Europe’s austerity disaster is not just a matter of reckless policy decisions by arrogant leaders in the EU, although that is ultimately where the buck stops. Many others have been involved in explicitly or implicitly, directly or indirectly, keeping the crisis going. Among them are assorted economists in various positions whose forecasts have reinforced the desires among political leaders: while the politicians want austerity to work, economists have predicted that it would work.
There is just one problem. Austerity does not work. While it has taken economists quite a while to begin to realize this, others have raised questions for some time now. Among them are business leaders: two years ago British corporate executives began expressing concern about the soundness of continuing EU-imposed austerity policies. The seeds of that doubt have grown, so much in fact that a few days ago Britain’s Chancellor of the Exchequer found it necessary to make a plea to business leaders to stay on board with Britain’s own austerity program. The Guardian reports:
George Osborne has asked business leaders to hold their nerve and continue backing the government’s austerity measures after the Bank of England gave the first signal since the financial crash of a sustained economic recovery. The chancellor told the CBI annual dinner on Wednesday night that the business community should ignore critics of his economic policy who advocate a stimulus package to spur growth and reduce unemployment. … His speech followed a series of forecasts from Threadneedle Street showing the UK recovery strengthening and inflation falling over the next three years. Sir Mervyn King said the outlook had improved, with growth likely to reach 0.5% in the second quarter of 2013, after the 0.3% registered in the first three months.
This is a good example of how the desires of politicians conspire with unrefined forecasts by economists. Anyone who reads a “strengthening recovery” into a 0.2 percent of GDP uptick in growth, from 0.3 to 0.5 percent, is either sloppy or desperate. Since the difference between 0.3 and 0.5 percent is little more than a margin-of-error change to GDP growth, I am inclined to conclude that at least some of the involved economists are sloppy.
One reason for this is that there have been forecasts of an improvement at the time of the announcement of every new austerity package in Europe over the past few years. I am planning a larger research paper to expose these errors; in the meantime, it is important to ask why economists think that the current austerity policies will have any other effect than the others that have been implemented since 2009.
More on that in a moment. It is important that we do not let the political leaders off the hook. I am firmly convinced that they are desperately looking for any sign that austerity is working – and that their desperation has reached such levels that they are inviting to a conspiracy of the desperate and the willing. It is interesting, namely, to see all the optimistic forecasts that are surfacing now. Politicians who should know better than most of us that austerity does not work, give a surprising amount of attention to those forecasts.
Their desperation is cynical yet understandable. Almost every political leader in Europe has invested his entire political career in supporting austerity. Now he is witnessing more and more critics lining up with The Liberty Bullhorn, pinning the unfolding social disaster on austerity advocates.
The obvious reaction should be to question austerity. After all, I cannot be the only one to ask how much farther the EU is willing to push its member states. For example, how much more can Greece take before the country explodes?
Europe’s leaders are no doubt aware of how close some parts of the continent are to social unrest. So long as austerity-minded politicians cannot provide people with an economic recovery, they know they are accountable for whatever happens.
As an alternative, they use forecasts of willing economists to convince people that the recovery is just about to happen, no matter how microscopic it might be. The Guardian again:
The modest improvement in output over recent months comes against a backdrop of rising unemployment, the lowest wage rises on record … According to the Office for National Statistics unemployment rose by 15,000 to 2.52m in the three months to the end of March. Wages were 0.8% higher in March than a year ago and only 0.4% better if bonuses are taken into consideration, which is the lowest rise in incomes since records began in 2001.
Again, calling this a “strengthening recovery” is clear signs of desperation. There were times when any growth under two percent set off alarm bells, among economists as well as politicians. Now, numbers a fraction as high are raised to the skies as signs of a “strengthening” recovery. From the Sydney Morning Herald:
The dogged recession across the eurozone has snared key economy France, with the latest EU figures released Wednesday [May 15] showing a full year-and-a-half of contraction as tens of millions languish in unemployment. In Brussels, French President Francois Hollande tipped ‘zero’ growth on the national level, blaming an EU-wide, German-led austerity trap — and hitting out at banks for holding back on lending as he and fellow leaders battle to unlock taxable assets hidden in offshore bank vaults or breathe life into training programmes for Europe’s disillusioned youth.
And his recipe is to take it all out in the form of higher taxes instead. Yep. That will really make things better… The fact of the matter is that France desperately needs a complete reversal of its economic policy, with long-term credibility to go with it. The same holds for the entire euro zone, which according to the Sydney Morning Herald is in deep trouble:
official figures showed a 0.2 per cent contraction between January and March, in the longest recession since the single currency bloc was established in 1999. EU data agency Eurostat said output across the 17 states that share the euro — which are home to 340 million people — fell by 1.0 per cent drop compared to the same quarter last year. France notably slid into recession with a 0.2 per cent quarter-on-quarter contraction, with unemployment already running at a 16-year high.
French president Hollande blamed the bad economic news…
on “the accumulation of austerity politics” and a “lack of liquidity” within the banking sector leading to a euro-wide loss of confidence. Fresh from winning France a two-year period of grace from the Commission to bring its public finances back within previously-understood EU targets, Hollande argued that nascent plans to divert state and private investment towards projects intended to get Europe’s youth working would make a difference.
In other words, more government programs on top of government programs that don’t work. If government was the answer, there would not be a crisis in Europe today.
Instead, as the Sydney Morning Herald reports, Europe is heading for yet more of the same, though some economists seem stubbornly unwilling to accept the permanent nature of the crisis:
Following a string of disappointing survey results in recent weeks, Ben May of London-based Capital Economics warned: “We doubt that the region is about to embark on a sustained recovery any time soon.” The latest official European Commission forecast for 2013 published earlier this month tipped a 0.4-per cent contraction, but May said that was way off course with “something closer to a two-per cent decline” likely. His firm’s pessimism was backed by Howard Archer of fellow London-based specialist analysts, IHS Global Insight. “We expect the eurozone to suffer gross domestic product (GDP) contraction of 0.7 per cent in 2013 with very gradual recovery only starting in the latter months of the year,” said Archer.
What reason does he have for expecting a recovery? This is the standard mistake that mainstream economists and econometricians make: they rely heavily on models that are inherently prone to draw the economy toward long-term full employment equilibrium. When they “inject” a change to economic activity, such as an austerity package, their model automatically makes the assumption that this sudden and uncharacteristic change – called a “shock” – will be absorbed and the economy will move on.
Every new austerity package is treated the same way, both by the econometricians who design the models and by the economists who provide the analytical framework. Their take on the European crisis is therefore a series of individual shocks, not a systemic re-shaping of the entire economy. As a result, they always predict a recovery and return to some long-term stable growth path.
To the best of my knowledge there is not a single macroeconomic model out there that has yet incorporated the systemic effects of austerity. Therefore, the economics profession will continue to make systemic forecasting mistakes – and advise politicians based on those mistakes.
Don’t get me wrong. I am not blaming economists for the errors that politicians end up making. But our profession must begin to recognize its almost chronic inability to deal with economic crises. Our forecasting methods can handle regular recessions but are frustratingly inept at dealing with situations that become inherently unstable, such as the current European disaster.
In fairness, I am not the only economist with an unequivocal criticism of austerity. On March 5, Joseph Stiglitz explained in Economywatch.com:
While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. Indeed, it will now take a decade or more to recover from the losses incurred by misguided austerity policies – a process that may eventually force Europe to let the euro die in order to save itself.
