Tagged: The Welfare State

Fiscal Panic in Argentina

Of all the countries around the world that have tried to embrace the European welfare state, Argentina is perhaps the most tragic example. From the 1920s through the 1950s the Argentine economy was one of the strongest in the world, and there were years when Argentina attracted more immigrants from Europe than the United States did. But what could have become a formidable economic powerhouse caved in to the ideas of the welfare state. As the economy began declining, social and economic stability evaporated and Argentina suffered decades of political turmoil.

The long-term suffering of the Argentine people, and of many other South American countries, is a stark warning to today’s Europeans: their continent could become the same tragedy in the 21st century that South America was in the last century. Unfortunately, the Europeans refuse to hear the warning bells from recent history, so we might just as well pile on yet another story, on top of the ones already published about the crumbling Argentine economy and what brought it down. This one is from Bloomberg.com:

Argentina reduced government subsidies on natural gas and water by an average 20 percent in a bid to narrow the largest fiscal deficit in more than a decade. The government could save as much as 13 billion pesos ($1.6 billion) and will use proceeds to cover utility company costs and finance social spending, Economy Minister Axel Kicillof and Planning Minister Julio De Vido said today at a press conference in Buenos Aires. The cuts won’t apply to industrial users.

And the reason for the big deficit?

President Cristina Fernandez de Kirchner has boosted social spending since taking office in 2007 and left utility rates largely unchanged amid average annual inflation of about 25 percent, straining the finances of power distribution companies and leading to periodic blackouts.

If you live in California (which, thank my tax God, I don’t) you recognize this behavior. Back in the ’90s the state of California wanted to compassionately make sure that everyone could always pay their utility bills. So they regulated the price that utility companies could sell power for to households, but imposed no price regulations on the market where utility companies buy power from power producers. As a fourth-grader could have figured out, if the regulated price in the retail end was too low, on average utility companies would be buying power at a market price that exceeded the retail price they could charge.

The result? Rolling black-outs, no investments to improve either power production or power delivery, and in the end mounting costs for everyone in the back end when the entire power infrastructure needed massive upgrades anyway. (It did not help that California at the time was falling for the global warming delusion and chasing low-cost, fossil-based fuel out of the state.)

Now, Argentina finds itself in the exact same situation. But even more importantly, the Argentine government’s focus on entitlement spending is a stark parallel to Europe. Utility price regulation, which varies from country to country in Europe, is just another form of welfare-state intervention into the private sector. When coupled with the general plethora of entitlement programs that normally comes with welfare states, the subsidy becomes just another entitlement.

As Argentina demonstrates, this has consequences when government runs into fiscal trouble. Just like every welfare state the Argentine version combines spending determined by political preferences with revenues determined by a private sector, i.e., struggling entrepreneurs and tax-burdened consumers. Entitlement spending has a strong tendency to outgrow its revenues – in fact, I am working on an article for an academic journal defining a law that shows that welfare-state entitlement programs inevitably outspend their revenue – but politicians favoring the welfare state never realize that this is actually happening. Inevitably, therefore, they run into deficit problems, but since the politicians do not see this coming they are caught by surprise and react with fiscal panic.

There are three ways that fiscally panicking politicians can respond:

1. Buy time. This means, borrowing as much as they can. When they cannot borrow any more money by flooding the world with their Treasury bonds, they print money and have the central bank buy the Treasury bonds instead. If this happens in an economy with a stable financial system and a limited system of cash entitlements, the money printing will not cause high inflation. If on the other hand cash entitlements are comparatively important for daily consumer spending, then printing money to fund them opens a dangerous transmission mechanism for the money supply to cause high inflation.

2. Raise taxes. No longer a viable option, other than marginally. There is a fair amount of research that shows that voters in both Europe and North America grew tired of constantly rising taxes already back in the 1970s. Since then, an increasing share of the growth in government spending has been deficit-funded. The same is true in Argentina.

3. Cut spending. Since most politicians in our modern welfare states want to preserve the welfare state one way or the other, they do not want to eliminate entitlement programs. But when tax revenues do not grow as fast as they would want it to they are forced to downsize the welfare state to fit within a tighter revenue framework. This means chipping away at entitlements that people have gotten used to and based on which they plan their family finances.

For common-sense minded economists and politicians this means a good opportunity to prudently reform away the welfare state. “Just cutting spending, damn it” is not the way forward, but a structurally sound phase-out model can do wonders.

Leftists, on the other hand, go even deeper into panic. Bloomberg.com again:

Argentina, which has subsidized utilities since 2003, wants to cut aid from about 5 percent of gross domestic product to 2 percent of GDP and make higher income earners pay more for their utilities, Cabinet Chief Jorge Capitanich said March 12. “In 2003 the need for subsidies was clear,” Kicillof said in reference to the period after the nation’s $95 billion default and economic crisis. “Argentina isn’t ending subsidies, just redistributing them.” For Argentine households, the increase in their gas bill may rise as much as 161 percent for the biggest consumers and 306 percent for water bills, according to a presentation distributed by the Planning Ministry.

“The Planning Ministry”… Why not just adopt the Soviet acronym GOSPLAN and get it over with? Humor aside, though, it is worth noting that the families who are now hit with enormous price increases still have to pay the same amount of taxes as before.

The way out, again, is not to restore the subsidies. The way out is to end the entitlement programs and return purchasing power to the private sector so that those who have grown dependent on government can actually support themselves. This, of course, won’t happen in Argentina. What will happen there instead is that consumers now will respond by cutting spending elsewhere, thus reducing economic activity in general. This has repercussions for the tax base, which again will take government by surprise. And the entire process is repeated, with the difference that it starts from an already lower level of economic activity.

