Tag Archives: AUSTERITY

From Athens to Sacramento: Austerity Coming to America

As the Greek people have painfully experienced, you cannot “austere” yourself out of a budget crisis. It only makes the crisis worse: higher taxes destroy the tax base and spending cuts increase government’s net drain of resources out of the economy. The result is that fewer people work, more people qualify for welfare programs – and government spending ends up growing while tax revenues go down.

The only way to solve the budget crisis created by a welfare state is – surprise – to do away with the welfare state. This can be done; it takes hard work and dedication on behalf of us and our elected officials, but it can be done. So far, though, not a single welfare state in Europe, and not a single U.S. state, has been willing to step up to the plate and be the first to reform away the welfare state. Instead, Europe’s political leadership is going deeper and deeper into panic mode, relying as they are on budget cuts and tax increases to save their morbidly obese, fiscally unsustainable welfare states.

So far America has been saved from the austerity flu. But don’t bet your job on us being able to keep it that way. Some states are already resorting to policies reminiscent of austerity, and one of them has already entered the downward spiral that hurled Greece into full-fledged fiscal and political turmoil.

That state is California. The Golden State has wrestled with budget problems for many years, and Governor Brown was elected on promises to finally solve the problems. However, his strategy was the same old, same old: modest spending cuts and modest increases in some taxes. (He even accepted microscopic tax “cuts” by allowing a minor, temporary sales tax increase to expire.) Predictably, his strategy has not worked. As shown by an article in The Washington Post, The Golden State is now in even deeper budget trouble than it was before Jerry Brown got (back) into the gubernatorial mansion:

California’s budget deficit has swelled to a projected $16 billion — much larger than had been predicted just months ago — and will force severe cuts to schools and public safety if voters fail to approve tax increases in November, Gov. Jerry Brown said Saturday. The Democratic governor said the shortfall grew from $9.2 billion in January in part because tax collections have not come in as high as expected and the economy isn’t growing as fast as hoped for.

Part of the reason for this problem is of course that the governor and his staff joined the Democrats in the state legislature in an overly joyous forecast of how the Obama administration’s policies – including the nonsensical and totally wasteful stimulus bill – would put the economy back on a growth path. But part of the problem is also that the Democrats in California will try to save the welfare state at any and all cost. Thereby they allow themselves to completely ignore the very problem that caused the crisis in the first place: the welfare state.

But even worse is the fact that the solution they are applying – a very mild version of austerity – is now driving the state budget deeper into the deficit ditch.

In short: the medicine is killing the patient.

The austerity policies applied in California are supposed to increase tax revenues through higher taxes and cut government spending through – yes – spending cuts. But what austerity-minded politicians like Governor Brown do not understand is that the economy responds to austerity policies just like it responds to all kinds of economic policies. Tax increases discourage productive, private-sector economic activity; in combination with spending cuts, the tax hikes actually increase the government’s drainage of resources from the economy.

As a result, private-sector business activity is reduced or its growth rate is significantly reduced. Fewer people pay taxes and more people apply for the entitlements that the welfare state provides. Predictably, this is exactly what is happening in California. As shown by data provided by state controller John Chiang, tax revenues are lower while welfare-state spending is considerably higher this year than California’s politicians foresaw last year when they enacted the first round of Governor Brown’s austerity policies.

An analysis of the controller report for the period July 2011 to April 2012 shows a rise in two of the best short-term indicators of welfare-state spending:

  • Medical Assistance Programs spending has increased almost a quarter of a billion dollars more than even the Brown administration predicted it would under the recession; and
  • Social Services spending was hit hard by spending cuts and predicted to fall by $346 million; in reality, spending is almost $200 million above the budget target.

At the same time, tax revenues are coming in below target. During the period July 2011-April 2012 the state of California took in $73.5 billion in tax revenues. The forecast for the same period this year was $69.1 billion; the actual number is $65.6 billion. In other words, the state’s tax revenues are more than five percent below what the governor and his Democrat fellows in the state legislature needed in order to protect their welfare state from further cuts.

As is evident from these numbers and from the article in the Washington Post, the Sacramento statists have failed. The reason is not that they did not cut spending and raise taxes enough – the reason is that they combined spending cuts with tax increases. With this combination government takes more from the economy each year and gives less and less back. It is like government is trying to sell a new 2011 car at 2013 prices one year and a new 2010 car at 2014 prices the next year.

One of the most obvious reasons why austerity won’t work in California is that the state has a small and, relatively speaking, shrinking tax base. From the peak of the business cycle in 2007 to the 2011 California lost 1,028,000 private sector jobs. This was partly due to the national recession, partly due to California’s business-unfriendly policies. As of March 2012 The Golden State had fewer private sector jobs than it had in March of 2003, when the state was still suffering from the Millennium Recession.

