Feeds:
Posts
Comments

Archive for the ‘Fiscal Crisis’ Category

As much as I condemn American politicians for bad policy, things could be worse.

We could be Greek citizens, which would be very depressing. Indeed, you’ll understand why I put Obamaland in the title after you read today’s column.

Simply stated, Greece is a cesspool of statism. The people seem to be wonderful (at least outside of polling booths), but government intervention is pervasive and atrocious.

Here’s an example. As I was coming in a taxi from the airport to the city yesterday, we passed some sort of protest. There were a couple of hundred people at the rally and probably about 50 riot cops.

I naturally wondered about the situation, expecting that it was radical statists or some of the crazies from Golden Dawn. But the cab driver explained that it was pharmacists.

So why are pharmacists protesting? I found out from some of the locals at the Free Market Road Show that this is a heavily regulated and protected sector of the Greek economy.

The government has rules, for instance, that products such as aspirin and other painkillers can only be purchased at pharmacies. The bureaucracy also rigs all the prices to preclude competition. And there are even government policies that make it very difficult for new pharmacies to compete against the established firms.

When special interests have that much power, no wonder Greece is in trouble.

Thought there are some sectors of the business community, such as online entrepreneurs, that are treated like crap. Literally.

Here’s another example from a Wall Street Journal report, albeit one where a modest bit of progress has been achieved.

For the first time in more than a hundred years, Greece is sacking public servants. In 1911, Greece introduced jobs for life under Prime Minister Eleftherios Venizelos. Now, a century later, his descendant, Kyriakos Mitsotakis, Greece’s minister for administrative reform, is faced with the delicate task of slimming down the massive public sector this law helped create. …In exchange for…aid, Greece has promised to cut the government workforce by at least 150,000 by 2015 through attrition, and to lay off an additional 15,000 outright by the end of this year. Another 25,000 would be placed in the temporary labor pool. Of those goals, the first has been reached: Greece had 713,000 government workers at the end of 2012, down 122,000 from the end of 2010. …But the labor pool is still a work in progress. Last July, the first 4,000 employees were put in that pool, while another 8,000 or so followed a few months later. Few of them are expected to be rehired. And with Greece’s unemployment rate already close to 30%, few expect to find jobs in the private sector.

I actually feel a bit sorry for some of these people.

They probably took jobs in the bureaucracy without ever thinking about who was paying their salaries and without giving any thought to the featherbedding and waste that accompany most public sector positions.

But I bet they voted for the politicians that dramatically expanded the number of bureaucrats, so it’s hard to feel too much sympathy.

In any event, they’re understandably worried now that the gravy train is being derailed.

Or maybe the gravy is still there, but in different forms.

It appears that there’s still taxpayer money floating around that can be wasted in interesting ways.

Here are some excerpts from the Guardian about EU-funded “anger management” for some of Greece’s senior tax bureaucrats.

Until Greece’s economic meltdown, anger management was an alien concept at the country’s finance ministry. …Today these are the buzzwords flying around the ground-floor training room at 1 Handris Street. For tax inspectors attending mandatory seminars at the government building, anger management, like patience and politesse, are now seen as essential prerequisites of an increasingly stressful job. “Today, in Greece, everyone is either unhappy or angry when they have to go and pay at the tax office,” Fotis Kourmouris, a senior official at the finance ministry’s public revenues department said. “There is a lot of negative emotion … in the framework of better customer service, classes in psychological and emotional intelligence had become necessary.”

I wouldn’t call it “negative emotion.”

This is a long-overdue revolt of the Greek tax slaves.

…inspectors have found themselves at the sharp end of popular rage. In recent months visiting auditors have been chased out of remote villages, hounded out of towns and booted off islands by an increasingly desperate populace. “We’ve had multiple cases of violence at tax offices by angry members of public, including physical assaults; shots were fired in one case, and one attacker came with an axe,” said Trifonas Alexiadis, vice-chairman of the national association of employees at state financial services.

But when you read how the Greek government is trying to rape and pillage taxpayers, you can understand the anger.

A series of new tax laws has further fuelled public anger. Since the outbreak of the crisis, close to 30 new levies have been introduced by governments desperate to augment empty state coffers. “Too much pressure is being put on people who can’t pay,” said Alexiadis, who suggested that in such circumstances the classes were not only ill-conceived but “juvenile and unnecessary”. …accountant Heracles Galanakopoulos agreed. “They produce a law that nobody understands and then produce another three to explain it. By the time people get here they are really very angry,” he lamented… “I spend at least five or six hours a day reading up on all these new laws and still can’t keep up. Anger management is a nice idea but in a system that is so absurd it’s not going to make a jot of difference.”

Amen. As I’ve argued before, Greece’s problem is high tax rates. Evasion is simply a function of a bad tax code.

Let’s close with some Greek-related humor.

I very much recommend this very funny video from a Greek comedian and this politically incorrect map of how the Greeks view the rest of Europe.

Read Full Post »

Back in 2010, I shared a video that predicted a catastrophic end to the welfare state.

I said it was an example of “Libertarian Porn” because:

…it is designed for the dark enjoyment of people who think the government is destroying the nation. If you don’t like bloated government and statist intervention and you think that the policies being imposed by Washington are going to lead to hyperinflation and societal collapse, then you will get a certain level of grim satisfaction by watching the video.

While I also stated in that post that I thought the video was far too dour and pessimistic, I don’t automatically reject the hypothesis that the welfare state will lead to societal chaos.

UK RiotsIndeed, I’ve specifically warned that America might experience European-type disarray because of big government and I even wrote about which nations that might be good escape options if the welfare state causes our country to unravel.

Moreover, I’ve speculated about the possible loss of democracy in Europe and specifically said that people should have the right to be well armed just in case society goes you-know-where in a handbasket.

So I’m definitely not a Pollyanna.

I’ve given this background because here’s another video for those of you who revel in the glass being nine-tenths empty. It’s about the United Kingdom, but these numbers from the BIS, OECD, and IMF show that the long-term spending problem is equally severe in the United States.

Be warned, though, that it’s depressing as well as long. And I gather it’s also designed to sell a magazine, so you can ignore that (particularly if you’re not British).

Now that I’ve shared the video, I’ll add a couple of my own observations.

First and foremost, no country is past the point of no return, at least based on the numbers. It doesn’t matter whether we’re talking about the United Kingdom, the United States, Greece, or France. Politicians always have the option of reforming entitlements and restraining the burden of government spending. So long as they follow Mitchell’s Golden Rule over an extended period of time, they can dig out of the mess.

That’s why I’m a big fan of Switzerland’s spending cap, That policy, technically known as the debt brake, imposes a rolling cap on budgetary growth and has been very effective. Colorado also has a spending cap that has been somewhat effective in restraining the cost of the public sector.

My second observation, however, is that some nations may be past the psychological point of return. This is not easy to measure, but it basically means that there’s good reason to be pessimistic when the majority of citizens in a country think it’s morally acceptable to have their snouts in the public trough and to live off the labor of others. When you have too many people riding in the wagon (or riding in the party ship), then it’s difficult to envision how good policy is implemented.

Indeed, the video includes some discussion of how a growing number of people in the United Kingdom now live off the state. And if you add together the votes of people like NatailijaTraceyAnjem, Gina, and Danny, perhaps the United Kingdom has reached a grim tipping point. Especially since welfare spending has dramatically increased in recent years!

A third and final point about the video. I think it focuses too much on deficits and debt. Red ink is a serious issue, to be sure, but it’s very important to understand that too much borrowing is merely a symptom of too much spending.

P.S. On a totally separate matter, everyone should read the USA Today column by Glenn Reynolds. He explains how government is perverting our criminal justice system.

Here are some of the most important passages, but you should read the whole thing.

Here’s how things all-too-often work today: Law enforcement decides that a person is suspicious (or, possibly, just a political enemy). Upon investigation into every aspect of his/her life, they find possible violations of the law, often involving obscure, technical statutes that no one really knows. They then file a “kitchen-sink” indictment involving dozens, or even hundreds of charges, which the grand jury rubber stamps. The accused then must choose between a plea bargain, or the risk of a trial in which a jury might convict on one or two felony counts simply on a “where there’s smoke there must be fire” theory even if the evidence seems less than compelling.

This is why, Glenn explains, there are very few trials. Almost everything gets settled as part of plea bargains.

But that’s not a good thing, particularly when there are no checks and balances to restrain bad behavior by the state.

…although there’s lots of due process at trial — right to cross-examine, right to counsel, rules of evidence, and, of course, the jury itself, which the Framers of our Constitution thought the most important protection in criminal cases — there’s basically no due process at the stage when prosecutors decide to bring charges. Prosecutors who are out to “get” people have a free hand; prosecutors who want to give favored groups or individuals a pass have a free hand, too.When juries decide not to convict because doing so would be unjust, it’s called “jury nullification,” and although everyone admits that it’s a power juries have, many disapprove of it. But when prosecutors decide not to bring charges, it’s called “prosecutorial discretion,” and it’s subject to far less criticism, if it’s even noticed.

Here’s the bottom line.

…with today’s broad and vague criminal statutes at both the state and federal level, everyone is guilty of some sort of crime, a point that Harvey Silverglate underscores with the title of his recent book, Three Felonies A Day: How The Feds Target The Innocent, that being the number of felonies that the average American, usually unknowingly, commits. …The combination of vague and pervasive criminal laws — the federal government literally doesn’t know how many federal criminal laws there are — and prosecutorial discretion, plus easy overcharging and coercive plea-bargaining, means that where criminal law is concerned we don’t really have a judicial system as most people imagine it. Instead, we have a criminal justice bureaucracy that assesses guilt and imposes penalties with only modest supervision from the judiciary, and with very little actual accountability.

Glenn offers some possible answers.

…prosecutors should have “skin in the game” — if someone’s charged with 100 crimes but convicted of only one, the state should have to pay 99% of his legal fees. This would discourage overcharging. (So would judicial oversight, but we’ve seen little enough of that.) Second, plea-bargain offers should be disclosed at trial, so that judges and juries can understand just how serious the state really thinks the offense is. …And finally, I think that prosecutors should be stripped of their absolute immunity to suit — an immunity created by judicial activism, not by statute — and should be subject to civil damages for misconduct such as withholding evidence. If our criminal justice system is to be a true justice system, then due process must attach at all stages. Right now, prosecutors run riot. That needs to change.

Amen to all that. And you can read more on this topic by clicking here.

The Obama years have taught us that dishonest people can twist and abuse the law for ideological purposes.

Obamacare rule of law cartoonWhether we’re talking about the corruption of the IRS, the deliberate disregard of the law for Obamacare, or the NSA spying scandal, the White House has shown that it’s naive to assume that folks in government have ethical standards.

And that’s also true for the law enforcement bureaucracy, as Glenn explained. Simply stated, people in government abuse power. And jury nullification, while a helpful check on misbehavior, only works when there is a trial.

Indeed, I’m now much more skeptical about the death penalty for many of the reasons Glenn discusses in his column. To be blunt, I don’t trust that politically ambitious prosecutors will behave honorably.

That’s why, regardless of the issue, you rarely will go wrong if you’re advocating fewer laws and less government power.

Read Full Post »

When I give speeches around the country, I often get asked whether it’s time to give up.

