T Nation

Poor, Old Social-Democratic Europe


#1

Any thoughts on this study? I say it makes a good case for fewer regulations -- especially those that simply make it harder to do business or make things more expensive.


Europe vs. America
June 18, 2004; Page A10

The growing split between the U.S. and Europe has been much in the news, mostly on foreign policy. But less well understood is the gap in economic growth and standards of living. Now comes a European report that puts the American advantage in surprisingly stark relief.

The study, "The EU vs. USA," was done by a pair of economists -- Fredrik Bergstrom and Robert Gidehag -- for the Swedish think tank Timbro. It found that if Europe were part of the U.S., only tiny Luxembourg could rival the richest of the 50 American states in gross domestic product per capita. Most European countries would rank below the U.S. average, as the nearby chart shows.

The authors admit that man doesn't live by GDP alone, and that this measure misses output in the "black" economy, which is significant in Europe's high-tax states. GDP also overlooks "the value of leisure or a good environment" or the way prosperity is spread across a society.

But a rising tide still lifts all boats, and U.S. GDP per capita was a whopping 32% higher than the EU average in 2000, and the gap hasn't closed since. It is so wide that if the U.S. economy had frozen in place at 2000 levels while Europe grew, the Continent would still require years to catch up. Ireland, which has lower tax burdens and fewer regulations than the rest of the EU, would be the first but only by 2005. Switzerland, not a member of the EU, and Britain would get there by 2010. But Germany and Spain would need until 2015, while Italy, Sweden and Portugal would have to wait until 2022.

Higher GDP per capita allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. "Most Americans have a standard of living which the majority of Europeans will never come anywhere near," the Swedish study says.

But what about equality? Well, the percentage of Americans living below the poverty line has dropped to 12% from 22% since 1959. In 1999, 25% of American households were considered "low income," meaning they had an annual income of less than $25,000. If Sweden -- the very model of a modern welfare state -- were judged by the same standard, about 40% of its households would be considered low income.

In other words poverty is relative, and in the U.S. a large 45.9% of the "poor" own their homes, 72.8% have a car and almost 77% have air conditioning, which remains a luxury in most of Western Europe. The average living space for poor American households is 1,200 square feet. In Europe, the average space for all households, not just the poor, is 1,000 square feet.

So what is Europe's problem? "The expansion of the public sector into overripe welfare states in large parts of Europe is and remains the best guess as to why our continent cannot measure up to our neighbor in the west," the authors write. In 1999, average EU tax revenues were more than 40% of GDP, and in some countries above 50%, compared with less than 30% for most of the U.S.

We don't report this with any nationalist glee. The world needs a prosperous, growing Europe, and its relative economic decline is one reason for growing EU-American tension. A poorer Europe lacks the wealth to invest in defense, a fact that in turn affects the willingness of Europeans to join America in confronting global security threats. But at least all of this is a warning to U.S. politicians who want this country to go down the same welfare-state road to decline.


#2

That seems like an unsolicited endorsement for supply-side economics.

Let the people keep more of their own money, and they will buy shit with it. They will create the jobs that Gov't programs cannot.

I think 30% of our GDP is still way too much tax.


#3

It's no secret that tax cuts boost the economy, although to what degree is hotly debated.

I still think that arguing for tax cuts based upon economic improvement distracts from a more important issue... "negative" liberty. (As opposed to positive liberty, which is a pseudonym for social programs.)

The economic boost is irrelevant. It's MY money, not the government's. Yes, taxes are necessary to sustain necessary government programs. However, forgetting that the money belongs to the individual who earned it and not the government, leaves the door open for waste, dependency, and unwanted babysitting.

It's very interesting that the most quoted critic of supply-side economics, Paul Krugman, predicted that the Soviets' economy would surpass ours, and that the Soviets were unstoppable. Then, instead of admitting he was wrong, made up lies and pointed fingers. There's nothing like stepping up academic dishonesty to prove a point.