Strange conclusion. The euro is not the cause of the crisis. But Stiglitz is probably letting his ideological preferences get in the way of good economic judgment. Otherwise he would do the same analysis has I have and conclude that the crisis is caused by the welfare state.
That said, Stiglitz is eloquent in his criticism of austerity:
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s. Greece’s youth unemployment rate now exceeds 60 percent, and Spain’s is above 50 percent. With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy. The economy’s doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.
Well said. But what alternative is Stiglitz proposing? Certainly not that the welfare state must go:
The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.
I don’t know where Stiglitz gets his data but here are the debt/GDP ratios for Ireland and Spain in 2003-2008:
In terms of actual euros, the general government debt in Ireland shot up by almost 84 percent from 2003 to 2008. In other words, it was only thanks to strong growth in current-price GDP that the Irish did not see their debt ratio grow faster than it did. They were expanding their government as fast as they could, and certainly more than was healthy for the economy: in 2010 the debt-to-GDP ratio had reached 87 percent, i.e., close to double what it was two short years earlier.
The Spanish situation followed a similar pattern, though with less dramatic numbers than the Irish. The lesson to be learned from this is not that these economies could afford their big governments, but that their big governments survived only because there was enough current-price GDP growth to pay for them. As soon as GDP slacked off, the cost of the welfare state quickly became completely unbearable.
Stiglitz refuses to see this. He goes on to advocate even more government, without a hint of explanation of how the world’s already highest-taxed nations would be able to pay for that:
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates). … There will also have to be Eurobonds, or an equivalent instrument.
More welfare state spending, more government, more debt, more of the same that brought about the crisis in the first place.
Instead of wanting more of the same and providing politicians with rosy outlooks, practitioners of economics should re-examine the results of their own contributions over the past few years. The ability of hundreds of millions of people to maintain their current standard of living, even support their families, depends on it.
It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.
If so, the EU Commission is a bunch of condemned idiots.
Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.
I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.
Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:
The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.
You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.
When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.
Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.
One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.
With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:
Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.
As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented. Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.
And now, Fox News delivers the big number:
It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. ”The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.
Six and a half percent of GDP.
Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.
The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.
If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.
Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.
I would not want to set my foot in Greece over the next year.
Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:
Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.
This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.
I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?
Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:
The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.
So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?
In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.
The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.
There’s the future of Greece for you.
German magazine Der Spiegel has an interesting story about the current state of the European left. The story has broader implications than the magazine appears to realize – it is, in a sense, a prelude to an analysis of how Europe’s parliamentary democracy is in a state of degeneration. Decades ago, European elections were battles between ideologies; today, they are mere popularity contests between administrators of the welfare state.
More on that in a moment. First, let’s see what Der Spiegel has to say about the left. Using French President Hollande and German social-democrat leader Steinbruck as examples, the magazine makes the case that Europe’s left is having a hard time making itself relevant on the European political stage:
One year ago, the mood among Germany’s Social Democrats (SPD) was one of elated optimism. In May 2012, Socialist Party candidate François Hollande won the country’s presidential elections, opening up the possibility that a right-to-left changing of the guard might be possible in Germany too. Just weeks after his victory, Hollande invited the SPD leadership to Paris to allow them to bask in his popularity.
That popularity was short-lived…
On Friday, SPD chancellor candidate Peer Steinbrück is once again in Paris. But even as the general election campaign in Germany ahead of the vote this fall has begun to heat up, the mood on the Franco-German left has cooled. With Hollande’s public opinion poll scores plummeting, his country’s economy in trouble and his government mired in scandal, he looks to have very little sparkle left to lend to his cross-border political ally.
Here is one lesson to be learned: don’t promise to confiscate high-earning people’s money. But the other lesson runs much deeper and has much farther-reaching implications. When center-right governments in EU member states try to comply with the austerity measures imposed on them by the EU, they have to take the blame for the inevitably destructive results. Voters then turn to the left to find someone who will repair what austerity has broken. But due to the nature of the underlying problem – the inevitably unsustainable welfare state – the left cannot offer what voters expect. All they can do is put a different kind of band aid on big government’s bleeding wounds.
In terms of fiscal policy, this means that voters have the choice between the center-right approach to austerity, meaning government spending cuts combined with higher taxes, and the leftist approach, meaning government spending increases and much higher taxes.
Neither approach is good for the economy, which voters in, e.g., France are beginning to realize. Inevitably, this leaves voters disillusioned, which is what the European left is slowly beginning to feel.
Der Spiegel again:
Steinbrück’s campaign too seems to have reached an impasse. A new poll in Germany indicates that, were Germans able to vote directly for candidates (rather than for political parties), only one in four would cast their ballot for Steinbrück, against 60 percent for Chancellor Angela Merkel. Furthermore, only 32 percent approve of the job he is doing, his lowest such score since he entered federal politics in 2005, according to a survey released on Thursday evening by German public broadcaster ARD. Taken together, the travails facing the two politicians [Hollande and Steinbruck] amounts to a fading of hopes, particularly among euro-zone member states struggling under the ongoing euro crisis, that Hollande’s election would mark a resurgence of the European left — and an end to Merkel’s austerity-first approach to the common currency’s woes.
Right on the nail. The left has nothing to offer as an alternative. They want to preserve the welfare state even more than their center-right competitors, which means that they have to be even more destructive in their policies to defend it. In the end, voters see no difference between the two alternatives.
Case in point: it was the social democrat party in Sweden that in the ’90s implemented the most destructive austerity plan since the Weimar Republic. They cut away nine percent of GDP over three years, effectively injecting annual doses of a fiscal venom that until the current Greek crisis started was unsurpassed in terms of macroeconomic lethality.
Since then it is virtually impossible to distinguish between the center-right coalition currently governing Sweden and the social-democrat led leftist coalition. Voters looking for a break from austerity turn their backs on whoever is “the alternative”. For the most part that has been a center-right government in Europe over the past few years; when voters look at “the alternative” and see nothing but a bleak copy of what they are already stuck with, they see no reason to change team.
Der Spiegel elaborates on this point:
Steinbrück … said that a successful Hollande is in Germany’s interest so that the Franco-German partnership can once again take up its traditional role as the motor of Europe. But even the SPD has become concerned about identifying itself too closely with Hollande. … Steinbrück and his party are beginning to see Hollande more as a risk than a potential boon in the run up to the German vote. … Hollande himself appears to have had little luck in proving himself as an effective crisis manager. His administration has been unable to meet deficit reduction targets, many analysts believe that France could become the next euro-crisis hotspot and unemployment in the country has risen close to record levels in recent months.
The root cause of the left’s problem is actually not in their own domain. It has to do with the fact that Europe’s conservatives have abandoned the principles of limited government and individual and economic freedom. Instead they have adopted the welfare state and decided to save it at any cost.
It is worth noting that Germany’s conservative chancellor Angela Merkel is one of the leaders of the pan-European austerity crusade. Her goal is to save the welfare state. Her policy strategy is different in form from what the left wants, but at the end of the day the result is the same. It really would not have been better or worse for Greece to have raised taxes enough to both close the budget deficit and increase government spending.
The left created the welfare state. Despite such political giants as Margaret Thatcher, they won the ideological battle over it. The welfare state is still standing, and Europe’s conservatives have embraced it. Whether they did it for tactical purposes – in some welfare states half of the population can’t make it through the month without tax-paid entitlements – or because they have given up on conservatism is really not that relevant. What matters is that parliamentary democracy has gone through a process of degeneration. Thanks to the conservative capitulation at the altar of the welfare state, the choices in European elections have been decimated to selecting those for power whose policies to defend the welfare state will be least painful for the public.
