Northern Europe shows U.S. how to prosper: raise taxes

I'm a big fan of European "socialism." Which, of course, isn't really socialism.

It's a productive public-private partnership where people pay more in taxes than we in the United States do and get a lot back in return: economic growth, more income equality, greater opportunities for the middle class, stronger social safety nets.

Jeffrey Sachs is an economist who heads up The Earth Institute at Columbia University. He wrote a fascinating piece for the Huffington Post, "The Super Committee's Big Lie." Which is:

The big political lie of the Super Committee is that the deficit must be closed mainly by cutting government spending rather than by raising taxes on corporations and the super-rich. Both parties are complicit. The Republicans want to close the deficit entirely by cutting spending; Obama has brandished the formula of $3 of cuts for every $1 of tax revenues. On either approach, the poor and middle class would suffer grievously while the rich and powerful would win yet again (at least until the social pressures boil over).

What I found most eye-opening in his essay were the statistics about how northern European countries manage to out-perform the United States on a "misery index" that combines the unemployment rate, budget deficit as a percent of GNP, and the current account deficit (basically the ratio of exports to imports).

We're getting crushed on the Misery Index. 

When we calculate the Misery Index for the U.S., Canada, and Western Europe, we find that, lo and behold, the U.S. ranks among the most miserable performers, 5th out of 20 countries. The country with the highest Misery Index is Ireland, followed by Spain, Greece, Portugal, and the United States. All five countries deregulated their financial markets and thereby experienced a housing bubble and bust.

The lowest macroeconomic misery is in Northern Europe. Norway has the lowest score, followed by Switzerland, Luxembourg, Netherlands, Sweden, Germany, and Denmark. All seven countries have lower unemployment rates, smaller budget deficits as a share of GDP, and lower foreign deficits as a share of GDP, than the U.S. We look pretty miserable indeed by comparison.

Lots of people mistakenly think that Europe is in poor economic shape. Sachs says this is true of southern Europe, but not of northern Europe. Even conservatives who like to bash European social democracies recognize this. On right-wing talk radio I often hear envious praise of Germany.

So what can we learn from countries who are doing better on the Misery Index than the United States is? Well, we shouldn't be trying to lower taxes, but rather to raise them. Northern European countries collect considerably higher taxes from their citizens and prosper as a result.

Yet, miracle of miracles, these seven countries collect higher taxes as a share of GDP than does the U.S. Total government revenues in the U.S. (adding federal, state, and local taxes) totaled 31.6 percent of GDP in 2010. This compares with 56.5, 34.2, 39.5, 45.9, 52.7, 43.4, and 55.3 percent of GDP in Norway, Switzerland, Luxembourg, Netherlands, Sweden, Germany, and Denmark, respectively. These much higher levels of taxation are raised through a combination of personal, corporate, payroll, and value-added taxes.

The Northern European countries earn their prosperity not through low taxation but through high taxation sufficient to pay for government. In five of the seven countries, Denmark, Germany, Norway, Netherlands, and Sweden, government spending as a share of GDP is much higher than in the U.S.

These countries enjoy much better public services, better educational outcomes, more gainful employment, higher trade balances, lower poverty, and smaller budget deficits. High-quality government services reach all parts of the society. The U.S., stuck with its politically induced "low-tax trap," ends up with crummy public services, poor educational outcomes, high and rising poverty, and a huge budget deficit to boot.

Yes. It's a plain fact: the government often can spend our money better than we can.

Low taxation in the United States is stifling our ability to compete in the global economy. Our infrastructure is crumbling. Our mostly private health care system is wasteful and inefficient. Our citizens aren't being prepared for 21st century jobs.

A Gallup poll conducted about two months ago found that Americans support raising taxes on corporations and the wealthy. They also favor increased spending on public works projects, unemployment insurance, and public employees such as teachers, police offices, and firefighters.

In short, a majority of people in the United States want this country to become more like northern Europe, with higher taxes and more social spending. So why isn't this happening? That's the big question.

Sachs offers up some answers in his new book, "The Price of Civilization: Reawakening American Virtue and Prosperity." A review says:

Extrication of American politics from the clutches of the "corporatocracy" will require the provision of public money for campaign financing, free media time, a ban on campaign contributions from lobbying firms, and a stop to the "revolving door" between lobbying firms and federal employment. However, Sachs doubts whether effective government can be achieved without the rise of a "credible third party" to break the corrupted Republican-Democratic duopoly.

Makes sense. Hopefully the 2012 election will help get us closer to achieving these goals.

Comments

[DJ]

Anyone who merely watches Rick Steves can tell you there is much to admire about the rich history and modern culture of each of the countries of Northern Europe. But to compare them economically to the US is approaching the absurd.