And he's STILL quoted by the media on economics!


#4

I agree with you to a point. On a micro level - "it's my money and I want to keep it" has nothing to do with the condition of the economy - it's a personal thing.

But on a macro scale- when 150 million people have more money in their pockets - more money is spent. Businesses are started, people are hired, more money is made, more money is spent. The economy improves.

To argue against my self - all economies are cyclical. There's no pie in the sky answer to keep the economy always growing.

Some say that the Fed has more to do with the economy than tax cuts. That may be true if you're a bank, or an investor, but Joe the Butcher is more concerned with selling prime cuts than how much the prime rate is going to change. The Fed can control the cost of money, but in a free market economy - it's supply and demand that fuels the bus.

In the late 70's, we were in one of the worst ecomonic cylces since the depression. Top marginal rates were 70%. When those rates were lowered to 28% Americans pulled themselves out of the shitter on their own. Was it more money in our pockets that pulled us out, or Greenspan doing his magic that pulled us out? I like to think it was us, not the gov't, that fixed our problems.


#5

Great thread.

Don't forget, Paul Krugman was once an advisor to Enron.

Europe has made its bed and now it must lay in it. The generous welfare and pension state has sapped initiative. Entrepreneurs have to get an act from God before they can hang their shingle out. Tax rates erode real savings (I don't count European gov't pensions since demographic mathematics spell bankruptcy) and investment.

Europe's grand design now is to glue enough countries together in a pact and add their GDPs together until they get enough to surpass the US - all this to assuage the massive inferiority complex.

Reform has been needed in Old Europe for awhile - steady, sober, conservative reform. That these problems are being ignored is giving rise to political movements like Le Pen in France - angry, revolutionary minded, and wanting to charge the Bastille.


#6

Timbro, just what then world needs another neo-conservative think tank.

It would be very interesting if Timbro had information about its financial backers on its website. After all you will get the results that please you bosses.

They throw a lot of code words around (i.e. freedom, liberty, globalisation, free trade etc) but I doubt they mean it.

Here is a simply test for anyone who espouses economic freedom and free trade etc: ask them their opinion on private money? If every thing else is free and open why not the right to issue money? This will expose them for the socialists/statists that they really are. Basically they don't care about freedom, liberty etc it is just their vehicle to wealth and power (i.e. take over and expand the state).

When people start talking about "open anything" and "new anything" (as the Timbro does) I get very nervous. Whether it be open:
Society (Open Society Foundation, George Soros's revolutionary pardon me charitable group)
Boarders
New:
American century (neo-con think tank)
World order
Deal (FDR's original)
Economic policy (where Lenin went back to capitalism after all the wealth of Russia had been transferred to his Bolsheviks cronies, most of who were not Russians. Minus tens of million of dissenters I mean White Russian, counter-revolutionaries, bourgeois who just had to die for the whole thing to work)

This is the international communism of our time. Basically it is the same old bullshit; tell a good story to the great-unwashed trigger finger happy. Then start a perpetual revolution so you and your cronies can become the new kings. Lots of people will die in the process but you will be rich and powerful.

All the better if this is on a world scale rather than just your little piece of dirt (hence to push for open everything, one world, world government, globalisation, internationalism etc)

So given that I consider anything Timbro, think tanks in general, politicians, media say as mute.

Oh by the way what tax cuts? The US has just moved away from direct taxation (i.e. income, sales etc) to taxation by inflation. Everyone who holds US Dollars is taxed when the Federal Reserve monetarists debt (i.e. print money and then buy US treasuries (i.e. government expenditure not paid by direct taxation) or as those in the trade call it "expansionary monetary policy" or theft if you are more uncouth). Notice of late that you can't buy as much with your money? Where has your wealth gone? To the US government via the Federal Reserve (commercial banks get their cut too).