Europe is not in as bad a shape as Argentina is. But if they continue down the current path of using spending cuts and tax increases to save the welfare state in tough times, they will perpetuate their own crisis – and thereby perpetuate the need for spending cuts and tax increases.

The end station? An economic wasteland where children grow up to be poorer than their parents. That is, in effect, where Argentina is today, and has been for a long time. Sweden has been there for a good two decades and other European countries are beginning to see that same economic wasteland on the horizon.

The Relentless Growth of Debt

The Great Recession has been a rockier ride for the economies of the Western world than any other economic crisis since the Great Depression. We are still not out of it, and there is no way of telling when Europe will recover – if ever. While the U.S. economy continues its moderate recovery, there are still no credible signs of a turnaround in Europe, where there is almost no GDP growth and very slow growth in consumer spending.

It is entirely understandable that the Europeans have not yet seen the light in the tunnel. Their focus during the recession has been to bring down government budget deficits, prioritizing a balanced budget over any other economic goal. But underneath the efforts to balance the budget there is another, less visible but nevertheless unrelenting agenda: to save the European welfare state.

The EU has propagated for, and imposed, austerity policies upon member states not because a balanced budget is inherently good, but because it makes the welfare state look fiscally unsustainable. During the 1980s, when Lady Thatcher led Britain back to the 20th century, Europe’s conservatives used budget deficits as an argument against big, redistributing entitlement programs. They had a point: government debt as share of GDP has been growing all over the Western world for almost half a century now. The following tables illustrate this. They report data from CESIFO, a German research institute, with the numbers illustrating a relationship between government debt as share of GDP in two different years. For example, in the first table, the number reported for Japan is 6.04 under the column title “1970 to 1990″. This means that the Japanese government’s debt in 1990, as share of GDP, was 6.04 times higher than it was in 1970. In other words, if the Japanese government’s debt in 1970 was ten percent of GDP, it would be 60.4 percent of GDP in 1990.

Consequently, any report of a number larger than 1.00 means that the debt ratio in that country has increased:

Debt ratios

Country selection is based entirely on data availability; not all countries have reported comparable data for the periods in question. However, for each period, the selection shows the same consistent trend of growing government debt. In the first period, from 1970 to 1990, debt grew in eleven of 13 countries. In the second period, 1975-1995, debt grew in 14 out of 16 countries. In period three, 1980-2000, 14 out of 17 countries experienced debt growth. Finally, in the fourth period debt grew in 22 out of 28 countries.

The unrelenting growth in debt is closely associated with the welfare state. A good example: the Danish record-breaking growth in debt between 1975 and 1995 originates in an out-of-control expansion of entitlement programs in the 1970s and early ’80s. In the late ’80s Denmark went through a very painful period of austerity, with massive tax increases that in some ways crippled private consumption. Debt growth stopped, though, and in the early ’90s focus shifted toward tax cuts. As a result, the Danish debt ratio declined from 1995 through 2005.

Does the Danish example show that the welfare state is compatible with economic growth and prosperity? No, it does not. More on that in a later article. For now, enjoy the debt ratios and consider what they tell us about our generation’s sense of entitlement, especially vs. future generations.

Obama Spends Less than Reagan

While European politicians are busy declaring the end of the economic crisis in Europe, Americans have seen their economy pick up speed for a good year now. Inflation-adjusted quarterly growth figures during 2013 actually looked encouraging: compared to the same quarter a year earlier, U.S. GDP grew, respectively, 1.3 percent, 1.6 percent, 2.0 percent and 2.7 percent.

It remains to be seen if the upward trend in growth continues through 2014. We should keep in mind that these growth numbers are from a year when Obamacare had not yet gone into effect. That law is still hanging like a Damocles sword over businesses and households, though more and more point to the entire law slowly withering away. There is also the problem with the federal government’s regulatory assembly line, which continues to fire off artillery round after artillery round of regulations at America’s businesses and entrepreneurs.

My impression is that businesses are beginning to bet on the Obamacare law to eventually go away, or at least be reduced to somewhat of an expanded Medicaid program. This would partly explain the slow but visible growth in private-sector activity in most corners of the great country. If the federal government could declare regulatory cease-fire – and chances are they will if the Republicans take the Senate in the fall – then things could get pretty good.

But there is one variable that contributes even more to the recovery – no matter how weak it is – namely the remarkable restraint in federal spending.

If you ask the next guy you meet in the mall parking lot what American president is the biggest spender of them all, chances are the answer will be “Obama”. Conventional wisdom says that Obama is a major spender of other people’s money, regardless of whether it is taxes or debt. It is easy to understand this when Obama declares that the era of austerity is over:

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

When you demand more government spending, and when that spending is of the classical entitlement kind, you should not be surprised if you are characterized as the biggest spender.

Chances are, though, that Obama will not get to spend all the extra money he wants to. Once the budget gets to Congress it will meet solid resistance from Republicans, and this time around they will find lots of allies among reelection-minded Democrats.

It is entirely possible that the president knows this, and that his spending rhetoric is little more than the same kind of hot air we hear so much of in election years. In fact, it would be better for the president if his spending proposals fell flat to the ground in Congress than if he got what he wanted. So far he has a pretty good track record for federal spending: after the big mistake we all know as the American Recovery and Reinvestment Act, or the Stimulus Bill, which increased federal spending by 17.9 percent in one year, the average growth rate for Uncle Sam’s outlays has been 1.2 percent per year. (It is 4.8 percent per year if we include the stimulus year of 2009.)