During the same period, the state has increased its spending paid for with in-state tax revenues by 40 percent. In other words, the state is expecting each privately employed Californian to be able to pay $140 in 2012 for every $100 he paid in taxes in 2003. Yet his income has increased by far less: for every $100 a private-sector employee earned in 2003 he earns approximately $120 in 2012.

Where does the state government expect to get the remaining $20 from?

Looking again at California’s employment numbers, we find that there are fewer people working in Californa’s private sector in March of ’12 than even in March of 2000. Yet the state legislature has not downsized its government to 2000 levels. The state has 12 percent more employees now than it had in 2000; in fact, the state government had as many employees in March 2012 as it had in March of 2007.

It is unlikely that Governor Brown will realize what he is doing to his state in time to save it. To do so, he would have to abandon his policies of combining spending cuts with tax increases. Instead, he would have to:

  • Combine spending cuts with tax cuts;
  • Make the spending cuts structural so that they phase out, and eventually eliminate, entitlement programs; and
  • Cut taxes in such a way that people can take care of themselves instead of relying on government.

It is very unlikely that he will do this. More likely, Governor Brown will press on with his austerity policies: higher taxes and less spending. The result will be a continued erosion of the tax base. Not only will businesses refrain from expanding, but there will be close-downs and an escalating migration of productive citizens and businesses out of the state.

In 2009 California had a net migration loss to the other states of 87,000 people. The largest destinations for outbound Californians were states with notably lower taxes. Among the most attractive were no-income-tax states like Texas, Washington and Nevada. These numbers, which are the latest available, are likely to be significantly higher for more recent years.

California still has the chance to get out of the austerity spiral. But time is running out. If Governor Brown does not take the right steps and put his state on the right track, his austerity policies will put the entire nation’s economy in jeopardy. The consequences for all of us would be devastating.

Europe: From the Welfare State to the Totalitarian State?

Thanks to the voters who put Obama in the White House in 2008 and Democrats in charge of Congress in 2006 elections, the hard-line left has been able to determine the course of America over the past 3.5 years. In the 2010 election a majority of voters issued a restraining order on the runaway leftists who thought they were invincible after 2008. But so long as we have a radical in the White House and a Democrat Senate majority that gives the president a pass on every decisive power grab he wants, we are going to continue down the path that the hard-line left staked out in ’08.

That path goes straight into the murky backwoods of big-government Europe. We have already seen numerous examples of how the Obama administration is Europeanizing America: from anti-business environmental regulations to health “reform” to socialization of student loans to the continuous assault on state sovereignty. Everywhere they can they create another government incursion into the lives of private citizens.

Since the Obama administration and its allies in the Senate want to continue down the path of Europeanization, we need to look at what is going on in Europe and learn from their mistakes. We already know about the disastrous fiscal situation in welfare states like Greece, Spain and Portugal and what that will mean for America, should we continue to build a European welfare state here. What is less known is that the harsh austerity policies used in Europe to save the welfare states from inevitable collapse, are also having serious repercussions beyond the realm of economics.

As a result of a continuous downward spiral of unemployment, higher taxes and economic deprivation, Europeans are becoming increasingly desperate. Even politically. Support for extremist political parties is rising all across the European Union. in the harsh economic realities created by a crumbling welfare state and destructive austerity policies, authoritarian political movements are experiencing a new dawn.

Not surprisingly, Greece is the scene of one of the strongest surges in extremism. Nazis and Soviet-style Communists are rapidly gaining ground among voters and could make big gains in the upcoming parliamentary elections. In France, the leader of the National Front, Marine LePen, got 20 percent of the votes in the first round of the presidential election, placing her a close third among all voters. Her support among first-time voters surpassed that of any other candidate, which puts her party in a very favorable position for local and regional elections in the next few years.

In Hungary, one of the youngest members of the EU, the new government has brought back an old-style, dingy European form of nationalism that is openly threatening the country’s parliamentary democracy. The success of the Fidesz and Jobbik parties was built on deep dissatisfaction among Hungarians with the austerity policies forced upon them by the European Union.

Even Britain, often considered the pillar of classic European liberalism, freedom and democracy, is tilting toward the shadows. The British National Party, which gained significantly in opinion polls back in 2009, seems to have survived internal faction-fighting and is a frighteningly resilient player on the British political scene. Its fellow traveller on the authoritarian side of the political spectrum, the English Defense League, is a fast-growing, street-wise anti-immigration movement with an authoritarian touch and a disdain for the British parliamentary system.

In Sweden, the openly un-democratic National Democrats have seats in several city councils and are preparing for participation in the 2014 national parliamentary elections.

All these parties have one thing in common: they want to preserve the welfare state and they blame its decline on a combination of economic freedom, free trade and immigration. They are generally prepared to save the welfare state by sacrificing or severely restricting political freedoms and parliamentary democracy. They propose far-reaching government control over the economy – the differences between them are limited to how much of private property rights they want to take away. Other than that, they all stand for higher taxes, preserved or expanded welfare programs and harsh control of businesses. They also want to restrict free trade and more or less close national borders.