#7

Don't forget, depending on the precise tax rate that is changed, the effect of a tax cut will be greater or lesser. For example, the Child Tax Credit or Education Tax Credit, while they are technically tax cuts, have neglible stimulus effects. However, cutting the capital-gains tax, the dividends tax or the income tax have very stimulating effects (although different from one another). Also, the rate of the tax when it is cut will affect the marginal effect of the cut, a la the Laffer Curve.


#8

Bluey -

There is such a thing as creating your own currency. It's called the Barter system.

There has to be a gov't monitored currency system in order to collect taxes, incur debt, and pay debt.

Just in case anyone's interested - Alexander Hamilton was a big proponent of nations carrying debt to insure their existence.

Ever notice that the nation's debt increases when the economy is increasing?

FYI -


#9

My position in reference to economic and financial matters:

I tend to disbelieve groups that call for freedom, liberty, openness, competition etc if they are then unwilling to apply these principles money.

Money is just like any other good or service. Because of this there should not be a government monopoly on money.

Why does the government insist on this monopoly? Because it gives itself an almost unlimited scope to fund its megalomaniacal ambitions. The mechanics are somewhat complex but this is a crude version:
1 Expenditures greater than direct tax revenues thus runs a deficit
2 Issues treasury debt
At this point the treasury debt has to be paid with future direct tax revenues
3 But the Federal Reserve can always just increase the money supply
How does increasing the money supply pay for government?
Well the Federal Reserve has some nice newly created dollars (either notes or ledger balances). But how does it put them into circulation? It then buys treasury debt. The effect of this is that more dollars are in circulation but less treasury debt is. This is less treasury debt that has to be paid with future taxation.

The net effect is that government can fund its expenditure through either direct taxation or monetary inflation (i.e. growth of the money supply).

Magic? The nasty side effect of this monetary inflation is that the dollars that you have laboured for fall in value (more dollars chasing the same amount of goods and services, then the value of the dollars is going to fall). This decrease in wealth (i.e. what you can consume) is the silent tax of inflation. But really you are still paying tax.

So surely neo-conservatives are in favour of paying less tax (i.e. either direct of inflation) and the smaller footprint of government that would result? In this case I can?t see how they can be in favour of the massive tax that is monetary inflation.

If they are I would consider them insincere and question whether they are just using the ?freedom, liberty, competition? mantra as their path to power.

International communism was a good story (i.e. equality for all) but really it was just about transferring power to the communists. Lenin?s New Economic Policy is a very good example (basically all the wealth of Russia was moved to Lenin?s cronies no real equality, no real socialism just a power transfer).

I consider neo-conservatism to be an ideology similar to international communism. It may be a good story to tell the masses (i.e. freedom, liberty, openness etc) but I doubt it is anything but a tool so that the neo-conservatives can increase their power.

If neo-conservatives were genuine they would not object to extending their principles to money. But they will never do this since it will drastically limit their power.

Exactly. People should be ?free and have the liberty? to accept anything they won?t for their goods and services. The government should not force them to only accept the government money.

With government force private money would quickly out compete government money. Are you going to accept irredeemable dollars or claims to deposits of a universally valued product?

For example you have two bank accounts one has a balance of dollars (when you redeem your account all you get is bits of paper) the other has a balance of ounces of gold (when you redeem your account all you get is physical gold). You can transfer your claim (either of dollars or gold) to someone else in exchange for goods and services (i.e. this is money, a medium of exchange).

For most of history (until 1971) the claim to a universally valued product has been preferred. Now some might argue ?this time it is different?. It may well be. But people also said that ?this time it is different? in regards to Internet stocks. If this time it is not different and paper money collapses the carnage of tech wreak is going to be minor in comparison.

Well this just proves my point that people who object to private money are just closet socialists. Really you could not find a more glowing demand for big brother to know and monitor everything about you and then demand an increasingly large chunk of you for the service.

You can incur debt and pay debt in any means it does not matter.

Of course government could not incur the debts that it does or service this debt without the tax of monetary inflation. This is just another endorsement of the all powerful and ever growing state.