Some, like Dan Mitchell over at the Cato Institute, rightly make the point that the restraint in spending coincides with the Tea Party movement making inroads into the Republican caucus on Capitol Hill. But in addition to that Obama seems to have been fine with almost flat spending. Whatever his reasons, he deserves recognition for having shown this restraint.

One possibility is that the president knows that if he would allow the federal deficit to spin completely out of control, as it was beginning to do back in 2009 and 2010, his entire legacy would be overshadowed by that. More importantly, it is easier to get Congress to focus on other issues than the deficit if the deficit is shrinking.

According to the Office of the Management of the Budget, 2013 represents the first year under Obama when the federal deficit will be less than a trillion dollars. So far that is only an estimate, but if the current trend continues, then by 2018 the deficit will be back at 2005-2006 levels.

In all, this positive deficit trend helps reinforce confidence in the U.S. economy. It also helps ease the pressure on interest rates that in 2013 pushed U.S. Treasury Bonds higher than some European countries. As the budget deficit declines, Federal Reserve chairwoman Janet Yellen will get a good opportunity to phase out the Quantitative Easing program. Some people already expect this to happen, which contributes to a reduction in inflation expectations and strengthened confidence in the U.S. dollar.

All this together helps the economy continue its slow but visible recovery.

However, even if Obama works with Congress to keep a tight leash on federal spending we are eventually going to see federal spending increase again. In fairness, it is already happening to some degree: the OMB estimate for 2013 is that spending went up by 4.2 percent; for the remaining three years of Obama’s presidency the OMB predicts an average of 3.5 percent per year.

For his entire presidency, Obama would then average 4.2 percent per year in spending increases. Deducted the one-time spike in 2009 his average would fall to an exceptionally good 2.2 percent, but even with that included – as it should be – he will retire with a far better spending record than his predecessor. Over his eight years in office, George W Bush presided over a budget that grew, on average, by 6.6 percent per year, with the second term seeing faster spending increases than the first (6.8 vs. 6.4).

Bill Clinton beats them both. Working as he did with a Republican-controlled Congress, he kept the federal budget growing at a respectably low 3.3 percent per year. Reagan, by contrast, joined the Democrat majority in Congress and expanded spending by an annual average of 7.7 percent per year.

Based on these historical numbers, the best outlook for federal spending restraint is therefore that the Republicans take the Senate in November and Obama drops his demands for more entitlement spending. If he kept spending completely flat in his last two years in office he would actually beat Clinton by a tiny margin for the most spending-frugal president in recent history.

The chances of that happening are not good, though. The federal budget is driven by an enormous system of entitlement programs. Some are entirely federally funded, costing taxpayers $1.8 trillion per year; other programs are co-funded with the states and add almost half a trillion dollars in federal spending. These programs not only cost a lot as they are, but they often have spending parameters built into them that cause spending to rise automatically.

Consider this chart:

BOspendChart1 Source: Financial Accounts of the United States, Federal Reserve; and the Office of the Management of the Budget.

Take a look at the blue spending trajectory from 1995 to 2010. It illustrates the accelerating average annual spending during the Clinton and Bush presidencies.

In five out of Bush’s eight years in office, federal spending grew at more than seven percent per year. Even if some of the spending increases under Bush were related to the military build-up, the underlying trend of faster growing spending was driven by ever costlier, ever more generous entitlement programs.

Obama is not the big spending problem in Washington, DC. The big spender is the welfare state.

Welfare Statists Gain Momentum

There is an important reason for my projection that the European crisis is moving into a long-term stagnation phase: the Europeans are not willing to give up their welfare state.

The welfare state caused the crisis, primarily by using taxes to deplete margins in the private sector and by using entitlements to discourage work and entrepreneurship. Eventually, all it took was a regular recession spiced up with some speculative losses in the financial industry, and the entire Western world was hurled into a deep and very persistent crisis.

Unfortunately, the Europeans have not yet seen the light. (Perhaps they will when my book is out this summer.) Especially European voters are very persistent in demanding that the welfare state remains in place. This is particularly evident in a pan-European poll predicting the results in the May elections for the European Parliament. Reports EU Observer:

Europe’s socialists are set to top the polls in May’s European elections, according to the first pan-EU election forecast. The projections, released by Pollwatch Europe on Tuesday (19 February), give the parliament’s centre-left group 221 out of 751 seats on 29 percent of the vote, up from the 194 seats it currently holds. For their part, the centre-right EPP would drop to 202 seats from the 274 it currently holds on 27 percent of the vote across the bloc. If correct, it would be the first victory for the Socialists since 1994.

The last EU election was in 2009, before Europe’s voters had made much contact with the tough austerity measures that governments in EU member states have applied over the past few years. Those measures were actually used to try to save the welfare state – spending cuts and tax hikes recalibrated it to fit the deep-recession economy – but were in many cased received by a voting public as attacks on the welfare state.

Since 2009 there has been a voter backlash against austerity in several European elections, with Greece, Italy, Portugal and France as the best examples. Radical leftist parties have made a strong showing and, as in France, even scored major victories. This leftist momentum is now continuing into the EU elections. But voters’ desire to save the welfare state is not limited to the left. The EU Observer again:

Elsewhere, the poll projects a series of national victories for populist parties of the right and left in a number of countries. Marine Le Pen’s National Front is forecast to top the poll in France with 20 seats, while Beppe Grillo’s Five Star Movement would win in Italy with 24 seats. It also anticipates strong showings for parties in Belgium, Austria, Italy and Sweden and the Netherlands who have pledged to set up a new far-right political group with Le Pen, and are set to take a combined 38 seats.