What is emerging in Europe is nothing short of a totalitarian attempt at defending the inherently failing, and doomed, welfare state. If this movement becomes stronger, history from the 1920s Germany will eventually repeat itself. The German leaders during the Weimar republic did everything they could to preserve their welfare state in the face of enormous economic problems. Since the economy could not afford the welfare state, and since they were ideologically married to keeping it, the Weimar government tried its very best to shrink entitlements to make them fit the ever shrinking tax base. In a desperate measure to try and avoid the inevitable they started printing money en masse. The currency collapsed, economic and social chaos took over – and the road was paved for the NSDAP to march into Berlin.

With exception of the money-printing part, all the ingredients are there: a “higher” cause that motivates repealing political freedoms; a crisis to rally people around one leader; and a convenient group to blame. This group is not the Jews this time, but non-European muslims. It is a fact that Europe has received more muslim immigrants than the continent can handle, but this does not mean that they are the origin of the economic crisis. And it certainly does not mean it is legitimate for power-hungry, authoritarian-minded politicians to play the “blame game” on them.

The only ingredient missing is hyper-inflation. So long as countries like Greece stay within the European currency union they won’t be able to print money and destroy a currency in the name of saving the welfare state. However, there is a scenario where the EU can give up on Greece, and Greece give up on the EU. If the Greek government feels that their democracy cannot surviv another round of austerity, they may very well decide to leave the currency union, reintroduce their national currency and monetize their deficit. This would add the final ingredient and resurrect Weimar.

When one country has left the euro zone, pressure is going to mount for others to do the same. Spain and Portugal would be next, and the probability is high that they would take to the monetary printing presses to try and save their welfare states. It is not going to work, of course, but before they realize that they will also have stirred up the same ugly stew that brought Hitler to power in Germany.

A breakdown of Europe’s currency union was unthinkable two years ago. Today, more and more analysts are pointing to it as a credible alternative in the next couple of years. Likewise, the resurrection of authoritarianism in Europe has been unthinkable for a great long time, yet that is precisely what is happening.

With this in mind, and given the fact that America’s left is pushing hard to transform us into Europe 2 – how unthinkable is it that we might also experience a turn toward authoritarianism in the future? Just how far are American lefitsts willing to go to defend their welfare state project?

The Swedish Disaster – America’s Future?

If Obama gets re-elected, and if the Democrats gain any more power in Congress than they already have, it is almost certain that America will quickly turn into a full-fledged European welfare state.

Obama’s America is not the America you grew up in. It is not the America you want your children to grow up in.

I know, because I actually grew up in Obama’s America. It’s called Sweden.

For decades, the American left has touted Sweden as a role model for America: its income security system, its universal, tax-paid child care, and of course its government-run, single-payer health care system. From college professors to politicians, liberals have done everything in their power to convince America that they should entrust their and their children’s future to a Swedish-style social democratic welfare state.

God help America if they succeed.

Before I share the true story about Sweden, let me explain how close we are to fulfilling this wet Swedish dream of the left. The federal government only needs to add three more features to the already large American welfare state: single-payer health care, universal child care and general income security.

As I explained in my column last week, the road to a single-payer system is already paved. Proposals for federal, universal child care have been floating around in liberal circles for many years. Thankfully the idea has not yet gotten serious traction here in America, but don’t hold your breath on that. As recently as in 2008 Hillary Clinton made it one of her major issues.

The second biggest trophy for welfare statists, after single-payer health care, is a general income security system. It means, plain and simple, that government taxes us to hand out income replacement checks when we are home from work for a variety of reasons, such as caring for a sick child.

Sweden’s general income security programs are very elaborate. Predictably, they have also eroded workforce participation and raised government dependency to alarming levels.

In 2009 Congresswoman Lynn Woolsey (D-CA) introduced a bill to create a general income security program. It was called the FIRST Act, “Family Income to Respond to Significant Transitions”, and gained two dozen sponsors. Thankfully, it never made it out of committee.

That does not mean it won’t come back. Keep in mind how relentless the liberals were in getting a government-expanding health reform done. Behold Obamacare. The idea of a general income security program has strong support by the influential Center for American Progress, whose senior economist Heather Boushey has testified before Congress in ardent support of the act.

One of the most serious problems with the welfare state is that it is socially and economically deceitful. It comes front-loaded with benefits – you get your entitlements from day one – but the true cost does not appear until much later. And when the cost comes, it hits others than those who cashed in on the benefits.