Since the center-right seems to be better at that, the left is the victim of its own political victory.
Last week I published the first of two articles on income distribution. This topic is important for many reasons, one being that the redistribution of income and wealth is the main reason for the welfare state to exist. The welfare state, in turn, is a social and economic system that is entirely contradictory to the concepts of individual and economic freedom. It is a dysfunctional hybrid between the ideologically pure communist central-planning model and free-market capitalism. The socialist ideologues who created the Scandinavian welfare state, such as Ernst Wigforss, Alva Myrdal and Rudolf Meidner, thought that they could get the most of the benefits from socialism while still allowing free-market capitalism to create enough prosperity for all.
This was of course a huge miscalculation. Economists of many walks of life – or economics – pointed to this early on. The foremost early critic of the welfare state was Friedrich Hayek, whose book Road to Serfdom is really a big warning signal to friends of economic and individual freedom of the venomous nature of the welfare state. Others followed, such as Milton Friedman, but their work was for the most part academic, leaving the public policy field open to statist scholars to advance the welfare-state agenda.
America’s most prominent advocate of the welfare state was John Kenneth Galbraith. He wrote several public-policy oriented books back in the late ’60s and the early ’70s, among which The New Industrial State is a panegyric marketing effort for the Scandinavian model. Not only did Galbraith fervently propose a socialized health-care system, but he also wanted far-reaching structural measures in the economy for income redistribution.
The reason why income redistribution has become a cornerstone in welfare-state promoting policies is that the welfare state, unlike communism, does not distribute consumer goods and services among the citizenry. The goal with socialism – a goal shared by both communists and welfare statists (or social democrats as they prefer to call themselves) – is to eradicate differences between individuals in terms of what they have. This is why, e.g., the Cuban and North Korean governments hand out food rations to people. While the purpose of food rationing nowadays is to divide up whatever bread crumbs the communists are able to produce, the original purpose was indeed to make sure everyone was equal.
This is also why communist governments assign housing, furniture, bicycles and cars to people. In the last decade of East European communism this ridiculous distribution system was unraveling; in Budapest in the ’80s you could find shopping malls reminiscent of those in the West, filled with small shops that sold everything from shoes to appliances. The products were clearly of lesser quality than what we had in the West at that time, but there was no doubt that the communist regimes had begun realizing that the free market was simply much better at satisfying people’s needs.
Instead, the communists looked at transitioning from their rigid, dictatorial system into a more Scandinavian-oriented welfare state. This included income redistribution, but since there were not a whole lot of people with high incomes to take from, and a lot of poor people to give to, they failed to make the leap.
That is fortunate, because by the time Eastern Europe got out of its communist system the Scandinavian welfare state was beginning to show very clear signs of economic arthritis. The Swedish economy was no longer growing at the levels it had back in the ’50s and ’60s. Its inflation-adjusted GDP growth fell below two percent per year. Denmark was having even worse problems and plunged into a full-fledged fiscal crisis. Finland was hit by a double whammy: the true costs of its welfare state combined with enormous losses in exports as the Soviet Union collapsed.
In the cases of Sweden and Denmark there was no doubt that the slow growth was directly related to exceptionally high taxes. These taxes, in turn, were used to finance very elaborate income redistribution systems. With slower growth the higher incomes grew less than what the welfare state needed, while more people remained in income brackets where they were eligible to receive redistributive entitlements.
- to pay for the welfare state, government needs to raise taxes;
- as taxes go up the private sector finds way to cope and still produce jobs that pay reasonably well;
- there is still a large tax base available for government to tap into in order to finance all the entitlements it has handed out;
- as taxes increase, though, the private sector reaches a point where it can no longer adapt, but instead goes into a state of stagnation;
- when the private sector stagnates, so does the tax base – and the welfare state is hurled into a state of fiscal crisis.
In other words, political efforts at redistributing income between citizens eventually open up the fiscal whirlpool that has swallowed Greece, Spain and Portugal and is now sucking down Italy and potentially even France.
There are philosophical reasons why income redistribution is wrong. I will leave them for a future article. For now, let us conclude that from an economic viewpoint, income redistribution does not work. It harms the entire economy, erodes prosperity and creates perennial deficit problems.
Bottom line: you cannot combine free-market capitalism with any form of socialism. Either you embrace capitalism and freedom, or you learn to live with the atrocities of socialism.
It’s really that simple.
The decision to start confiscating bank deposits in Cyprus was not something that Europe’s political leadership came up with on a whim. It’s been long in the making, part of a carefully laid-out plan.
Those who believe that Cyprus was only the start appear to be right.
More on that in a moment. First, let us put this decision in its proper context. The leaders of the EU and the ECB – and the finance ministers of the euro zone – were all in on this deposit confiscation deal, and the idea very likely saw the light of day in the EU leadership. This is important, because it helps us understand whether or not this is indeed something that the EU will implement in more countries than just Cyprus.
The Eurocrats within the EU and the ECB have been trampling on the people of Europe for several years now. They have gotten high on their own political arrogance after having forced Greece into submission and years of bone-crushing austerity. They have put country after country under their authoritarian policies, apparently believing that they could continue to rule Europe at their own discretion.
If you can eradicate one quarter of the GDP in Greece and still subject tens of millions of other Europeans to the same anti-democratic, fiscally torturous policies, then why should the confiscation of people’s bank deposits present you with any more than minor white noise of protests?
The problem for the Eurocrats is that this might have been the worst possible thing to do at the worst possible point in time. It is one thing to tax people to death on their income, and to put heavy weights of value-added taxes on their spending. It is an entirely different thing to start going after what people have managed to set aside for themselves and their families – out of money that government has already taxed both one or two times.
A savings account is one of the few remaining sources of personal pride that citizens in Europe’s fiscally oppressive welfare states have left. Not to mention the fact that for many millions of middle-class families all over Europe, the money they have in the bank is a critical life line in tough economic times. Since these are tough economic times, they really do need to be able to rely on those savings.
Add to this that welfare state after welfare state in Europe has begun defaulting on their spending promises, cutting down on entitlements of all kinds, from unemployment benefits to college tuition assistance to subsidies for pharmaceutical products – and we have a full, sharp and chilling picture of why the Cypriot bank-deposit confiscation comes at exactly the wrong time.
Precisely because this looks small compared to years of austerity, at least from the viewpoint of someone up in the EU ivory tower, I highly doubt that the Eurocrats understand the depth of fear that their plan to seize bank deposits has stoked in Europe’s middle class. I also doubt that they will realize what the political fallout from this will be. If anything could cause the EU to unravel, it would be a widespread application of this kind of organized theft of people’s property.
However, we might never get that far. While the people’s will is little more than the irritating sound of a mosquito in the ears of the Eurocracy, the reaction on the financial markets might actually cause them to rethink their plan, or at least limit its application to one country. Consider this good analysis from Stefan Kaiser at Der Spiegel:
The shock waves of the Cyprus bailout deal hit financial markets on Monday, as anger spread over a one-time levy on bank deposits on the small island at the fringe of the euro zone. This marks the first time since the start of the European sovereign debt crisis that average savers are being forced to help rescue a country’s finances alongside taxpayers, investors and private creditors.