The nationalist parties are essentially old-fashioned European social-democrats. They do not share the left’s Marxist class-warfare rhetoric against big corporations, but they also do not share the strong commitment to free markets that we libertarians cherish. Instead, they combine a re-packaged form of traditional European nation-state patriotism with redistribution-oriented policies adopted from the less extreme segments of the left. Unlike the radical leftist parties, the nationalists do not primarily blame the decline of the welfare state on austerity – they blame it on large immigration.

While few in the European political industry would ever admit this, it is an inescapable conclusion that the rise of socialists and nationalists paints a grim picture of Europe’s political and economic future. As mentioned, both flanks want to preserve the welfare state. Both flanks also share a disdain for libertarian free-market principles and policies, advocating various forms of statist government intervention into the economy. Radical leftists want to seize private property by nationalizing big corporations; nationalists want to regulate them heavily, and in some cases the regulatory incursions are difficult to tell apart from what the left offiers. A good example is Golden Dawn in Greece, whose hatred toward private,for-profit banking is secondary only to their hatred for non-European immigrants.

Since this poll reflects national election results, it is worth taking it seriously. This also means that we have to take seriously the potential, long-term political and policy consequences of that result. One of those consequences is that it will be even more difficult to educate the European public and their elected officials on the destructive role that the welfare state plays in their economy. (I am still confident, though, that my upcoming book will serve an important educational purpose here in the United States.) Since a socialist will likely become the next chair of the EU Commission – de facto the executive branch of the EU – we can rest assure that there is not going to be any change for the better in their policies.

On a somewhat more speculative note, the competition between socialists and nationalists could actually turn out to be a temporary phenomenon. Both flanks defend social collectivism and economic statism. As the second phase of Europe’s transformation into industrial poverty now unfolds – stagnation replaces depression – legislators both at the national level and in the European Parliament will fight increasingly tough battles over perennially scarce tax revenues. Dissatisfaction among voters will grow stronger over time. With youth unemployment at the 20-20 level (20 percent or more in 20 or more EU states) and with incomes stagnant, welfare-state entitlements cut or stagnant, and taxes remaining very high or even going up, the ground is getting more and more fertile for “political innovations”. One such possible innovation is the merger of socialist and nationalist movements.

Far-fetched? Maybe. But not farther than today’s Europe is from the Weimar Republic. It is up to the European electorate to decide how big that distance should be.

OECD Wrong on European Crisis

The Great Recession continues to baffle economists around the world. Some have actually admitted that their academic research has been wrong – kudos to the economists at IMF for leading the pack – while others continue to stumble around in the dark. A story in The Guardian gives an example of economists in the latter category:

A failure to spot the severity of the eurozone crisis and the impact of the meltdown of the global banking system led to consistent forecasting errors in recent years, the Organisation for Economic Co-operation and Development admitted on Tuesday. The Paris-based organisation said it repeatedly overestimated growth prospects for countries around the world between 2007 and 2012. The OECD revised down forecasts at the onset of the financial crisis, but by an insufficient degree, it said. “Forecasts were revised down consistently and very rapidly when the financial crisis erupted, but growth out-turns nonetheless still proved substantially weaker than had been projected,” it said in a paper exploring its forecasting record in recent years.

Technically they under-estimated the effects of the credit losses that financial institutions suffered, but not for the reasons the OECD believes. Their forecasting mistake is instead founded in a two-pronged misunderstanding of the true nature of the crisis. First, they fail to realize that this was a welfare-state crisis, created by a slow but relentless growth in the burden of government on Europe’s economies. The weight of the government’s fiscal obesity eventually became so heavy on taxpayers, and the disincentives toward work and investment so strong, that it did not take much to nudge the economy into a deep, severe crisis.

The welfare state’s role in the crisis was enhanced by the fact that in the years leading up to the crisis Europe’s banks bought a trillion euros worth of Treasury bonds, a good chunk of which was from countries that soon turned out to be junk-status borrowers. This seriously aggravated the balance sheets of banks that were already struggling with credit losses.

If they had not been forced to deal with the junkification of Greek, Spanish, Portuguese and Irish government bonds, the banks would have been able to manage and endure the private-sector credit losses. But the unlimited irresponsibility of spendoholic legislators escalated a recession into a crisis.

The second prong of the OECD’s forecasting mistake has to do with austerity. Humbly put, nobody outside of my office grasped the truly negative impact of austerity as early as I did; the only ones who have caught up are IMF economists. On the other hand, their analysis of the role of the multiplier has, frankly, been intriguing. Nevertheless, by not understanding that austerity is always negative for macroeconomic activity, the OECD has missed the forecasting mark even more than by just misunderstanding the relation between the welfare state and the financial sector.

All in all, there is still a lot to be said on what has happened in Europe these past few years, and what implications that has for the future of Europe as well as for America. I am impatiently looking forward to the July release date of my book Industrial Poverty which provides a thorough analysis of the crisis.

Interestingly, as we return to The Guardian, the OECD denies my point about austerity:

The OECD said a failure to understand the impact of austerity policies in various countries did not appear to be a major driver of forecasting inaccuracies. It said the OECD became better at factoring in the impact of austerity amid little space for further monetary loosening as the crisis continued. Overall, “fiscal consolidation is not significantly negatively related to the forecast errors”.

This is a blatant refutation of what the leading economists at the IMF concluded over a year ago. The IMF paper is compelling and based directly on observed forecasting errors. Their main point is that the multiplier effect of one dollar’s worth of government spending cuts is stronger than the multiplier of one dollar’s worth of government spending increases. They show good evidence for this conclusion, evidence that the OECD ignores entirely.

Furthermore, as I report in my forthcoming book there is a wide range of literature on austerity and its effects, and that literature has one thing in common: politicians always under-estimate either of two things: the negative effects of austerity, or the persistent problems with pulling out of a recession by means of austerity.

