I don’t expect a good outcome to the European fiscal crisis, largely because nobody seems to understand that the real problem is excessive government spending.
The economic illiterates in the press sometimes say the fight in Europe is between austerity and Keynesianism, but that’s not accurate. It’s really a battle between those who think big government should be financed by taxes and those who think big government should be funded by taxes and debt.
And it doesn’t help that the supposedly conservative governments in places such as Spain, Germany, France, and the United Kingdom are run by statists.
The good news is that some people understand the real problem. The bad news is that they generally don’t live in Europe. Writing for the Australian, Professor Judith Sloan cites the Rahn Curve as she explains the need to reduce the size and scope of the public sector.
Here’s some of what she included in her article.
The real question that a number of European and other countries should be asking themselves is this: what should be the role of government in terms of providing an environment for economic prosperity and security? There is absolutely no doubt that the size of the public sector and the intrusion of government have grown to excessive proportions in a number of these countries. A pervading sense of entitlement – on the part of retirees, welfare recipients, parents, university students, public servants and others – has been encouraged by these governments, but now threatens to block reform. …What is required is a complete rethink of the role of government. …According to the Rahn curve, the rate of economic growth initially increases with government spending (as a proportion of gross domestic product). Establishing and funding a quality judicial system, defending a country, ensuring the safety of citizens, funding (but not necessarily providing) some basic services: these are legitimate functions of government. But beyond a certain point (about 20-25 per cent of GDP) long-term economic growth tends to fall as government spending rises. This is the zone – well above 25 per cent in most instances – in which EU countries find themselves. …There are a number of reasons why the size of government really matters. After all, government spending has to be paid for by taxes, and almost all taxes reduce rewards for effort. …Moreover, government spending is often not subject to rigorous cost-benefit analysis in the same way private spending is.
To be fair, some people in Europe understand this issue, including economists at the European Central Bank who recently produced a study finding that, “…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.”
And Swedish economists also have acknowledged the negative relationship between government spending and economic performance, writing that, “…there is a negative correlation between total government size and growth. It appears fair to say that an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is on average associated with an annual lower growth rate of between one-half and one percentage point.”
But these are lonely voices in Europe.
I’ve also weighed in on the topic from this side of the Atlantic, having produced this paper when I worked at the Heritage Foundation, and I also narrated this video for the Center for Freedom and Prosperity.
Unfortunately, all this research isn’t having much impact. Only the Baltic nations have done the right thing and reduced spending. The Germans also have been semi-responsible in the past couple of year, though that’s not saying much. And the Swiss were smart enough not to go overboard for big government in the first place.
What about the other European countries? Well, even though their economies are falling behind, their governments are going bankrupt, and their societies are becoming unstable, the politicians in the rest of Europe don’t seem to care about all the real-world evidence.
They’re still spending like there’s no tomorrow. I just hope American politicians won’t be foolish enough to provide a bailout when the house of cards comes tumbling down.