And this after years of higher taxes and government spending cuts that, each time they were introduced, were sold to the public as “the” solution to the current crisis. And just like each round of austerity proved to be just a prelude to the next one, people in Europe now have good reasons to ask themselves where this bank-deposit confiscation scheme will strike next.
According to Kaiser and Der Spiegel, investors on the financial markets have already made up their mind:
Financial markets reacted nervously, as share prices of banks across Europe dropped. Monday’s biggest losers were financial institutions in countries hardest hit by the debt crisis, like Spain’s Bankia, whose stock temporarily slipped by more than 8 percent. Deutsche Bank was also not immune, losing 4 percent of its stock price. Investors appeared to be fleeing to assets perceived to be safer, like German bonds or gold.
Then Der Spiegel reveals the true depth of support among Europe’s political leadership for the confiscation scheme:
It looks as if the deal struck by euro-zone finance ministers in Brussels over the weekend is already in doubt as a result of massive uncertainty among the public and on the finance markets. Several news agencies have reported that the terms of the deal were to be renegotiated on Monday. Proposals include lowering the levy on bank deposits below €100,000 ($129,000) to 3 percent from 6.75 percent, and potentially increasing the forced contributions of deposits above €500,000 to 12.5 or 15 percent, up from 9.9 percent.
In other words: all the finance ministers of the euro zone were in on this deal. This means that the plan to seize bank deposits has been in the making for quite some time. It is therefore not a desperate measure aimed at simply saving Cyprus, but something that will become a regular part of the European policy tool box for grabbing more money whenever government needs it.
This, in turn, means that the Eurocracy has been planning to do this for a long time – and as we know by now, whenever the Eurocracy decides to do something, they will stick with it regardless of the consequences. You don’t need to look further than to Greece where the persistence of the Eurocracy to force austerity down the throat of the Greek people has now cost that nation one quarter of its GDP.
That tells us quite a bit of what they are willing to do in terms of trampling on public protests in order to get their will; if they can basically transform an EU member state into a complete economic wasteland and throw half of all the young in that country into unemployment and economic despair, then why would they worry when their plans to seize bank deposits draws flak in the media?
Their determination to stay the course is put on full display in how they are considering a re-arrangement of the confiscation rates. By suggesting to take more from large deposits and less from small deposits they are playing the same despicable class-warfare tones as the left always uses when it wants to go after private property.
Then Stefan Kaiser at Der Spiegel reminds us that there is actually a precedent to this deposit confiscation:
In the case of Greece’s second loan program in 2011, private investors were called on to take part for the first time. German Chancellor Angela Merkel insisted that such action would remain unique to that program.
This was when the Greek government declared that it would write down what it owed them. Backed by the EU, the ECB and the IMF they basically unilaterally seized a portion of the money people had lent them by buying their treasury bonds.
It was, in some way, possible for them to get away with that scheme since the bond buyers had technically deposited their money with the government. The Cypriot bank-deposit confiscation plan is different in that those who have the deposits have given their money to another private entity, a bank. Even with the Greek debt writedown in mind you would expect private-to-private transactions to be safer.
Not so, alas, which explains why this is becoming such a toxic political issue. In fact, it is becoming so toxic that the leaders in Europe who concocted the scheme are now trying to pass the blame to someone else. From the EU Observer:
German finance minister Wolfgang Schaeuble and European Central Bank board member Joerg Asmussen during parallel events in Berlin on Monday (18 March) tried to blame each other for an unprecedented eurozone bailout deal demanding small savers in Cyprus to take losses on their bank deposits. “The levy on deposits under €100,000 was not an invention of the German government,” Schaeuble said during a conference on taxation. He insisted that the “configuration” he and the International Monetary Fund were defending was to tax only deposits above €100,000 – to a much higher rate than what was finally agreed. “The figures we have come up with are at the lower limit. If another configuration was chosen, touching only deposits above €100,000, the result would have been different and we would not have had these problems,” Schaeuble said.
The last statement is startling. Apparently, Mr. Schäuble seems to believe that all he and the Eurocracy need in order to get away with their deposit confiscation is a little bit of class-warfare rhetoric.
But his statement also reveals the utter contempt that he and others in Europe’s power-hungry political elite have acquired for the rule of law. This contempt is extremely dangerous, because it opens the floodgates of completely unabridged government power. It is very easy to transition from today’s policy paradigm where private property rights are worth defending only insofar as they produce taxable economic activity, to a paradigm where property rights are not even given such scant recognition.
America can learn a lot from this moment in Europe’s downward spiral. One lesson is that when a welfare state finally plunges into a deep crisis, no rules apply anymore. When government has brought the private sector to its knees in its desperate attempt to save the welfare state, then the distance between the welfare state and the totalitarian state will be so short that no one can see the difference anymore.
The more the federal deficit grows, the closer we get to an untenable situation where panic will drive policy and stabilizing, long-term solutions will fall of the political radar screen. We still have time to design a pathway out of our costly welfare state without paying the price of panic and austerity that the Europeans are currently dealing with.
However, time is running out fast. As the awareness of the looming “point of panic and no return” grows stronger, the calls for desperate policy measures will grow louder. One of those calls will be very likely be to cut benefits in welfare, a controversial measure that wins supporters and enemies of equal passion on both sides of the ideological divide. Opponents make the case that it is cruel to cut benefits, but they also claim that people on welfare somehow have a right to what they are receiving, a right that is as untouchable as any of the rights spelled out in our constitutional amendments.
Proponents of welfare cuts, on the other hand, often make the case that lower welfare levels will encourage people to go out and get a job. They have a compelling case, at least if we immediately disregard the job market situation. The challenge for slash-benefits proponents grows stronger the harder it is to find a job for someone who is currently on welfare.
A good example of a welfare reductionist facing this challenge is British Member of the European Parliament, Roger Helmer of the United Kingdom Independence Party. He is also worth listening to because he is a libertarian, a staunch supporter of limited government. A few days ago he wrote about welfare in the Libertarian Press:
I must recently have made some passing comment about welfare, because a certain @DocHackenbush replied: “Memo to Helmer: Unless you’ve lived on social security, you don’t get to have an opinion on it”. That’s about as sensible as saying “Unless you’ve been hooked on cocaine, you can’t mention drugs”.
Mr. Helmer had a well-worded comeback, pointing to the tax-funded nature of welfare, or “social security” as the Brits call it:
“I’m entitled to an opinion on social security because, like most of us, I pay for it”. This response was felt by a close family member (of mine) to be somewhat lacking in compassion. Yet is seems to chime with public opinion. I was rather surprised to find in a recent opinion poll that 62% of respondents agreed that “unemployment benefit is too high and discourages work”. The public understands that the welfare budget is out of control, and that we cannot solve the country’s fiscal and debt problems without dealing with the welfare issue.
This is true indeed. So called social protection programs – bundled together as “welfare” in America – cost about 28 percent of the British GDP. Sweden and the Netherlands are at higher levels, 30 percent, while France and Denmark top out at 32 percent. In almost every EU member state the share has risen considerably during the recession.
American estimates, of which there are several, do not come close to these numbers. The comparison is somewhat difficult to make, though, primarily because the United States still has a large private welfare sector. Another reason is that there are different types of programs here than in Europe, producing different incentives structures among the recipients. The American habit of handing out tax-funded food stamp cards does not exist in the same form in Europe, where instead general cash entitlements are more common. Furthermore, in many European countries people can qualify for general income security, a deplorable form of welfare that thankfully does not exist in the United States.