The US has a $15T economy. Among the countries listed above, aside from Germany, all are measured in the billions, with teeny tiny little Luxembourg at just $55 billion. Did Sachs also write a book comparing/contrasting water pistols with automatic weapons? Yes, that’s just how absurd this conversation is.

So what about Germany? Germany is no doubt the economic powerhouse of the European Union, with an economy just over a fifth the size of that of the US. But if you think the German citizenry is happy right now with European style socialism, think again. Thanks to the interconnected socialist structure of the EU – Germans now get to see their tax dollars bail out citizens of EU member countries Greece, Italy, Ireland, Portugal, Spain, and Belgium who each figured out long ago that they could vote for the party that would promise them the most goodies from the public trough. That’s right – German tax dollars going toward “economic growth, more income equality, greater opportunities for the middle class, stronger social safety nets” - for citizens of OTHER countries. EU socialism is such a great model that the day is not far off when each bankrupt debtor nation is booted from the EU, or the EU itself ceases to exist.

By the way, each of the Northern European nations sleeps well at night taking for granted that if push comes to shove and history produces the second coming of Adolf Hitler, the US will be there to lead her allies to stop him. Each country aside from Germany has just a token military (if that), and in Germany itself reside more than 50,000 US active duty personnel. Did Sachs by chance factor that into his misery index mathematics? I kinda doubt it.

[DJ]

Here’s a Northern European example using Sachs’ own data. If socialism is so great and higher taxes was the answer for the Supercommittee to improve the US budget balance, then why does the UK – with a 9% greater taxation rate per GDP than the US – itself have such an out of balance budget? Answer: Because taxes aren’t the issue – spending is.

Today’s headlines from Financial Times: Britain Braces for Debt Storm (http://www.ft.com/home/us)

- British Chancellor George Osborne will on Tuesday be forced to admit that the black hole in UK public finances has increased by almost £30 billion, requiring the government to impose years of further austerity on the public sector.

And if socialism is so great and higher taxation is the answer to national prosperity, then why does the UK have such a high misery index?

[Blogger Brian]

Paul Krugman explains why. Conservatives have taken over the government in Great Britain. They embarked on an austerity program that hasn't worked. The deficit is rising, not falling. Unemployment is rising, not falling. That's why this country can't make the same mistake. Without job creation, deficit cutting won't work. See:
http://www.nytimes.com/2011/03/25/opinion/25krugman.html?_r=1&hp

[DJ]

Krugman is a Keynesian-style spender alright, but he also wants to raise taxes on the rich – a big Keynesian no-no. http://www.cnbc.com/id/45463641

From Wikipedia: “Keynesians see Herbert Hoover’s June 1932 tax increase as making the Depression worse and would advise tax cuts instead.” http://en.wikipedia.org/wiki/Keynesian_economics#Active_fiscal_policy

Keynes understood that if you want less of something you tax it. Under Keynesianism, taxes are raised to cool the economy during good times to prevent inflation. Yes, Mr. Krugman, that’s just what the US needs to do right now – give the rich one more reason to second-guess the business environment and sit even longer on their hands.

[tucson]

The Great Society welfare experiment started in the '60's has wasted trillions of dollars and the poverty rate has not improved one iota since its inception.

I just don't understand why people want to give this government more money when it has proven it can't manage it. You can tax the wealthy 100% and it won't put a dent in the $15 trillion dollar deficit. The government is a dying dysfunctional parasite in collusion with many corrupt businesses.

I don't want to be like Europe. I want to be left alone. I don't want to trade liberty for security. I don't want government intruding into every aspect of my life.

The spirit of this country is independence and freedom to succeed or fail according to one's talents and initiative. People came here originally to get away from "the boss."

The government doesn't owe anyone anything except law and order and national defense. Where is it in the Constitution that the wealthy must finance the improprieties of congress? Where is it in the Constitution that the middle class must do it? Where is it in the Constitution that I owe the guy living stoned under a bridge a house and a root canal? I may take pity and give him a handout, but that should be up to me or a private agency, not some puffed up bureaucrat.

What do we do about the poor and unfortunate? There will always be the unsuccessful as well as the prosperous. It is part of the polarity of life, the yin-yang if you will. However, in a healthy society there will be plenty of overflow to take care of food, clothing, and shelter for those who fall on hard times.

[DJ]

Gee that’s odd…newswires state that 15 EU nations have been placed on credit watch today by S&P…including Sachs favorites Luxembourg, Finland, Netherlands, and Germany. Guess those folks better brace themselves for a “misery index” adjustment as each country responds by “raising taxes in order to prosper.”

http://www.bloomberg.com/news/2011-12-05/s-p-said-to-place-all-17-euro-nations-on-downgrade-watch-over-debt-crisis.html

[tAo]

I totally agree with tucson.

