What Cues Can South America Take From Europe?

Over the past few years Greece has probably made the news more than ever before. Whether it be protesters in the streets, election results, or the announcement of some new government policy, whatever happens in Greece seems to be written about in all corners of the world. Just recently the fierce rhetoric of a relatively obscure populist left-wing party made international headlines and fueled new speculations about the future of one of the world’s major currencies, if not the world economy and financial markets. The eventual ascent of that same party, Syriza, to Parliament has all eyes both on the Old Continent and across the world focused on its plan of action. Mind you, we are talking here about a country whose GDP represents less than 0.4% of the world economy.

In the meantime, incessant government intervention into the economy has caused major upheaval in several countries in South America. Venezuela is currently experiencing the worst depression in decades, Argentina’s economy is in shambles once again on the heels of its most recent default, and since the World Cup bubble popped Brazil has equally dipped into recession. These countries dwarf Greece in terms of population as well as contribution to world GDP, and some of their resources make them important players in global commodity markets. Yet aside from some news outlets’ reporting on Venezuelans having to stand in line for hours for even the most rudimentary items or the mysterious death of a federal prosecutor in Argentina, major media are hardly paying attention.

The latter, far from being the result of a massive media cover-up, reflects a general sentiment in South America. Here in Chile, for instance, nobody in their right mind would dream up some theory about the aforementioned woes causing a spillover effect that might bring the entire continent to its economic knees. Unlike in Europe, xenophobia has not been on the rise here, nor have there been any incidences of heads of state being compared to blood-thirsty dictators. As much as some populist leaders like to speak of a “Latin American brotherhood”, in truth the misery even in neighboring countries is hardly discussed except in case of any personal ties.

While it would clearly not be a fair comparison to put the South American economy on equal footing with that of Europe, the events that have unfolded in recent decades can certainly serve as valuable lessonsEurope-SouthAmerica for the continent. The mere suggestion that one day, Europe’s economic fate would seemingly come to hinge on the outcome of Greek elections would have seemed outright preposterous as recent as the nineties or even in the early 2000s. Indeed it would be like predicting that two decades from now, all of South America would be trembling at the prospect of a severe recession in Guyana.

Still, a lot more can be drawn from European history than simply a long list of don’ts. Going further back just a few centuries can literally provide a blueprint for sustainable growth and pave the way for prosperity on a continent too long haunted by the destructive and backward forces of socialism. Historians and other scholars have written extensively on “the European miracle” and its foundations. As it turns out, the terminology belies an astonishingly simple recipe; defense of property rights and decentralized power structures limited by competing jurisdictions in their ability to intervene in and expropriate resources out of the market.

Whilst academia and politicians would have us believe economics is an incredibly complex field of study that should be left safely and exclusively in the hands of the “experts”, historical evidence proves them utterly wrong. In fact, the more power is centralized into the hands of these conmen, the lower the odds of the kind of sustainable economic growth that has permanently lifted millions out of poverty, and continues to do so to this day.

Political leaders and their outdated and misplaced allegations of imperialism cannot be allowed to stand in the way of free people and free markets in South America. In the words of Ron Paul: “An idea whose time has come cannot be stopped by any army or any government”!

If Not Budget Cuts, What Is Troubling Europe?

My previous blog post concluded that the widely reported budget cuts as part of  “austerity measures” that are supposedly being implemented across Europe are really not all they are being trumped up to be. Nonetheless, it seems we keep hearing about how times are tough for many Europeans. Rising crime rates and sharp increases in (youth) unemployment are just some of the problems facing several nations on the Old Continent as we speak.

TaxBut one might wonder: if governments are still running huge budget deficits (which are detrimental in the long run, of course, but keep the alleged “economy recovery” going for now) because spending is not going down much or at all, why do we see so many reports of people suffering? If it is not the slashing of government budgets, what is hampering a return to prosperity in Europe?

The answer is plain and simple: higher taxes. Francois Hollande, president of France, implemented a now infamous 75% tax on the highest tax bracket while also raising corporate tax and sales tax. On the other side of the Canal, the British government has raised taxes to record levels, with the amount of tax paid in Britain projected to soar by 15 percent in real terms by 2015-16.  “Kabinett Merkel II”, the second coalition government under Chancellor Angela Merkel, has brought German citizens the largest increase in taxes and social security contributions of the last 17 years. In The Netherlands tax hikes were introduced in the form of a redistributive overhaul of the income tax system and VAT going from 19 percent to 21 percent, among other things. In Ireland taxes (such as VAT and property taxes) already began to go up in 2010, when the country suffered a major blow as a result of the global financial crisis.