But there is yet another point where the OECD is wrong. If the financial-sector problems were to blame for the depth and the length of this recession, then why is it that the credit losses happened several years ago, that the bank bailouts have been essentially wrapped up and that, thanks in part to the European Central Bank’s easy monetary policy, there are no longer any credit worries in the European banking system – and Europe is still sinking into higher unemployment and more budget problems??

The underlying presumption in the OECD’s focus on the financial system is again that this was a financial crisis, nothing else. But if that was the case, we would have entered the crisis with sky high interest rates; the banking system would have signaled systemic credit defaults by drying up credit and raising interest rates to the sky before the macroeconomic downturn began. But none of that happened. Interest rates in Spain, Greece and other troubled EU member states started rising only after the recession had escalated into a crisis!

What does this tell us? To answer that question, let us take one more step into the technicalities of macroeconomics. The reason why interest rates went up was not that the financial sector raised the price of credit. The reason was that Treasury bonds in Europe’s big-government states were sent to the financial junk yard. The reason why the Greek government has had to pay ten times higher interest rates than, e.g., the Swiss government is that the Swiss government has never defaulted on its loans while the Greek government forced its creditors to write off part of their loans.

In short: when interest rates started rising in Europe, it was because of unimaginable budget deficits, i.e., a crisis in the welfare state, not the financial system.

One last weirdo from the OECD:

“The macroeconomic models available at the time of the crisis typically ignored the banking system and failed to allow for the possibility that bank capital shortages and credit rationing might impact on macroeconomic developments,” it said.

Credit rationing? At a time when the central bank has flooded every corner of the economy with liquidity?? Europe’s banks hold trillions of dollars in government bonds, and in theory they could go to the ECB and, under the ECB’s bond buyback guarantee, demand cash right now for them. That would be free money for the banks who could then lend it out to whoever they wanted to lend to, and almost be guaranteed to make good money.

In reality, the rationing is not on the supply side of the credit market. It is on the demand side where there are not enough credit-worthy households and businesses to gobble up Europe’s rapidly growing money supply. The fact that the OECD fails to see this adds to my conclusion that they have not done their homework on the Great Recession.

Again: this is a welfare-state crisis, not a financial crisis.

Infanticide and the Welfare State

There are many signs that the European crisis is not at all a matter of a financial credit meltdown. If it were, the ethical foundations of the welfare states that define life in Europe would stand unfettered by the crisis. But it is rather clear by now, six years into the crisis, that its root cause was a big, redistributive and excessively expensive government. For this reason it is perhaps no big surprise that the economic crisis is escalating into a moral crisis. After all, the welfare state was built on high-pitched moral principles, presenting the collectivist theory behind the welfare state as ethically superior to free-market capitalism.

Well, there is hardly any doubt anymore that the fiscal decline of the welfare state is paving the way for moral decay where the value of life itself is changing. In my essay The Black Coats of Death Care in November last year I explained that desperate attempts to save the welfare state in the midst of an economic crisis lead to a situation where…

some lives are deemed too costly to live. The moral cynicism in this budget-driven sorting process, where lives worthy of living as spared and lives unworthy of living are discarded, bears strong resemblances to certain medical practices under the Third Reich. Those practices were summarized under the label Lebensunwertes Leben, i.e., life unworthy of living; to mark this strong resemblance I use the term Haushaltsunwertes Leben (life unworthy of the budget) for the rationing-driven practice where people are selected to die or suffer in order to keep a lid on the government’s costs for health care. Regardless of whether a government-run health care system chooses people to die for reasons of “population hygiene”, which was the motivation in the Third Reich, or to “balance the budget”, as the motivation is in the modern welfare state, the practice creates entirely new moral standards for the notion of what a life is. It is no longer sacrosanct, even by the highest ethical standards applied in our modern, government-dominated health care. In addition to the use of tax money to fund abortions, health care systems in the modern welfare state are beginning to establish euthanasia as a form of medical practice on par with traditional forms of health care treatment.

And euthanasia is coming. Lifenews.com reminds us that in December, the upper chamber of the legislature in Belgium passed a bill that would legalize child euthanasia.

Today Lifenews,com presents yet another voice in the debate over government-sanctioned infanticide. As the Belgian legislative bill moves closer to becoming law of the land in that troubled little EU member state, a family in Quebec directs a plea to the Belgian king to not sign the bill into law. Their video is a very important contribution to the fight against the moral decay that follows in the footsteps of the declining welfare state:

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Greek Bailout, Episode III

Never bark at the big dog. The big dog is always right.

If your goal is to restore growth and full employment in a crisis-ridden economy, don’t use austerity. It does not work. I have explained this for two years now – in blogs, research papers and numerous debates – and I am pleased to say that my work has been recognized. One step forward on that front is my book, out in July. But more important than the recognition of my work is the constant reminders of austerity failure that reality provides. In addition to raw, statistical evidence of decline and stagnation all over Europe, the German government is now de facto conceding defeat on the austerity front. From British newspaper The Guardian:

Germany has signalled it is preparing a third rescue package for Greece – provided the debt-stricken country implements “rigorous” austerity measures blamed for record levels of unemployment and a dramatic drop in GDP. The new loan, outlined in a five-page position paper by Berlin’s finance ministry, would be worth between €10bn to €20bn (£8bn-16bn), according to the German weekly Der Spiegel, which was leaked the document. Such an amount would chime with comments made by the German finance minister, Wolfgang Schäuble, who, in a separate interview due to be published on Monday insisted that any additional aid required by Athens would be “far smaller” than the €240bn it had received so far.

