Just a few months ago, I wrote about Germany’s fiscal decay.
Over the past eight years, government spending has grown much faster than the private sector, thus violating the Golden Rule of fiscal policy.
Given the shift to bad policy in Germany, I was very interested to see that the New York Times has a report by Liz Alderman and Melissa Eddy that explains how Germany no longer is the economic engine in Europe.
Here are some excerpts.
Something extraordinary is happening to the European economy: Southern nations that nearly broke up the euro currency bloc during the financial crisis in 2012 are growing faster than Germany… In a reversal of fortunes, the laggards have become leaders. Greece, Spain and Portugal grew in 2023 more than twice as fast as the eurozone average. Italy was not far behind. …southern European countries made crucial changes that have attracted investors, revived growth and…reversed record-high unemployment. Governments cut red tape and corporate taxes to stimulate business and pushed through changes to their once-rigid labor markets, including making it easier for employers to hire and fire workers.
It’s encouraging to read about some pro-market reforms in Southern Europe.
It’s also encouraging that the New York Times seems to be acknowledging that free markets are the way to achieve more growth.
That being said, I’m not ready to declare that the PIGS (Portugal, Italy, Greece, and Spain) are the new role models for economic policy.
For instance, the NYT story is based on just one year of economic data. And I’ve warned that it is risky to draw big conclusions without seeing decades of evidence.
But a journey of a thousand miles begins with a first step. Given my interest in fiscal policy, I looked at the IMF data to see which countries have been most responsible over the past few years.
Lo and behold, Greece and Italy have been doing a decent job.
Three years of fiscal restraint may not seem like much, but it’s worth noting that the burden of government spending in Greece has declined by more than 10 percentage points of GDP.
And the spending burden in Italy has been reduced by nearly 7 percentage points of GDP.
Keep that up for 5-10 more years, and those countries could become Switzerland.
Do it for 10-20 years, and they can become Singapore or Taiwan.
Our friends on the left, by contrast, have the opposite perspective. They believe in so-called “positive liberty,” which means an entitlement to various handouts.
And they don’t care that those goodies can only be financed by using government coercion (via taxes, regulations, mandates, etc).
But today’s column is not going to involve a serious discussion of rights. Instead, I want to add to my satirical series on “great moments in human rights.”
The latest example comes from Spain, where you have the right to declare a different gender to get more benefits from the government.
Spain’s Left-wing government introduced a self-ID law in 2022 that made it simple to transition formally, while at the same time boosting benefits for women in the military and security forces. Since the change was introduced, 41 men have become women in the Spanish territory of Ceuta in North Africa. Only four of that number have changed their names. …Roberto Perdigones, an army corporal who registered as female in the last year, now earns more money and lives in superior accommodation. “On the outside I feel like a heterosexual man, but on the inside I am a lesbian…” “For changing my gender, I have been told that my pension has gone up because women get more to compensate for inequality. I also get 15 per cent more salary for being a mother,” he said. …Under Spain’s transgender law, anyone can switch the gender entered on their ID card and passport by formally requesting the change, without any additional requirements… Sources told El Español that officers in the Civil Guard, the National Police and the Local Police in Ceuta were also changing their sexes for benefits.
Like any good libertarian, I support the right of adults to change their names, to dress how they want, and/or to surgically alter their genitalia.
Making any of those choices simply to get more goodies from the government, however, seems a bit strange.
But, as I’ve written before, incentives matter. For better or worse.
P.S. Here are some other bizarre moments in human rights.
Because the burden of government spending, which already was excessive, increased even further.
And with taxes already very onerous in those countries, much of that new spending was financed with borrowing.
Investors then realized it was very risky to finance the various spending sprees. And when they stopped buying bonds from these governments (or started demanding higher interest rates to compensate for risk), that triggered the crises.
One would think that the nations most affected – Portugal, Italy, Greece, and Spain (the PIGS) – would have learned a lesson.
As you can see from this IMF data, those governments did not use the post-crisis recovery as an opportunity to get debt under control. Instead, every nation has more debt today than it did when the crisis occurred.
And why do these nations have higher debt levels?
For the simple (and predictable) reason that they have not reduced the burden of government spending.
To make a bad situation even worse, the European Central Bank cranked up the figurative printing press starting in 2020 by massively expanding its balance sheet.
Dumping all that money into the system quite predictably caused prices to soar. And now that the ECB is belatedly trying to undo its mistake.
That puts the PIGS under more pressure, as Desmond Lachman explained for National Review.
Christine Lagarde, the president of the European Central Bank (ECB)…has to raise interest rates at a time when governments in the euro zone’s economic periphery are more indebted today than they were at the time of the 2010 euro zone sovereign-debt crisis. This more hawkish interest-rate policy, coupled with a shift to quantitative tightening, now risks triggering another round of the euro zone debt crisis. …One of the ECB’s problems in having to raise interest rates aggressively to contain inflation is that such a course risks exacerbating the cracks that are now emerging in the European banking system. …if current trends continue, then another round of euro zone sovereign-debt crisis, where investors lose faith in the government’s ability to repay its debt, could be just around the corner. …This is especially true for Italy, where until recently the ECB had been buying Italian government bonds equivalent to that government’s net borrowing needs.
By the way, Lachman seems to think the Fed should allow continued inflation in order to help bail out Italy and the other PIGS.
That would be a big mistake. The long-run damage of that approach would be much greater than the long-run damage (actually, long-run benefits) of letting Italy and the others go bankrupt.
These factors explain why many nations in Europe have abolished their wealth taxes. This map from the Tax Foundation shows the holdouts that still pursue this senseless version of class warfare.
You’ll notice that Spain is one of the few countries that still has this punitive levy. And if you want to learn more about the Spanish version of this levy, you can click here and here for thorough summaries.
But one thing that everyone should understand is that politicians are always capable of making a bad situation worse.
And as you can see from this story by Grace Dean for Business Insider, that’s precisely what the Spanish government is doing by imposing a second wealth tax on the country.
Spain has introduced a second wealth tax amid soaring inflation, adding an extra 3.5% tax on top of wealth over $10 million. …To avoid people being double-taxed, the tax will only apply to the part of people’s assets not already taxed by their autonomous community, the government said. People will be taxed at a rate of 1.7% on assets between 3 and 5 million euros, 2.1% on assets between 5 and 10 million euros, and 3.5% on assets of more than 10 million euros (around $9.76 million). The government said that it was a temporary state tax for 2023 and 2024… The government is also raising taxes on companies with at least 200 million euros in annual income and expects to bring in an additional 200 million euros by increasing taxes on capital gains above 200,000 euros.
The title of today’s column asks “what fiscal policy is worse than a wealth tax”?
The obvious answer is two wealth taxes.
Though I’m not sure why people are referring to this levy as a second wealth tax when it could be considered an expansion of the existing wealth tax.
But semantics don’t matter. What is important is that this levy will backfire.
I explained back in 2019 that a wealth tax is basically a back-door way of increasing the tax burden on income that is saved and invested.
This is a very bad idea in theory, for reasons explained here and here, but most people do not realize how bad it is in practice.
It can result in effective tax rates of more than 100 percent.
But there are other examples of decentralized systems, with Canada also deserving plenty of praise.
Today, though, I want to write about Spain.
I had an opportunity to learn about the Spanish system while giving speeches last week in Castellon, Barcelona, and Madrid as part of the Free Market Road Show.
Let’s look at some data from Liberalismo a la madrileña, written by Diego Sánchez de la Cruz, the head of Foro Regulación Inteligente.
His book documents how pro-market reforms in the Madrid region have resulted in greater prosperity.
We’ll start with a look at the level of economic freedom in different Spanish regions. Madrid is at the top and Extremadura (bordering Portugal) is at the bottom.
Does a higher level of economic freedom produce better results, as measured by per-capita economic output?
The answer is yes. Madrid ranks first and Extremadura ranks last.
And one of Diego’s earlier publications graphed the relationship between economic freedom and per-capita output.
Definitely a strong correlation.
But what about causation? For instance, some of my left-leaning friends may wonder if there’s some other reason for the superior performance of the Madrid region. Maybe it was always the richest part of Spain and its current prosperity has nothing to do with current policy.
People always should be skeptical about data, particularly when looking at one-year snapshots.
That’s why I’m a big fan of looking at long-run trends. And this chart showing how Madrid has overtaken Catalonia helps confirm that good policy produces good results.
To elaborate, Madrid enjoyed rapid convergence over the past two decades, a period where there was lots of economic liberalization (including de jure elimination of a wealth tax and de facto abolition of a death tax).
By the way, based on current trends, Madrid and Catalonia now may become members of the anti-convergence club.
P.S. There has been some discussion of decentralizing in Australia and the United Kingdom, but no actual progress so far.
Here’s a chart that will tells you everything you need to know. Andorra’s top tax rate is just 10 percent, while its neighbors (Spain and France) have top tax rates of more than 40 percent.
Not as good as the Cayman Islands and Monaco, to be sure, but it is obviously better to keep 90 percent of the income you earn rather than only about 50 percent in Spain or France.
Actually, you probably only get to benefit from the use of about 40 percent of your income in those two nations when you factor in the value-added tax.
Lawrence Reed of the Foundation for Economic Education recently wrote about the virtues of Andorra, including its superior tax regime.
