November 1, 2014

Austerity? Europe never even got there.

Just because France and Greece have decided, by majority vote, that they don’t want to cut down the welfare state does not mean that they can afford to continue spending. Nor does it mean, as Democrats would have you believe,  that cutting the deficit is a bad idea.

All it means is that a majority of voters in France (about 51.8%...not exactly a resounding mandate) picked Socialist Hollande and his promise to end “austerity.”  Meanwhile,  in Greece, where unemployment is well over 20%, Coalition for the Radical Left  leader Alexis Tsipras, when given the opportunity to form a governing majority, thumbed his nose at the holders of Greece’s debt and edged his country closer to national bankruptcy.

World markets responded accordingly…meaning, European stocks dropped when investors fled, taking their money to places where people actually face reality with seriousness.  Places that don’t rhyme with “syrup.”

None of this means, however, that “austerity” is wrong.

In fact, it’s not even clear that Europe has even entered the phase of “austerity” programs where austerity happens. Taxes have been raised on the wealthy, says Michael Tanner, but austerity programs won’t actually kick in for several years.

For example, France will raise its retirement age from 60 to 62, but not until 2017! A cap would also be put on government health-care spending, starting next year. It is a little hard, therefore, to discern whether it is budget cuts that may or may not happen some day in the future, rather than tax increases today, that have slowed French economic growth.

Or take Britain, where the Tory-Liberal coalition recently suffered a drubbing in local elections, in part as a reaction to so-called austerity measures. Among the Cameron government’s first “austerity” measures was to hike the personal income tax to 50 percent for those earning more than £150,000 a year. That measure managed to actually decrease income-tax revenues by £509 million. The U.K. did trim government payrolls and cut back on some government programs, but British government spending still consumes more than 49 percent of GDP. Government spending actually increased by £59.2 billion from 2009 to 2011.

It’s a “tax today and maybe we’ll cut entitlements in the distant future” type approach. There’s no austerity happening. Just promises austerity accompanied by immediate increases in tax rates on the wealthy and middle-class. Says Tanner

  • Spain: imposed a “wealth tax” on citizens with €700,000 of assets, and a 7 percent income tax on those earning more than €300,000 per year; capital-gains taxes were also hiked.
  • Italy: imposed a “Solidarity Tax” of 3 percent on all taxpayers who earn more than €300,000.
  • Greece: increased taxes by nearly twice as much as it cut spending, including a 5 percent surtax on the wealthy.
  • On the middle-class Europe-wide: VAT hikes,  as well as tax increases on fuel, alcohol, and tobacco.

Any wonder why European stocks dropped yesterday? No one wants to invest in a country–or a continent–where their investment isn’t going to grow and in fact faces a very real likelihood of being taken, too.

This shouldn’t be a debate over “raising taxes” and the “cutting taxes.” Rather, it should be about government spending less so that the tax burden on business is not so heavy. The way to growth is to make it easier, and cheaper, for businesses to grow, there by putting more money into the pockets of individuals to spend. You can’t with one hand run up big surpluses and with the other hand raise taxes or print more money. The result is a net loss, especially to those who can afford to save less.

Europe never stopped spending, at least not less than it taxed. Greece and France are going that reality really is non-negotiable. Especially when Germany, who holds the cards, tells them ‘no’ to new bailouts.

“Greece can rely on the solidarity of Europe, but if Greece does not help itself, there is nothing to be done,” German Finance Minister Wolfgang Schaeuble told a news conference.

“Whether Greece is ready to do what is necessary – only the Greek people can decide.”

When it comes down to it, the Democrats in America can point to the votes in France and Greece as for why cutting government won’t put people back to work. At the end of the day, though, Democrats are wrong. Three years of spending has not brought about real change in our employment or our wealth creation. We are still at around 15% unemployed (when counting those who are underemployed or no longer seeking work).

 

[CBS] [CNBC] [Christian Science Monitor] [CATO]