Overall, and partly because of the restrictions on the American welfare state, the U.S. economy is in better shape than the European economy. As a result, Americans can still support themselves to a larger degree. The high share of private welfare also means that there is still a large presence of charity, voluntary contributions and private compassion here – the true basis for any kind of care for the poor and needy. This makes welfare more efficient, and the personal ties between donor and recipient tend to create motivations for self sufficiency to a larger degree than tax-paid welfare does.
Another major problem with tax-funded welfare is that government makes a promise it can’t keep (it eventually runs out of taxpayers’ money). As is abundantly evident around Europe, governments cannot pay for their spending commitments without having to max out taxes and then still run deficits. (Here in America we just run deficits…)
Back to Roger Helmer:
Compassion is all very well, but if we allow the costs of compassion to run out of control, it can do more harm than good. You don’t eliminate poverty by bankrupting the country. I was particularly struck by the case of the single mother of eleven, Heather Frost, who has a new £400,000 house being built for her and her eleven children, all living on benefits. Hard-working tax-payers who couldn’t dream of having such a house built are paying for Ms. Frost’s house — and have every reason to be angry. They will be asking “Why do we have to pay? Where are the men who fathered those children? Why don’t they pay?”.
This is a lesson for America as well. The ’90s welfare reform was designed to end the opportunities for people to make a career out of living on welfare. It was a relatively successful reform, though the Obama administration has eroded key parts of it. They are handing out food stamp cards like they were invitations to a Wednesday party with Mrs. Obama. There have also been some attacks on the workfare component. So far though the foundations of PRWORA still stand, and the urgent fiscal crisis of the federal government is in itself a mandate on Congress to pursue another welfare reform in the same restrictive direction.
We’ll see where that goes. For now, back to Mr. Helmer, who now turns to the problems of reining in welfare spending:
This point, however, seems to have escaped our new Archbishop Welby, who has written to the papers saying that the government’s welfare policy will have a negative social impact on children. Of course in the short term, and assuming a static view of the economy, he has a point. Take money from a family, and if nothing else changes, that family will be worse off. But the good prelate ignores the positive impact on the wider economy from getting debt and government spending under control.
The theory behind this argument is that it is so easy to live on welfare that recipients see no reason to go out and find a low-paying job. Therefore, the story goes, government should reduce welfare to a point where it barely offers subsistence.
There is an implicit assumption in this argument that there is a job out there for every welfare recipient. That is not true, especially not in high-tax jurisdictions (European countries or U.S. states like New York, Illinois or California). Any effort at incentivizing welfare recipients through benefits cuts must be combined with dramatic tax cuts. Such cuts are not possible simply through welfare benefits cuts. It is important to keep in mind that the high share of GDP that goes to welfare, in Britain as well as in America, is not primarily caused by lavish benefits – the serial British mom’s half-million-dollar house being an exception – but by the fact that a very large number of people have been enticed into becoming dependent on welfare.
The main problem with welfare dependency is that welfare dependency makes people lazy. Regardless of the job situation, after a certain period of time the automatic replenishment of your bank account becomes a pacifier that can turn people with normal work ethic into lazy couch potatoes.
This effect is reinforced when politicians and bureaucrats preach that “you have the right to this money”, a right for which there is no credible support in the literature on moral or political philosophy.
This does not mean that we can disregard the job situation. In fact, high unemployment adds insult to injury in this case. Back in the last century welfare dependency and poverty was, for the most part, a transitional problem at the individual level. It was still relatively easy – and culturally mandated – for individuals on the dole to become self sufficient. A fair amount of academic research published back in the ’90s confirmed this.
Today, we are looking back at a recession that seems to be transforming people’s attitude to welfare, in particular in notoriously unemployed Europe. This is a warning signal to America, which is a few steps behind Europe but still risks sliding into the same dungeon of irreparable damage from a morbidly obese welfare state. When the “right to welfare” conspires with the pacifier effect and high unemployment, we have a situation where the solution no longer is as simple as cutting benefts.
That is not to say we should disregard cuts altogether. However, to be effective such cuts must be part of a package with a fiscal policy for limiting government (see the economic benefits of limiting government, parts one, two and three). On the structural front, a welfare reform that reduces the benefits people get must be combined with active measures to open pathways for individuals into self sufficiency.
Mr. Helmer raises a very important question. His simple answer – cut welfare benefits – may not be enough to solve the problem he is tackling, but he deserves credit for bringing it up and for pointing right at the heart of the issue. Being from Britain he has experience of a welfare state that exceeds the American in size and “generosity”, which makes his questioning of the nature of tax-paid welfare all the more relevant for the American debate. He gives us a hint of how tense the issue will get if we allow our welfare state to continue to grow.
The other day I reported on the crumbling retirement system in Sweden, where the national legislature may soon pass a reform to force everyone to work longer. The superficial motivation is that every other newborn is expected to reach the respectable age of 100, a statement that is quite a bit of demographic trickery in itself. The rise in life span in the Western world is actually flattening, which means that the most reasonable prediction is that there will be very small changes over the next century.
On top of that, the retirement system, which is based in part on a pay-as-you-go model and partly a tightly regulated private-accounts system, is performing poorly for two reasons: the high taxes in Sweden is stifling private-sector economic activity, which erodes revenues for the pay-go part; and decades of fiscal-policy mistakes and labor market regulations have effectively halted the rejuvenation of the Swedish business landscape. The corporate performance that lays the groundwork for the stock market is decreasingly profitable, as big, bureaucratic and rather low-productive manufacturing corporations dominate the Swedish stock market.
As a result, retired Swedes are seeing their standard of living decline over time, where their parents saw a decent, steady stream of retirement income.
Today we can report on another downtrodden side of the Swedish welfare state. From the Swedish daily newspaper Svenska Dagbladet (my translation; click link for google translation):
In its assessment of what medical drugs to subsidize, the Swedish government takes into account that retired citizens contribute less to the economy. The National Board of Dental and Medical Drug Subsidies claims that they are only following the law, but the National Organization of Retired People intends to look at a lawsuit over age discrimination.
Readers familiar with QALY can already now see what is coming.
Mr. Calle Waller, 75, from [the town of] Knivsta, says… ‘My first reaction was that I could not wrap my head around it. I paused and thought about it and got a distinct feeling that there was something wrong, they just can’t say this’. … Since nine years he is suffering from prostate cancer, and since the summer of 2012 in his capacity as the vice president of the Organization of Prostate Cancer Patients he has been trying to find out how [The National Board of Dental and Medical Drug Subsidies] reached its decision not to subsidize the drug Zytiga, which gives men beyond treatment more time.
In late 2012 The National Board of Dental and Medical Drug Subsidies notified the socialized Swedish health care system that it was going to subsidize a cheaper alternative, which has significantly more side effects and requires intravenous provision. A main reason for this decision is of course that the Swedish health care system is badly starved for resources and is under serious, constant cost-cutting pressure.
However, there is another important reason:
As part of the reasons for its decisions … the National Board states that the drug does not produce enough of an elevation in the quality of life and extended life span for the patients, compared to how much each Zytiga treatment costs taxpayers. But what really caught Mr. Waller’s attention was a statement hidden away toward the end of the report, explaining that a subsidy would be more expensive because the average patient, in this case 69 years old, cannot start working afterward. … ‘Indirect costs are added for this patient age group since production less consumption results in a deficit. As a result, extension of the life span for this age group results in higher costs to society.’