…one of Europe’s seven “micro-states,” quaint and tiny nations which are political holdovers from the distant past. The other six are San Marino, Liechtenstein, Luxembourg, Monaco, Malta, and Vatican City. Andorra is landlocked and sandwiched in the eastern Pyrenees Mountains between France and Spain. …Micro-states are fascinating and among the freest enclaves in the world. …Freedom House ranks Andorra in its highest category—a “Free” country scoring an impressive 93 on a 100-point scale of political and civil liberties. …“The legal and regulatory framework,” the survey reports, “is generally supportive of property rights and entrepreneurship, and there are few undue obstacles to private business activity in practice.” …writes Guy Sharp, a native Andorran financial advisor…“you get many of the benefits of Europe without the high taxes.” …The maximum personal income tax rate, as well as the capital gains rate, is just 10 percent. …Most goods are subject to a modest value-added tax rate of less than five percent.
I can vouch for the fact that everything is more affordable in Andorra. That nation’s 4.5 percent value-added tax is akin to a modest sales tax in American states. When I’m in Spain, France, or other European countries, by contrast, you definitely feel the pain of 20 percent-plus VATs.
That being said, it’s the low-rate income tax that is a magnet for jobs and investment. The nation’s tax system is even attracting Spanish tax exiles.
Especially entrepreneurs who are making money online. Miodrag Pepic reports for the Valencian.
When the famous YouTube star ElRubius announced last month that he is permanently moving to Andorra, the Spanish public became aware for the first time that the most popular YouTubers are leaving the country, taking their earnings with them as well. The reason is very simple – Andorra has become a tax haven for this type of activity…many Spanish YouTubers have moved there. But ElRubius is one of the most famous. …In Spain, he would have paid up to 54% of his income in taxes, while in Andorra, the top income tax is only 10%. …The decision of ElRubius was criticised in the Spanish media as unpatriotic. …his popularity on YouTube remained undeterred, and in fact, his subscription base even grew. …There are quite a few other countries that have begun to lose their top earners, notably France and the Netherlands
Predictably, the Spanish government is not amused, as reported by Aida Pelaez-Fernandez of Reuters.
Spain’s tax agency said on Monday it would start using “big data” to track wealthy individuals who pretend to reside abroad for tax purposes. The crackdown comes after some of Spain’s most popular YouTube personalities moved their residency to Andorra, a wealthy microstate perched in the Pyrenees mountains between France and Spain, with lower tax rates than its larger neighbours. …In Spain, anyone who earns above 300,000 euros per year must pay income tax of 47%, compared with a 10% flat rate charged by Andorra on earnings of more than 40,000 euros.
As you might expect, the Spanish government is not considering lower tax rates, which would be the best way of retaining successful entrepreneurs.
P.P.S. Of the seven European micro-states mentioned by Lawrence Reed, I’ve now visited San Marino, Liechtenstein, Luxembourg, Monaco, and Vatican City. I still need to get to Malta.
And there’s certainly plenty of evidence for that view. After all, taxes drive a huge wedge between pre-tax income and post-tax consumption. So there is not much incentive to be a productive member of society.
But it’s important to remember that fiscal policy is just one of the ways politicians can hurt an economy.
In an article for the Foundation for Economic Education, Michael Peterson explains how labor law is stifling job creation in the Spanish economy.
Spain doesn’t suffer from a labor shortage like in the United States, but something much worse—a sclerotic labor market marked by…Employment Protection Legislation (EPL) that constrains employers from hiring and firing workers. …These figures help explain the high unemployment rates observed in Spain over the past three decades—averaging 17.3 percent compared to 7.6 percent for EU-8 countries and 5.2 percent for the U.S. …one study showed that Spain’s unemployment rate wouldn’t have been as high following the Great Recession had there been less onerous costs to firing workers in permanent jobs… In another study, researchers from the Banco de España found that the duality function of the labor market increases unemployment volatility relative to a unified employment system (like in the U.S., for instance). A similar study finds that increasing the number of workers on temporary contracts reduces the number of days they worked by 4.5 percent and their total earnings by 9 percent. …Additionally, the labor force participation rate has steadily declined in Spain since 2012—from almost 60 percent to 56.7 percent. …Spain also has one of the highest historical long-term unemployment rates among OECD nations, further reflecting the rigidities within its labor market.
Here’s the chart that accompanied the article.
If you peruse the EU’s data on unemployment, you’ll find that Greece also has very high levels of joblessness. And for largely the same reasons.
By the way, Mr. Peterson also notes that excessive tax rates play a role.
Another factor that we can’t ignore is the high social security tax on employers in Spain, which stands at 29.9 percent.
So what’s the bottom line?
The most important thing to understand is that some of the politicians who support “employment protection legislation” may genuinely think they are helping workers.
But their efforts are backfiring for reasons that should be obvious.
Making it more expensive to hire workers means fewer workers will be hired.
Making it more expensive to fire workers means fewer workers will be hired.
Making it more expensive to employ workers means fewer workers will be hired.
P.S. Labor law is one area where the United States is far ahead of most European nations.
P.P.S. I applaud Spaniards for coming up with clever ways of avoiding excessive taxation.
P.P.P.S. Spanish politicians balance their bad labor taxation with bad business taxation.
Another contentious issues is the degree to which society should accept less growth in order to achieve more equality, with Arthur Okun – author of Equality and Efficiency: The Big Tradeoff – being the most famous advocate for prioritizing equity.
Let’s take a closer look at this issue in today’s column.
We’ll start by perusing a working paper, published by Spain’s central bank, that explores the optimal tax rate for that nation. The author, Dario Serrano-Puente, concludes that society will be better off if tax rates are increased.
Many modern governments implement a redistributive fiscal policy, where personal income is taxed at an increasingly higher rate, while transfers tend to target the poorest households. …In Spain there is an intense debate about…so-called “fiscal justice”, which is putting on the table a tax rate increase for the high-income earners… once the theoretical framework is defined, a bunch of potential progressivity reforms are assessed… Then a Benthamite social planner, who takes into account all households in the economy by putting the same weight on each of them, discerns the optimal progressivity reform. The findings suggest that aggregate social welfare is maximized when the level of progressivity of the Spanish personal income tax is increased to some extent. More precisely,in the optimally reformed scenario (setting the optimal level of progressivity), welfare gains are equivalent to an average increase of 3.08% of consumption.
I have a fundamental problem with the notion of government acting as a “Benthamite social planner,” but I don’t want to address that issue today.
Instead, I want to applaud Senor Serrano-Puente because he openly acknowledges that higher tax rates and more redistribution will lead to less growth.
Here’s some of what he wrote about that tradeoff.
For each reformed economy evaluated in the progressivity gridτ={0.00, …,0.50}, the main macroeconomic aggregates are calculated. …the evolution of these magnitudes on progressivity is depicted in Figure 4. …Broadly speaking, it is clear that aggregate capital and output are decreasing in progressivity in a (almost) linear pathway, with the drop in capital being more pronounced than in output. …aggregate consumption and aggregate labor are also decreasing in progressivity.
Here’s a look at the aforementioned Figure 4, and it is easy to see that the economy suffers as progressivity increases.
Kudos, again, to the author for acknowledging the tradeoff between equity and efficiency. But applauding the author for honesty is not the same as applauding the author’s judgement.
Simply stated, he is trying to justify a policy that will hurt poor people in the long run. That’s because even small differences in growth can have a big effect over time.
Let’s illustrate how this works with a chart showing the life-time earnings of a hypothetical low-income Spaniard.
The orange line shows how much money the workers gets if he starts with an extra 3.08 percent of income thanks to higher taxes and additional redistribution, but the economy grows 2.0 percent per year.
The blue line shows income for the same worker, which starts at a lower level because tax rates have not been increased to fund additional redistribution, but the economy grows 2.2 percent per year..
As you can see, that low-income worker is a net beneficiary of bigger government for about 10 years. But as time goes on, the worker would be far better off with smaller government and faster growth.
Different assumptions will lead to different results, of course. My goal is simply to help readers understand two things.
P.S. To illustrate the high cost of big government, let’s shift from hypothetical examples to real-world data. Most relevant, OECD data shows that the average low-income person in the United States is better off than the average middle-class person in Spain.
P.P.S. The study cited above considers what happens if Spanish politicians raise taxes on the rich. That would be a mistake, as illustrated by the chart, but let’s not forget that Spanish politicians also over-tax low-income people.
Simply stated, government spending grew faster than the private economy. And when nations violate fiscal policy’s Golden Rule, that means a growing fiscal burden and – if maintained for a long-enough period of time – a recipe for chaos.
Spain managed to get past that crisis, thanks to indirect bailouts and some belated spending restraint.
But some politicians in the country didn’t learn from that experience. The nation now has a hard-left government that is going to test how long it takes to create another fiscal crisis.
And even establishment-oriented experts are worried. In an article last June for the Bulwark, Desmond Lachman and John Kearns warned that Spanish politicians were putting the nation in a precarious fiscal position.
Spain’s economy was painfully slow to recover from its 2008 economic recession, which saw its GDP drop by 4 percent. …Over the past decade, a major reason for Spain’s poor economic performance was its need to mend its public finances, which were seriously compromised by the collapse of its housing bubble… Spain’s coronavirus-induced recession could now make the 2008 housing market collapse look like a minor speed bump. …Spain’s GDP is projected to contract by almost 13 percent. As in 2008, Spanish public finances will be sure to suffer… the country’s public-debt-to-GDP ratio will by the end of this year jump to 120 percent—a level appreciably above its 2010 peak. …Another disturbing projection is the toll that the recession will take on its banking system… It does not inspire confidence that Spanish banks entered the present crisis with among the slimmest capital reserves in Europe.
At the risk of understatement, no sensible person should have confidence in any aspect of Spain’s economy, not just the banking system.
A few days ago, Daniel Raisbeck authored a column for Reason about the country’s downward spiral to statism.