Let me use my own background to illustrate. My grandparents were born in the 1910s into a country that had no welfare state whatsoever. They got married and had children in the late ‘30s and ‘40s, still without a welfare state to take care of them. They lived by the old-fashioned work ethics that has underpinned Western Civilization for centuries: work hard, be virtuous and charitable, and take care of your family. They were poor, but they were still able to feed, clothe, house and educate their children. And they were proud of it.

My mother once said of her upbringing: “We never had time to complain about how poor we were. We were too busy doing our homework.”

As my parents grew up during the ‘50s, the Swedish welfare state started growing. The socialists who ruled Sweden uninterruptedly for 44 years expanded government in all thinkable and unthinkable directions. There was universal child care, and all kids were supposed to be in it. There was socialized health care. Public housing was expanded to such a degree that only families with very high incomes could afford a house.

Private landlords were reduced to a curiosity.

Even when you rented from public housing you got a tax-paid subsidy check toward your lease. You got an annual child benefits check (as opposed to the American tax credit version).

And then of course there was general income security.

In Sweden, the general income security was set up to pay the paycheck for pregnant women, for women who had just had a baby, for women who wanted to stay home with their baby, for anyone who wanted to stay home and take care of a sick child or a relative in need of assistance.

In 20 years’ time, from 1960 to 1980, the size of government as share of GDP went from 18 percent to 40 percent. For my parents’ generation, it looked like Sweden had found The Ultimate Solution to all social and economic problems. They voted passionately to keep the welfare state in place, even when systemic problems began showing up in the early ‘80s.

To pay for its enormous spending, government needed tax revenues. Lots and lots of tax revenues. Local income taxes doubled from 1960 to 1980. The top bracket of the national income tax reached 80 percent and in some absurd cases even topped 100 percent! The value added tax (a complicated European replacement for the sales tax) climbed to 25 percent.

To pay for the general income security system the Swedish government raised the payroll tax year after year. It is now twice as high as the American payroll tax.

Inevitably, this max-tax policy started affecting the free part of the economy. Economic growth slowed to a crawl, private consumption virtually stagnated, and after the recession in the early ‘90s Sweden never recovered from its huge private-sector job loss. Today Sweden has as many private-sector jobs as the country had 20 years ago.

This stagnation in the private sector also shows itself in sharp increases in the actual tax burden. For every $100 a taxpayer paid in taxes in 1990, he paid $143 in 2000.

Again, under the world’s highest taxes the private sector has stagnated. Tax revenues have stagnated as well – but demand for services and entitlements from the welfare state have skyrocketed. This is the work of a combination of reckless generosity from the welfare state and rising poverty due to a poorly performing economy.

In response, Sweden’s lawmakers have instituted perpetual austerity programs. They cut services, reduce entitlements and try to change eligibility rules to lock more and more people out of the welfare state. But they don’t cut taxes to compensate; if they did, they would admit that the welfare state is no longer working.

The price for this perpetual austerity policy is high. Health care services have been cut to bare bones, with, literally, deadly consequences. Patients die of curable conditions at rates that would cause a revolution in America.

When my grandfather got heart problems in the 1990s, after a long life of hard work and putting his faith in the welfare state to be there for him when he needed it, he was admitted to a government-run hospital, courtesy of the Swedish single-payer system. His experience was so terrible that he begged my grandmother: “If I get ill again, please do not send for an ambulance. I’d rather die at home than go back there.”

He passed away peacefully at home. My grandmother, on the other hand, ended up in the harsh, budget-starved hands of a government-paid elderly “care” home. After a traumatic period of neglect, malnourishment and carelessness she died alone, humiliated and abandoned by a welfare state she had put her faith and money into all her life.

Her experience is shared by vast numbers of Sweden’s elderly today. Despite the world’s highest taxes the Swedish welfare state still cannot care for the most vulnerable. Elderly care homes are cutting costs to the point where they impose severe rationing of food, coffee and personal hygiene for their residents/patients.

The rest of the welfare state is in equally bad shape. The general income security system orders cancer patients back to work in the name of cost cutting. What was once created as a compassionate government institution to allow people to get well without the pressure of having to rush back to work, is now a bureaucracy with one single goal: to cut its costs and terminate entitlement payments to individuals as quickly as possible.

All this is systemic and inherent to the welfare state. It brings this destructive ausiterity upon itself. Its confiscatory taxes crush the private sector. Adding insult to injury, the welfare state itself de-incentivizes work: when government promises people all sorts of perks to people, one big reason to work hard is gone.

My parents grew up to enjoy all the perks the welfare state provided for them; my generation, born in the ‘60s, pays the price in the form of low income, perpetually high unemployment, low and stagnant standard of living and a grim outlook on the future.

I left Sweden in the late ‘90s. I have never looked back. The last thing I want is for America to become another Sweden.

There is still time for America to turn the tide on the welfare state. But not much. Only a strongly conservative Congress and a freedom-minded president can safeguard us against being transformed into another Sweden.