who served as Chairman of President Reagan’s Council of Economic Advisers. The Gipper must be rolling in his grave.

To be fair, when compared to Obama’s tax-hike plan, Feldstein wants to raise taxes in ways that impose much less damage on the economy. Obama wants to raise tax rate on productive behavior, thus discouraging work, saving, investment, and entrepreneurship. Feldstein, by contrast, wants to cap various tax preferences.

Reducing the budget deficit and stopping the explosion of our national debt will require more tax revenue… But the need for more revenue needn’t mean higher tax rates. …tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name. …such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care. …here is a way to curb this loss of revenue without eliminating any individual deduction: limit the total tax saving for any individual to a maximum percentage of his total income. …What’s the result? Taxpayers with incomes of $25,000 to $50,000 would pay about $1,000 more in taxes; those with incomes of more than $500,000 might pay $40,000 more. The cap would affect more than 80 percent of taxpayers. Although they would continue to benefit from the mortgage deduction, the health insurance exclusion and other tax expenditures, their tax savings would not increase if they took out a larger mortgage or a more expensive insurance policy. …a 2 percent cap on tax expenditures in 2011 would raise tax revenue by $278 billion — nearly 30 percent of total projected income tax revenue for this year. The extra revenue would increase over time, reaching nearly half of the projected future fiscal deficits.

I’m not a fan of tax preferences. I agree with much of Professor Feldstein’s argument about the inefficiency and distortions that are created when government plays industrial policy with the tax code.

But there are good ways and bad ways of addressing the problem. If Professor Feldstein was proposing to cap or eliminate tax preferences as part of a plan that also lowered tax rates, that would be great news.

Unfortunately, Feldstein is proposing to cap tax preferences in order to funnel more money to Washington. But giving more tax revenue to politicians and bureaucrats, in the words of P.J. O’Rourke, would be like giving whiskey and car keys to teenage boys.

The big problem with Feldstein’s approach is that any source of additional revenue will ease up the pressure to restrain government spending. There are several budget plans, such as Congressman Ryan’s proposal and the House Study Committee plan, that would significantly improve America’s fiscal position by restraining the growth of federal spending. But these pro-growth initiatives will have zero chance of getting enacted if politicians think more revenue is forthcoming.

America’s fiscal problem is too much spending, not insufficient revenue.

Yes, the tax code is riddled with terrible provisions that are both corrupt and economically inefficient. But those provisions should be eliminated as part of tax reform – not as part of a plan to give politicians an excuse to prop up big government.

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