International Liberty 
[…] there’s now a bubble thanks to the combination of bad fiscal policy by national governments and bad monetary policy by the […]
[…] The problem in Europe is too much government spending, not the euro […]
[…] raison d’une association malheureuse de dépenses excessives, d’impôts punitifs et d’une dette écrasante. Depuis lors, les crises se sont calmées, en grande partie grâce à des […]
[…] Less than 10 years ago, many European nations suffered fiscal crises because of a combination of excessive spending, punitive taxes, and crippling debt. […]
[…] too much government spending and it remains in trouble because of too much government spending. As is the case for many other European […]
[…] Debt – An expanding burden of government spending also will mean ever-higher levels of red ink, especially once the tax burden is so high that additional levies don’t produce much – […]
[…] Debt – An expanding burden of government spending also will mean ever-higher levels of red ink, especially once the tax burden is so high that additional levies don’t produce much – […]
[…] Was he not aware that Europe had major problems such as high unemployment and a fiscal crisis? […]
[…] findings in the work of scholars from all over the world, including the United States, Finland, Australia, Sweden, Italy, Portugal, and the United […]
[…] unaware of the work of scholars from all over the world, including the United States, Finland, Australia, Sweden, Italy, Portugal, and the United […]
[…] also cited the work of scholars from all over the world, including the United States, Finland, Australia, Sweden, Italy, and the United […]
[…] frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the […]
[…] repeatedly explained that Europe’s real problem is an excessive burden of government spending. I want politicians to cut spending (or at least […]
[…] I want lower spending and lower taxes, I have a hard time cheering for either group. As I say in this John Stossel interview, […]
[…] many European nations already in the midst of a fiscal crisis caused by excessive government, and with most other industrialized nations heading down the same path thanks to aging populations […]
[…] frequently commented on Europe’s mercantile disaster and argued that extreme supervision spending is obliged for both a emperor debt predicament and a economic recession that plagues a […]
[…] frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the […]
[…] frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the […]
[…] frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the […]
[…] fiscal nightmare in Europe should be all the proof that’s needed about the dangers of wasteful spending and punitive tax […]
[…] fiscal nightmare in Europe should be all the proof that’s needed about the dangers of wasteful spending and punitive tax […]
[…] also cited the work of academic scholars from all over the world, including the United States, Australia, and Sweden. The evidence is very persuasive that big government is associated with weaker economic […]
[…] also cited a work of educational scholars from all over a world, including a United States, Australia, and Sweden. The justification is really impressive that large supervision is compared with weaker […]
[…] also cited the work of academic scholars from all over the world, including the United States, Australia, and Sweden. The evidence is very persuasive that big government is associated with weaker economic […]
[…] that Europe’s problem is too much government. The kind of policy maker who can argue for cutting back the welfare state, slashing tax rates, and ending […]
If increased government spending spending is the problem, how do you get the electorate to pay attention, and congress to alter its behavior?
Making little changes around the margins will not correct the tendency of Congress to spend more and more. We must change the motivations that drive congressional spending.
The current tax and budget system rewards high spending members of the legislature that vote for more spending than low spenders. The high spending members “bring home the bacon”, achieve positive press by supporting new spending, and the approval of their political contributors. This increase in spending is paid for with increased taxes by all citizens, not just the local district and contributors that put the representative in office. This lack of linkage between spending by a representative and the district tax rate rewards high spending representative’s districts, and other representative’s districts unfairly suffer the high tax rate with less of the high spending benefits.
This imbalance could be corrected with a tax system in which the personal and corporate tax rates would adjust such that districts of high spender representatives would pay a higher rate than an average district.
The legislative record of votes on spending bills would provide the required spending information. This would require that all spending bills be passed by recorded vote, not with a voice vote. It would also require that the all of the government spending be subjected to an annual vote, or at least every two years so as to match the election cycle. To fully capture spending, votes to approve tax deductions, refunds or any other changes to the tax code resulting in a reduced tax due to the treasury should also be included in the representatives total spending. The sum of each representatives voting would provide their total spending, and the average of all the members numbers would provide an average spend per representative.
If a member’s vote record matched the average, the tax rate for the district would remain unchanged at 100% of the stated tax rate. If a member voted for 50% more spending than average, the district tax rate would be changed from 100% of the stated rate to 150% of the stated rate. With the US Congress, the district rate would need to reflect the House representative and both senators. Districts that value high government spending would be willing to pay a higher tax rate and send high spending members to Congress. Districts that value lower tax rates over higher government spending could send members that reflect their wishes.
The district representative adjustments would reset each tax year, and the adjustment for each House and Senate member would be clear and separate line in the tax form. The rate would be based on the average for the representative for the years from the last election cycle. The tax rates would be computed on the votes for spending from October to the next years September, and announced on the second week of October, so as to be known to the voters prior to the elections.
This proposal if adopted should change the motivations of our representatives, making them more sensitive to high levels of spending.