Translated into plain English, this means that the patients will be paying so little in taxes over the remaining years of their lives that they will never be able to repay government for the cost of their treatment.
What the Swedish National Board of Dental and Medical Drug Subsidies is doing may be entirely immoral, but it is definitely nothing new. The methodology they are applying is called Quality Adjusted Life Years, or QALY. It is an instrument that in the hands of health care bureaucrats becomes a sorting mechanism where the strong win and the weak lose. (For an in-depth explanation of QALY, click here.) Its practice, which every week kills scores of treatable patients in countries with socialized health care, fits with chilling logic into the principle of fiscal eugenics that is increasingly accepted and widely practiced in Europe’s welfare states.
Back to the Svenska Dagbladet story, where we now get to hear from the government:
Mr. Niklas Hedberg, director of the division of new medical drugs at the National Board of Dental and Medical Drug Subsidies, contends that this is a case of unfortunate wording, but that the Board is complying with existing law that requires them to take into consideration every consequence of a subsidy. ‘This is a very complex issue … our nation’s resources are limited and we are charged with making subsidy priorities. Existing law mandates that we shall consider all principles, and put medical drugs in the context of society as a whole.
A nice way of saying exactly what Mr. Waller above quoted the Board as saying, but in words that make everyone feel a lot better about discarding older patients on the grounds of their inability to pay enough taxes.
The newspaper reported on the consequences of subsidy cuts already in September (again my translation; click link for google translation):
At the Karolinska university hospital [in Stockholm] prostate cancer patients are forced to pay out of pocket for a medical drug costing SEK 30,000 per month [$4,500]. If not, they will get an alternative [drug] with more side effects, that must be distributed intravenously. … Patients get on average an extra four months when all other treatment methods have been exhausted. ‘The improvement does not last forever, but at least the patients get an extension of life without any noticeable side effects’ says Ms. Anna Laurell, senior physician at the Akademiska hospital in Uppsala.
It is this extension of life that bothers the government Board. If the patients would be able to back to work and pay a lot of taxes, it would be worth treating them. But in a welfare state in general, and a socialized health care system in particular, a taxpayer’s life is worth more than anyone else’s. Those who are unable to feed government by paying taxes will be discarded.
Fiscal eugenics, for short.
There is a mysterious obsession with Sweden among American libertarians. They superficially glance at some isolated piece of legislation and suggest America follow the Swedish example. Having grown up in Sweden, and having escaped its oppressive tax system, its depressing social collectivism and cultural mediocrity, I am baffled by these Swedeophiles. The country I left for good 14 years ago had deteriorated pretty badly already then, and things have not gotten better.
If anything, Sweden is a prime example of what happens when you go out of your way to try and save a welfare state that is sucking the life out of its host organism, the private sector. From deteriorating schools to a health care system in real crisis, Sweden serves only one meaningful role: as a scarecrow in the cornfields of big government, deterring the sane, common-sensical observer from ever setting his foot there.
In previous articles I have explained how Sweden’s “successful” welfare state, recently praised by The Economist, is little more than an attempt at selling welfare-state snake oil; I explained that young Swedes are not only unemployed by the masses, leaving the country in desperate pursuit of a life, but those who stay are stuck living with their parents at alarming rates; I have pointed to the explosive problem with mass immigration of welfare-dependent illiterates from the poorest corners of the Third World; how the Swedish police is literally capitulating before the onslaught of organized crime; I have asked why such friends of liberty as Freedom Works are so appreciative of the grotesquely big Swedish welfare state, and I dispelled the myth that the Swedish treasury secretary, Anders Borg, is some kind of low-tax crusader.
In fact, On February 13 Mr. Borg explained in a tax policy debate in the Swedish parliament that he opposed flat income taxes and favors a steeply marginal, multi-bracket income tax code because, he said, it is an important income redistribution instrument.
In other words, Sweden is still the full-fledged, “democratic” socialist welfare state it has been since the 1970s. The fact that the treasury secretary has a pony tail and knows folksy-talk does not make a tangible difference.
What does make a difference, but for the worse, is that yet another hallmark of the Swedish welfare state is now crumbling. The retirement system, overhauled 20 years ago in a reform praised as “free market based”, is under such severe pressure that the parliament may have to raise the retirement age to 75. Euractiv reports:
Swedes should be prepared to work until they are 75 and to change careers in the middle of their work life if they are to keep the welfare standards they expect, Swedish Prime Minister Fredrik Reinfeldt said. The retirement age is being debated in the Swedish parliament ahead of an expected pension reform package in April. In its proposal, the government wants to give people the right to remain at work until 69 instead of the current 67 cut-off age.
Let’s just make a brief stop here and notice something. The government in Sweden bans you from working when you turn 67. It is illegal for you to seek employment above that age. People get around that by starting small consulting businesses, but the law is still a good example of how the big, Swedish nanny state operates: anything that is not explicitly permitted is forbidden by default.
Back to Euractiv:
Meanwhile, the right to early retirement would be delayed by two years, to 63. However, Reinfeldt said in several interviews over the weekend that Sweden must consider taking the step even further by raising the retirement age to 75. “This is a time of changes in the global world economy. The nations we meet in open competitions don’t have our welfare ambitions. They don’t put taxes on production to finance the pension system or welfare solutions. Therefore the question remains, is our equation correct?”
The man is delusional. This has nothing to do with saving the export industry. The big corporations that have characterized the Swedish private sector since at least the 1950s are either dead (SAAB Automobile), gone abroad (ABB; Pharmacia), gobbled up by foreign corporations (Ericsson; Volvo Cars; Scania) or in the process of leaving Sweden (Volvo Heavy Trucks). This is part of a natural industrial cycle, where big, mature corporations lose out to new, more dynamic business models. Just look at how the Japanese car manufacturers capitalized on the stale, bureaucratic inefficiency that characterized the Big Three in Detroit back in the ’80s.
Mr. Reinfeldt’s problem is instead that his welfare state has suppressed private-sector activity outside of the big, old manufacturers. Up until a few years ago the corporate landscape in Sweden looked almost exactly the same as it did half a century earlier. Since about 2007, the big old dinosaurs have been in an increasingly ailing condition, unable to function as the “engines” of the private sector. But since Swedish tax policies, labor market laws and other regulations have been tailored to the needs of those big corporations, they have made it very difficult for small, new, dynamic businesses to grow.
Therefore, what Mr. Reinfeldt is really seeing is that his country’s private sector can no longer feed the welfare state because it is dominated by over-subsidized, under-challenged industrial behemoths with bureaucratic arthritis. And he is utterly incapable of dealing with the situation, because he wants to protect the welfare state at all cost.
Including this ridiculous retirement reform, of which Euractiv has more to say:
Reinfeldt, who leads a centre-right government, also said half of today’s children in Sweden can expect to become 100 years old and there has to be a change in the way the Swedes view their work life. “Therefore, Sweden must as a society ask ourselves the question: are we ready to meet these changes? The changes are basically positive. But if we want good pensions and welfare then we need to start discussing what our work lives should look like,” the prime minister said in a radio interview.
To begin with, I would seriously question the suggestion that half of Sweden’s children will live to be 100. Given how their health care system has deteriorated over the past 15 years, and such socially destructive factors as widespread depression and serious levels of alcohol consumption among the young, I would question if the average life expectancy will in fact stay where it is today. It is more likely that it will actually decline over the next couple of decades.
