In the wake of French and Greek elections last weekend,
the backlash against European austerity is now in full swing. Meanwhile, in the
U.S., advocates of big government are insisting that the European debacle
proves we must reverse our efforts to reduce debt and deficits. After all, Paul
Krugman writes in the New York Times, “claims that slashing government spending
would somehow encourage consumers and businesses to spend more have been
overwhelmingly refuted by the experience of the past two years.”
Given Europe’s continued slow growth, Professor Krugman
might have an argument to make — if there actually had been any austerity in
Europe over the last two years.
It is true that Europe has not been engaged in the same
sort of massive Keynesian spending that characterized, say, the Obama stimulus
package. Well, that’s not universally true. Portugal did try its version of
stimulus spending: It pumped more than €2.2 billion into the Portugese economy
in 2009, 1.25 percent of its GDP. The result was that economic growth stayed
negative, while unemployment rose by roughly 3 million Portuguese workers.
Recently, that country’s finance minister told the New York Times that “it
didn’t turn things around, and may have made things worse.”
At the same time, the rest of Europe was hardly
“dismantling” the welfare state, as the Washington Post’s Eugene Robinson
claims. Of course, given that the average EU government consumes more than half
of a country’s GDP, a bit of dismantling might be in order. But so far, European
governments haven’t even been willing to take a penknife to the welfare state,
let alone an axe.
In France, for example, the so-called austerity largely
consisted of raising taxes. There was a 3 percent surtax on incomes above
€500,000, an increase of one percentage point in the top marginal tax rate
(from 40 to 41 percent), and an end to the automatic indexation of tax brackets
for inheritance, wealth, and income taxes. There was also a 5 percent hike in
the corporate income tax on businesses with revenue of more than €250 million,
as well as a hike in the capital-gains tax, and closure of several corporate
tax breaks. And even though most of these tax hikes were aimed at the wealthy,
the middle class did not get off free. There was an increase in the Value Added
Tax (VAT) and the excise taxes on tobacco and alcohol.
That’s an agenda that should gladden the heart of any
tax-increase zealot — or even Paul Krugman.
True, there were some entitlement reforms and spending
reductions. But they haven’t actually occurred yet. For example, France will
raise its retirement age from 60 to 62, but not until 2017! A cap would also be
put on government health-care spending, starting next year. It is a little
hard, therefore, to discern whether it is budget cuts that may or may not
happen some day in the future, rather than tax increases today, that have
slowed French economic growth.
Or take Britain, where the Tory-Liberal coalition
recently suffered a drubbing in local elections, in part as a reaction to
so-called austerity measures. Among the Cameron government’s first “austerity”
measures was to hike the personal income tax to 50 percent for those earning
more than £150,000 a year. That measure managed to actually decrease income-tax
revenues by £509 million. The U.K. did trim government payrolls and cut back on
some government programs, but British government spending still consumes more
than 49 percent of GDP. Government spending actually increased by £59.2 billion
from 2009 to 2011.
Other European countries have taken the same approach:
tax hikes today (especially) on the rich and promises of tiny benefit cuts in
the dim and distant future. Spain imposed a “wealth tax” on citizens with
€700,000 of assets, and a 7 percent income tax on those earning more than
€300,000 per year; capital-gains taxes were also hiked. Italy imposed a
“Solidarity Tax” of 3 percent on all taxpayers who earn more than €300,000.
Greece increased taxes by nearly twice as much as it cut spending, including a
5 percent surtax on the wealthy. VATs were hiked nearly everywhere. And fuel,
alcohol, and tobacco were also prime tax targets.
It should come as no surprise that all those new taxes,
combined with a lack of spending restraint, has threatened to throw Europe back
into a double-dip recession. Is it any wonder that French, Greek, and British
voters were anxious to “throw the bums out”?
Wait, this sounds familiar. Tax hikes on the rich
accompanied by vague promises of future spending restraint, while refusing to
restructure entitlement programs. That sounds a lot like . . . Barack Obama.
Maybe the U.S. can learn something from Europe after all.
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