More specifically, has America reached a tipping point, with too many people riding in the wagon of government dependency and too few people creating wealth and pulling the wagon in the right direction?

These questions don’t surprise me, particularly since my speeches frequently include very grim BIS, OECD, and IMF data showing that the long-run fiscal problem in the United States is larger than it is in some nations that already are facing fiscal crisis.

But that doesn’t mean I have a good answer. I think there is a tipping point, to be sure, but I’m not sure whether there’s a single variable that tells us when we’ve reached the point of no return.

Is it when government spending consumes 50 percent of economic output? That would be a very bad development if the burden of government spending reached that level, but it’s not necessarily fatal. Back in the early 1990s, the public sector was that big in Canada, yet policy makers in that country were able to restrain budgetary growth and put the country on a positive path. Sweden is another nation that has turned the corner. Government spending peaked at 67 percent of GDP in the early 1990s, but is now down to 47 percent of GDP after years of free-market reforms.

Is it when a majority of households are getting government handouts? That’s also a worrisome development, especially if those folks see the state as a means of living off their fellow citizens. But taking a check from Uncle Sam doesn’t automatically mean a statist mindset. As one of my favorite people opined, “some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.”

Is it when a majority of people no longer pay income taxes, leaving a shrinking minority to bear all the burden of financing government? It’s not healthy for society when most people think government is “free,” particularly if they perceive an incentive to impose even higher burdens on those who do pay. And there’s no question that the overwhelming majority of the tax burden is borne by the top 10 percent. There’s little evidence, though, that the rest of the population thinks there’s no cost to government – perhaps because many of them pay heavy payroll taxes.

I explore these issues in this interview with Charles Payne.

The main takeaway from the interview is that the tipping point is not a number, but a state of mind. It’s the health of the nation’s “social capital.”

So for what it’s worth, the country will be in deep trouble if and when the spirit of self-reliance becomes a minority viewpoint. And the bad news is that we’re heading in that direction.

The good news is that we’re not close to the point of no return. There is some polling data, for instance, showing that Americans still have a much stronger belief in liberty than their European counterparts.

And we’ve even made a small bit of progress against big government in the past few years.

I speculated in the interview that we probably have a couple of decades to save the country, but it will become increasingly difficult to make the necessary changes – such as entitlement reform and welfare decentralization – as we get closer to 2020 and 2030.

Welfare State Wagon CartoonsAnd if those changes don’t occur…?

That’s a very grim subject. I fully understand why some Americans are thinking about the steps they should take to protect their families if reforms don’t occur and a crisis occurs.

Indeed, this to me is one of the most compelling arguments against gun control. If America begins to suffer the chaos and disarray that we’ve seen in nations such as Greece, it’s better to be well-armed.

Though maybe there will be some nations that remain stable as the world’s welfare states collapse. And if emigration is your preferred option, I’d bet on Australia.

But wouldn’t it be better to fix what’s wrong and stay in America?

Read Full Post »

Every so often, when the temptation is too great, I’ll comment on something written by Paul Krugman.

When he botched his analysis of Estonia, for instance, I joined that nation’s President in correcting some egregious errors.

And I periodically remind people that Krugman was wildly wrong to deny the scandalous shortcomings of the government-run health system in the United Kingdom.

Today, however, I want to agree with Paul Krugman. He recently wrote that there’s a “plot against France,” and I think that’s unambiguously true.

But we do have one small disagreement. Krugman thinks the plot is being carried out by right-wing ideologues who want to discredit France because it “committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky.”

I think, by contrast, that the plot against France is being carried out by France’s statist politicians.

Simply stated, it’s almost as if the nation’s political elite is trying to destroy the nation with a fiscal regime of reckless spending and punitive taxation.

And since France’s “leaders” presumably are aware of the country’s grim medium-term fiscal outlook, it certainly seems like they are scheming to impoverish their own people.

Let’s look at some evidence of France’s decline.

Canada’s Financial Post has an article about the growth of government dependency in France. Here are some of the horrifying details.

More than half of the active French population is living off the state, according to figures in a new book by a tax lawyer seeking to explain why so many of his clients in private enterprise are leaving France. …the author begins with France’s or civil servants, of which there are 5.2 million and whose number has increased by 36% since 1983. These represent 22% of the workforce compared with a European average of 15%, leading him to conclude that France has 1.5 million too many “fonctionnaires”. He then adds the 3.2 million unemployed people in France relying on state benefits, another 1.3 million taking low-income handouts, a further two million in the “parapublic” sector — majority state-owned companies — and more than a million people in state-funded associations such as charities. Under the current Socialist government, there are 750,000 state-subsidized jobs and the author includes a million people in the agricultural sector who rely largely on contributions from European Common Agricultural Policy subsidies.

Wow. I sometimes complain about growing dependency in the United States, but I guess we should count ourselves as being lucky that we’re not as far down the path as France.

The article continues with some observations about how the geese with the golden eggs are tired of being mistreated.

The book is written in the first person, supposedly by a successful boss of a medium-sized company who decided to move abroad with his wife and children to avoid “being treated like an enemy because I make a good living”. In fact, the narrator is a mixture of about 20 clients of Jean-Philippe Delsol, a tax advisor, who is also an author and administrator of the Institute for Research in Economic and Fiscal Issues, a think tank. Those fleeing France would only speak anonymously “to avoid reprisals from the tax authorities,” he explained. …The huge nanny state, he said, had “modified the very spirit of (French) society by turning everyone into fonctionnaires”. …soon “the system will no longer function as there will be less and less people working to support more and more people working less”, he argued.

The last quote in the excerpt, by the way, is a real-world version of the famous set of cartoons about what happens when too many people decide to climb in the wagon.

But not everybody has the ability to escape France’s tax net, and those that remain are protesting against a rapacious central government.

A story from France 24 discusses anti-tax riots. Here are some highlights.

Protest organisers said 30,000 people, including hauliers, fishermen and food industry workers, had gathered in the town of Quimper in Brittany to demonstrate against an environmental tax on trucks and layoffs, even though the government had earlier in the week suspended the application of the so-called ecotax. Authorities estimate that 15,000 people joined in the protest. Some of the protestors pelted police with stones, iron bars and even pots of chrysanthemum, while others burned palettes. Police responded with water cannons and tear gas. …protestors marched under banners such as “Right to work”, “Bretons yes, sheep no” and “France is not a cash cow”. Many also wore red caps, a symbol of the anti-tax campaign in Brittany in the 17th century. …52-year-old mason Claude Sergent said the taxes “are killing us”.

Even equestrians are agitated about the growing burden of the value-added tax. Here are some tidbits from a news report.

Thousands of horse-lovers paraded their animals through central Paris on Sunday in a protest against a planned sales tax rise they say will put riding centers out of business and send horses to the slaughterhouse. …Organizers of Sunday’s protest say the EU-mandated rise of France’s VAT to 20 percent as of January 1 – from the 7 percent reduced rate paid by equestrian centers today – will shut down a fifth of centers across France. Some 6,000 jobs will be lost, they estimate, and 80,000 horses will have to be sent to slaughter. “Riders, up in arms!” shouted protesters carrying signs reading “Sales tax at 20 percent – Death of Horses and Ponies”. A guillotine was wheeled through the streets, its blade poised above a toy horse’s head. Another horse effigy was mounted on a crucifix.

And since we’re on the subject of the VAT, it’s worth noting that the feckless Finance Minister is browbeating retailers in hopes that they will swallow the cost of a tax hike rather than passing it on to consumers. Here are key portions of a Reuters report.

France’s finance minister appealed to retailers’ better instincts on Thursday, urging them not to pass on a rise in sales tax to shoppers in January as public frustration grows over a tax-heavy 2014 budget. Following violent anti-tax protests in western France, Pierre Moscovici said he would not abandon plans to raise value added tax by 0.4 percent on Jan. 1. But he would ask retail chains – already struggling with smaller margins than some of their European peers – not to raise their prices. Nobody has to reflect this (VAT hike) in their prices,” he told RTL radio. “I think it’s important to show virtuous behaviour, notably in the retail sector which along with the French people must display a civic spirit.”

And let’s not overlook the government’s additional taxes on people who save. Here is some analysis from a column in the UK-based Telegraph.

This was the face of a future French Tea Party, a political development that seems increasingly likely. Mr Hollande also had to “suspend” — a word that fills the French with unease, as it promises a stealthy return of the same measures whenever the fracas dies down — a 15.5 per cent retroactive tax on savings schemes that seemed tailor-made to infuriated his most natural voters. A Parisian barrister, himself not a Hollande voter, told me that his Portuguese-born cleaning lady, a single mother of five children, had sworn never again to cast her ballot for the president, as she did last year. “You work hard all your life, you do what’s right, and then they come after the little bit you’ve managed to put aside for your retirement age?” she said. “What kind of a Left-wing government is that?” …Since the spending ministries do not really want to make hard cuts, the only way — or so he thinks — is through more taxes.” The Laffer curve theory (too much tax kills tax revenue) does not seem to have made it to Bercy, the massive brutalist fortress built 20 years go to accommodate the finance ministry’s plethoric troops. …An unchecked French civil servant can think up some pretty outlandish tax ideas. …The beginning of the week saw Mr Hollande’s ratings plunge even lower than before, breaking records of unpopularity. Two separate polls have given him the worst ratings of any French president.

So let’s sum up all these articles. France is in the toilet, with a stifling fiscal burden, growing social unrest, and a deeply unpopular political class.

Does that sound like a nation that has been, in the words of Krugman, a role model of “fiscal responsibility”?

Krugman’s response would be that the French government still has the ability to borrow at very low interest rates, meaning that there is faith among international investors that the nation is well managed.

I must confess that this is a strong point. It’s possible to argue, of course, that the investors are wrong. After all, many investors thought Greece, Spain, Italy, etc, were in good shape before those nations suffered their fiscal crises.

My prediction, for what it’s worth, that France will suffer a fiscal crisis. As I’ve already admitted, I don’t pretend to know whether that crisis will start in 7 months or 7 years, but the underlying trend lines are unsustainable in the long run. This is a nation that violates my Golden Rule on a regular basis and that can’t end well.

P.S. To elaborate, I don’t think French politicians actually are plotting against their own country, just like I reject conspiracy theories that American leftists are deliberately trying to bring down the United States. Instead, what we’re witnessing is classic and predictable political behavior. Simply stated, politicians always have an incentive to buy votes with other people’s money and they very rarely are willing to engage in genuine reform until a crisis actually happens.

P.P.S. For those who think that it is “compassionate” for government to provide an extensive array of services, I’ll ask the same question I posed to a French audience earlier this year: Is there any evidence that the French government, which consumes 57 percent of the economy’s output, provides more and/or better services than the Swiss government, which accounts for only 34 percent of GDP?

P.P.P.S. I’ve written that Obama will never be able to make America as bad as France. But as this Michael Ramirez cartoon illustrates, that doesn’t mean he isn’t trying.

Read Full Post »

At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?”

But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates.

Combined with the fact that Europe’s demographic outlook is rather grim, you can understand why I’m not brimming with hope for the continent. And I’ve shared specific dismal data for nations such as Portugal, France, Greece, Italy, Poland, Spain, Ireland, and the United Kingdom.