More importantly, though, is the fact that Mr. Reinfeldt – an alleged conservative – adamantly believes that it is the business of government to dictate when people are allowed to retire, and when they are allowed to work. All this shows is that Mr. Reinfeldt is just another statist European social democrat.
A far better approach would be to say that “we see such dramatic changes in the ability of the economy to support today’s retirement system that we will allow everyone to keep their own money and invest for retirement as they see fit”.
Some would rightly point out that Sweden already has a system of private retirement accounts within the government-run model. This is correct, but the ability of that system to fund future retirement is entirely dependent on an ailing economy. The pay-as-you-go part suffers from the same problems as our American Social Security system, while the private account part can only give good returns on investments if the Swedish economy is doing well.
Which it is not. More on that later. For now, back to Euractiv:
To be able to work until the age of 75, the Swedish prime minister says he envisions at least one career change during a person’s work life as the job one may have as a young person could become too tough or stressful later on. Reinfeldt acknowledges that this will require a huge change of mindset among the Swedish population. “It’s a very challenging idea. Our whole life is affected by the fact that we speak to a career counselor, make a decision, and then think we will work with the same things for the rest of our lives,” the prime minister stated.
The real issue here is that Sweden has a serious under-employment problem already as things are today. Youth unemployment is among the highest in Europe, and laid-off 40-somethings have enormous problems landing a new job. The work force is being expanded by up to 100,000 immigrants each year, yet the labor market can only add a net of 60-70,000 new jobs annually (and that is in a strong growth year).
On top of that, Sweden has very rigid labor market laws compared to other “free” economies. Unions are exceptionally strong, with all the negative consequences that follow. Firing workers is a significant undertaking, which makes employers balk at hiring people for full-time positions. Labor-based taxes put a steep price on new jobs, as do the responsibilities that employers have for income replacement when workers are home sick.
The bottom line is that the Swedish economy does not suffer from a shortage of labor. It suffers from a shortage of jobs. To force people to stay in the work force up to the age of 75 under such circumstances is – forgive my repetitive use of the term – delusional. I can only see one logical motive: to try to cut the cost of the retirement system while keeping it in place.
In other words: the purpose of the reform is to make people pay taxes in to the retirement system for several more years and take benefits out of it over a shorter period of time. But there will be no attempt to give people a chance to opt out entirely.
A classic example of how a government applies austerity measures to save a welfare state it does not want to let go of, come Scylla or Charybdis.
And they will come. Sweden is on a downbound path that sooner or later will hurl the country into social chaos. The fact that this has not happened yet is entirely due to Swedes still believing that their country is a stable, functional welfare state.
They are like the famous bumble bee, which can’t fly but does not know it can’t, so it does it anyway. And just like the bumble bee, once the truth dawns on them, the Swedes will fall flat to the ground. From a cynical viewpoint, it will offer us an opportunity to study the last stages of the deterioration of a welfare state in a full-scale laboratory.
From a human viewpoint, though, it is going to be one big tragedy, brought upon an entire people by simple-minded socialist politicians, determined to shove their ideological construct down people’s throats.
I can only thank my lucky star I left that place 14 years ago.
Earlier this week I made the point that socialism is a resilient delusion. I exemplified with the arrogance and determination of the newly re-elected Ecuadorean president Rafael Correa. He is not the only socialist-in-chief in Latin America: the notorious Hugo Chavez is still clinging to power in Venezuela, Evo Morales is doing his best to be Chavez’ copycat in Bolivia and Cristina Kirchner is hard at work advancing her own version of the Chavez model in Argentina.
But the political virus we know as socialism is not just spreading in Latin America. Its symptoms of grandeur, political hubris, economic delusion and legislative arrogance are showing up in many places around the world, one of which is South Africa. The ANC, which has governed the country since Apartheid ended 19 years ago, has already built a tragic record of delusional economic policies. Among the many tragic results are a 30-percent unemployment rate and a burdensome, unpredictable tax system, not to mention rampant corruption and a terribly over-regulated labor market.
So far the ANC has not shown much interest in any of the country’s problems. They have allowed crime to run amok, especially in the form of a genocide on white farmers, they have turned a blind eye to government corruption and they have not cared one bit about how poverty has become a plague among the nation’s black majority.
Like all socialists, the ANC leaders were intoxicated with power. But one event seems to have forced them to sober up, namely the Marikana massacre when police killed three dozen striking miners and injured twice as many. Suddenly, the black population in South Africa saw “their” government behave like the Apartheid regime had treated them in Sharpville and Soweto. Long-growing frustration over how the economy has slowly deteriorated under the ANC, paired with quiet whispers among many blacks that it was actually easier to feed your family under Apartheid, now formed a plume of erupting anger, so high that it was visible all the way up to the Ivory Tower dwellers that currently run South Africa.
Panic has now taken hold in the ANC leadership quarters. Realizing that they are actually politically mortal, they suddenly care a great deal about the social destruction they have inflicted on their own people. Worried that the rest of the world is going to take notice of their widespread political, social and economic failure as leaders, they call in Cyril Ramaphosa, a man whose reputation in Europe and America is not far from that of Nelson Mandela.
Ramaphosa is charged with repairing the ANC’s reputation, but the product he is trying to sell – the National Development Plan – reveals that nothing, absolutely nothing, has changed in the ANC mode of thinking. The document, which looks good on the website of the National Planning Commission, is a classic socialist mumbo-jumbo product. Back in my naive young days when I was a teenage socialist activist traveling Europe socializing with everything from British Militant activists to Italian communists, I saw tons of the same rich-on-words, void-of-reason kind of products.
The so called National Development Plan, available at the ANC website, is yet more evidence that the ANC is determined to drive South Africa into the ditch, and then have the elephant of big government stomp her to into a pile of trash. Here is, e.g., what they have to say about the young, whose future they have already destroyed:
South Africa has an urbanising, youthful population. This presents an opportunity to boost economic growth, increase employment and reduce poverty. The Commission, recognising that young people bear the brunt of unemployment, adopted a “youth lens” in preparing its proposals, which include:
Before we get to what they suggest in order to help the young, let me point out how the ANC, just like every other socialist movement in the world, compartmentalizes its constituents into distinct mono-characteristic categories. The young are young, and shall be treated as such – and accept to be treated as such. Never mind that the only thing they have in common is their age.
Then we get to the list of policy goals to “help” the young – a list that we might as well read while listening to an appropriate piece of music:
A nutrition intervention for pregnant women and young children. Universal access to two years of early childhood development. Improve the school system, including increasing the number of students achieving above 50 percent in literacy and mathematics, increasing learner retention rates to 90 percent and bolstering teacher training.
Does it get more statist than this? More government-provided entitlements means more government bureaucrats and higher taxes. Where in this chain does a young South African with ambitions to start his or her career get more opportunities to be self sufficient?
Strengthen youth service programmes and introduce new, community-based programmes to offer young people life-skills training, entrepreneurship training and opportunities to participate in community development programmes. Strengthen and expand the number of FET colleges to increase the participation rate to 25 percent. Increase the graduation rate of FET colleges to 75 percent. Provide full funding assistance covering tuition, books, accommodation and living allowance to students from poor families.
Ah. More tax-paid educational programs that won’t lead to any new jobs, because in order to pay for them the government has to put yet more hate taxes on the “rich”. This crushes small businesses, which are almost without exception the best job creators in any economy. And since nothing is being done about the corruption in the country, except talking about it, larger corporations are unlikely to want to expand their operations in South Africa. As a result, the young who are lured into these new ANC-proposed programs – if they ever become reality – will get an education they can’t use. Their frustration with their government may be postponed, but it will be exacerbated by the years that the young feel they wasted on a useless education.