Spain introduced its set of tax hikes last year when Prime Minister Mariano Rajoy came to power; VAT went up by three percentage points to 21 percent while Spanish income tax rates were elevated to the point where they got to be among the highest in Europe. Italians face a similar fate with the sales tax now at 21 percent, a newly introduced housing tax (yes, you read that right) and an additional 3 percent levy on high incomes. Greece and Portugal were forced to jack up taxes in order to qualify for the EU-IMF bailouts. .

It doesn’t take an economist to figure out that such measures will wreak havoc and cause serious economic and societal upheaval. So next time somebody raises the argument that cutting government spending is bad for economic growth – because “look at what’s going on in Europe right now!” – you might want to kindly advise him or her to stop parroting the talking heads on TV and do some old-fashioned research before bothering you with such nonsense.

The Myth of Austerity

The Merriam-Webster online dictionary’s definition of austere is “giving little or no scope for pleasure”. In the economic sense austerity, according to Investopedia, refers to the following:

“A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”

The Myth of AusterityConsidering the constant media reports on such austerity measures, let’s see how those claims hold up to the facts.

In the United Kingdom in 2011, the government spent £711 billion. The year after, spending decreased to £683bn to top £720bn in 2013; an overall increase of about 1.7 percent in the last three fiscal years. The German Bundesbank estimates it will spend €302 billion this year as compared to €307bn in 2012, when expenditures went up by nearly 9 percent relative to the year before. French government spending hit a record high in 2010, then fell slightly for about a year until mid-2011. It then picked back up again to the point where, in the fourth quarter of 2012, it once again came close to the 2010 record level. The Dutch government has been on a spending spree for three consecutive years, going from €244.7 billion in 2011 to €245.3bn in 2012 and an estimated €260.9bn this year. The latter figure stems from before the €3.7bn bank bailout of SNS Reaal, by the way.

Now let’s move on to the most troubled (PIIGS) countries in the eurozone. Surely these countries have had to make deep cuts to their budgets, right? Wrong. The Italian government so far has reduced spending by a mere 2.2% compared to 2010 levels. In Portugal government expenditure has diminished somewhat in the last three years, but not even by 10%. The Irish government has not been much more frugal either. Though government expenditures in Spain have been on the decline for about two years, so far less than 7% has been cut relative to early 2011.

So what about Greece, arguably the most troubled nation of them all? As detailed in my previous blog post, the bloated Greek government has been bailed out several times since May 2010 yet most people would probably be surprised to hear spending has gone down by less than 17% since. I guess it’s a start but €1bn in cuts on a total budget of nearly €9bn is really not all that impressive. .

Across the Atlantic, the situation in the United States is not much different. The so-called “draconian” cuts represented by the sequester didn’t even make a dent in the size of government as its spending simply increased by less than had previously been projected. In other words, the government grew at a less rapid rate than the power-hungry bureaucrats had hoped it would. But it still grew.

Some people might argue that the riots going on in places like Greece have made harsh across the board budget cuts impossible, as to propose such a thing would be political suicide. That may be true. However, the question here is not whether such measures could conceivably take place without (more) massive social unrest. The only point I am trying to make here is that, perhaps except for Greece (though even that is pushing it in my opinion), there simply are no draconian unprecedented cuts to government spending taking place in any of these countries by any stretch of the imagination. Nonetheless, reports about so-called austerity and its alleged consequences abound in the media, despite the fact that even the strictest budget cuts – the Greek ones – amount to less than one-fifth the original budget and many a government budget is actually growing in size.

Bloated governments and their spending by definition extract capital – wealth – from the private sector. It is important to note that in the private sector any and all economic activity is subject to the laws of the free market, i.e. success is rewarded and failure penalized by you and me in the form of corporate profit and loss. In the public (government) sector, on the other hand, the exact opposite tends to happen; the more a particular policy wreaks havoc on the economy, the bigger the excuse for the State to usurp more power in an attempt to correct the unintended consequences caused by its very own policies.

The only way to reverse this trend and unwind the massive clout of government policies on the global economy is to free up resources by letting them flow back into the private sector. In order for the world economy to find its way back to real sustained growth we need to first see serious cuts in the size of governments everywhere.