But one thing I’ve largely overlooked is the degree to which the European Central Bank may be creating an unsustainable bubble in Europe’s financial markets. I warned about using bad monetary policy to subsidize bad fiscal policy, but only once in 2011 and once in 2012.

Check out this entertaining – but worrisome – video from David McWilliams and you’ll understand why this issue demands more attention.

I’ve openly argued that the euro is not the reason that many European nations got in trouble, but it appears that Europe’s political elite may be using the euro to make a bad situation even worse.

And to add insult to injury, the narrator is probably right that we’ll get the wrong outcome when this house of cards comes tumbling down. Instead of decentralization and smaller government, we’ll get an expanded layer of government at the European level.

Or, as I call it, Germany’s dark vision for Europe.

That’s Mitchell’s Law on steroids.

P.S. Here’s a video on the five lessons America should learn from the European crisis.

P.P.S. On a lighter note, the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.

P.P.P.S. If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money policy will turn out, but I’m not overly optimistic about the final outcome. As Thomas Sowell has sagely observed, “We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System… In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded.”

Read Full Post »

We have an amazing man-bites-dog story today.

Let’s begin with some background information. A member of the European Commission recently warned that:

“Tax increases imposed by the Socialist-led government in France have reached a “fatal level”…[and] that a series of tax hikes since the Socialists took power 14 months ago – including €33bn in new taxes this year – threatens to “destroy growth and handicap the creation of jobs”.

Given the pervasive statism of the European Commission, that was a remarkable admission.

But the Commissioner who issued that warning, Olli Rehn, is Finnish, so French politicians presumably don’t listen to his advice any more than they listen to the thoughtful, well-meaning, and generous suggestions I make.

Indeed, based on the actions of the current President and the former President, we can say with great confidence that French politicians compete over who can pursue the most misguided policies.

But maybe, just maybe, there are some people inside France who realize the house of cards is in danger of collapse.

Here are some excerpts from a story I never thought I would read. At least one senior official in France has woken up to the dangers of ever-rising taxes and an always-growing burden of government spending.

France’s state auditor urged the government Tuesday to redouble efforts to limit spending rather than increases taxes… The head of the state auditor, Didier Migaud, said the interruption in deficit reduction stemmed primarily from lower-than-expected tax revenue, due to the weak economy. Yet, he said “the spiraling welfare debt was particularly abnormal and particularly dangerous.” During his first year in power, President François Hollande relied on large tax increases to plug holes in public finances, including social programs such as pensions, unemployment benefits and health care. But economic stagnation in 2012, coupled with a mild recession at the start of 2013, has waylaid the plan, while both companies and households are crying foul over what some have called “a tax overdose.” Mr. Migaud added his voice, saying: “The strategy of fixing the system by collecting new revenue is reaching its limits.”

Before any further analysis, I have to make one correction to the story. Hollande’s plan was not “waylaid” by a recession. Instead, his policies doubtlessly helped cause a recession. You don’t impose huge tax hikes on productive behavior without some sort of negative impact on economic performance.

So the “holes in public finances” are at least partially a result of the Laffer Curve. As I’ve repeatedly warned, higher tax rates rarely – if ever – collect as much money as politicians expect.

Returning to the specific case of France, the fiscal variable that should set off the most alarm bells is that the burden of government spending has soared to 57 percent of GDP. And based on projections from the BIS, OECD, and IMF, that number is going to get even worse in the future.

This is the data that presumably has convinced Monsieur Migaud that France is approaching the point of no return on taxes and spending.

Interestingly, the French people may be ahead of their politicians. Polling data from 2010 and 2013 show that ordinary people very much understand the need to limit the size and scope of government.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity. And successful people already have been leaving the country because of punitive tax rates.

But I’m not sure I believe the aforementioned polls. If the French people genuinely have sound views, why do they keep electing bad politicians? Of course, the same thing could be said about the United States, so perhaps I shouldn’t throw stones in my glass house.

P.S. My favorite example of government running amok in France is the law threatening three years in jail if you say your husband is a fat slob or if you accuse your wife of being a nag.

P.P.S. The most vile French official may be the current Prime Minister, who actually had the gall to complain that some of his intended victims weren’t quietly entering the slaughterhouse.

P.P.P.S. Just in case you think I’m exaggerating about France being a fiscal hellhole, more than 8,000 households last year were subjected to a tax burden of more than 100 percent . Obama must be very envious.

Read Full Post »

As illustrated by this chart, economists are lousy forecasters.

To be more specific, economists are no better than fortune tellers when trying to make short-run macroeconomic forecasts. Heck, if we actually knew what was going to happen over the next 12 months, we’d all be billionaires.

But we can (on occasion) make sensible predictions about the long-run impact of various government policies. All other things being equal, for instance, it’s safe to say that countries with bigger governments will grow slower than nations that don’t divert as many resources from the private sector. Even the World Bank and European Central Bank agree with that common-sense proposition.

Another can’t-fail prediction is that bailouts will reward bad behavior and lead to dependency. That’s why I’m not at all surprised by the news that Greece will get another bailout.Greek Bailout 1 Indeed, if there was a least-surprising-headline contest, it would go to the EU Observer for this headline.

A third bailout? You mean the first two didn’t work? I’m shocked! Which is why we need to change to a least-surprising-headlines contest, Greek Bailout 2because we also have this headline from City AM.

And this one from the UK-based Times. Which they may want to save for when it’s time for the fourth bailout. Greek Bailout 3And the fifth bailout. And…well, you get the idea.

Makes you wonder why the Germans (and the Dutch, Finns, Swedes, etc) keep subsidizing bad behavior elsewhere. Greek Bailout 4Yet these people apparently don’t care about moral hazard, so we see this headline from the Telegraph.

Last but not least, here’s what the BBC wrote. Greek Bailout 5

Given all these headlines from today, you can see why I felt safe in predicting a couple of days ago for Canadian TV that Europe was still in bad shape. Simply stated, government is far too big and costs far too much.

Yes, there are a few bright spots, such as Switzerland and the Baltic nations, but the fiscal debate in Europe is mostly between those who want higher taxes and those who want higher spending.

With that kind of contest, there are no winners other than politicians.

P.S. The ostensible purpose of the interview was to discuss Europe’s supposed recovery. I explained a few days ago why nobody should be impressed by the anemic growth on the other side of the Atlantic. But I think any changes in short-run economic performance – for better or worse – are far less important than the long-run projections of expanding government and growing dependency in Europe.

P.P.S. Americans shouldn’t feel cocky or superior. Long-run projections from the BIS, OECD, and IMF all show that the United States will be in deep trouble if we don’t engage in genuine entitlement reform.

P.P.P.S. Since I was talking to a Canadian audience, I mentioned that Europe should copy the spending restraint Canada enjoyed in the 1990s. You can click here to learn more about happened north of the border (and why the United States also should copy the same policy).

Read Full Post »

In an interview last week about Detroit’s bankruptcy, I explained that the city got in trouble because of growing dependency and an ever-rising burden of government spending.

I also warned that the federal government faces the same challenge. Washington is in trouble mostly because of poorly designed entitlement programs rather than excessive compensation for a bloated bureaucracy, but the end result is the same. Or, to be more accurate, the end result will be the same in the absence of genuine entitlement reform.

As I said in the interview, fiscal crisis was “the most predictable crisis in the world for Detroit [and] it’s the most predictable crisis for America.”

The Washington Examiner has the same assessment. Here’s how they conclude a recent editorial.

More than anywhere else in America (with the possible exception of Chicago) Detroit has been a one-party union city. Democratic politicians backed by the United Auto Workers and public employees unions have ruled virtually as they pleased. Along the way, many of the politicians ended up in jail on corruption charges and the bureaucrats made out with sweetheart deals on pensions and health benefits. Those sweetheart deals now account for most of the $20 billion in debt that put the city into bankruptcy. There are too many disturbing parallels between Detroit and America. The national debt of $17 trillion gets a lot of attention, but the reality is the government’s actual debt, counting the unfunded liabilities of Social Security, Medicare and federal employee and retiree benefits, exceeds $86 trillion, according to former congressmen Chris Cox and Bill Archer. As they say, things that can’t go on forever, won’t.

I used to warn that America was on a path to becoming Greece, but maybe now I should use Detroit as an example.

Some of America’s best political cartoonists already are using this theme.

Here’s one from Glenn McCoy. Since I’m not overly optimist about either Illinois or California, I also think it’s just a matter of time before this happens.

Detroit Cartoon 1

Keep in mind, however, that there was plenty of wasteful spending in both Illinois and California under Republican governors, so this is a bipartisan problem.

Speaking of California, here’s a good cartoon by Lisa Benson.

Detroit Cartoon 2

Amazingly, some people think California’s no longer in trouble because a retroactive tax hike collected more tax revenue. Yeah, good luck with that.

Next we have a cartoon by Rob Rogers of the Pittsburgh Post-Gazette.

Detroit Cartoon 3

And last but not least, Eric Allie weighs in with a cartoon comparing Texas and Detroit.

Detroit Cartoon 4

On a serious note, it would be interesting to see how Detroit looks compared to cities in Texas, such as Dallas and Houston.

But let’s end with something that’s really hilarious, albeit by accident rather than on purpose.

A few people want to enable Detroit’s profligacy. Here are some excerpts from a story in The Hill about union bosses wanting a federal-state bailout of Detroit.

Union leaders are calling on Congress and President Obama to provide a federal bailout to the city of Detroit. The executive council of the AFL-CIO, the nation’s largest labor federation, called for an “immediate infusion of federal assistance for Detroit” to be matched by Michigan, which they say has not done enough to keep the city from going through bankruptcy. …“It appears that Governor [Rick] Snyder and [Emergency Financial Manager] Kevyn Orr are pushing Detroit into bankruptcy to gut the modest benefits received by Detroit’s retired public service employees,” the AFL-CIO’s statement reads.

I suppose I could make some snarky comments, but I’ll close with two vaguely sympathetic responses.

First, there’s no way a bailout of Detroit goes through the House of Representatives. Heck, I don’t even think it could make it through the Senate. So some folks on the left would be justified if they asked why the high rollers on Wall Street supposedly deserved a bailout a few years ago but they don’t get one today.

The answer, of course, is discrimination by color. But I’m not talking black vs white. The color that matters in politics is green. The financial industry dispenses huge campaign contributions to both sides of the aisle, and the bailout was their payoff. Public employee unions, by contrast, give almost every penny of their money to Democrats, so there’s no incentive for GOPers to do the wrong thing.

Second, I have no idea whether retired bureaucrats in Detroit get “modest benefits.” I’m skeptical for very obvious reasons, but the real problem is that the city screwed up by having too many people riding in the wagon without paying attention to whether there were enough people producing in the private sector to pull the wagon.

Is that the fault of the garbage men, clerks, secretaries, and other municipal employees? That’s a hard question to answer. They obviously weren’t calling the shots, but they were happy to go along for the ride.

At some point, they should have paid attention to the message in this Chuck Asay cartoon.

P.S. For readers in New Jersey (and also New York City), I’ll be speaking this Wednesday, July 31, at the Friedman Day luncheon sponsored by Americans for Prosperity.

Read Full Post »

There are all sorts of ways to measure the burden of government spending.