So how can the German government be admitting it has lost the austerity fight against the economic crisis, when it actually demands more austerity by the Greek government? Simple: the German government together with assorted Eurocrats from Brussels have sold last two fiscal-disaster packages as “the” fix for the crisis. If only Greece agreed to this-or-that austerity measure, and then got a loan, then the Greek economy would be on a fast track to a recovery.

By now proposing not a second, but a third bailout for the Hellenic welfare-state wasteland the German government is de facto admitting that the prior two packages did not at all deliver as promised.

Which, of course, is an outstanding reason to try the same policies a third time while expecting a different outcome…

The Guardian again:

The renewed help follows revelations of clandestine talks between Schäuble and leading EU figures over how to deal with Greece, which despite receiving the biggest bailout in global financial history, continues to remain the weakest link in the eurozone. The talks, said to have taken place on the sidelines of a Eurogroup meeting of eurozone finance ministers last week, are believed to have focused on the need to cover an impending shortfall in the country’s financing and the reluctance Athens is displaying to enforce long overdue structural reforms.

It is a bit unclear what the “structural” element of those reforms would be, but if the history of Greek bailouts is any indication we can safely assume that the “reforms” would be higher taxes and lower entitlement spending. While less spending is highly desirable, it has to come in the form of predictable reductions – and they have to be coupled with targeted tax cuts that give those dependent on government a fighting chance to provide for themselves once the government handouts are gone.

Such reforms are not rocket science. Two years ago I put together five such proposals in a book. I would not expect the Greek government to have read it, or that any Eurocrat would have seen it… but the basic idea – permanent spending cuts coupled with targeted tax cuts – is so common-sensical that you would expect someone in Europe to propose it as a guideline for getting Greece, and Europe, out of its crisis.

So far, though, I have not seen a single proposal for “structural reform” in Greece along these lines.

Perhaps it is understandable, at the end of the day, why no such ideas are floating around in the public debate. After all, the end result is a dismantling of the welfare state, an idea as alien to Europeans as a monarchy is to Americans. But so long as Europe’s political leaders remain married to the welfare state, they will also have to continue to come up with non-solutions to the crisis. One of those solutions is another debt write-down. The Guardian again:

Most of the debt overhang now haunting the country belongs to European governments and at 176% of GDP – up from 120% of national output at the start of the crisis – is not only a barrier to investment but widely regarded as being at the root of its economic woes. “They are missing the point: Greece does not need a third bailout, it needs debt restructuring,” said the shadow development minister and economics professor, Giorgos Stathakis. “Even in the IMF, logical people agree there is no way we can have any more fiscal adjustment when the whole thing has reached its limits,” he said. “There is simply no room for further cuts and further taxes and that is what they are going to ask for.”

It is precisely this attitude that traps Greece in a perpetual crisis. Its plunge into industrial poverty over the past five years was not caused by a financial crisis, as public economic mythology suggests. The plunge was the work of the welfare state, which over a long period of time had drained the private sector of money, entrepreneurship, investments and productivity. When the global recession hit, the excessive cost of the welfare state was exposed full force. Trying first and foremost to save the welfare state, Eurocrats from the EU and the ECB joined forces with economists from the IMF to squeeze even more taxes out of the private sector. At the same time, the rapidly growing crowds of unemployed and poor were deprived of more and more of the only thing that had kept them going: welfare-state handouts.

The result was that those who saw their handouts shrink were even less able to find a job than they had been before. Rising taxes killed the job market for them.

At the core, the Greek crisis is one of a welfare state that costs vastly more than the private sector of the Greek economy can afford, even on a good day. The debt that the good professor and fellow economist Stathakis wants to have forgiven is the result of this historic mess of irresponsible entitlements and burdensome taxes.

If Greece does not fix its welfare-state problem, it does not matter how much debt that is forgiven. It will continue to accumulate more debt, and then what? Another round of debt forgiveness?

Again, this basic insight is missing from the European discussion on what to do with Greece. Even the IMF is apparently concentrating on the debt burden, suggesting, according to the Guardian, that “without additional debt relief by eurozone governments, Greece’s debt burden could smother the country’s economy.” That is exactly wrong: the economy is being smothered by the welfare state, which austerity measures are aimed at saving.

At least there is some common sense in the debate. The Guardian concludes:

China, Brazil, Argentina, India, Egypt and Switzerland have been among the countries expressing grave doubts that the assistance would work, arguing that Greece might end up worse off after the austerity programme.

Thank you for that. Let’s now hope that more people see this and that we can get some traction for a reform program that combines entitlement phase-out with targeted tax cuts. It is the only way to save Greece from generations of industrial poverty – and it is the only way to save the rest of Europe from the same fate.

There Is No Income Inequality

Let us make one thing clear right now: there is no such thing as income “inequality”. There are income differences, but no income “inequalities”.

The very term “inequality” has been constructed to imply a moral content in differences between people’s incomes (or wealth). Every time we use the term we imply – deliberately or inadvertently – that income differences are problematic and need to go away. But if the premise of any discussion of income differences is that the differences are somehow immoral, then there really is not going to be a dispassionate conversation about those differences.

There is a crucial distinction distinction between “income inequality” and “income difference”. The former term, again with its moral content, implies that there is a role for economic policy – in other words government – to play in how people earn their money. This involvement, in turn, would come in the form of measures correcting differences between people’s incomes.