The PSOE-Podemos coalition is not only Spain’s most left-wing government since the country restored democracy after dictator Francisco Franco’s death in 1975; currently, it’s also the most leftist government in the entire European Union (E.U.). As you would expect, this has brought about a barrage of progressive pet projects…a torrent of debt, public spending, and tax increases. …The government’s budget for 2021 also includes record levels of spending after the executive raised the ceiling on non-financial expenditures by over 50 percent. …The Spanish government has also taken advantage of the current crisis to impose drastic tax hikes. These include a “tax harmonization” scheme—a euphemism for getting rid of fiscal competition—that would end the freedom of autonomous communities, the largest political and administrative units in Spain, to set their own policies in terms of wealth, inheritance, and income taxes, the last of which consist of both a national and a regional rate.
Let’s now look at a few additional passages from the article.
Spain’s spending spree will be subsidized with €140 billion ($172 billion) of E.U. money, part of a “recovery fund” agreed upon last July at an emergency summit in Brussels.
They also have evidence at the regional level. Catalonia has a bigger population than Madrid and imposes higher tax rates, but it collects less revenue.
…although Madrid…charges some of the country’s lowest rates for inheritance and income taxes, the region raises €900 million ($1.1 billion) more in taxes per year than the far more interventionist Catalonia according to economist José María Rotellar.
As you might expect, politicians in Catalonia grouse that Madrid’s lower tax rates are “fiscal dumping” and they argue in favor of tax harmonization.
Madrid’s leading lawmaker has a very deft response.
…the Republican Left of Catalonia, the pro-Catalan independence party that allowed Sánchez to become president, recently accused Madrid of practicing “fiscal dumping.” …Isabel Díaz Ayuso, the Popular Party president of the Community of Madrid, stated that “if Catalonia wants fiscal harmonization, they should reduce their own taxes,” a reference to that region’s notoriously high taxation levels.
Touche!
Let’s close by returning to the big-picture topic of whether it’s a good idea for Spain’s government to expand the nation’s fiscal burden.
The leftists politicians currently in charge make the usual class-warfare arguments about helping the poor and penalizing the rich. Whenever I hear that kind of nonsense, I’m reminded of this jaw-dropping story about how people with modest incomes are being strangled by statism.
Imagine only making €1000 per month and losing two-thirds of your income to government?!?
No wonder Spaniards come up with clever ways of lowering their tax burdens.
P.S. The current government of Spain may be naive (or malicious) about taxes, but there are some sensible economists at the country’s central bank who have written about the negative impact of higher tax rates.
The British dodged that bullet but the people of Spain are not so fortunate. A new government with a very statist platform has just been formed.
Writing for CapX, Luis Pablo de la Horra explains that Spain now faces a grim future.
The agreement between socialists and populists includes an economic agenda which, if carried out, would have a disastrous impact on the Spanish economy. …the new coalition government intends to repeal the labor-market reform passed by Rajoy’s conservative government in 2012. This reform, which was aimed at introducing flexibility in Spain’s dysfunctional labor market, has crucially contributed to reducing the unemployment rate from 26% in late 2012 to 14% today. In fact, a 2016 report by BBVA Research shows that the labor-market reform prevented the destruction of almost one million jobs between 2012 and 2015. ..Sánchez’s government plans to increase taxes on large corporations… The agreement between Sánchez and Podemos also includes the imposition of rent controls in large cities. …Given that the problem of housing in Spain is related to an insufficient supply of apartments in urban areas, rent controls would only aggravate the situation, reducing the number of dwellings available and pushing up prices in non-rent-controlled areas. …An increase in public spending is also among the plans of the soon-to-be new government of Spain. …Juan Ramón Rallo, professor of Economics at IE Business School, estimates that the increase in public spending planned by Sánchez’s government for this year amounts, in net terms, to 3 percentage points of GDP.
A column by Leonid Bershidsky for Bloomberg also notes the new government’s hard-left agenda.
The formation of the government headed by Socialist leader Pedro Sanchez and including the far-left Podemos group…commits him to a more resolutely leftist agenda than the Socialists would have advanced alone. Among other things, it calls for the repeal of the 2012 labor market reform, which succeeded in driving down unemployment from its peak of 26.3% in February, 2013 to about 14% today. …The coalition also plans to hike income taxes for corporations and high earners, starting with those individuals who make 130,000 euros ($146,000) a year and capital gain taxes. A minimum wage hike to 1,200 euros a month from the current 1,050 euros is planned. The leftist parties also have committed to unlink pensions from life expectancy…an ambitious tax-and-spend program.
By the way, I can’t resist sharing these excerpts from a BBC report on the hypocrisy-drenched leader of hard-left Podemos.
Pablo Iglesias and Irene Montero, the party’s spokeswoman, were accused of hypocrisy for spending €600,000 (£527,000; $700,000) on a house with a swimming pool and guest quarters. Mr Iglesias has previously criticised politicians who live “in villas”. …Some rank-and-file members said it undermined the party’s grassroots credibility. …Mr Iglesias formed Podemos in January 2014 with a group of fellow left-wing university lecturers. …He has previously made much of the fact that he lived in modest accommodation in the working class Madrid neighbourhood of Vallecas and that he bought his clothes in supermarkets.
The moral of the story is that people never get rich from leftist economic policy, but leftist politicians inevitably wind up fat and happy.
But I’m digressing.
What makes the new Socialist-Podemos government so disturbing is that Spain desperately needs to move in exactly the other direction.
Writing for Cayman Financial Review, Miguel Sanchez de Pedro warned about his country’s unpalatable fiscal position.
Spain is a welfare state… Public expenditures represent 43.9 percent ($498 billion, 2017) of GDP. …pensions, healthcare and education made up 68.2 percent ($418 billion) of total public expenses for the year 2017. …The quasi-federal regime has proven highly expensive and inefficient, particularly during troubled economic cycles that leave the central government largely without any capacity to influence expenditure and rebalance regional finances. …The untenable compulsory public pension system is threatened under current and foreseeable scenarios of an ageing population…the social security accounts show a technical bankrupt institution with a negative financial net worth…due to the growing mismatch between the number of contributing workers needed to pay per pensioner – actually 1.9 workers per pensioner.
And here’s a portion of an infographic he put together about his nation’s unstable pension system.
A big problem for Spain is that too many people are riding in the wagon and too few workers are generating prosperity in the economy’s productive sector.
In a column for E21, Daniel Di Martino highlighted this concern.
Sánchez’s plan is to increase spending and finance it by raising taxes on businesses and high-income individuals. …These measures would discourage work and solidify the culture of dependency on the state. …hiring more public workers would make more people want to switch to the public sector… there are more people who receive government pensions, are unemployed, or work for the government than there are workers in the private sector. …Prime Minister Sánchez’s measures would sentence Spaniards to joblessness and state dependency, while emptying the state coffers when millionaires and soccer players leave.
And here’s a pie chart from his column.
In a study for the Bank of Spain, five economists crunched numbers for the country’s economy and concluded that higher taxes don’t yield good results.
In this paper we adopt the narrative approach to estimate the output effects of tax shocks in Spain. To this end, we have constructed a detailed record of all the relevant legislated tax changes implemented during the period 1986-2015. …Next, we estimate the GDP effects of an exogenous tax change by constructing impulse-response functions derived from simple VARs. …We find that a 1% of GDP increase in taxes depresses output by around 1.3% after one year, this effect fading away at more distant horizons. …All things considered, our set of estimates provides a coherent picture of negative short-term output effects triggered by tax increases (and vice versa).
Here’s one of the graphs from the study.
This echoes earlier academic research showing that class-warfare tax increases are especially destructive.
And let’s not forget how higher corporate tax burdens in Spain also have backfired.
P.S. Supposedly right-of-center governments in Spain also have adopted bad policy, so maybe voters figured they should opt for the real thing.
P.P.P.S. Politicians always claim they want to tax the rich, but the Spanish experience shows that people with modest incomes are the big victims, to it’s understandable that they do everything possible to protect their money from greedy government.
We’ll start in China, where a local government proved that incentives mattered.
In March, a man in Zhejiang, China…divorced his wife. He then married his sister-in-law. Shortly after, he divorced her too, in order to marry another sister-in-law. Several other members of the Pan family started to do the same with other relatives and eventually, 11 members of the brood married and divorced each other 23 times over a two-week period. Their motivation? To cash in on a compensation scheme… As part of an urban village renovation project, those living in the area are given a minimum compensation of one 40-square meter apartment, even though they didn’t own property. This was provided to any family whose hukou (household registration) was filed by April 10. But the Pan family learned that they could game the process by getting married, registering as residents of the village, and divorcing to do it again… By doing so, each family member would get their own household registration, which means more compensation. …The 11 family members involved have been arrested… Upon interrogation, one suspect said they didn’t think there was anything illegal with what they were doing.
I wonder if the Chinese government will learn anything about incentives from this episode.
Maybe, just maybe, it will then apply those lessons to tax policy (at the very least, by ignoring poisonous advice from the IMF and OECD).
In Spain, we re-confirm that governments are just as capable of wasting money on defense spending as they do on domestic programs.
A new, Spanish-designed submarine has a weighty problem: The vessel is more than 70 tons too heavy, and officials fear if it goes out to sea, it will not be able to surface. And a former Spanish official says the problem can be traced to a miscalculation — someone apparently put a decimal point in the wrong place. “It was a fatal mistake,” said Rafael Bardaji, who until recently was director of the Office of Strategic Assessment at Spain’s Defence Ministry. The Isaac Peral, the first in a new class of diesel-electric submarines, was nearly completed when engineers discovered the problem. …The Isaac Peral, named for a 19th century Spanish submarine designer, is one of four vessels in the class that are in various stages of construction. The country has invested about $2.7 billion in the program. The first was scheduled to be delivered in 2015 but the Spanish state-owned shipbuilder, Navantia, has said the weight problems could cause delays of up to two years.