The most obvious approach is to look at the share of economic output consumed by the public sector. That’s what I did, for instance, when comparing fiscal policy in France and Switzerland. And it goes without saying (but I’ll say it anyhow) that Switzerland’s comparative frugality helps to explain why its economy is much stronger than the French economy.

It’s also good to know whether a country is heading in the wrong direction or right direction. If one country has a bigger government but has implemented reforms that slow the growth of the public sector, it may have a better future than another country where government currently is a smaller burden but the long-term fiscal outlook is grim.

For this reason, I was very interested in the data showing that most European nations actually increased the size of government in recent years – notwithstanding all the hyperbole about “savage” and “draconian” austerity.

That’s why the “exceptions to the rule” in Europe – such as Estonia and Germany – are so noteworthy. While their neighbors are doing the wrong thing, these countries are being at least semi-responsible and trying to rein in the burden of government spending.

The same thing is true for state governments, which is why this new map from the Tax Foundation is worth sharing. It shows how fast spending has increased in each state over the past 10 years.

Louisiana gets the worst grade for profligacy, followed by Wyoming and New Jersey, while Alaska has been the most frugal, followed by West Virginia and South Carolina.

State Spending Map

It would be interesting to see annual numbers. Is Louisiana’s poor performance due to Governor Jindal, for instance, or in spite of him? Likewise, has Chris Christie made any difference in New Jersey?

Looking at states that have done well, did Governor Palin make a difference in Alaska? And did Governor Sanford make a difference in South Carolina? Again, without seeing the annual data, there’s no way of answering these questions.

Moreover, it might be interesting to also know what has happened to local government spending, particularly since some states may have artificially low or high numbers depending on whether there have been changes in how overall spending is allocated.

Last but not least, we should remember that the key goal of fiscal policy is – or should be – to have government grow slower than the private sector. To determine whether states are satisfying my Golden Rule, you need the Tax Foundation data on spending, but it needs to be augmented by similar data for economic output.

And if you look at personal income growth on a state-by-state basis, adjust it for inflation, and then compare it to spending growth, you get some interesting results.

It turns out that North Dakota is the state that most satisfies Mitchell’s Golden Rule, followed by South Dakota and Alaska. West Virginia and South Carolina stay in the top 10, but they drop to 4 and 9, respectively.

New Jersey, meanwhile, takes over as the worst state, followed by Arizona and Louisiana.

Not only has New Jersey been the biggest failure based on my Golden Rule, it also doesn’t have a lot of breathing room. If you look at this info-graph on state debt, you can see that it has the nation’s 7th biggest debt load. In other words, the Garden State’s politicians have been making a bad situation even worse.

And since New Jersey also has a punitive death tax, the obvious message is that productive people should flee the state. Which is exactly what’s been happening. Thanks to migration, about $70 billion of wealth escaped between 2004 and 2008 alone.

But be careful where you move. Other states that get black marks on both spending and debt are Ohio, Illinois (gee, what a surprise), and New Mexico.

Read Full Post »

About two weeks ago, while making an important point about the Laffer Curve, here’s what I wrote about the fiscal disaster in Detroit.

Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And the problems of Illinois. …Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics. More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers. Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.

And in this Fox News interview, I elaborate on these arguments and warned that federal government profligacy – if unchecked – will lead to similarly dismal results for the entire United States.

I want to augment on a couple of my points.

First, I explained that Detroit’s bankruptcy won’t have any major and long-lasting ripple effects – assuming politicians on the state or national level don’t encourage more bad policy with bailouts. If you’re a creditor, it’s not good news that the city owes you money, and it’s also not a cheerful time if you’re a retired bureaucrat hoping for years and years of pension payments and healthcare subsidies, but there’s no reason to expect that Detroit’s problems will impose significant damage on Michigan – particularly compared to the harm that would be caused if Detroit was allowed to continue with business as usual.

Similarly, the United States wouldn’t suffer major consequences if (probably when) California no longer can pay its bills. On the other hand, the European Union and the euro currency are being weakened by the mess in Greece, though that’s because they’ve been subsidizing bad fiscal policy with bailouts.

Second, I made the argument for entitlement reform, specifically the “pre-funding” version of Social Security reform that’s been adopted in nations as diverse as Australia and Chile.

Incidentally, this approach is even bolder than the Medicaid and Medicare reforms in the GOP budgets.

Third, I expressed some optimism that the United States has a chance to implement these much-needed reforms, in part because countries such as France and Japan will blow up before America.

And each time another nation, state, or city gets into trouble, it will strengthen our arguments to put the federal government on a long-overdue diet.

Big problems for America if politicians leave government on auto-pilot

Having a strong argument, though, is not the same as having an argument that will prevail. So even though America still has some breathing room, and even though the economic and moral case for spending restraint is very powerful, we’re in the unfortunate situation of having to rely on politicians in Washington.

So keep places such as Australia in mind just in case you need to escape when America’s fiscal chickens come home to roost.

In conclusion, I can’t resist drawing your attention to something I wrote back in 2011, when I showed the eerie similarity of Detroit’s collapse with the “blighted areas” in Ayn Rand’s classic novel, Atlas Shrugged.

Read Full Post »

According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America. According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States.

IMF Future Spending-Adjustment Needs

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states.

Read Full Post »

The late, great Margaret Thatcher famously said that “Socialist governments…always run out of other people’s money” and “I love the smell of napalm in the morning” is an iconic line from Apocalypse Now.

Thinking about the fiscal mess in Europe, I’m going to combine these two sentiments and state that, “I love it when statists run out of victims and start cannibalizing each other.”

And that’s about to happen in France.

The burden of government spending is enormous, with the public sector consuming 57 percent of economic output.

That’s more than either Greece or Sweden!

If something isn’t done, France will suffer a Greek-style crisis as investors lose trust in the government’s ability to pay its bills.

The situation is so bad that even the country’s Socialist President claims that he plans to cut spending, but he faces a revolt in his own party from those who refuse to recognize reality. Here are some excerpts from a column in the UK-based Telegraph.

President Francois Hollande has already angered much of his own Socialist base with plans to cut spending next year in absolute terms for the first time since 1958, but this may be just start of the battle. The Cour des Comptes said France is not even “halfway” through its fiscal squeeze. …”France is drifting away. Like a receeding wave, it is retreating little by little from the global economy, imperceptibly in the past, but visibly so today,” said Jean-Pierre Letartre, Ernst & Young’s chief in France. …The government has pencilled in economic contraction of 0.3pc this year, with a weak recovery starting in the second half, but a chorus of private economists fear far worse if there is any outside shock. “It could be as much as minus 1.5pc,” said Jean-Michel Six from Standard & Poor’s. …Mr Hollande has so far gone along with EU austerity demands, backing away from his pledge for a New Deal growth strategy in the elections last year. But his poll ratings have crashed at the fastest rate ever for a new president, and much of his own party is near revolt.

I’ll be surprised if France actually follows through with genuine spending cuts, but you can see from this chart that the time for fiscal restraint is long overdue.

French Spending, 2003-2012

To be somewhat optimistic, it’s worth noting that governments will do the right thing when there’s no other alternative.

Greece, for instance, has cut spending three years in a row, bringing the budget down from 124 billion euro in 2009 to 106 billion euro last year. Unfortunately, there have also been big tax hikes, and the overall level of spending is still about where it was in 2007, so Greece is far from a role model. But at least the era of ever-rising outlays has ended.

And I’ve already pointed out that the Baltic nations are a role model since they made genuine spending cuts the moment the crisis began and they’re now enjoying an economic rebound.

I realize this will be the understatement of the year, but France is not going to be the new Estonia.

Unlike the Canadian Liberal Party or Australian Labor Party, it does not appear that the Socialist Party in France is willing to recognize reality and do the right thing.

But the good news is that they don’t have any room to raise taxes. Successful people already are leaving the country because of punitive tax rates, and I suspect even President Hollande privately understands that France is on the wrong side of the Laffer Curve.

So I expect there will be a fight. On one side, we’ll have the rational statists who recognize that spending cuts are needed to avoided a fiscal crisis. On the other side, we’ll have the irrational statists who blindly think more money can be squeezed from the rich with more class-warfare tax policy.

Let’s hope for heavy casualties on both sides.

P.S. There’s a lot to like about France, and I reported a few years ago that it was ranked as the top nation for good living. But that’s only if you already are rich. Now that the French national sport is taxation, productive people who want to become rich have a big incentive to go someplace else.

Read Full Post »

According to my reader poll, Michael Ramirez is the nation’s best political cartoonist.

His new masterpiece about entitlements is a good example of his talent. In one image, he manages to convey how the system lures people into danger by offering the illusion that they can get something for nothing.

Ramirez Entitlement Cartoon

The cartoon is an apt illustration of where we are today with programs such as Food Stamps and disability, with ever-greater numbers of people being lured into lives of dependency.

In other cases, though I’m afraid we’ve already passed the point of biting the hook, particularly for many of the middle-class entitlements. We’re now being reeled in and face a very real danger of being turned into euro-style fish filets.

Though if I’m allowed to extend the metaphor, many people are working to reform Social Security, Medicare, and Medicaid in hopes of escaping the hook of dependency and fiscal crisis.

But it’s very important to realize that not all entitlement reform is created equal. As I explained back in 2011, the left would be more than happy to impose price controls and means testing as part of a “grand bargain” that seduces gullible Republicans into accepting a tax hike.

Which is why this Glenn Foden cartoon hits the nail on the head.

Foden Entitlement Cartoon

Sort of reminds me of this Ramirez cartoon. Simply stated, Republicans are dangerously susceptible to bad deals, which helps to explain why tax-increase budget agreements are always fiscal disasters.

The moral of the story is that we need the right kind of entitlement reform, but that won’t be possible until at least 2017.

P.S. If you want a tragically funny look at how the welfare state changes people for the worse, read the politically correct version of The Little Red.

Read Full Post »

In my never-ending crusade to push for the right kind of austerity, I appeared on RT to pontificate on the merits of limited government.

We got to cover a lot of material, so here’s some augmenting material.

1. The right kind of “austerity” is less government spending, which is why I’m very frustrated that the fight in Europe is largely between Keynesians who support more spending and IMF types who advocate higher taxes.

2. I explain why Keynesian economics is misguided, in part because government can’t spend money without taking resources from the productive sector of the economy and in part because politicians never follow through on Keynesian prescriptions for fiscal restraint when the economy is strong..

3. In an example of how to damn with faint praise, I give the International Monetary Fund credit for understanding that 2+2=4, though I also criticize the IMF for shifting from one bad approach (higher taxes) to another bad approach (Keynesian spending).

4. We discuss how many European nations got in trouble and then looked at how various governments responded to the crisis. Not surprisingly, I praise Switzerland for never getting in trouble and I commend the Baltic nations for rectifying their mistakes with genuine spending cuts.

5. I even give the “PIIGS” credit for slowing the growth of spending, albeit only after they had exhausted every possible bad policy option.

6. Not all government spending is created equal and I explain that Europe’s problem is that far too much money is spent on the welfare state.

7. I close with some analysis of the data fight between Senator Sheldon Whitehouse and the Heritage Foundation. As I’ve already explained, the Senator was the one relying on speculative data.

Showing that I have a tiny bit of non-economic knowledge, I even quoted Saint Augustine, though I’m sure he would be horribly offended that I indirectly equated him with politicians.