Once proponents of government intervention in people’s incomes have won the conceptual debate they move on to the policy goals for such intervention. We know all too well what those goals are: even though government expansionists do not spell it out on a daily basis, their goal with income interventionism is to eradicate differences between what people have to spend each month. A colossal government apparatus has been created for this very purpose – we know it as the welfare state – which is capable of redistributing astounding amounts of money between citizens. The Tax Foundation provides a good overview in a compilation of data on income redistribution, with the following main conclusions:

  • The federal income tax code has been more progressive, i.e., more punitive of higher incomes, in the past five years than during any five-year period since 1979;
  • Since at least 2004 and the enactment of the Bush tax cuts, the top one percent income earners have been paying more in federal income taxes than the bottom 90 percent;
  • At the top of the last business cycle, in 2006, the top-40 percent of U.S. income earners redistributed $1.2 trillion to the bottom-60 percent income earners.

The first conclusion indicates that both the Reagan and the Bush tax cuts vastly benefited income earners in lower brackets. The second conclusion shows that while Congress has cut federal income taxes, they have also distributed the tax burden upward in income layers. If any “inequality” exists in the U.S. economy, it would be the tax code that asks less than 1.4 million people to pay more in taxes – in actual dollars -  than more than 120 million of their fellow citizens together.

The third conclusion drawn by the Tax Foundation illustrates well the redistributive power of the American welfare state. Splitting the $1.2 trillion redistributed to those in the receiving three quintiles gives each employed person in those quintiles an average of $14,692 per year.

What have those people done to receive that money? Nothing, other than not make enough money to disqualify.

Herein lies the core of the problem with the concept of “income inequality”. The income earners who constitute the three lowest-income quintiles in the data quoted by the Tax Foundation are in those quintiles for a reason. They have chosen a career path that does not pay well; they have chosen to not pursue a college degree or trade diploma that opens high-income tracks for them; or they have made other personal choices that affect their ability to earn more money than they actually do.

By contrast, the members of the two highest quintiles have made career, education and other personal choices that have allowed them to climb the income ladder.

These are common-sense points that should raise no eyebrows. But the government expansionist proposing legislative action against income “inequality” will have more to say. He will suggest that it does not matter what choices people make; each one of us has the right to a certain standard of living simply because of our existence as fellow humans.

At the heart of this moral pitch for government action against income “inequality” is a suggestion that all human beings have the right to the same satisfaction of needs. A government expansionist would claim that Jack’s need for a three-bedroom house for his family is as important as Joe’s family’s need for the same-sized house. When these “equalists” can set the public policy agenda they create redistribution programs that elevate the ability of low-income Jack to buy that three-bedroom house to the same level as Joe’s ability.

The problem for the redistribution activists is that they can only help Jack by depriving Joe of his ability to buy a nicer four-bedroom house. The ethical principle behind redistribution is, namely, that humans have a right to have their needs satisfied. But when government confiscates  – in other words taxes away – parts of Joe’s income it actually deprives him of his ability to fully satisfy his needs. As a result, the ethical underpinnings of policies against income “inequality” lack consistency: eventually it becomes impossible for the redistributionist to provide a logically consistent, universally applicable distinction between what needs people have the right to, and what needs they can be deprived of.

When public policy is based on ethical principles that lack logical consistency they ultimately become arbitrary. When the principles validating policy initiatives are arbitrary, they give legislators uncheckable, unbalanced powers to legislate and interpret that same legislation as they see fit. Arbitrariness effectively means endless powers in the hands of government. Endless power is an express route to tyranny.

A redistributionist would disagree, pointing to Europe’s parliamentary democracies as a sign that you can combine the welfare state and democracy. But that argument reduces the concept of “tyranny” to a technical issue of who gets to decide who should govern a country. It omits a person’s economic actions, preferences and desires from the picture. But a person’s right to the proceeds of his work is as unabridgable as his right to speak his mind, write down and publish his thoughts, to travel and live wherever he wants to.

The redistributionists have lost the moral argument based merely on the logical inconsistency of their case. But as is well known to avid students of economics, they have also lost the argument based on the economic outcomes of their own policy initiatives. Europe, the continent where redistributionists have had the strongest public policy influence outside the Soviet Empire, is sinking into a hole of industrial poverty, pulled down by its increasingly unbearable welfare state.

It is time that their losses translate into practical policy. It is time for economic freedom to set the legislative course, in Europe’s parliaments, in U.S. Congress as well as in our state legislatures.

Eurocrats Frustrated over Crisis

I recently noted that the Greek economy has begun a transition from depression to stagnation. A couple of days ago an EU Observer report reinforced my point:

Greece came under renewed pressure to reach a deal with creditors on the latest round of cuts and economic reforms at a meeting of eurozone finance ministers in Brussels on Monday (28 January). Troika officials representing Greece’s creditors began their latest review of the implementation of the country’s €240 billion rescue in September. But they are still to approve the next tranche of a rescue loan, with offficials [sic] indicating that an agreement was unlikely to be reached before the end of February.

There you have it: austerity is not over. As I noted in the aforementioned article, the implosion of the Greek economy is tapering off not because the austerity measures have somehow worked – because they have not – but because the private sector of the Greek economy has reduced itself to its bare bones. Consumers basically have nothing more to cut away. The businesses that are still up and running have slimmed down to pure survival mode. What looks like the end of a depression is really the emergence of industrial poverty.

But even under these harsh conditions and grim future outlook for the Greek people, the austerity-thumping Eurocracy is not satisfied. The EU Observer again:

The review “is taking too long,” Jeroen Dijsselbloem, the Dutch finance minister and chairman of the “Eurogroup,” said. “It’s been going on since September-October, and I think it’s in the joint interest of us and the Greek government to finalise it as soon as possible.” Dijsselbloem also told reporters that any further discussions aimed at tackling an estimated €11 billion shortfall in Greece’s finances in 2014 are on hold. “We’ve made it quite clear that we’re not going to come back to it until there is a final positive conclusion to the review,” he noted. “We call on Greece and the troika to do the utmost to conclude the negotiations,” he added.