Last but not least, we travel to Germany, where the government is trying to outdo New York City for the prize of most over-budget infrastructure boondoggle.
As a structure, it looks impressive enough. Until you pause, look around you, and absorb the silence. This is Berlin Brandenburg…, the new, state-of-the-art international airport… It is a bold new structure, costing billions, and was supposed to be completed in 2012. But it has never opened. BER has become for Germany not a new source of pride but a symbol of engineering catastrophe. …a “national trauma” and an ideal way “to learn how not to do things”. No passengers have ever emerged from the railway station, which is currently running only one “ghost train” a day, to keep the air moving. No-one has stayed at the smart airport hotel, which has a skeleton staff forlornly dusting rooms and turning on taps to keep the water supply moving. …Huge luggage carousels are being given their daily rotation to stop them from seizing up. …The company running the airport promises it will finally open next year, which would make it at least eight years late as well as billions over budget. …So what on Earth has happened…? politicians…set up a company to build an ambitious new airport. “The supervisory board was full of politicians who had no idea how to supervise the project,” says Prof Genia Kostka, of the Free University of Berlin. “They were in charge of key decisions.” …the politicians supervising the airport…insisted new departure gates were added to accommodate giant Airbus A380 aircraft, whose production has ended before the airport can open. …the overall cost of the project will be 6bn euros (£5.3bn) – if it opens as planned next year – up from an original projection of about 2bn euros. The final sum will be paid mostly by German taxpayers.
Of course taxpayers will get stuck with the tab. That’s the ongoing scam we call government.
But there is another question to ponder: How can a nation that is so aggressive (not to mention dogmatic and inventive) about collecting taxes be so incompetent at spending money?
The bottom line is that waste seems to be an inevitable part of government, regardless of the nation or the continent.
The moral of these stories, both from America and around the world, it that government is not the answer.
At the risk of over-simplifying, the difference between “supply-side economics” and “demand-side economics” is that the former is based on microeconomics (incentives, price theory) while the latter is based on macroeconomics (aggregate demand, Keynesianism).
When discussing the incentive-driven supply-side approach, I often focus on two key points.
Marginal tax rates matter more than average tax rates because the incentive to earn additional income (rather than enjoying leisure) is determined by whether the government grabs a small, medium, or large share of any extra earnings.
Some taxpayers such as investors, entrepreneurs, and business owners are especially sensitive to changes in marginal tax rates because they have considerable control over the timing, level, and composition of their income.
Today, let’s review some new research from Spain’s central bank confirms these supply-side insights.
Here’s what the authors investigated.
The impact of personal income taxes on the economic decisions of individuals is a key empirical question with important implications for the optimal design of tax policy. …the modern public finance literature has devoted significant efforts to study behavioral responses to changes in taxes on reported taxable income… Most of this work focuses on the elasticity of taxable income (ETI), which captures a broad set of real and reporting behavioral responses to taxation. Indeed, reported taxable income reflects not only individuals’ decisions on hours worked, but also work effort and career choices as well as the results of investment and entrepreneurship activities. Besides these real responses, the ETI also captures tax evasion and avoidance decisions of individuals to reduce their tax bill.
By the way, “elasticity” is econ-speak for sensitivity. In other words, if there’s high elasticity, it means taxpayers are very responsive to a change in tax rates.
Anyhow, here’s how authors designed their study.
In this paper, we estimate the elasticity of taxable income in Spain, an interesting country to study because during the last two decades it has implemented several major personal income tax reforms… In the empirical analysis, we use an administrative panel dataset of income tax returns… We calculate the MTR as a weighted average of the MTR applicable to each income source (labor, financial capital, real-estate capital, business income and capital gains).
You can see in Figure 1 that the 2003 reform was good for taxpayers and the 2012 reform was bad for taxpayers.
If nothing else, though, these changes created the opportunity for scholars to measure how taxpayers respond.
And here are the results.
We obtain estimates of the ETI around 0.35 using the Gruberand Saez (2002) estimation method, 0.54 using Kleven and Schultz (2014)’s method and 0.64 using Weber (2014)’s method. …In addition to the average estimates of the ETI, we analyze heterogeneous responses across groups of taxpayers and sources of income. …As expected, stronger responses are documented for groups of taxpayers with higher ability to respond. In particular, self-employed taxpayers have a higher ETI than wage employees, while real-estate capital and business income respond more strongly than labor income. …we find large responses on the tax deductions margin, especially private pension contributions.
In other words, taxpayers do respond to changes in tax policy.
And some taxpayers are very sensitive (high elasticity) to those changes.
Here’s Table 6 from the study. Much of it will be incomprehensible if you’re not familiar with econometrics. But all that matters is that I circled (in red) the measures of how elasticities vary based on the type of income (larger numbers mean more sensitive).
I’ll close with a very relevant observation about American fiscal policy.
But what if the United States had a large-sized welfare state, like the ones that burden many European nations?
If you review the data, those large-sized welfare states are financed with stifling tax burdens on lower-income and middle-class taxpayers. Politicians in Europe learned that they couldn’t squeeze enough money out of the rich (in large part because of high elasticities).
Indeed, I wrote early this year about how taxes are confiscating the lion’s share of the income earned by ordinary workers in Spain.
Given the grim trends on the continent, I expect many other nations (probably led by Italy) will experience the fiscal and economic mess that we’ve seen in Greece.
Let’s dig into this issue by reviewing a story in the New York Times about economic stagnation in Europe, focused mostly on Spain.
After decades of living comfortably in Spain’s upper middle class, the middle-aged couple are struggling with their decline. Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. …Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union…they face unprecedented levels of vulnerability.
So why are middle-class workers in such bad shape?
As you read the article, you find references to factors such as the “financial crisis” and “weakened social protections,” but no coherent explanation for why the private sector is languishing.
Unless you read all the way down to the 22nd paragraph, where you finally get an interesting detail that probably explains much of Spain’s economic malaise. Taxes are so absurdly high that a guy with a modest income only gets to keep one-third of the money he earns! This is such a jaw-dropping factoid that I’ve made it an image rather than an indented excerpt.
Wow, the confiscatory tax rates that Alexandria Ocasio-Cortez and Bernie Sanders want to impose on “rich” people in the United States already are already being imposed on low-income taxpayers in Spain.
No wonder Spaniards are so inventive about avoiding taxes.
And this story is a perfect example of why I constantly warn that European-type redistribution policies in the United States would result in much higher taxes for lower-income and middle-class taxpayers.
By the way, you probably won’t be surprised to learn that the current Spanish government (just like a previous Spanish government) wants to make a bad situation even worse.
Prime Minister Pedro Sánchez… The Socialist leader grabbed power last summer with the fragile backing of Podemos, the left-wing anti-austerity party. Warning of middle-class frustrations, his embattled government ordered a 22 percent rise in the minimum wage in January, and has vowed to reverse some labor laws, increase social spending and raise taxes on companies and the rich.
There’s an election in April, so we’ll see whether Sánchez’s plan to impoverish his country actually gets adopted.
P.S. The story has two additional excerpts that help to explain Spain’s anemic performance. We have very strong evidence in the United States that unemployment benefits subsidize joblessness. Spain appears to be learning the same lesson, though the government still pays people to be unemployed for 1-1/2 years.
Unemployment benefits…that state money, with budget cuts, now lasts 18 months, down from 24.
…temporary and part-time contracts…can lead to steady work and better incomes. But companies and Europe’s public sector have mostly used them to dodge protections for permanent employees. In Spain alone, 90 percent of new jobs in 2017 were temporary.
P.P.S. Spain has a member of the Bureaucrat Hall of Fame, though the guy who “put a decimal point in the wrong place” probably also deserves induction.
P.P.P.S. Here’s a sobering look at pre- and post-1990 growth in Spain and Poland.
It’s possible, as some of my friends argue, that I’m not actually sane. That would explain why I try to put my finger in the dyke of big government as more and more new leaks keep developing. Only a crazy person would fight against big government when politicians and bureaucrats have a “public choice” incentive to do the wrong thing.
Moreover, if “victory” is restoring the kind of limited government envisioned by the Founding Fathers, then there’s a 99.99 percent chance all my efforts will be wasted.
But allow me to offer a reason for optimism. What if we decide that “victory” is simply hindering the growth of government so that the private sector has enough “breathing room” to continue making our lives richer and better?
That’s the basic message of Human Progress, Marian Tupy’s website showing how the world is constantly improving. And we see good long-run developments from Economic Freedom of the World.
In other words, we don’t need to achieve Libertarian Nirvana. We just need to throw sand in the gears of government.
And that’s why I don’t think my life is pointless. To be sure, I haven’t given up on my dream of replacing the odious internal revenue code with a flat tax, but if the only thing I achieve is to protect America from a value-added tax, I’ll nonetheless go to my grave feeling like I did something very valuable for my country.
But there’s something else that keeps me sane. I also enjoy laughing at government. I regularly write about “great moments” in government and point out that incompetence and stupidity is a regular feature of the federal government, of state governments, and of local governments.
And I also enjoy mocking the spectacular screw-ups and bizarre blunders that are a feature of foreign governments as well.
And that’s our topic for today. So let’s start with this story from India about a very unusual example of vote buying.