Read Full Post »

I’m not reluctant to criticize my friends at the Heritage Foundation. In some cases, it is good-natured ribbing because of the Cato-Heritage softball rivalry, but there are also real policy disagreements.

For instance, even though it is much better than current policy, I don’t like parts of Heritage’s “Saving the American Dream” budget plan. It’s largely designed to prop up the existing Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it’s not the pure Hall-Rabushka version. One of the most alarming deviations, to cite just one example, is that it creates a tax preference for higher education that would enable higher tuition costs and more bureaucratic featherbedding.

That being said, I’m also willing to defend Heritage if the organization is being wrongly attacked. The specific issue we’ll review today is “austerity” in Europe and whether Senator Sheldon Whitehouse of Rhode Island is right to accuse Heritage of “meretricious” testimony.

Let’s look at the details.

Earlier this month, Paul Krugman wrote that, “a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee.” Krugman was too clever to assert that the Heritage economist “did present” dishonest data, but if you read his short post, he clearly wants readers to believe that an unambiguous falsehood has been exposed.

Krugman, meanwhile, was simply linking to the Washington Post, which was the source of a more detailed critique. The disagreement revolves around  whether Europeans have cut spending or raised taxes, and by how much. The Heritage economist cited one set of OECD data, while critics have cited another set of data.

So who is right?

Conn Carroll of the Washington Examiner explains that the Heritage economist was looking at OECD data for 2007-2012 while critics are relying on an OECD survey of what politicians in various countries say they’ve done since 2009 as well as what they plan to do between now and 2015.

Whitehouse believed he had caught Furth and The Heritage Foundation in a bald face lie. …There is just one problem with Whitehouse’s big gotcha moment: The staffer who spoon-fed Whitehouse his OECD numbers on “the actual balance between spending cuts and tax increases” failed to also show Whitehouse the front page of the OECD report from which those numbers came. That report is titled: “Fiscal consolidation targets, plans and measures in OECD countries.” Turns out, the numbers Whitehouse used to attack Furth for misreporting “what took place in Europe” were actually mostly projections of what governments said they were planning to do in the future (the report was written in December 2011 and looked at data from 2009 and projections through 2015). At no point in Furth’s testimony did he ever claim to be reporting about what governments were going to do in the future. He very plainly said his analysis was of actual spending and taxing data “to date.” Odds are that Whitehouse made an honest mistake. Senators can’t be expected actually to read the title page of every report from which they quote. But, considering he was the one who was very clearly in error, and not Furth, he owes Furth, and The Heritage Foundation an apology. Krugman and Matthews would be well advised to revisit the facts as well.

In other words, critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what’s actually happened over the past six years.

So far, we’ve simply addressed whether Heritage was unfairly attacked. The answer, quite clearly, is yes. If you don’t believe me, peruse the OECD data or peruse the IMF data.

Now let’s briefly touch on the underlying policy debate. Keynesians such as Krugman assert that there have been too many spending cuts in Europe.  The “austerity” crowd, by contrast, argues that strong steps are needed to deal with deficits and debt, though they are agnostic about whether to rely on spending reforms or tax increases.

I’ve repeatedly explained that Europe’s real problem is an excessive burden of government spending.  I want politicians to cut spending (or at least make sure it grows slower than the productive sector of the economy). And rather than increasing the tax burden, I want them to lower rates and reform punitive tax systems.

The bad news is that Europeans have raised taxes. A lot. The semi-good news is that spending no longer is growing as fast as it was before the fiscal crisis.

In the grand scheme of things, however, I think Europe is still headed down the wrong path. Here’s what I wrote back in January and it’s still true today.

I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden. And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years. So you can understand why I don’t express a lot of optimism about European economic policy.

By the way, I’m not optimistic about the long-term fiscal outlook for the United States either. In the absence of genuine entitlement reform, we’ll sooner or later have our own fiscal crisis.

Read Full Post »

It is reported that Henry Kissinger, commenting on the Iran-Iraq war, said something to the effect that, “Too bad both sides can’t lose.” I imagine lots of people felt the same way when two of the world’s worst murderers, Hitler and Stalin, went to war in 1941.

I have the same attitude about the fiscal fight in Europe. On one side, you have “austerity” proponents of higher taxes. On the other side, you have Keynesians who think a higher burden of government spending will produce growth.

Since I want lower spending and lower taxes, I have a hard time cheering for either group. As I say in this John Stossel interview, “there’s nobody in Europe who’s actually advancing that position that…the transfer of resources from the private sector to the government…is what hurts your economy.”*

But at least the fight is entertaining, especially since former allies at the International Monetary Fund and European Commission are now in a public spat.

Here are some blurbs from a New York Times report.

…tensions…have now burst into the open with an unusual bout of finger-pointing over policies that have pushed parts of Europe into an economic slump more severe than the Great Depression and left the Continent as a whole far short of even Japan’s anemic recovery. The blame game [was] initiated by a highly critical internal I.M.F. report released this week in Washington… Speaking Friday at an economic conference in his home country of Finland, Mr. Rehn, the usually phlegmatic commissioner of economic and monetary affairs, sounded like a put-upon spouse in a messy breakup. “I don’t think it’s fair and just for the I.M.F. to wash its hands and throw dirty water on the Europeans,” he said. He was responding to assertions by the I.M.F. that the European Commission, the union’s executive arm, had blocked proposals back in 2010 to make investors share more of the pain by writing down Greece’s debt and, more generally, had neglected the importance of structural reforms to lift Europe’s sluggish economy. Simon O’Connor, Mr. Rehn’s spokesman, said the report had made some valid points, but he derided as “plainly wrong and unfounded” a claim that the commission had not done enough to promote growth through reform.

The most accurate assessment is that neither the IMF nor the European Commission have done much to promote growth. But that’s not changing now that the IMF is migrating more toward the Keynesian camp (jumping out of the higher-tax frying pan into the higher-spending fire).

A “hands-off” approach would have been the right way for the IMF and European Commission to deal with the fiscal crisis in Greece and other nations. Without access to bailout funds and having lost access to credit markets, profligate governments would have been forced to immediately balance their budgets.

This wouldn’t necessarily have produced good policy since many of the governments would have raised taxes (which they did anyhow!), but a few nations in Southern Europe may have done the right thing by copying the Baltic nations and implementing genuine spending cuts.

Let’s finish up this post by speculating on what will happen next. I’m actually vaguely hopeful in the short run, largely because governments have exhausted all the bad policy options. It’s hard to imagine additional tax hikes at this stage. Heck, even the IMF has admitted that nations such as Greece are at the point on the Laffer Curve where revenues go down.

Moreover, many of these governments have slowed the growth of spending in the past couple of years, and if they can maintain even a modest bit of fiscal discipline over the next few years, that should boost growth by shrinking government spending as a share of economic output.

But continued spending restraint is vital. The burden of government spending is still far too high in the PIIGS nations, even when merely compared to pre-crisis spending levels.

P.S. Paul Krugman has been the main cheerleader for the spend-more Keynesian crowd, but he has an unfortunate habit of screwing up numbers, as you can see from his work on Estonia, the United KingdomFrance, and the PIIGS.

P.P.S. I’m not a fan of the euro, but Europe’s common currency shouldn’t be blamed for the mess in Europe.

P.P.P.S. You can read my thoughts here on the Rogoff-Reinhart kerfuffle, which deals with many of the same issues as this post.

*To be fair, there are a few policy experts who understand that Europe’s problem is excessive government spending. Even European voters seem to recognize that spending needs to be cut. The challenge is getting a corrupt political class to make good choices.

Read Full Post »

I want a smaller burden of government spending, so you can only imagine how frustrating it is for me to observe the fight in Europe.

On one side of the debate you have pro-spenders, who call themselves “growth” advocates, but are really just Keynesians. On the other side of the debate, you have pro-taxers, who claim to favor “austerity,” but actually just want big government financed by taxes rather than borrowing.

I had a chance to condemn these statist policy prescriptions in an appearance on the John Stossel show.

Here are 10 takeaways from the discussion, along with links to further information.

  1. The main point of the interview was to explain that government spending hasn’t been cut in Europe, with the United Kingdom being a poster child for bad policy (you won’t be surprised that Paul Krugman hasn’t bothered to look at the actual numbers).
  2. Austerity in Europe generally is just a code word for higher taxes. Governments only restrain spending as a last resort.
  3. Excessive spending is the problem, but many people mistakenly fixate on government borrowing.
  4. Keynesian spending doesn’t work, regardless of when it’s been tried.
  5. The Baltic nations are a rare good example of how to respond to a crisis (and another example of Krugman misreading the data), though I should have mentioned that Switzerland never got in trouble in the first place because of its admirable fiscal policy.
  6. We also discussed some historical examples of good policy, such as fiscal restraint in Canada and New Zealand, as well as a shrinking burden of government spending during the Clinton years.
  7. At the end of the interview segment, I say the goal should be to reduce the size of government relative to the productive sector of the economy. I wasn’t narcissistic enough to say “Mitchell’s Golden Rule” on air, but I did say that good fiscal policy occurs when government grows slower than the private sector.
  8. In the Q&A section at the end, I talked about the economic impact of different forms of government spending. Politicians and other defenders of statism like to highlight capital spending, which can have positive effects, but they overlook the fact that the vast majority of government outlays are for things that hinder growth.
  9. Most important, I made the key point about poor people are much better off in pro-market, small-government jurisdictions such as Singapore and Hong Kong, where at least they have opportunity, rather than France or Italy, where the best they can hope for is permanent dependency.
  10. Last but not least, I express some optimism about the possibility of genuine entitlement reform, though I should have acknowledged that nothing good will happen while Obama is in office.

It’s always great to do a show with Stossel since he genuinely care about freedom and wants to explore the details. In previous appearances on his show, I’ve discussed dishonest fiscal policy in Washington, the differences between Texas and California, and the reverse Midas touch of government.

P.S. There is at least one person in Europe who understands the real problem is too much spending.

Read Full Post »

Did Cyprus become an economic basket case because it is a tax haven, as some leftists have implied?

Did it get in trouble because the government overspent, which I have suggested?

The answers to those questions are “no” and “to some degree.”

The real problem, as I explain in this interview for Voice of America, is that Cypriot banks became insolvent because they made very poor investment decisions, particularly their purchases of Greek government bonds.

A few additional points.

1. The mess in Cyprus won’t cause problems in other nations, but it may lead investors in other nation to pay closer attention to whether there are problems with the government and/or banking sector.

2. There is not a “European problem” or “euro problem.” Some nations, such as Switzerland and Estonia, have made sound decisions. Others, such as Sweden, Denmark, and Germany, are in decent shape.

3. The final outcome in Cyprus was bad, but probably less bad than other options. The final result surely was better than the corrupt TARP regime in the United States.

4. It is utterly absurd to blame tax havens for the financial crisis. That disaster was caused by mistaken decisions by politicians in Washington.

So what happens now? I fear that Cyprus is going to be like Ireland, a nation that used to have a few attractive policies but now will have a bleak future.

Read Full Post »

It’s been more than three weeks since I targeted French fiscal policy for abuse and more than one week since I wrote something negative about the French fiscal system.

I must be slowing down as I get older, so it’s time of rectify this oversight.

My fundamental problem with the French system is that the burden of government spending is excessive and the politicians seem to think the answer is additional increments of class-warfare tax policy.