But wait – there’s more:
A tax incentive to employers to reduce the initial cost of hiring young labour-market entrants. A subsidy to the placement sector to identify, prepare and place matric graduates into work. The subsidy will be paid upon successful placement. Expand learnerships and make training vouchers directly available to job seekers.
There are many South Africans already out there looking for the jobs that don’t exist. Perhaps the best irony in this is that the ANC might end up creating a valuable export product: skilled labor.
In the section that looks at the economy, things get even better. Here are some of the ANC’s new ideas for what they want to accomplish by 2030 – a convenient 17 years into the future:
Eliminate income poverty – Reduce the proportion of households with a monthly income below R419 per person (in 2009 prices) from 39 percent to zero. Reduce inequality – The Gini coefficient should fall from 0.69 to 0.6. Enabling milestones Increase employment from 13 million in 2010 to 24 million in 2030. Raise per capita income from R50 000 in 2010 to R120 000 by 2030. Increase the share of national income of the bottom 40 percent from 6 percent to 10 percent.
To begin with, it is easy to promise higher wages over a period of 17 years. Basically, all you have to do is let inflation walk through the economy. At three percent per year, inflation-adjusted income advancement will turn R419 into R692 without the government having to do a single thing about it.
The per-capita income of R50,000 will become R120,000 in 17 years at a slightly higher inflation rate of 5.3 percent. Currently, inflation in South Africa is higher than that. Again, the ANC will achieve two of its key economic policy goals by kicking back and letting employers adjust the earnings of their employees to inflation.
The talk about reducing income differences is worrisome, and I urge all you South Africans who read this blog (a steady readership down there!) to pay close attention to this part of the National Development Plan. Income differences are typically larger in thriving economies. The reason is simple: when people are allowed to earn whatever they can, they build a career, work hard and make a lot of money. Then they spend their money in the local economy, thus creating more jobs. Many hard working professionals also start their own businesses, creating even more jobs.
The more jobs that high-earning people create or help create, the better the chances are for unskilled workers or newly graduated professionals to find a well-paying job. The closer an economy gets to full employment, the more incomes will grow across the spectrum.
Since the ANC has now – again – declared that income differences are income inequalities, and that they are going to fight such inequalities, we can safely conclude that the ANC will continue down the path with new and higher hate taxes on the “rich”. This means steeper marginal income taxes, chopping the top off high earnings and thus reducing or even eliminating the positive multiplier effects of high earnings. Fewer jobs are created at the bottom of the labor market, leaving more people on the government dole.
And just to drive home the point that government, not individual citizens and certainly not the free market, is the final arbiter of all economic activity, the African Nonsensical Congress makes clear in its National Delusion Plan that ideology trumps reality every day of the week:
Ensure that skilled, technical, professional and managerial posts better reflect the country’s racial, gender and disability makeup. Broaden ownership of assets to historically disadvantaged groups.
In other words, keep the resentment from the Apartheid years alive by blaming today’s whites for historic atrocities. And since the ANC knows that this will anger many non-black entrepreneurs and make them less appreciative of the government’s social-engineering policies, they have to drive home the point that every employer must make sure that his staff reflects “the country’s racial, gender and disability makeup”.
Other than that, it is rather interesting to see that after almost two decades in power, the ANC feels inclined to say that “give us another two decades and we will…”
Increase the quality of education so that all children have at least two years of preschool education and all children in grade 3 can read and write. Provide affordable access to quality health care while promoting health and wellbeing. Establish effective, safe and affordable public transport. Produce sufficient energy to support industry at competitive prices, ensuring access for poor households, while reducing carbon emissions per unit of power by about one-third. Ensure that all South Africans have access to clean running water in their homes.
In 2030 very few South Africans will have any first-hand memories of what life was like under Apartheid. That is probably fortunate for the ANC, if it can cling to power for that long, because the worst that can happen to them is that more and more blacks begin to compare everyday living conditions under the ANC with those they or their parents experienced under Apartheid.
The racism of that government can never be excused or mitigated by attenuating circumstances, but if indeed the black population in South Africa is worse off today than it was back then, it is a monumental failure for the ANC – and for socialism. There is a lot to point in that direction, especially when it comes to unemployment.
For a socialist government to perform worse than a racist, socially and economically stratifying government is an embarrassment of galactic proportions. It is a verdict on socialism so heavy that it can hopefully be eliminated from South Africa’s political institutions for a long time to come.
The National Development Plan shows clearly that with the ANC in power, things are only going to deteriorate. But hopefully it will also be the motivator for the political opposition to begin formulating a common-sense alternative.
South Africa deserves better than socialism.
Sadly, the world is full of failing welfare states. One of them is Argentina, where the out-of-control welfare state is causing runaway inflation. This, together with bad GDP growth numbers, has led to a credit downgrade that expels Argentina’s treasury bonds from the reliable end of the market, confining it to shady backstreets together with other C- and CC-rated bonds.
As if this was not bad enough, the government of Argentina is engaging in a macroeconomic form of accounting fraud byt trying to conceal its 30-percent annual price increases in manipulated data. This has rightfully caused a confrontation between Argentina and the IMF, whose credit line is in part dependent on the debtor country complying with certain statistical standards.
Aside some real yelling and screaming from Buenos Aires, the IMF demands seem to have a little bit of an impact on the Argentine government. It is not all for the better, but at least the Fund has caught president PMS Kirchner’s attention. From MyFoxNY:
Argentina announced a two-month price freeze on supermarket products Monday in an effort to break spiraling inflation. The price freeze applies to every product in all of the nation’s largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine market, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported.
This is pure cosmetics. You don’t do away with inflation by banning the last agent in the chain from compensating himself for price increases further back in the process. Wal-Mart and the other supermarket chains are still going to have to compensate their suppliers for higher costs of production and transportation.
There are only two possible results from this: empty shelves in the stores or product reconfiguration. The former is the Soviet solution, the latter the Venezuelan version. After Hugo Chavez caused 30-percent inflation in Venezuela he went after the retailers and food producers when they reconfigured their products. His aggressive policies actually escalated the crisis to the Soviet level, causing food shortage in Venezuela.
It remains to be seen what the outcome will be in Argentina. But one thing is clear: you cannot escape the devastating consequences of inflation by banning people from raising prices.
Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it’s trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.
The underlying problem is that the government has been flooding the economy with borrowed funds and printed money, paying for all sorts of work-free entitlements. When more and more spending in the economy is based on work-free income, you open up an imbalance between production and consumption.
This is one of three transmission mechanisms from reckless monetary and fiscal policies to consumer prices spiraling out of control. The second has to do with banks being flooded with cheap liquidity. This can encourage banks to start lending without due attention to the credit strength of their borrowers, simply because they are faced with tempting interest margins, ultimately created by a reckless government.
A third transmission mechanism involves the exchange rate, where a surge in domestic money supply causes a depreciation of the currency.
Which one of these transmission mechanisms has had the strongest influence thus far is yet to be determined. Preliminarily, it looks as though the first one is a major culprit, simply because of the perpetually bad government finances and the lavish nature of Argentina’s entitlement systems.
Argentina offers yet another example of how a runaway welfare state can bring devastation and destitution to a country. It is about time that policy makers in Europe and America pay attention – and start working on Ending the Welfare State.