A south Indian state has become possibly the first in the world to offer publicly-funded breast implants, its health minister arguing, “Why should beauty treatment not be available to the poor?” The Tamil Nadu state health department on Wednesday launched the free service at a clinic in the capital Chennai. …The clinic had already been providing breast reconstruction surgery for cancer patients, but was now extending the service for people who wished to alter the size of their breasts for other health or cosmetic reasons. The head of plastic surgery at the clinic, Dr V Ramadevi, said some of her patients…sought to augment or shrink their breasts for a boost in confidence. “There is a psychological benefit. Many girls who have larger breasts don’t like to go out. There is no reason this surgery should be restricted from the poor.” The procedure would also be available to men, she said. …Tamil Nadu’s government is known for its largesse, particularly under former chief minister Jayalalithaa, who pioneered free food canteens and doled out wedding jewellery and venues to the poor.
And since taxpayer-financed cosmetic surgery exists in the United Kingdom and the United States, Indian taxpayers can take solace that they’re not alone.
Prince Laurent of Belgium has had his monthly allowance docked for a year, after a vote by the country’s federal parliament. The sanction was imposed after the prince attended a Chinese embassy reception last year without government permission, in full naval uniform. Lawmakers voted for a 15% cut to his €307,000 (£270,000; $378,000) annual allowance. …Prince Laurent, who is the younger brother of King Philippe, wrote a lengthy emotional letter to parliament before the vote on his endowment, arguing that, as a royal, he is unable to work for a living. He described the vote as “the trial of my life” and said it would “likely cause me serious prejudice” if MPs went against him. …The prince, 54, said the royal family had obstructed his attempts to be financially independent. …Lawmakers ultimately rejected his claim that no citizen of their country had been so exploited, voting to cut his stipend by 93 to 23 votes. …He had previously been criticised for attending meetings in Libya when the late Muammar Gaddafi was still in power, and making an unsanctioned 2011 trip to the Democratic Republic of Congo, a former Belgian colony.
I suppose this is a feel-good story in that politicians actually voted to cut spending.
Though we should never forget that this is the country where the public sector consumes half of economic output but officials actually complained that it’s hard to fight terrorism because of “the small size of the Belgian government.”
Now it’s time for ar stop in Malaysia, where corrupt politicians spent the country into debt and now they want taxpayers to voluntarily cough up extra money.
When Malaysian Prime Minister Mahathir Mohamad unexpectedly won his bid for office in May, he pledged to…get the country’s $250 billion worth of debt under control. And this week, he announced the government had found a way to at least get started: crowdfunding. Within 24 hours, the “Malaysia Hope Fund” raised almost $2 million, the BBC reported. “The rakyat (people) voluntarily want to share their earnings with the government to help ease the burden,” the finance ministry said in a statement, announcing that it would be accepting donations to a special fund set up to help relieve the country’s debt. …The crowdfunding idea started with a 27-year-old named Nik Shazarina Bakti, who recently launched a private crowdfunding initiative to help relieve Malaysia’s debt. She raised around $3,500 before the government stepped in. In a sense, the effort is a version of what she said Malaysians did during their struggle for independence from Britain, when they donated jewelry, money and valuables. It’s also similar to what South Korea did as it attempted to pull itself out of economic crisis in the late 1990s, and regular citizens lined up to donate their most prized possessions to the government, including wedding rings and trophies.
Hmmm…, $2 million raised to pay off $250 billion of debt. Methinks they won’t meet their goal.
Though this story reminds me that politicians like Elizabeth Warren want the rest of us to pay more tax, yet she conveniently doesn’t participate in her state’s version of voluntary crowdfunding.
He’s a dead man walking and the court ruling is final. A Romanian court has rejected a man’s claim that he is still very much alive, after he was officially registered as deceased, the Associated Press reports. Constantin Reliu, 63, lost his case in Vasului because he appealed too late on the ruling, a court spokeswoman said Friday. The story goes that Reliu had traveled to Turkey in 1992 for work and lost contact with his family. Since his wife had not heard from her husband in years, she acquired a death certificate for him in 2016, the AP reports. However, since Reliu was discovered by Turkish authorities this year with expired papers, he was deported back to Romania. That’s when he discovered he had been declared dead.
Last but not least, here’s a report from Spain that should leave you skeptical about the efficacy of additional NATO spending.
An attempt to deploy a new submarine for Spain’s navy has run aground again, after it emerged it cannot fit in its dock, Spanish media report. The S-80 boat was redesigned at great expense after an earlier mistake meant it had problems floating, and it was lengthened to correct the issue. Spanish newspaper El País now reports that after the changes, the docks at Cartagena can no longer fit the vessel. The cost for each has almost doubled, the newspaper said. …The original problem with the submarine dates back to 2013, when it was discovered that it was about 100 tons heavier than it needed to be. That caused a problem for its buoyancy – so it could submerge, but might not come back up again. A former Spanish official told the Associated Press at the time that someone had put a decimal point in the wrong place, and “nobody paid attention to review the calculations”. …the base at Cartagena will have to be dredged and reshaped to accommodate the now-floating longer vessel, the El País report said. Spain’s Defence Minister Margarita Robles, speaking on Spanish radio, admitted that “there have been deficiencies in the project”.
Call me crazy, but “deficiencies” doesn’t really describe what happened. Almost makes the Pentagon look frugal. Almost makes the German intelligence service look competent.
Earlier today, I gave a speech about populism and capitalism at the Free Market Road Show in Thessaloniki, Greece.
But I’m not writing about my speech (read this and this if you want to get an idea of what I said about American policy under Trump). Instead, I want to share some remarkable data from a presentation by Ewa Balcerowicz of Poland’s Center for Social and Economic Research.
She talked about “The Post Socialist Transition in Poland in a Comparative Perspective” and showed that Poland and Spain has similar living standards after World War II. But over the next 40 years, thanks to the brutal communist system imposed by the Soviet Union, Poland fell far behind.
But look what has happened over the past 25 years.
Per-capita GDP has skyrocketed in Poland and the gap between the two nations has dramatically narrowed.
So why is Poland now rising relative to Spain?
For the simple reason that public policy has moved in the right direction. Here’s the data from Economic Freedom of the World, comparing Poland’s score in 1990 and today. Poland has jumped from 3.54 to 7.42, and the nation has jumped from a dismal ranking of #104 to a respectable ranking of #40.
By the way, Spain’s score also has increased, but by a much smaller amount. And because the world has become more free, Spain’s ranking has dropped. Indeed, Spain now ranks below Poland
Which means that we shouldn’t be surprised if per-capita GDP in Poland soon jumps about Spanish levels.
And here’s a must-watch video on the relationship between good policy and better economics performance.
All of which helps to explain why I’m so disappointed in both Bush and Obama. Their statist policies have caused a drop in America’s score and relative ranking.
The Bureaucrat Hall of Fame has plenty of American members, but it also has civil servants from India, France, and Italy, and the United Kingdom, all of whom have gone above and beyond the call of duty in their efforts to rip off taxpayers.
And now we have a new applicant from overseas, so maybe we’ll enjoy even more diversity.
The U.K.-based Timesreports on a Spanish bureaucrat that didn’t bother to show up for work for six consecutive years.
A civil servant in Spain didn’t turn up to work for six years. …He had continued to collect his annual salary. Records show that the engineer started working for a water company run by the municipal authorities in Cádiz in 1990 but last did a day’s work in 2004.
Even though this bureaucrat is an amateur compared to the Indian civil servant who skipped work for two decades, I think he’s worthy of membership in the Hall of Fame.
Especially since one aspect of the story perfectly symbolizes the mind-boggling inefficiency of government.
…his absence was noticed only when he was due to collect a long-service award. …Mr Blas said: “We thought the water company had supervised him but it was not the case. We discovered this when we were about to present him with a commemorative plaque for his 20 years of service.”
You may be thinking that this combination of sloth and incompetence at least led to a termination.
Not exactly.
…he cannot be sacked from his €37,000-a-year job as he has since retired.
For what it’s worth, Senor Garcia supposedly is now obliged to return 30,000 euro of his ill-gotten loot.
I’m not holding my breath expecting that to happen.
However, even though it’s not mentioned in the story, I feel very confident that he’ll get a bloated pension courtesy of the Spanish taxpayers.
P.S. Back in 2012, I pointed out that Obama and Romney both were endorsed by different porn stars.
So you probably won’t be surprised to learn that porn stars also are playing a role in the 2016 campaign.
First, the Cruz campaign put together a commercial featuring an actress who is better known for her other roles. The Daily Callerhas the details.
Amy Lindsay, the actress featured in films such asKinky Sex Club,Milf,Carnal WishesandSex Sent Me to the ER starred in Sen. Ted Cruz‘s latest campaign ad entitled “Conservatives Anonymous.” In the ad, the Lindsay said, “Maybe you should vote for more than just a pretty face next time.” Seconds before this story was to be published, the Cruz campaign removed the ad from YouTube.
The Daily Caller also reports that the other conservative senator in the race also has a link to the adult industry.
Jenna Jameson…former porn star recently criticized the $1.1 trillion omnibus federal spending plan, and on Monday, she expressed some serious support for Republican presidential candidate Sen. Marco Rubio.
But she apparently doesn’t like compassionate conservatives.
Jameson told TheDC that she isn’t a fan of Bush.
Though maybe I’m making a mistake by assuming that she’s referring to President Obama’s big-spending predecessor.
For understandable reasons, the fiscal mess in Greece has dominated the European economic headlines.
But there are other developments that deserve attention. Amazingly, some politicians think Europe’s stagnant economy can be improved with more harmonization, more bureaucratization, and more centralization.
The EU Observer has a story about a French scheme to transform the eurozone into a supranational government.