I am just trying to get what I think is a valuable alternative idea injected into the mix as the discussion of how to balance the budget evolves. The question is would taxing districts of higher spending representatives at a higher rate have the effect of reducing spending? If it would work, what advantages would it have over other policies? The US constitution has been amended many times. It is not easy, but can be done. A balanced budget amendment is what some see as a solution. Would this be a superior alternative? I do not know, but if the concept is made public, considered, challenged, and compared to other plans in open debate, we will know. If this idea of proportional taxation never sees the light of day, it will have no impact.
I took a look at the US constitution. The sections on tax and equal protection are
Article 1, Section. 8. Powers of Congress
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
Hum, they forgot to say tax in the second half. Does that mean that taxes do not have to be uniform? If taxes have to be uniform, then our current income tax with multiple rates and deductions would clearly be in violation. Is the current federal income tax unconstitutional?
Amendment 14 Equal protection
1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
The states have to allow equal protection to every citizen. But the states already have tax codes that tax incomes at different rates, and deductions for some activities and not others. Are the current state taxes unconstitutional?
Amendment 16 Income tax
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration
So, incomes can be taxed. We have to avoid apportionment or the use of census counts. To my non-lawyer eye, it does not say everyone has to pay the same rate. But wait, ever one already does not pay the same rate. We charge higher rates at higher incomes, deduct home mortgage interest but not other interest, and so on. Why not set rates based on districts representatives spending votes?
I think this plan could change the actions of members of congress, making them more sensitive to spending more than average. The Pareto principle suggests that 20% of congress is responsible for 80% of the high spending. This plan would change there actions of the 20% of the high spenders, or replace them.
Europe’s central existential problem is not sovereign debt, but competitiveness – or to put it in more direct terms, the problem of a peoples who have stopped producing in the flat effort-reward environment of the welfare state. After all, were it only a matter of debt, Europe is not quite as bad as the US, since per capita debt in Europe as a whole is lower than American per capita debt.
Ironically, for flat effort-reward environment Europe, what will postpone the day of reckoning and will alleviate the fiscal crisis in Europe’s periphery, is exactly what will accelerate Europe’s ultimate systemic decline. Namely, the augmentation of intra country welfare with cross-country welfare, in other words the augmentation of the intra-country redistribution counterincentives to produce with cross- country counterincentives to produce. And this is exactly the scenario that will materialize over the next one to three years. The end result will be a further flattening of the effort-reward curve. Europe’s systemic existential problem and deterministic decline.
In Europe, growth expectations are already so low, and decline such a foregone conclusion, that European countries who manage to muster the grossly sub-par growth trendline of 2%, in a world that by contrast grows by 4-5%, are promoted to “tiger economy” status. “Amongst the blind, the one-eyed is king” as an old Greek proverb says. Amongst the precipitously declining, those growing 1.5-2% are “Euro-tiger” economies.
How is Europe going to increase its competitiveness against an emerging world juggernaut of three billion awakening people, growing at three times the European rate? By instituting an additional permanent wealth transfer mechanism from those European economies that can still muster the anemic 2% growth to the more indolent ones that are in the final stages of a low-incentive near-zero growth decline? The proposition is beyond laughter, when viewed form outside Europe. But if you live within Europe, desperation will make you cling on to the redistribution of mandatory collectivism — like the electrician who, once in contact with the hot wire, cannot help but clasp it to his death. That is the deadly embrace of decline. Alas that is also the vicious cycle that Americans have now entered. Americans have now also touched the hot wire of HopNChange…
But returning to Europe, the final chapter of Europe’s decline will come as the indolent European welfare majority is given voting rights to the wallets of German taxpayers over the next few years. All the new pan-European taxes, direct and indirect (Tobin tax, energy taxes, Euro-Bonds, bank bailouts), are all steps in this direction: Getting Germans and the few other “Euro-tiger” economies to share the wealth leading to an even faster and systemic decline. Germans at the margin will go Laffer and the resulting vicious cycle of eroding competitiveness and desperation will carry Europe through a swift decline.
But perhaps swift decline will provide salvation and ultimately be better for Europeans who will go through the pain of teaching the world another lesson yet in the failed dream of mandatory collectivism.
American voters are following in line for the next world lesson…