U.S. Embraces Model That's Failed Europe

Posted by on Jun 9th, 2010 and filed under Economy, Government Spending, Politics, Regulation. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry from your site

The newspaper headlines say it all. On the one hand, “Crisis Imperils Liberal Benefits Long Expected by Europeans,” while in this country: “Private Pay Plummets, Government Handouts Soar.”

The modern European welfare state has proven unsustainable. From Greece to Britain, from France to Portugal, European countries are slashing social welfare benefits, raising the retirement age and dismantling government bureaucracies. Yet, even as Europe is learning that you can’t forever rob Peter in order to pay Paul, the U.S. is racing to transform itself into a copy of the failing European model.

Greece has been the face of the crisis thus far, with a national debt that equals 108% of GDP, and talk of service cuts sparking spectacular riots in Athens. Spain had its credit rating cut two weeks ago. But Hungary might well be the next debt-explosion poster child: Last Friday the prime minister’s spokesman began openly using the word “default,” sending markets into a further tizzy.

But how much better off are we?

Our national debt just topped $13 trillion. The Congressional Budget Office projects it will equal 90% of our GDP by 2020. The U.S. government spent $83 billion more than it took in last month, and that figure is expected to exceed $1.56 trillion for the year.

Faced with this rising tide of red ink, our Congress blithely enacted a new multitrillion-dollar health care entitlement. It’s now engaged in a debate over legislation repealing a scheduled cut in Medicare reimbursements and further extending unemployment benefits.

Of course, if one points out that we are driving the country toward bankruptcy, the traditional response in Washington is that we must have the “courage” to raise taxes. The Obama administration is preparing to allow Bush era tax cuts to expire, leading to a big jump in income and capital gains taxes.

The health care bill that just passed contained more than $569 billion in tax hikes between now and 2019. And many in the administration and Congress are now pushing for a Value Added Tax (VAT), a sort of federal sales tax imposed at every level of a product’s production.

If taxes could solve the problem, Greece would be bailing out the U.S. Taxes currently take a third of Greece’s GDP, roughly double the U.S. tax burden.  It would be even higher, but the absurdly high tax rates have led to widespread evasion. Greece soaks the rich with a top income tax rate of 40%. It even has a 21% VAT.

Yet, somehow, Greece hasn’t managed to tax its way to prosperity. That’s because the problem isn’t inadequate taxes, it’s too much spending.

Last year, U.S. federal spending topped 24.7% of gross domestic product, the highest peacetime percentage in history. That compares to a historical average of roughly 21%.  As the full force of entitlement programs kicks in, the federal government will consume more than 40% of GDP by the middle of the century.

That’s getting dangerously close to Greek levels. And the trajectory of government spending is projected to keep rising beyond 2050, eventually hitting an unfathomable 80% of GDP, according to the Congressional Budget Office. Think of that: The government will spend 80 cents out of every dollar earned in this country!

There is no way to tax your way out of that. After all, every dollar that government spends is a dollar that is siphoned off from American workers regardless of whether it is raised through debt or taxes. Both divert money from more efficient uses in the private sector to less-productive uses in the public sector. Both mean fewer jobs and less economic growth.

More importantly, every dollar the government spends is one less dollar that you can spend on food, clothing, housing, charitable contributions or other goods and services of your choosing.

Recently, Democrats in Congress and much of the media have seized upon the victory of Rand Paul in the Kentucky Republican senatorial primary to ask libertarians, small-government conservatives and tea partyers, “How much do you really want to cut government?” It’s a legitimate question. But they might equally ask the other side, “Is there any limit to how big you are willing to grow government?”

Or to put it another way, “Have we learned anything from Europe?”


This article was originally published by Michael D. Tanner at www.investors.com

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