French president Francois Hollande has called for a stronger more harmonised eurozone… “What threatens us is not too much Europe, but too little Europe,” he said in aletterpublished in the Journal du Dimanche. He called for a vanguard of countries that would lead the eurozone, which should have its own government, a “specific budget” and its own parliament. …French prime minister Manuel Valls Sunday said…France would prepare “concrete proposals” in the coming weeks. “We must learn the lessons and go much further,” he added, referring to the Greek crisis.
So why is anyone supposed to believe that adding a new layer of government is going to make Europe more prosperous?
In all likelihood, the French are pursuing this agenda for two selfish reasons.
A “harmonised eurozone” means that all affected nations would have to abide by the same rules, and that inevitably means taxes and regulations are set at the most onerous levels. The French think that’s a good idea because it’s a way of undermining the competitiveness of other eurozone nations.
A eurozone government with a “specific budget” sets the stage for more intergovernmental transfers in Europe. The French think that’s a good idea since they presumably could prop up their decrepit welfare state with money from taxpayers in nations such as Germany, Finland, and the Netherlands.
By the way,not all French politicians are totally misguided.
At least one of them is expressing more sensible ideas, as reported by the U.K.-based Telegraph.
France is “the sick man ofEurope”, François Fillon, the former centre-Right prime minister, has said in an open letter to French presidentFrancois Hollande, calling for urgent economic reforms.“The Greek tragedy shows that the threat of bankruptcy is not abstract,” according to Mr Fillon… French commentators writing about the Greek crisis in recent days have pointed out that France’s own national debt of more than €2 trillion (£1.4 trillion), amounting to 97.5 per cent of GDP, places it in the same league as Spain and other southern European countries.
By the way, the commentators who are fretting about French debt are focused on the wrong variable. The French disease is big government. High levels of debt are simply a symptom of that disease.
Moreover, I’m not sure that Monsieur Fillon is a credible spokesman for smaller government and free markets since he served during the statist tenure of President Sarkozy.
In any event, if there are any serious reformers in France, they face an uphill battle. As I’ve previously noted, many successful people and aspiring entrepreneurs have left France.
Here’s a news report on the phenomenon.
And just in case you think this is merely anecdotal data, here’s a table showing the nations that lost the most millionaires since 2000.
In the case of China and India, rich people leave because they want to establish a domicile in a developed nation.
Let’s now cross the Pyrenees and see what’s happening in Spain.
Our Keynesian friends, as well as other big spenders, are always trumpeting the value of infrastructure projects because they ostensibly pump money into an economy.
I’ve made the point that such outlays should be judged using cost-benefit analysis. Well, it appears that Spain listened to the wrong people. It got a €10,000 return on an infrastructure “investment” of €1,100,000,000.
One of Spain’s “ghost airports”—expensive projects that were virtually unused—received just one bid in a bankruptcy auction after costing about €1.1 billion ($1.2 billion) to build. The buyer’s offer: €10,000. Ciudad Real’s Central airport, about 235 kilometers south of Madrid, became a symbol of the country’s wasteful spending.
But Spanish politicians should be known for more than just misguided boondoggles.
Some of them also are working hard to make sure citizens don’t work too hard. Here’s a story from an English-language news outlet in Spain (h/t: Commentator).
Between the hours of 2pm and 5pm you will struggle to find anyone in the Valencian town of Ador; the town’s inhabitants will have taken to their beds to catch their mandatory forty winks. The town’s summer siesta tradition is so deep-rooted the mayor has enshrined his citizen’s right to an afternoon snooze in law. …Ador could be the first town in Spain to actually make taking a siesta obligatory by law. …The new rules also stipulate that children should remain indoors:
One imagines the next step will be mandatory bed checks by new bureaucrats hired for just that purpose.
Though maybe they would need special permission to take their mandatory siestas from 11:00-2:00 so they would be free to harass the rest of the population between 2:00-5:00.
Since I’m an economist, I generally support competition.
But it’s time to admit that competition isn’t always a good idea. Particularly when international bureaucracies compete to see which one can promote the most-destructive pro-tax policies.
For instance, I noted early last year that the bureaucrats at the Organization for Economic Cooperation and Development (OECD) were pushing a new scheme to increase the global tax burden on the business community.
Then I wrote later in the year that the International Monetary Fund was even more aggressive about pushing tax hikes, earning it the label of being the Dr. Kevorkian of the world economy.
That must have created some jealousy at the OECD, so those bureaucrats earlier this year had a taxpalooza party and endorsed a plethora of class-warfare tax hikes.
Now the IMF has responded to the challenge and is pushing additional tax increases all over the world.
This chart from the IMF shows how much the bureaucracy thinks that the tax should be increased just on coal consumption.
The chart doesn’t make much sense, particularly if you don’t know anything about “gigajoules.” Fortunately, Ronald Bailey of Reason translates the jargon and tells us how this will impact the average American household.
The National Journal reports that the tax rate would be $8 per gigajoule of coal and a bit over $3 per gigajoule of natural gas. Roughly speaking a ton of coal contains somewhere around 25 gigajoules of energy, which implies a tax rate of $200 per ton. …The average American household uses about 11,000 kilowatt hours annually, implying a hike in electric rates of about $1,100 per year due to the new carbon tax. Since the average monthly electric bill is about $107, the IMF’s proposed tax hike on coal would approximately double how much Americans pay for coal-fired electricity. A thousand cubic feet (mcf) of natural gas contains about 1 gigajoule of energy. The average American household burns about 75 mcf of natural gas annually so that implies a total tax burden of $225 per residential customer.
To be fair, the IMF crowd asserts that all these new taxes can be – at least in theory – offset by lower taxes elsewhere.
…we are generally talking about smarter taxes rather than higher taxes. This means re-calibrating tax systems to achieve fiscal objectives more efficiently, most obviously by using the proceeds to lower other burdensome taxes. The revenue from energy taxes could of course also be used to pay down public debt.
If you think something different would happen following the implementation of an energy tax, you win the grand prize for gullibility.
But let’s give the IMF credit. The bureaucrats are equal opportunity tax hikers. They don’t just want higher taxes in the United States. They give the same message everywhere in the world.
Here are some excerpts from an editorial about Spanish fiscal policy in the Wall Street Journal.
Madrid last month cut corporate and personal tax rates, simplified Spain’s personal-income tax system and vowed to close loopholes. That’s good news… So leave it to the austerity scolds at the International Monetary Fund to call for tax increases. …Specifically, the Fund wants Spain to raise value-added taxes, alcohol and tobacco excise taxes, tourism taxes, and various environmental and energy levies: “It will be critical to protect the most vulnerable by increasing the support system for them via the transfer and tax system.”
Gee, I suppose that we should be happy the IMF didn’t endorse higher income taxes as well.
Rather than heed this bad advice, Prime Minister Mariano Rajoy and Finance Minister Cristobal Montoro are cutting government spending and eliminating wasteful programs to reduce pressure on the public fisc. Public spending amounted to 44.8% of GDP in 2013, which is still too high but down from 46.3% in 2010. The government projects it will fall to 40% by 2017. …Madrid has also made clear that it believes private growth is the real answer to its fiscal woes. …In other words, economic growth spurred by low taxes and less state intervention yields more revenue over time. If Mr. Montoro can pursue the logic of that insight, there’s hope for Spain’s beleaguered economy.
I’m not overly confident about Spain’s future, but it is worth noting that, according to IMF data, government spending has basically been flat since 2010 (after rising by an average of about 10 percent annually in the previous three decades).
So if the politicians can maintain fiscal discipline by following my Golden Rule, maybe Spain can undo decades of profligacy and become the success story of the Mediterranean.
Let’s hope so. In any event, we know some Spanish taxpayers have decided that they’re tired of being fleeced.
We have one final example of the IMF’s compulsive tax-aholic instincts.
Allister Heath explains that the bureaucracy is pushing for a plethora of new taxes on the U.K. economy.
The IMF wants an increase in the VAT burden.
…the IMF wants to get rid or significantly reduce the zero-rated exemption on VAT, which covers food, children’s clothes and the rest. While it is true that the exemptions reduce economic efficiency, ditching them would necessitate a big hike in benefits and a major uplift in the minimum wage, which would be far more damaging to the economy’s performance and ability to create jobs for the low-skilled. It’s a stupid idea and one which would destroy any government that sought to implement it, with zero real net benefit. It would be a horrendous waste of precious political capital that ought instead to be invested in real reform of the public sector.
And an increase in energy taxes.
The report also calls for a greater reliance on so-called Pigouvian taxes, which are supposed to discourage externalities and behaviour which inflicts costs on others. It mentions higher taxes on carbon and on congestion as examples. But what this really means is that the IMF is advocating a massive tax increase on motorists, even though there is robust evidence which suggests that they already pay much more, in the aggregate, than any sensible measure of the combined cost of road upkeep and development, pollution and congestion.
And higher property taxes.
It gets worse: these days, one cannot read a document from an international body that doesn’t call for greater taxes on property. This war on homeowners is based on the faulty notion that taxing people who own their homes doesn’t affect their behaviour, which is clearly ridiculous. This latest missive from the IMF doesn’t disappoint on this front: it calls for the revaluation of property for tax purposes, which is code for a massive increase in council tax for millions of homes, especially in London and the home counties.
Understandably, Allister is not thrilled by the IMF’s proposed tax orgy.
The tax burden is already too high; increasing it further would be a terrible mistake. The problem is that spending still accounts for an excessively large share of the economy, and the political challenge is to find a way of re-engineering the welfare state to allow the state to shrink and the private sector to expand. The model should be Australia, Switzerland or Singapore, countries that boast low taxes and high quality services.
And I particularly like that Allister correctly pinpoints the main flaw in the IMF’s thinking. The bureaucrats look at deficits and they instinctively think about how to close the gap with tax hikes.
That’s flawed from a practical perspective, both because of the Laffer Curve and because politicians will respond to the expectation of higher revenue by boosting spending.
But it’s also flawed from a theoretical perspective because the real problem is that the public sector is far too large in all developed nations. So replacing debt-financed spending with tax-financed spending doesn’t address the real problem (even if one heroically assumes revenues actually materialize and further assumes politicians didn’t exacerbate the problem with more spending).
Here’s a remedial course for politicians, international bureaucrats, and others who don’t understand fiscal policy.
With occasional exceptions such as Switzerland and Estonia, there’s rarely good news from Europe. At least with regards to fiscal policy.
But maybe there’s a bit of sense on the Iberian Peninsula. I reported a couple of years ago that Portugal was at least flirting with the notion of lower tax rates and spending restraint.
The Wall Street Journal is reporting that the government plans to lower tax rates on both personal income and corporate income.
Spanish leaders who broke their no-new-taxes pledge after taking office 2½ years ago announced sweeping tax cuts on Friday, saying it was time to compensate a recession-battered populace for its sacrifices and boost a nascent recovery. Budget Minister Cristóbal Montoro, announcing the government’s main economic initiative of the year, said the planned reductions of income and corporate taxes will stimulate investment, creating jobs and making Spanish companies more competitive abroad. …Spain’s corporate tax rate would drop from 30% to 25% by 2016. People earning more than €300,000 ($408,000) a year would see their personal income-tax rate fall from 52%, one of the highest in Europe, to 45% in 2016. …The cuts announced Friday would by 2016 bring income-tax rates back to their pre-2012 levels for high-income earners and lower them slightly for low-income earners.
For what it’s worth, I don’t think the tax cuts will happen – or at least won’t be durable – unless Spain’s politicians also impose some long-run spending restraint.
Since we’re on the topic of international tax developments, let’s shift to another story.
If you want hard-core tax enforcement, beyond the fantasies of even the IRS, then it’s hard to beat the ISIS crowd in Iraq.
Let’s not give the IRS any ideas
Here some of what the New York Timesreported on that group’s “tax” regime.
Behind the image of savagery that the extremists of the Islamic State in Iraq and Syria present to the world, as casual executioners who kill helpless prisoners and even behead rival jihadis, lies a disciplined organization that employs social media and sophisticated financial strategies in the funding and governance of the areas it has conquered. …Once in charge, they typically levy “taxes,” which are just as lucrative. So-called road taxes of $200 on trucks are collected all over northern Iraq to allow them safe passage. The Iraqi government claims that the insurgents are now levying a “tax” on Christians in Mosul, who were a significant minority there, to avoid being crucified.
Hopefully, this is just a short-run aberration and not a new idea that will spread to other nations.
Though politicians in other countries already have demonstrated that they’re willing to innovate when it comes to extracting money from their citizens.
Showing amazing capacity for innovation, Pakistan’s tax authority hires transgendered people to encourage (presumably homophobic) taxpayers to cough up more money.
The tax police in England have floated a proposal to have all paychecks go directly to the tax authority, which would then decide how much gets forwarded to taxpayers.
And since we’re talking about the United Kingdom, that nation’s despicable political class wants to improve compliance by indoctrinating kids to snitch on their parents.
Speaking of snitches, tax authorities in both the state of New York and the city of Chicago have programs encouraging neighbors to rat our neighbors.
And New York also has won a case to treat lap dances – for purposes of sales tax – as a service rather than art.
And who among us isn’t impressed that the German tax authorities have figured out how to levy a prostitute tax using parking meters.
Just remember that politicians view any money you earn as either a current tax obligation or a potential source of future revenue.
Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity.
Greece, Italy, and Spain, by contrast, are among those that increased the size of the public sector. So the argument presented in the New York Times is completely wrong. Indeed, it’s 100 percent wrong because Iceland (which Professor Gurdgiev didn’t measure since it’s not in the European Union) also has smaller government today than it did in the pre-crisis period.
But that’s just part of the problem with the Stuckler-Basu column. They want us to believe that “slashed” budgets and inadequate spending have caused “worse health outcomes” in nations such as Greece, Italy, and Spain, particularly when compared to Germany, Iceland, and Spain.
But if government spending is the key to good health, how do they explain away this OECD data, which shows that government is actually bigger in the three supposed “austerity” nations than it is in the three so-called “stimulus” countries.
Once again, Stuckler and Basu got caught with their pants down, making an argument that is contrary to easily retrievable facts.
But I guess this is business-as-usual at the New York Times. After all, this is the newspaper that’s been caught over and over again engaging in sloppy and/or inaccurate journalism.
If there was a prize for fighting back against tax authorities, the Italians would probably deserve first place. I’m not aware of any other country where tax offices get firebombed. The Italians also believe in passive forms of resistance, with tens of thousands of boat owners sailing away to protect themselves from the government.
But the Spanish are beginning to get into the swing of things, perhaps because they are increasingly upset by the plethora of tax hikes imposed by the supposedly right-of-center government in Madrid.
Here’s part of a report from NPR about a new tax revolt on the Iberian Peninsula.
When the Spanish government hiked sales tax on theater tickets this past summer, Quim Marcé thought his theater was doomed. With one in four local residents unemployed, Marcé knew that even a modest hike in ticket prices might leave the 300-seat Bescanó municipal theater empty.
So what did he do to protect the theater from fiscal destruction?
Taxes are revolting, so why aren’t you?
“We said, ‘This is the end of our theater, and many others.’ But then the next morning, I thought, we’ve got to do something, so that we don’t pay this 21 percent, and we pay something more fair,” says Marcé in Spanish. …He…suddenly had an idea: Instead of selling tickets to his shows, he’d sell carrots. “We sell one carrot, which costs 13 euros [$16] -– very expensive for a carrot. But then we give away admission to our shows for free,” he explains in Spanish. “So we end up paying 4 percent tax on the carrot, rather than 21 percent, which is the government’s new tax rate for theater tickets.” Classified as a staple, carrots are taxed at a much lower rate and were spared new tax hikes that went into effect here on September 1.
Very clever. Senor Marcé is getting lots of praise for his novel approach, though it’s unclear whether the ravenous tax bureaucrats will come up with some sort of ruling to squash the tax revolt.
Spanish media have dubbed this the “Carrot Rebellion,” and the Bescanó theater has won kudos from arts advocates nationwide. Shows are sold out. …Marcé, the theater director, says he consulted a lawyer before launching his carrot sales. He’s got backing from the local mayor too. And no one has stopped him so far. …He says he’s a little worried the government might declare it illegal to sell carrots at theaters. But dozens of foods are considered “staples” and taxed at only 4 percent. So if that happens, Marcé says he might switch to selling tomatoes instead.
And if he has some leftover tomatoes that are rotten, perhaps they can be used – along with spoiled eggs and moldy cabbage – to express appreciation for any tax collectors that happen to visit (I won’t say what the carrots can be used for).
So why doesn’t the title of this post award “three cheers” for this Spanish tax revolt?
Well, as much as I admire non-compliance when tax systems are too onerous, I suspect that these Spaniards are protesting against the idea that they should pay for big government, but I wouldn’t be surprised to learn that they very much support a bloated welfare state if someone else is picking up the tab.
In other words, they’re probably hypocrites, and I wouldn’t be shocked to learn that their Irish and Greek compatriots also are protesting for the wrong reason.
Moreover, it’s not specified in the article, but I’m quite certain that the Spaniards actually are protesting in favor of tax distortions. The 4 percent tax on carrots and other “staples” presumably is a special exception to the normal value-added tax of 21 percent.
If they were protesting the VAT, I would give them three cheers, but if they’re simply protesting the fact that theater tickets are now treated the same as most other forms of consumption, then I’m tempted to give this tax revolt only one cheer.
But I’ll still give them two cheers because I’m in favor of just about anything that will reduce the amount of money diverted to finance government.
That’s because the real fiscal problem, in Spain and the United States, is that government is far too big. And trying to curb the rapacious appetites of politicians with a tax hike is akin to trying to cure a group of alcoholics by giving them the keys to a liquor store.
P.P.S. Just to cover my you-know-what, allow me to take this opportunity to stress that maximizing revenue should not be the goal of tax policy. I’m a big fan of the Laffer Curve, to be sure, but policy makers should target the growth-maximizing point.
Not that it makes any difference. I’m slowly coming the conclusion that my friends on the left will never learn – in large part because they’re more interested in punishing success with class warfare tax policy than they are in collecting extra revenue for government.
But surely there are some statists who are motivated by emotions other than spite, so I refuse to give up. Let’s look at some evidence from Spain to further confirm that high tax rates aren’t necessarily the way to maximize tax revenue (this also is a story showing that tax competition between nations is a good way of disciplining governments that are too greedy, but that’s another issue).
Spain’s corporate tax take has tumbled by almost two thirds from pre-crisis levels as small businesses fail and a growing number of big corporations seek profits abroad to compensate for the prolonged downturn at home. …Spain has a headline corporate tax rate of 30 percent, broadly in line with other large European economies. Switzerland, however, has a headline rate of 8.5 percent, and lawyers say deductions can be made to reduce this further. “A fundamental right of EU law is the freedom of establishment. All companies and taxpayers look after their tax affairs, and if they can pay a lower rate somewhere else, it’s better for their business and natural that they would do so,” a global tax lawyer based in Spain said. …Rajoy did eliminate some corporate tax breaks in 2012, a policy he will continue in 2013, and has also brought forward some tax payments, though that could be storing up problems.