[JackL]

@tuscon, there is no $15T deficit, that's the national debt. Increased taxation is not being offered as a way to pay off the national debt, except for the increased tax revenues from a healthy and growing economy. We do need to close the structural deficit and in today's economic climate, it will take additional tax revenue to close it. The problem with trying to keep revenues flat (even though we're at a historical low on tax rates) and reduce spending is the economic impact of taking that spending out of the economy. The government is acting as the spender of last resort since the alleged 'job-creators' with plenty of money in their pockets from the last 10 years' tax breaks are making enough money to satisfy themselves, particularly since they are able to expatriate profits.

@DJ, This country is much too big to rely on inhumane libertarian and/or conservative policies as a means to fixing our economic woes. You'll see revolution before that happens (just ask Frank Luntz). It's time to accept that government is necessary and needs to be fixed. Sitting back and spouting tired axioms that "government just doesn't work" is not an option. Government is us. As an advanced (arguable) civilization, we cannot avoid our social needs, particularly those for which a profit motive cannot be contrived, or for which private profit should never be a factor (like healthcare).

Germany may have its conservatives complaining about bailing out other countries, but they too belong to a bigger social structure and the national borders in Europe are giving way to a USE that will rival, if not exceed our economy. The "socialists" will win in Europe because a market-driven (though not completely free market) and socially responsible paradigm that currently works in Northern Europe (though not without recent strains) is ultimately scalable. Our economic and political structure is clearly broken in its current form--never mind with a larger populace and economy--and we are suffering in many ways as Brian points out.

[DJ]

JackL, the US economy is “too big” to be fixed with capitalism and fiscal discipline? But not too big to be fixed with socialism and runaway deficit spending – the very things that caused the problem in the first place?

You’ve got it all backward my friend. Uncontrolled deficit spending is fiscal cancer that can’t be cured with even more deficit spending. The “recent strains” you refer to in Europe are the beginning of the end for the EU. The biggest drag on the growth rate of large mature economies is deficit spending to service overburdened debt and to keep up with the myriad of entitlement and welfare programs (which of course we’re told spur economic growth, wink wink) . If digging the hole deeper was the answer, you my friend would be the inventor of the perpetual motion money machine: collecting more taxes creates more jobs which increase revenues with which to create even more jobs and pretty soon we’re all swimming in a river of gold. History hasn’t been kind to nations that have blindly taken that path.

By the way, do you like that computer you’re tapping on? It would be one helluva clunker (if it existed at all) were it not for the profit motive. If you want the healthcare equivalent of a profit-free computer, I hear Michael Moore recommends a visit to the state of the art healthcare facilities on the island of Cuba.

[tucson]

JackL wrote: "The problem with trying to keep revenues flat (even though we're at a historical low on tax rates) and reduce spending is the economic impact of taking that spending out of the economy. The government is acting as the spender of last resort"

--You're right, I meant debt not deficit. But it doesn't matter. It's all funny money created by the FED in collusion with international banking cartels. Bernanke is a shill for these interests. Take the money out of the economy? What money? It's counterfeit. The real stuff is long gone with the gold standard. Sooner or later the system must fall and hopefully out of the ashes will rise the phoenix.

Why give government money? All they do is create giant programs they can't manage efficiently. They have no one to answer to. No bottom line to meet. If they fail they run the printing press or sell some worthless bonds.

It all can be run by private enterprise... roads, schools, the military. All of it. Who builds the tanks? Not the government. Who builds the schools? Not the government. Who builds the roads? Not the government. All these things are built by private enterprises hired by the government who gets riped off and taken advantage of because they don't have to pay for it. We do.

All we need the government for is to keep us from hurting and screwing each other over. Murder,robbery,fraud,assault pollution and theft. That sort of thing.

Executive, legislative, judicial. That's it. Back to basics.Get them working for us instead of the other way around.

Let the marketplace sort out the rest. Ultimately that's what happens anyway.

[DJ]

Surprise, surprise. Despite my skepticism of Robin Hood economics, I still gave Sachs’ Northern European economics narrative far too much credit. And he outright duped you, Brian.

In his own words, Sachs’ cure for what ails the economy is “raising taxes on corporations and the super-rich” or otherwise “the poor and middle class would suffer grievously while the rich and powerful would win yet again.”

But then he tries to portray Northern Europe as his proof this model works. The implication is they tax the rich and spend it on the poor and middle class.

Here’s the reality about Northern Europe:
- These countries have relatively flat tax structures across economic classes (ie: no class warfare)
- These countries have employed significant cuts in the levels of government spending since 1993 (ie: austerity)

To my surprise, most of the comments to Sachs’ Huff Post piece point these facts out. This American Thinker piece pulls it all together in great detail: http://www.americanthinker.com/2011/12/debt_and_taxes_settled_science.html#ixzz1fyESSIov
(How about that, an American Thinker contributor and Huff Post readers in agreement).