If you think I’m exaggerating, just check out this chart on government spending. The public sector in France is more bloated than the ones that exist in Italy, Sweden, and Greece!

That’s quite an achievement.

And then remember that the new French President is imposing a new top income tax rate of 75 percent. Though, to be fair, President Hollande generously says he doesn’t want the overall tax burden on any taxpayer to exceed 80 percent. All hail Francois the Merciful!

Notwithstanding this magnanimous gesture, some taxpayers have the gall (no pun intended) to object to this level of fleecing. Famous actors and successful entrepreneurs are among those saying Au Revoir and moving to jurisdictions that have less punitive tax laws.

What most amuses me about this exodus is the way France’s political elite is throwing a temper tantrum. How dare our victims run away!

The situation is so grim in France that The Economist wrote up a special report warning that France is Europe’s “time-bomb.”

Which raises an interesting question. How brightly is the fuse burning, and how much longer until the bomb detonates?

The honest answer is that I don’t know, but here are two stories worth noting.

First, you have to figure the tax burden is a bit too onerous if even high-ranking officials from a socialist government are utilizing tax havens to protect themselves. Here are details from a BBC report.

Jean-Jacques Augier, who managed Mr Hollande’s campaign funds, told the daily Le Monde that there was “nothing illegal” in his tax haven affairs. Meanwhile, ex-budget minister Jerome Cahuzac has been charged with fraud. Ministers are under pressure to reveal what they knew about his tax evasion. On Wednesday President Hollande addressed the scandal on national television, saying that in future all ministers and MPs would have to declare fully their personal finances.

Gee, don’t these members of the political elite understand that Hollande wants them to be able to keep 20 percent of their earnings? What a bunch of ingrates!

Our next story shows that French politicians are so greedy that they’re even willing to undermine their own national sport.

Prime Minister Jean-Marc Ayrault’s office issued a statement today confirming that a 75 percent surcharge on salaries above 1 million euros ($1.3 million) will apply to soccer clubs. “This new tax will cost first-division teams 82 million euros,” France’s Football League said in a statement. “With these crazy labor costs, France will lose its best players, our clubs will see their competitiveness in Europe decline, and the government will lose its best taxpayers.” …Many soccer players would already be taxed at France’s top marginal rate of 49 percent, which kicks in at 500,000 euros a year. Teams would then pay a surcharge to bring the effective tax rate on salaries above 1 million euros to 75 percent.

Mon Dieu! The government “will lose its best taxpayers.” Sounds like the Laffer Curve effects may be so large that the government actually loses tax revenue.

“Follow me. We can escape in this direction”

And since even left-leaning economists have confirmed that tax rates have a big impact on the decisions of such athletes, I hope French sports fans won’t mind if all the best players decide to take their talents elsewhere.

With policy this bad, no wonder Obama will probably never achieve his goal of turning America into another France. But he can take comfort in the fact that the French people overwhelmingly support what he’s trying to do.

But they also must be schizophrenic. As of 2010, an overwhelming majority of them also acknowledged that it was necessary to lower the burden of government spending to boost growth. And an astounding 52 percent of them might move to evil capitalistic America if given the opportunity.

The key thing is not to import French economic policy. Having escaped from her former country, Veronique de Rugy explains why that would be a mistake.

You can also watch Veronique explain the basics of fiscal policy in this testimony to a congressional committee.

P.S. This Chuck Asay cartoon captures the French mentality. Makes you wonder what they’ll do when the house of cards comes tumbling down. All I can say for sure is that the ones who put their money in tax havens will be much happier than the ones who thought they could trust government.

Read Full Post »

I’ve 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 continent.

But it does seem that things have calmed down, so the readers who have submitted questions about whether the fiscal crisis has ended obviously are paying attention.

I have two responses.

  • My first answer is very mature and thoughtful: HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?
  • My second answer is a bit more guarded and circumspect: No. To be more specific, the immediate crisis may have slightly abated, but I have no confidence that the long-run problem has been solved.

But let me start with some good news. Most of the hard-hit European nations have finally begun the cut spending. And when I say cut spending, I mean they actually spent less in 2011 than they did in 2010 (unlike the fake version of spending cuts that you find in the U.S. and U.K., where spending simply grows at a slower pace).

We don’t have data for 2012, but I wouldn’t be surprised if many of the PIIGS nations also cut spending last year as well.

Now for some bad news. Unlike the Baltic nations, the PIIGS dragged their feet and didn’t reduce the burden of government spending until they had no choice.

Moreover, they all imposed crippling tax hikes. Indeed, the tax increases in Greece were so severe that even the International Monetary Fund warned that the country might be past the Laffer Curve revenue-maximizing point.

So while long-overdue reductions in spending meant less money was being diverted from the economy’s productive sector, higher tax rates have discouraged entrepreneurs and investors from creating jobs and wealth.

So what’s the net effect?

From an optimistic perspective, the fiscal situation should stabilize if governments keep spending under control. Some additional spending cuts would be very desirable since government spending consumes 45 percent-50 percent of GDP in these nations, which is at least double  the growth-maximizing level.

“I’m going back in my bottle if you don’t cut spending!”

But even if these nations merely abide by Mitchell’s Golden Rule and restrain spending so that it grows slower than the private sector, that would be progress.

The reason I’m not optimistic, though, is that I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden.

And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years.

So you can understand why I don’t express a lot of optimism about European economic policy in this interview with Canadian TV.

The ostensible topic was European-wide financial regulation, but that topic is really a proxy for the fact that some nations want to bail out their financial sectors. But they’re in such lousy fiscal shape that they can’t borrow the money that would be needed to prop up their dodgy banks.

So I pointed out that European-wide regulation wasn’t the right answer. It wouldn’t make banks safer (since it would be based upon the deeply flawed Basel regulations), but could become a vehicle for nations such as Germany to further subsidize countries such as Spain.

But I hope I got across my main point, which is that these nations are burdened with too much government and their problems won’t be solved with more handouts, regulation, or bureaucracy.

In other words, there’s no substitute for genuine spending cuts implemented by the nation states of Europe.

P.S. Just in case you’re under the impression that only cranky libertarians think government is too big in Europe, I invite you to peruse this research from the European Central Bank, World Bank, and National Bank of Finland.

P.P.S. To close with some European-themed humor, we have three videos: 1) A romantic comedy involving Mr. Greece and Ms. Germany, 2) Hitler learning about the European downgrade, and 3) A Greek perspective on Germany.

P.P.P.S. Heck, I can’t resisting sharing this cartoon, this Dave Barry mockery, and the non-PC map of Europe as well.

Read Full Post »

Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising taxes.

Needless to say, I was right. Not that this required any special insight. After all, no nation has ever taxed its way to prosperity.

We’re now at the end of 2012 and Portugal is still saddled with a weak economy. And the higher taxes haven’t resulted in less red ink. Indeed, according to the Economist Intelligence Unit, government debt has jumped from 93 percent of GDP in 2010 to 124 percent of GDP this year.

Why did higher taxes backfire in Portugal? For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other nations.

  • Higher taxes undermine incentives for productive behavior, thus reducing an economy’s potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as much money as initially projected.
  • Higher taxes usually are a substitute for the real solution of spending restraint (i.e., Mitchell’s Golden Rule). Politicians oftentimes refuse to reduce the burden of government spending because of an expectation of additional tax revenue. Heck, in many cases, higher taxes trigger an increase in the size and scope of the public sector.

So did Portugal learn any lessons from this failed experiment in Obamanomics?

Hardly. Indeed, the government plans to double down on this approach – even though it’s increasingly apparent that higher tax burdens won’t translate into much – if any – additional tax revenue. Here are some excerpts from a report in the Financial Times.

Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. …the steep tax increases facing many families have made the outlook for 2013 – the third consecutive year of austerity, recession and rising unemployment – the grimmest yet. Total tax revenue has fallen considerably below target this year, forcing the government to implement additional austerity measures… The coalition will be relying on increased state revenue to account for about 80 per cent of the fiscal adjustment required in 2013 – a reversal of the original bailout plan, in which consolidation was to be achieved mainly through spending cuts.

Amazing. The government imposes huge tax hikes, which don’t generate any positive results. Yet even though “tax revenue has fallen considerably below target,” confirming that there are significant Laffer Curve issues, the government chooses to repeat the snake-oil fiscal therapy of higher taxes.

Anybody want to guess what’s going to happen? The answer, of course, is that this will further dampen incentives to generate income and comply with the government’s fiscal demands.

The latest increases have stretched the tax system to the limit, says Carlos Loureiro, a tax partner at Deloitte. “The current model is exhausted. We need to do something different,” he says. “Any further increase in tax rates is unlikely to result in increased revenue.” Income from value added tax, the government’s biggest source of tax revenue representing about 36 per cent of the total, has been falling since 2008, despite a sharp increase in the rate – the main rate is now 23 per cent. Both the government and the European Commission have acknowledged the risks of depending on increased tax revenue, which is more growth sensitive, to meet fiscal targets and contingency spending cuts amounting to 0.5 per cent of national output have prepared in case of another tax shortfall.

I almost want to laugh at the part of the excerpt which notes that tax revenue “has been falling…despite a sharp increase in the rate.”

Maybe it’s time for these fiscal pyromaniacs to realize that revenues might be falling because rates are higher. In other words, Portugal not only isn’t at the ideal point on the Laffer Curve (collecting the amount of revenue needed to finance legitimate activities of government), it may even be past the revenue-maximizing part of the curve.

To be fair, there are lots of factors that determine economic performance, so higher tax burdens are just one possible explanation for why the tax base is shrinking or stagnant.

The one thing we can state with certainty, though, is that Portugal’s fiscal problem is too much government spending. The failure to address this problem then leads to very unpleasant symptoms, such as lots of red ink and self-destructive class-warfare tax policy.

If all that sounds familiar, that’s because it’s also a description of what President Obama is proposing for the United States.

Ummm…shouldn’t they be targeting politicians?

P.S. I don’t want to imply that Portugal is a total basket case. True, I’m not optimistic about the country’s future, but at least some lawmakers now acknowledge that Keynesian spending was a big mistake. And there are even signs that Portuguese officials are beginning to realize that lower tax rates should be part of the solution. But good policy may be impossible since so many people now have a moocher mentality.

P.P.S. At the risk of bearing bad news to close the year, research from both the Bank for International Settlements and the Organization for Economic Cooperation and Development shows the United States actually faces a bigger long-run fiscal challenge than Portugal.

Read Full Post »

There aren’t many fiscal policy role models in Europe.

Switzerland surely is at the top of the list. The burden of government spending is modest by European standards, in part because of a very good spending cap that prevents politicians from overspending when revenues are buoyant. Tax rates also are reasonable. The central government’s tax system is “progressive,” but the top rate is only 11.5 percent. And tax competition among the cantons ensures that sub-national tax rates don’t get too high. Because of these good policies, Switzerland completely avoided the fiscal crisis plaguing the rest of the continent.

The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations.

The situation in the rest of Europe is more bleak, particularly for the so-called PIIGS. To varying degrees, Portugal, Italy, Ireland, Greece, and Spain have lost the ability to borrow, received bailouts, and been mired in recession.