Alexander Hamilton as in the main proponent of the foundation of a national (i.e. central) bank?

?Alexander Hamilton, founding father, first Secretary of the Treasury, major author of the Federalist Papers and advocate of a strong central government.?

From:

http://www.isidore-of-seville.com/hamilton/

?Advocate of a strong central government? I take strong to mean large and influential.

This is another example of neo-conservative insincerity. For all the rhetoric of limited government they are unwilling to support the one measure that would bring it into effect (i.e. remove government ability to fund itself through monetary inflation).

Of course he was in favour of a nation carrying a large nation debt, it meant greater profits and greater power to his constitutions, the bankers.

Have a look at the chart below. Basically a third of the budget goes to the treasury department. What does the treasury department do? Well the best analogy is that is just a collection agency for the banks. Would your life be better off if a third of the budget was returned to you in tax cuts or it was spent on government programs? Well this is not possible since it is a good thing (supposedly) that nations carry debt. Again the insincerity debt means more tax, more government etc.

If the chart does not come up here is the link:

http://www.federalbudget.com/

This would be fine it there was a real increase in the productive capacity of the economy. But in the post services (i.e. not based on farming, mining, manufacturing and increasing less on service) it is a debt binge that is fuelling economic growth. This can?t go on for ever at some point the creditors are going to stop lending and demand repayment. Since the productive capacity has not increased repayment is going to be very painful.

Look at a personal example if I borrowed 10 K from a loan shark the first few days might be enjoyable but if I had spent (as opposed to invested) the money repayment is going to be a bitch. This is the same for a nation that borrows to consume.

That?s OK. I especially liked the whole debt being a good thing. Surely that what is true for a person is also true for a nation. Debt is not good for a person.


#10

Bluey -

Hamilton was in favor of some debt, not too much debt. That is what should be transferrd to individuals.

If it were not for the ability to incur debt, how many people could own their own homes? How many people could afford to buy a car?. That is good debt. Credit card debt, and other types of unsecured borrowing - that is debt that is choking the average joe in this country. It's a disease.

There are trade offs that a people must be willing to make in order to preserve an infrastructure, a national defense, and maintain it's ability to trade outside it's borders.

You can't have private money and enjoy the peace of mind that comes with a strong national defense or a well maintained infra-structure.

Your point about just printing more money is a valid one - but that would lead to rapid inflation. We don't have that right now.

In a free market economy, anything the fed does is reflected almost immediately in the financial markets.

When more money is printed, each successive dollar printed becomes less valuable than the previous. This is what gives rise to inflation.

I would agree that we spend entirely too much of our tax dollars on fluff. However this has little bearing on the supply of money, or it's cost other than to say that it takes money out of the private sector where real economic growth is born.


#11

bluey:

The problems you state are indeed associated with too much inflation. However, we have to grow the money supply to allow for economic growth -- in order to allow businesses to afford to borrow to take on expansive activity.

And, don't forget, that deflation is punishing as well -- punishing to those who have debt (which is a lot of people in our society, given mortgages, college loans, etc.), because it makes the money they need to pay back more dear than the money they borrowed.

Milton Friedman believed that the proper level of a target for growth in the monetary supply to allow for growth and to battle inflation, without amounting to much of an invisible tax, was approximately 3% per year.

It's interesting that you think private money is the only way to police the politicians on the money supply. Luckily, in the U.S., Congress has no power over the money supply. The only way the legislature has any influence over the money supply is the Senate's ability to confirm the President's appointments to the Federal Reserve. In addition to the independent fed, we also have external discipline imposed on our currency via the exchange rate, i.e. the market for currency. Many countries have discovered, much to their chagrin, that the currency market is a very stern master when it comes to inflationary policies.

I'm not saying that private money could not work. But I am saying that the U.S. has some very good safeguards on its monetary policy, and that people are willing to give up the freedom of private money in order to have a broadly agreed upon medium of exchange in this broad, fast-paced economy.