There are echoes of frustration in Dijsselbloem’s words. Not only is the Greek economy basically going nowhere (except into the shadow realm of industrial poverty and perpetual stagnation) but the rest of Europe is also, at best, at a standstill. Even if Eurocrats in general practice political denial as best they can, even they have to see the macroeconomic writing on the wall.

But even if Greece were to manage to turn its economy around, it would not be able to pull out of its stagnation. The EU Observer again:

The Greek government is not facing an imminent cash-flow crisis, but says it has no political room to implement any more spending cuts. The Greek government says its economy will emerge from six years of recession in 2014, and record a primary budget surplus of 1.6 percent of GDP in the process. It also says that a primary surplus should see its creditors reduce the country’s debt burden as part of the bailout agreement. For his part, Greek finance minister Yannis Stournaras said he hoped a deal could be reached next month, paving the way for the release of more financial aid in March.

The budget surplus is the work of austerity, not a macroeconomic recovery. By completely recalibrating the welfare state for a lower economic activity level, the Greek government has made sure that should the economy ever recover, it will have a budget surplus even before unemployment falls below 25 percent. That surplus, in turn, will have a depressing effect on the private sector much in the same way as austerity does, namely by exacting excess taxation.

Again, the root cause of Europe’s economic ailment is the welfare state. It is also the elephant in the room that nobody wants to talk about. So I will continue to do so.

France, Germany on the Downslope

Recently I have reported how Europe’s troubles continue, now in the form of deflation and rising poverty. But unemployment is still a major issue; recent signs of plateauing or even a minor decline in joblessness are indicators of stagnation rather than a recovery under way.

Today I can report yet more evidence that Europe’s crisis is continuing. From Euractiv:

One of French President François Hollande’s ambitions is to put in place social and fiscal convergence between his country and Germany, but for now the two economies are taking opposite turns. The number of unemployed people looking for a job has increased by 0.3% in France, which marks the president’s failure to decrease unemployment by the end of 2013. According to official figures published by the Labour Ministry this week, people without any activity (known as category A) have reached a record high number of over 3 million. Categories B and C (persons who have a slower activity) has increased by 0.5 to reach 4,898,100 in continental France and over 5 million including the overseas territories.

It is difficult to give “slower activity” a statistically meaningful definition. However, there are some ways to measure it, and as Eurostat has shown there is a widespread problem in Europe with people not getting full-time jobs. Part of the reason, especially in the French case, is the incredible rigidity of their hire-and-fire laws. But on top of that there is also the problem with unending austerity – aimed at saving the welfare state when tax revenues decline – which depresses overall economic activity. So long as European austerity continues there can be no recovery in private-sector activity. As a result, the French government will fail miserably in its attempts to put the economy back on a growth track again. This failure includes the so called “responsibility pact” that the socialist government came up with last year. Euractiv again:

These figures were published on the day when Prime Minister Jean Marc Ayrault was meeting with employers’ and trade unions’ organisations to launch the “responsibility pact” announced by the president and which looks to reduce employers’ contributions in exchange for commitments for more job creation.

Long story short, the French government is doing practically everything wrong. That includes trying to take advice from its German neighbor. Back to Euractiv (and a poorly written part of the article):

The situation is Germany is radically different. At the beginning of January, Germany unveiled that after four months of rising unemployment, figures fell by 15,000 to 2965 million [sic!] in December in seasonally adjusted (SA) data, according to the Federal Labour Office. The unemployment rate remained stable at 0.9%, [sic!] close to its lowest level since 1990, after a peak in 2011. In absolute numbers the job seekers, however, increased by 2.87 million against 2.80 million in November and the unemployment rate reached 6.7% against 6.5%.

Obviously, Germany does not have 2,965 million unemployed – the article meant to say 2.965 million. Also, the German unemployment rate is not 0.9 percent… The latest monthly Eurostat figure, from November 2013, is a seasonally adjusted 5.2 percent. This is still low, and less than half of the EU average. But the trend is no longer downward, and there is a good reason for that. Consider the following national accounts numbers for the German economy, reported in fixed prices:

2007 2008 2009 2010 2011 2012 2013
Gross exports 8.0% 2.8% -13.0% 15.2% 8.0% 3.2% 0.6%
Private consumption -0.2% 0.8% 0.2% 1.0% 2.3% 0.8% 0.9%
GDP 3.3% 1.1% -5.1% 4.0% 3.3% 0.7% 0.4%

The Gross exports numbers explain why the German economy has been so good at producing jobs recently. But as the number for 2013 shows, that boom is tapering off. In order to keep growing, the German economy would need the domestic, private sector to take over. The only way this could happen is if private consumption went into high gear, obviously has not happened. Over the seven years reported here, German private consumption has exceeded two percent growth in one year only, namely the second year of the fabulous export boom of 2010-11. With consumption growing at less than one percent, and the export boom coming to an end, it is safe to say that the German economy will not continue to push down its unemployment rate. Not surprisingly, GDP growth is now below one percent for the second year in a row, with a declining trend.

These numbers from Germany verify that the European economy completely lacks ability to grow on its own. The reason, again, is the depressing campaign to save fiscally doomed welfare states in the midst of a recession. If Europe’s political leaders had the courage – as well as moral conviction and economic insight – to let go of the delusion of a big, redistributive government, then Europe would quickly rise to once again become an engine in the global economy.

Until that happens, Europe’s fate is the same as that of other formerly great industrial nations, such as Argentina. However, because of the extreme rigidity of European politics I fear that the economic wasteland opening up in Europe will have consequences that reach even farther than the decline and fall of one of Latin America’s economic powers.