The silver lining is that the fiscal crisis has forced them to finally cut spending. All of those nations implemented real spending cuts in 2011 according to European Commission data, bringing spending below 2010 levels. Final figures for 2012 aren’t available, of course, but the International Monetary Fund estimates that spending will drop in every nation other than Italy (where it will climb by less than 1 percent).

That’s the good news. The public sector finally is being subjected to some long-overdue fiscal discipline.

The bad news is that politicians also imposed very significant tax increases on the private sector. Income tax rates have been increased. Value-added taxes have been hiked, and other taxes have climbed as well. These penalties on productive activity undermine potential growth.

The politicians say that this is a “balanced approach,” but this view is misguided, First, as Veronique de Rugy has shown, it generally means lots of new taxes and very little spending restraint. Second, it is based on the IMF view of “austerity,” which mistakenly focuses on the symptom of red ink rather than the underlying disease of too much spending.

What Europe really needs is a combination of lower spending and lower tax rates.

Portugal may actually be moving in that direction, according to a report in the Wall Street Journal.

The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said. The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview. …”We want to make Portugal one of the most attractive countries in Europe for new investment,” Mr. Santos Pereira said. “We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive,” he added. …While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs. If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.

Before getting too excited, it’s important to note that the Portuguese proposal is a bit gimmicky. It’s not a corporate tax rate of 10 percent, it’s a special rate of 10 percent for new investment, however that’s defined.

But at least it might be a small step in the right direction. As the article indicates, it “would be a departure from a series of tax increases.” And Portugal definitely has been guilty in recent years of raping and pillaging the private sector.

To be fair, though, this chart shows that government spending in Portugal did decline last year. And the IMF is projecting that it will fall again this year and next year.

Portugal Fiscal Policy

But the key to good fiscal policy is reducing government spending as a share of economic output. And if tax increases keep the private economy in the dumps, then the actual burden of government spending doesn’t change much even when nominal outlays decline.

A pro-growth policy is needed to boost economic performance. Portugal’s corporate tax rate proposal, by itself, won’t make much of a difference. But if it’s the start of a trend, that could be significant.

By the way, it’s amusing to see that one of the bureaucrats from the European Commission is pouring cold water on the plan, implying that a decision to take less money from a company somehow is akin to government assistance.

“We would want to be sure that anything proposed would help the competitiveness of the economy,” said spokesman Simon O’Connor, “but at the same time it would have to be in line with state aid rules,” referring to EU regulations that limit the assistance governments can give to the private sector. “There really isn’t any scope for them to reduce revenue,” he added.

But I guess that’s not too surprising. Along with their tax-free colleagues at the Organization for Economic Cooperation and Development, the European Commission has been trying to undermine tax competition and make it easier for nations to impose bad tax policy.

Returning to our main topic, what’s next for Portugal?

Your guess is as good as mine, but Portugal’s leaders already have acknowledged that Keynesian fiscal policy is ineffective. Perhaps they’ve gotten to the point where they realize punitive tax systems also are destructive.

Read Full Post »

I’m very concerned about both the fiscal cliff and its possible replacements. It will be bad news if we get an automatic tax hike on January 1, and it will be bad news if that tax increase is replaced by an even more odious plan concocted by the White House.

Fiscal Cliff Cartoon RamirezBut the cliff is not our biggest fiscal problem.

Here’s some of what I wrote for today’s New York Post about the fiscal cliff, along with a warning that we have a much bigger problem down the road.

…it’s a fight that has important implications, particularly since some of the tax increases will have a significantly harmful impact on incentives to work, save, invest and create jobs. In a competitive global economy, for instance, it is bizarrely self-destructive to increase the double taxation of dividends and capital gains. …This is all bad news, but it is not a crisis. If we go over the cliff, it simply means the economy will grow a bit slower and politicians will spend a bit more money. And the sequester actually would be (modest) good news, since it means the burden of government spending would be “only” $2 trillion higher 10 years from now, rather than $2.1 trillion higher. And even if Obama prevails in the fight, that simply means that we get a different mix of tax hikes and spending rises at a faster rate. Sure, that’s bad for the economy, but it’s not the end of the world. The real crisis is the ticking time bomb of entitlement programs and the welfare state. This bomb won’t explode this year or next year. It may not even explode for another 20 years. But at some point America will experience a Greek-style fiscal collapse if these programs are not reformed.

Just how bad is this future problem? Gee, I’m glad you ask.

A lot of people get upset about the national debt, which is somewhere between $11 trillion and $16 trillion, depending on whether you include money the government owes itself. Those are big numbers — but if you add up the amount of money that the government is promising to spend for entitlement programs in the future and compare that figure to the amount of revenue that the government projects it will collect for those programs, the cumulative shortfall is more than $100 trillion. And that’s after adjusting for inflation. Some politicians claim this huge, baked-into-the-cake expansion of government isn’t a problem, because we can raise taxes. But that’s exactly what Europe’s welfare states tried — and it didn’t work. Simply stated, even huge tax hikes won’t stem the flow of red ink in the long run if government keeps growing faster than the private economy. This is the fiscal problem that demands attention. Absent real entitlement reform, such as block-granting Medicaid to the states, the burden of government spending will consume ever-larger shares of our economic output with each passing year.

In other words, the solution is to follow Mitchell’s Golden Rule. That’s the only way to make sure that the burden of government spending shrinks relative to economic output.

Fortunately, that simply requires some modest spending restraint to address the short run problem and some intelligently designed entitlement reform to solve the long run challenge.

P.S. If my only choice is surrendering to Obama or going over the fiscal cliff, I’ll take the plunge without a second’s hesitation. At least we get the sequester if we go off the cliff, so there’s a tiny bit of spending restraint. Moreover, if the GOP capitulates to Obama on this fight, it will set the stage for additional bad policy over the next two years (much as the acquiescence to Obama during the March 2011 “government shutdown” fight was a sign of things to come for the last years, but at least we resuscitated two good cartoons and got some good jokes out of that debacle).

P.P.S. In addition to the Ramirez cartoon above, you can enjoy this bunch of amusing fiscal cliff cartoons. Or I should say they’re amusing so long as you don’t think about the implications.

Read Full Post »

Washington frustrates me. The entire town is based on legalized corruption as an unworthy elite figure out new ways of accumulating unearned wealth by skimming money from the nation’s producers.

But one thing that especially irks me is the way people focus on the trees and forget about the forest. Politicians and journalists are now engaged in an inside-baseball game of analyzing every twist and turn of the fiscal cliff negotiations.

That’s all fine and well, but perhaps it would be a good idea to talk about the need to fix the real crisis of excessive spending instead of arguing about how fast we should be traveling in the wrong direction.

And let’s not delude ourselves. In the absence of real entitlement reform, the United States is doomed to repeat Europe’s mistakes.

And how are things going in Europe? Well, I’m glad you ask. Let’s look at some excerpts from an Associated Press report.

Another month, another record unemployment rate for the economy of the 17 European Union countries that use the euro. Figures released Friday by Eurostat, the EU’s statistics office, showed that the recession in the eurozone pushed unemployment up in the currency bloc to 11.7 percent in October, the highest level since the introduction of the euro in 1999. …Eurostat found that 18.7 million people were out of work across the eurozone, an increase of 173,000 on the previous month and 2.2 million higher than the year before. The wider 27-nation EU that includes non-euro countries such as Britain and Poland had an unemployment rate of 10.7 percent in October and a total of 25.9 million out of work. …”Talk of a `lost generation’ of young people now looks like an alarming possibility,” said Andrea Broughton, principal research fellow at the Institute for Employment Studies.

In other words, we may complain about America’s miserable track record on jobs during the Obama years, but at some point in the future we may someday look back on 8 percent unemployment as good news.

Unfortunately, the crowd in Washington doesn’t want to acknowledge that the real problem is spending. And I’m particularly irked (but not surprised) that Republicans now seem willing to go along with Obama even though they won this fight back in 2010 when they didn’t control the House and had fewer seats in the Senate. Here’s what I said to one of the local DC stations.

I realize I’m sounding glum, so let’s close out this post with a couple of amusing cartoons about America’s European future.

I’ve already shared the “European Lemming” cartoon. This one has the same theme.

Cartoon Obama Iceberg

Other Eric Allie cartoons can be enjoyed here, here , hereherehere, and here.

And here another cartoon with the same theme.

Cartoon Obama Cliff

If you like this Bok cartoon, some of my other favorites can be seen here,  hereherehereherehere, and here.

If you still haven’t cheered up, this bit of Dave Barry humor about the European fiscal crisis is a classic, and I’d also recommend this bit of unintentional satire.

Read Full Post »

It’s not easy to find some humor in the European fiscal crisis, though this Hitler parody video surely is a classic.

We now have a new video to enjoy.

There are some naughty words, so be forewarned.

And speaking of Greek-related humor, this cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

P.S. If you like Greek-related humor, I have two more posts that have been very popular. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one has some very un-PC maps of how various peoples – including the Greeks – view different European nations.

Read Full Post »

I try to be self aware, so I realize that I have the fiscal version of Tourette’s. Regardless of the question that is asked, I’m tempted to blurt out that the answer is to reduce the burden of government spending.

But sometimes that’s exactly the right prescription, particularly for an economy weighed down by a bloated public sector. And, as you can see from this chart, the French welfare state is enormous.

Only Denmark has a bigger burden of government spending, but at least the Danes are astute enough to compensate with hyper-free market policies in other areas.

So is France also trying to offset the damage of excessive spending with good policy in other areas? Au contraire, President Hollande is compounding the damage with huge class-warfare tax hikes.

Here’s what the Wall Street Journal says about Hollande’s fiscal proposal – including the key revelation that spending will go up rather than  down.

Remember all that euro-babble before the French election about fiscal “austerity” harming growth? Well, meet the new austerity, same as the old austerity, which means higher taxes on the private economy and token discipline for the state. Growth is an afterthought. That’s the lesson of French President François Hollande’s new “fighting” budget, which is supposed to reduce the deficit to 3% of GDP from 4.5% and represent the country’s toughest belt-tightening in three decades. …More telling is that two-thirds of the €30 billion in so-called savings is new tax revenue, and one-third comes from slowing spending growth. Total public expenditure—already the second most lavish in Europe—will increase by €6 billion to 56.3% of GDP.

The spending cuts are fictional, but the tax increases are very, very real.

The real austerity will be imposed on taxpayers, and not only on the rich. Income above €150,000 will now be taxed at 45%, up from the current 41%. Mr. Hollande’s 75% tax rate on income over €1 million comes into effect for two years, reaping expected (and predictably paltry) revenue of €200 million. That’s dwarfed by the €1 billion from reducing the threshold for the “solidarity” tax on wealth to €800,000 from €1.3 million. The French Socialists will also now tax investment income at the same high rates as regular income. The rates have been 19% for capital gains, 21% for dividends and 24% for interest income. If Mr. Hollande’s goal is to send capital out of France, that should help.

Anybody want to take bets, by the way, on whether the “temporary” two-year 75 percent tax rate still exists three years from now?

I say yes, in large part because the tax almost surely will lose revenue because of Laffer Curve effects. But rather than learn the right lesson and repeal the tax, Hollande will argue it needs to be maintained because revenues are “unexpectedly” sluggish.

It’s also remarkable that Hollande wants to dramatically increase tax rates on capital gains, dividends, and interest. These are all examples of double taxation.

