Tag: europe

Where Are the European Spending Cuts?

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Austerity in Europe

Here are some of his conclusions from reviewing the data:

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country - where protests are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Margaret Thatcher and the Battle of the 364 Keynesians

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

The Hagel Hearings: Congressional Politics at Its Worst

The confirmation hearings on Chuck Hagel’s nomination to head the Pentagon are mercifully over. His wobbly performance earned derision among neoconservatives, but he responded as they intended to an interrogation that was all about politics, not policy. 

As I have noted before, Hagel is under fire because he disputed neoconservative nostrums to speak unpleasant truths to the Republican Party. He was an orthodox conservative, including on foreign policy. However, he was an Eisenhower, not a Dubya, Republican: Hagel criticized the debacle in Iraq, urged negotiation to forestall Iran from developing nuclear weapons, and backed reductions in today’s bloated military budget. General turned President Dwight Eisenhower could not have put it better. 

But this enraged a GOP that has turned perpetual war into its most important foreign policy plank. Hence the ludicrous attempt to paint him as an anti-Semite. Only slightly less dishonest was the performance of Hagel’s Republican interlocutors in the Senate, who asked the sort of questions which could not be honestly answered without wrecking the political façade behind which legislators on both sides of the aisle hide. His performance was disappointing, but far more striking is the fact that the uber-hawks who badgered him over every past statement exhibited little interest in exploring the most important challenges facing America. 

Consider the analysis of questions from Rosie Gray and Andrew Kaczynski at Buzzfeed.  They counted 166 questions about Israel—an important ally, but more important than every other ally combined? There were 144 questions about Iran. No one wants Tehran to build nukes, but U.S. intelligence does not believe Iran has an active weapons program and there is no evidence that the Iranian government cannot be deterred, as were Joseph Stalin and Mao Zedong. Surely there are options short of war. And is Iran that much more important than Afghanistan, where Americans continue to die, which rated only 20 questions? Sen. John McCain (R-AZ) fixated on Iraq, an invasion that should never have been launched, irrespective of the impact of the “surge.” And from which, if he hadn’t noticed, U.S. troops have been withdrawn. 

Nothing else received serious attention at the hearings. Not how to adjust America’s foreign policy to reflect inevitable Pentagon budget cuts, since Washington no longer can afford to police the globe. Not China, including the worrisome possibility of war between Japan and China over worthless islands in the Sea of Japan. Not North Korea and the enduring challenge of dealing with the world’s most malign actor.  

Not Europe, which continues to under-invest in the military while relying on America for its defense. Not Africa, where the U.S. is steadily being drawn into more conflicts. Not Russia, which, despite the difficult bilateral relationship, has been helpful in Afghanistan and Iran. Not Venezuela, where the possible death of Hugo Chavez could open up opportunities for reform and engagement with America.

And the neoconservatives claim to be serious about international issues and military capabilities. 

Chuck Hagel is eminently qualified to be Secretary of Defense. As my colleague Chris Preble has noted, Hagel’s thinking is mainstream and noncontroversial. Obviously, one can disagree with him on particular issues, such as the possibility of nuclear disarmament.  However, the president still will make the ultimate decisions. Hagel will bring a fresh perspective to administration discussions of foreign and military policy. That is reason enough to welcome him to the Pentagon. 

America’s European Diplomacy: A Bull in a China Shop

The U.S. government appears to be pathologically unable not to interfere in matters foreign as well as domestic. According to the Sun, the Obama Administration has warned the British government not to hold a referendum on remaining a part of the European Union. The U.S. assistant secretary for Europe Philip Gordon said that, “We have a growing relationship with the EU, which has an increasing voice in the world, and we want to see a strong British voice in it. That is in America’s interests.” He added that, “Referendums have often turned countries inward.”

Predictably, the British are annoyed. Bernard Jenkin, a Conservative Party member of Parliament said:

“The Americans don’t understand Europe. They have a default position that sometimes the United States of Europe is going to be the same as the United States of America. They haven’t got a clue.”

Another parliamentarian, Peter Bone, said that Gordon should “butt out” and that the British membership of the EU had “nothing to do with the Americans.” “It’s quite ridiculous,” he added, “and it’s not what you’d expect from a member of the senior executive in the USA.”

Quite so! After all, how would Americans feel if the British government opined about U.S. membership in NAFTA? Would they not be a bit “miffed?” Not too long ago, the then-secretary of state Condoleezza Rice urged the Europeans to accept Turkey as an EU member state. Again, how would Americans feel if the Europeans urged the U.S. government to make Mexico America’s 51st state?

Moreover, is it really a good idea for the U.S. government to be dissuading foreign governments from consulting their people on matters of national interest? Not quite democratic, is it?

