RSS Feed MenuMissing from the media coverage of Greece’s budget meltdown has been a message perhaps never before proven so true: social democracy isn’t sustainable. Greece spent the last few decades erecting social safety nets: government healthcare, a retirement age of 61, and a generous welfare system. As a result, it’s run massive deficits and faces a debt to GDP of 150% by next year: if the country doesn’t go bankrupt before then.
Spain, Italy and Portugal are in a similar boat, each weighed down with debt loads from cradle to grave government programs that are proving to be unaffordable. Each country has also enacted sky-high taxes in an attempt to pay for at least part of the cost. Spain’s VAT tax (a national sales tax) alone is 16%. Higher taxes haven’t been good for Spain’s economy, where unemployment just shot above 20%: putting more people on welfare and adding to the country’s deficit.
In an attempt to trim its deficit, the Greek government has proposed modest cuts to government worker salaries, and wants to increase the retirement age (the age at which all Greeks can collect a pension from the government) to 63. Doing this would only reduce the budget deficit from 13.6% of GDP to 8%, but even these “austerity measures” have provoked massive protests from a public that has never been told “no” by the government before. One protester complained that if the cuts to her salary are enacted, she would have to forgo buying a new car, and would need to switch to using cheaper makeup.
One problem with an economy based around government spending is that, unlike a private-sector business, it’s nearly impossible to cut spending when times are bad. Look at England. UK Conservative Party leader David Cameron had been running as a strong fiscal conservative last year, proposing necessary cuts to Britain’s budget. This quickly proved to be political suicide in a country where 53% of the economy is government spending and more than 6 million people work for the government. Gordon Brown and the Labour Party pointed out the impact that cuts would have on healthcare, government workers, and the performance of an economy dependent on government spending. Cameron blinked, dropping proposals for cuts that had any teeth.
Regardless of who’s in power, how will Britain find the political willpower to trim its exploding deficit? By defunding the armed forces. The UK’s military has already been hit by the budgetary axe, with many army battalions 1/5th below their regular size (2/5th when you count soldiers so injured they aren’t fit to deploy). Many in England are already questioning the importance of remaining a world military power, reports the Economist, arguing that “Britain could limit itself to defending its national territory while sheltering under NATO and America’s nuclear umbrella.” In a country dependent on government spending for social services, it’s easier for politicians to gut their militaries than to ask citizens to accept the cuts. National security? Why worry about that when you know the United States can bail you out.
Last week Bill Maher pointed out the merits of Europe’s social safety nets over American capitalism, using statistics from infant mortality rates to life expectancy. Even if one is to concede that Maher is correct, his argument misses the point: economies heavily dependent on big government are not sustainable. One by one, European governments are beginning to show signs of breaking economically. Greece may get bailed out for now but its debt will only grow, reaching 400% by 2040. Long before then, the country will either collapse into bankruptcy or unwind its government-run healthcare and pension system.
Nations must adopt economic systems that are financially sustainable, by giving citizens control of their own destiny. Cradle to grave systems will only push them into a grave.
sinz54 // May 4, 2010 at 12:33 pm
Krugman wrote a column in the NY Times, in which he blamed the euro for Greece’s problems. If only the Greeks weren’t tied to the EU and the euro, they could simply print more of their own currency and hyperinflate their way out of their debt problems.
That’s likely to be the liberal prescription for America’s debt problems too: Double-digit (or even triple-digit) inflation will make America’s nominal $8 trillion debt melt away in inflation-adjusted terms.
All those who depend on savings for their kids’ college education or their own retirement will see those savings melt away. And the cost of investment will soar, as depreciation writeoffs will decline to nothing too. Back to the 1970s we go, by young fools who are too young to remember the last time we tried this.
forgetn // May 4, 2010 at 1:45 pm
First off, I understand that you are fighting a rear-guard anti-VAT fight in America, but lets be clear VAT has been in place in Spain for many years (as it has across Europe for that matter), that is not even close to being the case of Spain’s current problems.
Spain’s problem arose first from a building boom that turned southern Spain in the playground of Northern Europe. Today 5% (1.6 million) of the housing stock is vacant and prices are falling (as are taxes). BTW the Spain’s vacancy rate is almost identical to that of the U.S. (in the us with a 300 MM population the figure is around 14 million).
Second, Spain’s deficit is almost identical to that of the U.S. of about 11% of GDP, but its external debt is far smaller at 66% (Vs. 89% for the U.S.), but that deficit is growing quickly, from 36% of GDP in 2007 to 94% in 2014, because Spain’s revenue base has eroded faster than has America’s. Moreover, Spanish taxation rates are far higher than in the U.S. so Spain has no real room for maneuver there (Americans ares very lightly taxed compared to Europe).
At this stage I’m not sure there’s anything left to learn from the errors which have been made, Europe was too slow in reacting — contagion has taken over. Spain is still a side show, the real event is Italy that has serious borrowing from French banks & insurance companies (around Euro 500 billion).
But overall, VAT is not the culprit, sure any tax will have the effect of slowing economic activity, but for most of the decade the Spanish economy has been red hot (GDP growth was far higher than the U.S.) so VAT is not the issue or to blame. Economic rigidities and a blinkered mentality were a big issues, but Spain was in excellent company there. I still remember commentators laughing at anyone who said there was a U.S. housing bubble in 2007…
Natal // May 4, 2010 at 2:02 pm
It the engagement in unnecessary wars that’s going to sink the US economy. There’s little or no benefit to the standard of living of the average American. The Canadian social democracy survived the recession meltdown very well.
thijsvn // May 4, 2010 at 2:03 pm
It’s unbelievable that you wrote an entire article on this subject without mentioning the corruption in Greece. The total tax evasion in Greece is estimated to be as high as 10 % of the GDP, which is just insanely high. So this is an integral part of the problem, leaving it out because it doesn’t flow with whatever you’re trying to sell is ridiculous.
mcmilner // May 4, 2010 at 2:48 pm
We’re doing pretty well, thank you, in France, Germany, Scandinavia and, even Great Britain. Maybe we veer too close to “socialism” for your liking, but our health care, at least in France, costs the country a fraction of what it costs in the U.S. and we live longer. Perhaps you equate a healthy economy with rich insurance companies.
Greece’s corruption goes beyond anything ever contemplated in the phrase “banana republic.” The government is lives on bribes, accounting is “creative,” taxes are not collected. Equating Greece with either “socialism” or “government” is a contradiction in terms. It’s a society built on corruption and graft. Unfortunately for Greece, and the rest of Europe, without collecting taxes, you have an unsustainable economic model.
bfos // May 4, 2010 at 7:06 pm
These are valid questions to discuss. There is truth to the devastation that can be brought about by excessive and unrestrained public spending. But, it is quite a stretch to throw social programs out the window because Greece and others are having such issues. Have we already forgotten what happened in our own economy just one year ago? Without MASSIVE public support, our infallible economy wouldn’t exist as we know it. The lesson we learn from that isn’t to throw out free enterprise, is it?
bamboozer // May 5, 2010 at 7:04 am
Yet another article that attempts to identify social programs as the root of all economic evil despite the success of the programs. It then attempts to brand Greece as the fate of all nations that employ social programs. Take this time to remember these programs came about due to the endless social misery uncontrolled Capitalism produced.
Taking advantage ... // Jun 30, 2011 at 6:19 am
[...] have to forgo buying a new car, and would need to switch to using cheaper makeup. read more at: Will Europe Learn from Greece’s Budget Meltdown? | FrumForum "To talk well and eloquently is a very great art, but that an equally great one is to [...]