And when you factor in the taxes at both the personal and business level, these charts show that France already has the highest tax on dividends in the developed world and the third-highest tax on capital. And Hollande wants to make a terrible system even worse. Amazing.

I’ve already predicted that France will be the next major economy to suffer a fiscal crisis. I was too clever to give a date, but Hollande’s policies are accelerating the day of reckoning.

P.S. The WSJ also takes some well-deserved potshots at the latest fiscal plan in Spain. Since I endorsed Hollande in hopes that he would engage in suicidal fiscal policy, this post is focused on the French fiscal plan. But Spain also is a disaster.

Read Full Post »

There are several reasons why I’m glad that there are Europeans.

From a serious perspective, the decentralized and competitive states of Europe gave us great gifts such as the rule of law, the enlightenment, and the industrial revolution.

From a policy perspective, today’s Europe gives us examples of policies to emulate and policies to avoid (and also confusing mish-mashes of good and bad policies).

And from a comedic perspective, it’s generally still okay to make fun of Europeans – even if it (gasp!) involves stereotypes.

Now we can add this video, showing the challenges of a transnational couple, to the list.

I would have preferred if the video had an ideological message, of course, but I guess one of the messages is that the Greek guy is a bum who has no intention of pulling his weight.

If you want a serious video about the fiscal mess in Europe, here’s one narrated by an Italian woman.

And here’s another video about the European crisis. I don’t agree with some of the conclusions, but it’s quite clever.

P.S. If you want some American humor about Europe, I recommend this Dave Barry column and this Michael Ramirez cartoon.

Read Full Post »

I’m a bad person. I know it’s not nice to take joy in the misery of others, but I can’t help but smile when I see a story about bad news in France.

In my defense, this is not because of hostility to French people, who have always been friendly to me. Instead, France has become the global symbol of statism (particularly since Sweden has been moving in the right direction). The French, for instance, are increasingly infamous for class-warfare tax policy and onerous levels of intervention.

And since it’s my job to promote liberty, I’ll confess that it’s easier for me to convince non-French policy makers that free markets and small government are the right approach when there’s more evidence that statism is failing in France.

So why am I smiling? Well, France wasn’t doing so well under the de facto socialist Nicolas Sarkozy, and it seems that things are looking even worse now that the de jure socialist Francois Hollande is in charge.

Here’s some of what Reuters recently reported.

“It’s always time for a tax hike!”

The French are bleaker about their country’s future than at any time since 2005, a new poll showed on Saturday, with 68 percent saying they are “rather” or “very” pessimistic… Hollande’s government has been reeling from unemployment at a 13-year high and a rash of job cuts in recent weeks at top employers like carmaker Peugeot and retailer Carrefour. The government launched a plan this week to create 150,000 state-sponsored jobs for youth. Only 34 percent of those surveyed were confident in the government’s ability to battle unemployment, and just 20 percent expect the government to be able to improve their buying power. …The poll found that the pessimism extended even to 58 percent of Socialist party supporters.

I’m wondering when the pessimism will spread to investors. France recently lost its triple-A credit rating, but the rating agencies don’t do a good job, so I think it’s much more important to look at the prices of credit default swaps.

In other words, how much does it cost for an investor to insure debt from the French government? According to this CNBC site, France isn’t viewed as being as creditworthy as nations such as Switzerland, Germany, and the United States, but it is closer to those countries than it is to Spain, Italy, or Portugal.

This is just a guess on my part, but I think France is reaching the point where investors are suddenly going to get concerned about the government’s ability to fulfill its promises.

If Hollande follows through on his threat to impose a “patriotic” 75-percent tax rate, for example, that could be the trigger that makes the bond market a lot more skittish. Particularly since it will result in fewer rich people in France.

I’ve already written about French entrepreneurs and investors leaving the country because of Hollande’s class-warfare tax agenda. It’s gotten so bad that even Hollywood types are packing their bags.

Actor Johnny Depp has moved out of France and returned to America because he didn’t want to become a permanent French resident and pay income tax there. …Depp has now moved his family out of France after government officials asked him to become a permanent resident, as he feared he would end up paying tax in both countries. He tells Britain’s The Guardian newspaper, “…France wanted a piece of me. They wanted me to become a permanent resident. Permanent residency status – which changes everything. They just want… Dough. Money… ” Depp goes on to explain that if he spends more than 183 days a year in France he will have to pay income tax in both Europe and America, adding, “So you essentially work for free.”

Wow, complaining that he doesn’t want to “work for free.” What is he, some sort of radical libertarian from the Tea Party?

But he may want to chat with fellow tax-averse actor Jon Lovitz before moving back to America. Obama’s class-warfare agenda isn’t as bad as what Hollande is trying to impose, but it’s not Hong Kong or the Cayman Islands either.

P.S. Here’s a very good Chuck Asay cartoon about the French economy.

P.P.S. In a few areas, France has better policy than the United States.

Read Full Post »

I wrote yesterday that the United Kingdom is doomed because there isn’t a political party with the vision or courage to restrain the welfare state.

At various points, I’ve also expressed pessimism about the future of France, Germany, Italy, Spain, Ireland, and even the United States.

Simply stated, almost all western nations suffer from the same toxic combination of dependency, demographic decline, and poorly structured entitlement programs.

But some nations are heading in the wrong direction more rapidly than others, and Greece is best example (perhaps I should say worst example?) of a country that is careening toward catastrophe.

It’s such a basket case that I’m not sure whether the politicians or the people deserve the lion’s share of the blame.

  •  The politicians deserve blame because they treat public office as a tool for self-enrichment and self-aggrandizement, largely by steering taxpayer money to friends, cronies, contributors, and supporters. Sometimes they do this in a search for votes. Sometimes in a search for cash.
  •  The people deserve blame because they view the state as a magical source of freebies and they see no economic or moral problem with using a coercive government to steal from fellow citizens. They realize the system is corrupt, which is why they seek to evade taxes, but that doesn’t stop them from trying to live at the expense of others.

In a best-case scenario, this type of dysfunctional system reduces prosperity. But when the number of people mooching off the state reaches a critical mass (as illustrated by these two cartoons), then you get societal meltdown.

Which is a good description of what’s happening in Greece.

And even when the government is on the verge of collapse and there’s pressure for reform, the political elite somehow figure out how to screw things up.

The latest example is the possible creation of “special economic zones.” When I first glanced at the story excerpted below, I thought this meant the Greek government was going to create something akin to “enterprise zones” featuring lower tax rates and less red tape.

Because I’m a supporter of the law applying equally to everybody, I’m not a big fan of such policies. I want to reduce the burden of government, of course, but I want that approach for entire countries, not just a handful of areas selected by politicians.

But at least the concept is good, right?

Not when Greek politicians are involved. They have taken the worst features of enterprise zones and combined them with the worst features of redistributionism. Here’s some of the story from Ekathimerini.

The government is paving the way for negotiations with the European Commission regarding the creation of special economic zones (SEZ) in Greece, Development Minister Costis Hatzidakis confirmed on Tuesday in Athens. …“SEZ will give a boost to the basis of the real economy,” said Hatzidakis, reiterating that the existing labor legislation will be fully respected. ..This forms part of the 10-point priority plan Hatzidakis announced yesterday aimed at boosting growth. Changes to the investment incentives law and the fast-track regulations will be completed within the next 15 days. The bill to be prepared will include subsidies of up to 80 percent for smaller companies… Public-private partnerships will be used for bolstering regional growth.

So the zones will keep all the bad labor laws, but provide big subsidies and create “public-private partnerships” (i.e., cronyism).

I hate to sound negative all the time, but that sounds precisely like the kind of nonsense that put Greece in a ditch to begin with.

To be fair, the article does talk about targeted tax relief and accelerated procedures for dealing with red tape. But that’s not exactly good news. Targeted tax cuts are a form of discrimination and they create an environment favorable to lobbying and corruption. And while it seems like good news to approve licenses more quickly, why not just get rid of bureaucratic hurdles? After all, this is the country (this is not a joke) that requires stool samples from entrepreneurs seeking to set up online companies.

It’s very hard to have any optimism after reading this type of story. Greece surely is an example of statism run amok, but let’s return to the point I made above about almost all other western nations heading in the same direction. Greece may be closest to the fiscal cliff, but the rest of us are driving in the same direction.

And if you think this is overheated rhetoric (yes, I’m prone to hyperbole), check out these dismal numbers from the Bank for International Settlements and the Organization for Economic Cooperation and Development.

P.S. The BIS and OECD numbers show that the United States is in worse shape – in the long run – than every European welfare state. I assume this is largely based on assumptions of health care spending rising more rapidly in America. The bad news is that this is a reasonable assumption (thanks to our third-party payer problem). The good news is that we can easily solve the problem with a combination of entitlement reform (which deals with a direct cause of third-party payer) and tax reform (which deals with an indirect cause of third-party payer).

Read Full Post »

I don’t give the issue much attention on this blog, but I’m very interested in Social Security reform. I wrote my dissertation on Australia’s very successful system of personal retirement accounts, for instance, and I narrated this video on Social Security reform in the United States.

So I was very interested to see that the Associated Press put out a story warning about the dismal state of the program’s finances.

Here’s some of what the AP reported.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government. Those days are over. Since 2010, Social Security has been paying out more in benefits than it collects in taxes… The projected shortfall in 2033 is $623 billion, according to the trustees’ latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security’s number crunchers because it covers the retirement years of just about everyone working today. Add up 75 years’ worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that’s $30.5 trillion in 2012 dollars, or eight times the size of this year’s entire federal budget.

First of all, kudos to the AP. I criticized them for a sloppy and biased report on poverty last month, so it behooves me to mention that their story on Social Security is mostly fair and accurate.

My only complaint is that the story does include some analysis of the Social Security Trust Fund, even though that supposed Fund is nothing but a pile of IOUs – money that one part of the government promises to give to another part of the government.

But let’s set that aside. Another interesting tidbit from the story is this quote from one of the kleptocrats at the American Association of Retired Persons. Note that he implicitly rules out any changes other than those that enable the government to “pay the benefits we promised.”  But that shouldn’t be a surprise. AARP is part of the left-wing coalition.

“I’m not suggesting we need to wait 20 years but we do have time to make changes to Social Security so that we can pay the benefits we promised,” said David Certner, AARP’s legislative policy director. “Let’s face it. Relative to a lot of other things right now, Social Security is in pretty good shape.”

But I will say that Mr. Certner is sort of correct about Social Security being in better shape than Medicare and Medicaid. But that’s like saying the guy with lung cancer who is 75 lbs overweight is in better shape than the two guys with brain tumors who are both 150 lbs overweight.

If you have to engage in fiscal triage, it would be smart to first address Medicare and Medicaid, but Social Security also needs reform. And not the kind of statist reform the folks at AARP would like to see.

By the way, you probably won’t be surprised to learn that President Obama’s approach is similar to the left-wingers at AARP. Here’s a video I narrated about his preferred policy.

It seems that the question doesn’t matter with this administration. The answer is always to impose more class-warfare tax policy.

P.S. If you need to be cheered up after reading this post, here’s a good cartoon showing the difference between Social Security and a Ponzi scheme, and here’s another cartoon showing what inspired Bernie Madoff to steal so much money.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,290 other followers

%d bloggers like this: