Yesterday, I posted about the “bait and switch” of using the word “austerity”. I made the point that tax increases are not part of the word, it’s meaning, nor implementation. It is the tax increases which are impeding the economic progress in so many nations today.
So, I’ve come across Dan Mitchell’s latest offering, and among other points, he makes the same case.
Moreover, they all imposed crippling tax hikes. Indeed, the tax increases in Greece were so severe that even the International Monetary Fund warned that the country might be past the Laffer Curve revenue-maximizing point.
So while long-overdue reductions in spending meant less money was being diverted from the economy’s productive sector, higher tax rates have discouraged entrepreneurs and investors from creating jobs and wealth.
I would, at this point quibble with Mitchell. The tax increases themselves are, in fact, diverting money from the economy’s productive sector. But, even here, we see Dr. Mitchell making the distinction between cuts (austerity) and tax increases.
So what’s the net effect?
From an optimistic perspective, the fiscal situation should stabilize if governments keep spending under control. Some additional spending cuts would be very desirable since government spending consumes 45 percent-50 percent of GDP in these nations, which is at least double the growth-maximizing level.
But even if these nations merely abide by Mitchell’s Golden Rule and restrain spending so that it grows slower than the private sector, that would be progress.
The reason I’m not optimistic, though, is that I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden.
He doesn’t sense there is any commitment because there isn’t any commitment. There isn’t even a discussion about where the limits of government spending lie.
Mitchell gave an interview with Canadian TV…. you can see the video at the link I provided.
The ostensible topic was European-wide financial regulation, but that topic is really a proxy for the fact that some nations want to bail out their financial sectors. But they’re in such lousy fiscal shape that they can’t borrow the money that would be needed to prop up their dodgy banks.
So I pointed out that European-wide regulation wasn’t the right answer. It wouldn’t make banks safer (since it would be based upon the deeply flawed Basel regulations), but could become a vehicle for nations such as Germany to further subsidize countries such as Spain.
But I hope I got across my main point, which is that these nations are burdened with too much government and their problems won’t be solved with more handouts, regulation, or bureaucracy.
In other words, there’s no substitute for genuine spending cuts implemented by the nation states of Europe.
And this is the problem with the Eurozone and other economic vehicles around the world. Sure, Germany has the money to float Spain for a while, but this is borrowing on time. There has been no real recognition as to what the real problem is. There isn’t really a magic percentage or number to place on government spending. (Unless you’re like me and state that we always need to balance the budget.) The nations in trouble and even the nations lending and the nations printing (such as the US), none have the fortitude to actually state what the problem is.
The entire Western civilization has spent itself into a hole it can’t get out without significant reforms. But, we can’t get to real reforms until they articulate what is happening. We all have spent or will spend beyond our means to pay for the spending. We’ve gone so far as to have written it in law. The spending isn’t sustainable. It isn’t a matter of getting our economies going again. Once they do, without recognition of the problems we face, we will simply spend more of the additional earnings a good economy provides.
The France graph enlarged for key….
The more a nation spends, the more the nation needs to tax to cover the spending. The more a nation taxes, the more “needs” it creates among the populace. The more “needs” identified, the more spending occurs…. the more taxes required…. it never stops.
It isn’t fiscal reform which is needed it is a reform of thought which is required.