The one tax rate that hasn’t been increased, though, is the top rate of corporate tax. So how can this be a story about the Laffer Curve?
Well, sometimes standing still is a recipe for defeat. And sometimes moving in the right direction isn’t enough when everybody else is going in the right direction at a faster rate.
Here’s a chart showing changes in the average EU corporate tax rate compared to Spain’s corporate tax rate.
Spain’s corporate tax rate has dropped by five percentage points. That’s progress, but other nations have moved more rapidly in the right direction. Back in 1995, the Spanish corporate rate was slightly lower than the EU average. Now it’s noticeably higher.
And as the excerpt above notes, there are nations such as Switzerland that have far lower tax rates and much better fiscal policy.
To be sure, Spain’s main challenge is the need to dramatically reduce the burden of government spending. That will help long-run growth because more resources will be allocated by private markets.
But Spain also should seek an immediate boost to growth by reducing tax rates on productive behavior. A lower corporate tax rate should be part of the answer.
With the exception of a few top-notch thinkers such as Pierre Bessard and Allister Heath, there are very few people in Europe who can intelligently analyze public policy, particularly with regard to fiscal issues.
I don’t know if Fredrik Erixon of the Brussels-based European Centre for International Political Economy is even close to being in the same league with Pierre and Allister, but he has a very good article that correctly explains that government spending and the welfare state are the real fiscal problems in Europe.
When it comes to overspending on social welfare, …Europe has no angels. Even the “good” Scandinavians, and governments that appeared to be in sound fiscal shape in 2008, …were spending too much and will have to restructure. …Greece, Ireland, Portugal and Spain…are in many ways different, but they have three important characteristics in common. …government spending in those nations grew at remarkably high rates. In Greece and Spain, nominal spending by the state increased 50 percent to 55 percent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 percent; in Ireland, almost 75 percent. No other country in Western Europe came close to these rates.
In any event, Mr. Erixon also has the right prognosis. The burden of the welfare state needs to shrink. And he seems reasonably certain that will happen.
Europe’s crisis economies will now have to radically reduce their welfare states. State spending in Spain will have to shrink by at least a quarter; Greece should count itself lucky if the cut is less than a half of the pre-crisis expenditure level. The worse news is that this is likely to be only the first round of welfare-state corrections. The next decade will usher Europe into the age of aging, when inevitably the cost of pensions will rise and providing health care for the elderly will be an even bigger cost driver. This demographic shift will be felt everywhere, including in the Nordic group of countries that has been saved from the worst effects of the sovereign-debt crisis. …Europe’s social systems will look very different 20 years from now. They will still be around, but benefit programs will be far less generous, and a greater part of social security will be organised privately. Welfare services, like health care, will be exposed to competition and, to a much greater degree, paid for out of pocket or by private insurance. The big divide in Europe won’t be between North and South or left and right. It will be between countries that diligently manage the transition away from the universal welfare state that has come to define the European social model, and countries that will be forced by events to change the hard way.
I’m not quite so optimistic. While I agree that current trends are unsustainable, I fear that the “optimistic” scenario is for governments to semi-stabilize their finances with both taxes and spending consuming about 50 percent of gross domestic product.
That’s obviously far beyond the growth-maximizing size of government, which means European nations – on average – would be condemned to permanent economic stagnation. Some of the nations that have very laissez-faire policies in areas other than fiscal policy, such as the Nordic nations, might experience some modest growth, but that would be offset by permanent recession in nations that have both big government and lots of intervention.
Late last year, Spanish voters kicked out a socialist government and elected a new government led by the supposedly conservative People’s Party.
Is that translating into smaller government and more freedom? Doesn’t look that way. It seems that Spanish right-of-center politicians are just as useless and statist as the faux conservatives in Germany, France, and the United Kingdom.
The ballots haven’t even gotten cold and the new government is proposing a bevy of new taxes. Here are some of the grim details from Tax-news.com, including a class-warfare increase in the top tax rate.
…the incoming Spanish government, headed by Mariano Rajoy, is to introduce higher taxes from 2012 contrary to the party’s pre-election pledge. …The government has announced numerous tax hikes worth EUR6.2bn, for introduction in 2012, including income tax increases across the board, ranging from a 0.75% increase in the tax rate applicable on income of EUR9,500, to a 7% hike for those earning above EUR300,000. Savings income will also be subject to higher taxes under the proposals. Personal savings of up to EUR6,000 will be subject to a 2% rate; with additional rates of 4% on savings income up to EUR24,000 and 6% above this threshold.
By the way, all these tax hikes are in addition to an increase last year in the value-added tax, which was boosted from 16 percent to 18 percent.
Could it be, though, that tax increases are necessary because Spain has already cut spending? As you might imagine, that’s a joke.
According to OECD data, government spending jumped from 39.2 percent of GDP in 2000 to 45.6 percent of GDP in 2010. Equally relevant, EU data shows that government spending almost doubled in the past 10 years.
In other words, Spain is screwed. The new government is just as bad – or perhaps even worse – than the previous government. I wrote two years ago that Spain was in trouble because of over-spending and I see no reason to change my analysis now. Actually, I have changed my analysis. Spain is going down the toilet even faster.
Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.
We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.
But which nation will be the next domino to fall? Who will get the next direct bailout?
Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.
But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.
Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart (2011 data) shows the same countries, and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).
Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.
Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.
By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.
The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.
The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.
Like other forms of so-called stimulus spending, the money devoted to supposed “green” energy programs has been a net drain on the economy. This is hardly a surprise, particular since the much-trumpeted Spanish experiment turned out to be a flop, destroying two jobs elsewhere in the economy for every green job created. But what is surprising is that the political crowd in Washington seems to be getting the message. The Washington Times reports that even the left if backing away from flushing more money down this hole.
Noticeably absent from President Obama’s latest economic-stimulus package are any further attempts to create jobs through “green” energy projects, reflecting a year in which the administration’s original, loudly trumpeted efforts proved largely unfruitful. The long delays typical with environmentally friendly projects – combined with reports of green stimulus funds being used to create jobs in China and other countries, rather than in the U.S. – appear to have killed the administration’s appetite for pushing green projects as an economic cure. …Peter Morici, a business professor at the University of Maryland, said much of the green stimulus funding was “squandered.” “Large grants to build green buildings don’t generate many new jobs, except for a few architects,” he said. “Subsidies for windmills and solar panels created lots of jobs in China,” but few at home. …Despite the massive infusion of government funding in recent years, renewable technologies have captured only a tiny share of the energy market and remain heavily dependent on government funding to be viable. Because of the need to constantly renew government funding, private investors remain skittish about committing to new projects.
I arrived in Madrid yesterday for a speech to the annual Convention of Independent Financial Advisors, and it is somehow fitting that Spain was downgraded by Standard and Poor’s as I entered the country. I’m not a fan of the bond-rating agencies, and the fact that it has taken so long for Spain to be downgraded simply reinforces my skepticism about their value. So let’s focus instead on identifying the sources of Spain’s fiscal crisis. If you look at the OECD’s fiscal database, you will see that Spain’s short-run problem is solely the result of a growth in the burden of government spending. Over the past seven years, the budget in Spain has skyrocketed from 38.4 percent of GDP to 47.2 percent of GDP. And since tax revenues have stayed the same as a share of national economic output, it is difficult to see how anyone can conclude that the fiscal crisis is the result of inadequate revenue. In the long run, the problem also is excessive government spending, largely because demographic factors such as an aging population will push up outlays for pensions and health care.
In other words, Spain is in trouble for the same reason that Greece is in trouble. Government is too big and politicians are unwilling to take the modest steps that are needed to rein in dependency. This, of course, is exactly why there should not be a bailout. Subsidizing Greek politicians and Spanish politicians – regardless of whether the bailout comes from German taxpayers and/or the IMF – will send a signal to other European nations that there is an easy way out. But the “easy way out” simply postpones the day of reckoning and makes the eventual adjustment much more challenging. Here’s an excerpt from the Washington Post report:
European and International Monetary Fund officials on Wednesday were considering a dramatically increased $158 billion bailout package for Greece as the country’s debt crisis continued to ripple across Europe, with Standard & Poor’s downgrading the credit rating on Spain, the continent’s fourth-largest economy. …In Europe, the most intense focus remains on Greece, but fears were intensifying elsewhere, especially in Portugal and Spain. Though analysts noted that both countries are in better shape than Greece — with lower ratios of debt — they both shared large fiscal deficits and poor long-term economic prospects. On Wednesday, the government in Portugal announced that it would move up a program of painful spending cuts to shrink its budget deficit and shore up confidence amid signs that fearful depositors were moving capital out of Lisbon banks. After lowering Greek debt to junk bond status on Tuesday, Standard & Poor’s kept Spain at investment grade status, but lowered its rating one notch, to AA.
Over the past eight years, government spending has grown much faster than the private sector, thus violating the Golden Rule of fiscal policy.In a reversal of fortunes, the laggards have become leaders. Greece, Spain and Portugal grew in 2023 more than twice as fast as the eurozone average. Italy was not far behind. …southern European countries made crucial changes that have attracted investors, revived growth and…reversed record-high unemployment. Governments cut red tape and corporate taxes to stimulate business and pushed through changes to their once-rigid labor markets, including making it easier for employers to hire and fire workers.
He called for a vanguard of countries that would lead the eurozone, which should have its own government, a “specific budget” and its own parliament. …French prime minister Manuel Valls Sunday said…France would prepare “concrete proposals” in the coming weeks. “We must learn the lessons and go much further,” he added, referring to the Greek crisis.
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