Finally, consider the astonishing brazenness of America’s government officials. Note that Gordon did not say that British membership of the EU was in the British interest. Instead, he simply stated that the British membership of the EU was in America’s interest. That, presumably, settles the matter for everyone. Gordon’s behavior is worthy of a Roman proconsul throwing his weight around some impoverished province on the edge of the world. It is not what people expect from a White House administration that supposedly wishes to correct the foreign policy mistakes of the previous one.

Is Secession a Good Idea?

I’m not talking about secession in the United States, where the issue is linked to the ugliness of slavery (though at least Walter Williams can write about the issue without the risk of being accused of closet racism).

But what about Europe? I have a hard time understanding why nations on the other side of the Atlantic should not be allowed to split up if there are fundamental differences between regions. Who can be against the concept of self-determination?

Heck, tiny Liechtenstein explicitly gives villages the right to secede if two-thirds of voters agree. Shouldn’t people in other nations have the same freedom?

This is not just a hypothetical issue. Secession has become hot in several countries, with Catalonia threatening to leave Spain and Scotland threatening to leave the United Kingdom.

But because of recent election results, Belgium may be the country where an internal divorce is most likely. Here are some excerpts from a report in the UK-based Financial Times.

Flemish nationalists made sweeping gains across northern Belgium in local elections on Sunday, a success that will bolster separatists’ hopes for a break-up of the country. Bart De Wever, leader of the New Flemish Alliance (NVA), is set to become mayor of the northern city of Antwerp, Belgium’s economic heartland, after his party emerged as the largest one, ending about 90 years of socialist rule. …The strong result recorded by the Flemish nationalist is likely to have an impact across Europe, where the sovereign debt crisis, which has seen rich countries bail out poor ones, has revived separatist sentiment throughout the continent. Flanders, which is the most economically prosperous region of Belgium, has long resented financing the ailing economy of French-speaking Wallonia, and Sunday’s victory will strengthen its demand for self-rule. Lieven De Winter, a political scientist at Université Catholique de Louvain, said that Mr De Wever’s victory was a clear step forward for separatists who had long been campaigning for secession from the southern part of the country.

Purely as a matter of political drama, this is an interesting development. We saw the peaceful split of Czechoslovakia into the Czech Republic and Slovakia about 20 years ago. But we also saw a very painful breakup of Yugoslavia shortly thereafter.

Belgium’s divorce, if it happened, would be tranquil. But it would still be remarkable, particularly since it might encourage peaceful separatist movements in other regions of other nations.

I think this would be a welcome development for reasons I wrote about last month. Simply stated, the cause of liberty is best advanced by having a a large number of competing jurisdictions.

I’ve opined about this issue many times, usually from a fiscal policy perspective, explaining that governments are less likely to be oppressive when they know that people (or their money) can cross national borders.

Belgium definitely could use a big dose of economic liberalization. The burden of government spending is enormous, consuming 53.5 percent of economic output - worse than all other European nations besides Denmark, France, and Finland. The top tax rate on personal income is a crippling 53.7 percent, second only the Sweden. And with a 34 percent rate, the corporate tax rate is very uncompetitive, behind only France.

Sadly, there’s little chance of reform under the status quo since the people in Wallonia view high tax rates as a tool for extracting money from their neighbors in Flanders. But if Belgium split up, it’s quite likely that both new nations would adopt better policy as a signal to international investors and entrepreneurs. Or maybe the new nations would implement better policy as part of a friendly rivalry with each other.

So three cheers for peaceful secession and divorce in Belgium. At least we know things can’t get worse.

P.S. Brussels is the capital of Belgium, but it is also the capital of the European Union. Don’t be surprised if it becomes some sort of independent federal city if Flanders and Wallonia become independent. Sort of like Washington, but worse. Why worse? Because even though Washington is akin to a city of parasites feasting off the productive energy of the rest of America, Brussels and the European Union are an even more odious cesspool of harmonization, bureaucratization, and centralization, richly deserving of attacks from right, left, and center.

Nobel Peace Prize to the EU Is a Farce

The Nobel Peace Prize Committee has awarded the 2012 Nobel Peace Prize to the European Union for “keeping peace in Europe.” The committee has now turned the award into a farce. But few people are laughing.

The Committee has ignored the important role that the North Atlantic Treaty Organization (NATO) and the United States have played in keeping Europe at peace throughout the Cold War. While it is true that the free trade agreements among the EU countries have led to more prosperity and cooperation, other EU initiatives have exacerbated Europe’s problems and ancient animosities.

Decision making in the EU lacks basic transparency and accountability. As shown by the Danish, French, Dutch, and Irish referenda, the EU has nothing but contempt for disagreement and opposition. The European common currency is in existential crisis. Periodic bailouts, which are needed to keep the eurozone together, have led to riots and loss of life. The EU today is deeply unpopular and distrusted. Corruption, scandals, and cynical abuses of power by EU officials are pervasive.

This is the troubling reality of the EU that should not be ignored. Unfortunately, the Nobel Peace Prize Committee has decided to look the other way.

Here is a related podcast.

Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.