So, Brian, now that you know the facts, do you still like the Northern European model of austerity that would have the US raise taxes across the board including on the poor and middle class? And what do you think a Gallup poll of average Americans would have to say?

[Blogger Brian]

DJ, there's other ways of looking at Europe, and austerity. Nobel prize winning economist Paul Krugman has a different take on all this:
http://www.nytimes.com/2011/12/02/opinion/krugman-killing-the-euro.html?_r=1&partner=rssnyt&emc=rss

Europe now is making the same mistakes the Republican party in this country wants us to make: slash spending in both the short and long term, which likely would produce a double dip recession.

Excerpt:
-----------------
The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

[tucson]

I think it is safe to say that the unresolvable economic crisis that we find ourselves in these days is the direct result of the ballooning of debt and derivatives over many years by opportunistic and irresponsible banks and other companies in the financial sector, WITH the support and collusion of cronies in government and throughout the business community, with the result that the debt and derivative mountains have grown to such humongous proportions that they are about to bring the world economy to a dead stop, verging on collapse.

The banks and finance companies are on the hook for huge losses and after years of garnering massive profits from deals associated with this debt pyramiding, are now scrambling to push all of their snowballing bad debts onto the ordinary citizen. They have already succeeded in doing this in 2008 - 2009 in the US with their "too big to fail" mantra and the average US citizen has been well and truly shafted, the way that the average European citizen is looking set to be.

The reason that they are now getting serious about rescuing Europe, which is why the market rallied last week, is that if they don't they are going to take a massive hit there, that will spill over into the US, as many big US banks hold a vast quantity of European debt instruments. So the name of the game is to get Mrs Merkel and Germany out of the way and proceed to pump up the European Central Bank with manufactured money so that it is up to the task of doing massive QE (aka quantitative easing, aka printing counerfeit money, aka fiat currency) to maintain basic liquidity in Europe - and also up to the task of committing to massive bailouts, so that the international banking cartel get off as near to "scot free" as possible, and all the debts are pushed off onto the hapless European middle and lower classes.

This is, of course, a super-inflationary solution. The key point to understand is that because the big banks have far more power over the government and individual politicians than the ordinary citizen has, their will is going to prevail and governments will in the end do their bidding. These govt. officals and leaders do not want to find themselves suspended by their necks from bridge railings.

If this reasoning is correct then we should in due course see a rapid shift in Europe towards a major QE operation that will inject liquidity on a massive scale, support the bond markets and bring down yields, and involve intervention to buy up bad debt to insulate the banks from loss and generally ease the acute state of crisis.

All this will of course breed what Germany fears so much - roaring inflation, but it will achive its main objectives from the perspective of the elites, which is to insulate the banks from losses and "kick the can down the road".

But the "can" still remains and eventually there will be nothing to kick it down the road with.

There will be a day of reckoning.

And the genius nobel prize winner Krugman's solution? Raise taxes on the wealthy? What an idiot. That's like trying to kill an elephant with a flyswatter.

The original motive behind OWS was correct, although they would have been more accurate camping out in front of the the Federal Reserve, Fannie and Freddie, and the offices of Ben Bernanke, Barney Frank and Chris Dodd.

The system does need to be revamped, and it will in a very ugly fashion.

[Brian Hines]

tucson, I pretty much agree with you. Banks and other financial institutions have way too much influence over government policies. And we (meaning the U.S. and other industrialized countries) are ignoring the root causes of our economic woes.

We spend too much. We tax in the wrong ways. We allow special interests to dominate economic discourse, rather than doing what is best for the public at large.

This has to change. I give the Tea Party, and conservatives in general, credit for getting people focused on our deficit and spending problems. I just don't agree with some of their prescriptions for solving the problems.

[DJ]

Brian, you’re correct to excerpt Krugman’s comment, “For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners.” This is the crux of the financial crisis. Subprime mortgages make up much of the “ballooning debt and derivatives” that tucson speaks of.

But what I find shocking is that tucson seems to understand the big picture while Krugman does not. The 1990’s tech bubble fueled federal revenue only to be followed by painful but necessary collapse. The tech bubble is no longer a problem because it was allowed to burst. Likewise, the housing bubble that followed fueled federal revenue only to itself collapse. The housing bubble burst is ongoing as we speak, despite the desire by some to artificially stop what is painful and necessary.

But the credit bubble that was born out of the housing bubble – what about that? The banks holding that bubble are deemed “too big to fail” by Krugman and others who think the credit bubble can be fixed with more credit – i.e.: by making the bubble bigger.

tucson described the ultimate outcome perfectly: “…kick the can down the road…eventually there will be nothing to kick it down the road with. …There will be a day of reckoning.”