The European Union: Bailing Out Banks, Politicians While Sticking It to the People

– May 2010: Greece receives an initial €110 billion bailoutEuropean Soviet Union
– November 2010: European governments bail out Ireland to the tune of €85 billion
– January 2012: Second €145 billion Greek bailout deal announced
– November 2012: Spain borrows €37 billion to restructure four of its weakest banks
– March 2013: Cyprus narrowly avoids exiting the euro, securing a €10 billion loan

Who’s next? That question seems to be on everyone’s mind as the fundamentals under the eurozone appear weaker and weaker with every new bailout; what country will the European Financial Stability Fund provide “stability” to next?

Meanwhile youth unemployment in Greece is over 60 percent, with Spain not far behind at 55 percent. Nearly 4 out of every 10 young Italians and Portuguese are unable to find a job, as well as 3 out of every 10 Irish. Young jobseekers in France are struggling too, with 1 in 4 being unemployed. Slovenia and Cyprus are in the same boat – or should we say life raft?

The old continent is facing a crisis on multiple levels and much of it can be traced back to the behemoth known as the European Union – or, as I like to call it, the European Soviet Union (see here). I won’t go over the catastrophe of the single currency again as I don’t want to repeat myself. Still, much more remains to be said about the ongoing crisis in Europe, the central question being: where do we go from here? Needless to say, the power-hungry EU bureaucrats’ solution is more “harmonization” i.e. more power in their hands to exercise still further control over the people. Never mind that the incessant centralization of power in Europe is at the very heart of the problem.

The European Union was supposed to bring “peace, prosperity, education, justice” and whatever other rosy buzzwords politicians and EU advocates could dream up. Today it is obvious that it has done a lousy job at that. From Athens to Madrid, people are taking to the streets to voice their discontent with the EU overlords that want to control every aspect of their lives while dodging taxes and receiving generous pay and benefits.

Considering the growing hatred of and intolerance towards immigrants, the flaring up of anti-Semitism in countries like Hungary and German Chancellor Angela Merkel recently being portrayed as Hitler by Greek protesters; to claim that Europe has become more peaceful since the inception of the EU would be quite a stretch. Much of this, it can be argued, is due to the economic misery evidenced by the aforementioned statistics. The initial increase in (fake) prosperity artificially created by the policies devised in Brussels came to an abrupt halt years ago.

As far as education goes, let’s hope the current crisis will stimulate young people to educate themselves in an effort to better understand why they are struggling to find a job and make a living. This kind of education might well turn out to be more important than anything they could ever hope to learn in college. The word justice is unlikely to come up in any scrutiny of the workings of this tyrannical system we call the European Union.

Martin Schulz, member of the European Parliament, was quoted by Reuters as saying: “If we have €700 billion to stabilize the banking system, we must have at least as much money to stabilize the young generation in such countries [referring to Spain]”. Well guess what Mr. Schulz? We don’t have that money. In fact we never even had the first €700 billion to begin with! The last thing we need to remedy this problem is for the European Union to step in and “solve” the issue. All we need the government – whether national or supranational – to do is to get out the economy and get out of our lives. Doing more of the same while expecting different results is what Einstein rightly defined as insanity.

“Union” is not exactly the first word that comes to mind in describing current events in Europe.  The EU is the brainchild of a small elite and has never enjoyed the widespread support of the European people. More recent events must lead even the staunchest supporters of European integration to have serious reservations as to the feasibility of this grand European experiment. The fate of that experiment will be sealed by the people deciding whether or not to put up with playing the role of guinea pigs.

The Giant Ponzi Scheme That is the “Welfare” State

“The problem [with modern social welfare states] is that they always run out of other people’s money”
The Giant Ponzi Scheme That is the Welfare State
Margaret Thatcher

In modern Western society, we have become accustomed to the idea that the government provides for a “safety net” consisting of unemployment and retirement benefits, among many other things. This safety net is paid for through taxation and so there is a pile of money somewhere that we have all been, and are still, working hard to save up, right?

The unfortunate truth is that we have been conned; as current taxpayers we are actually paying for the retirement of our parents and grandparents, on top of paying for the unemployment benefits of those either unwilling or unable to find a job. Despite the implicit promise of a future payout, the whole system is simply a tax-and-transfer system.

Therefore, those of us that are working and paying taxes right now are not in the least paying for our own retirement. This is the very essence of the so-called welfare state, as economist Henry Hazlitt states:

“In this [welfare] state, nobody pays for the education of his own children but everybody pays for the education of everybody else’s children. Nobody pays his own medical bills, but everybody pays everybody else’s medical bills. Nobody helps his elderly parents, but everybody else’s elderly parents. Nobody provides for the contingency of his own employment, his own sickness, his own old age, but everybody provides for the unemployment, sickness, or old age of everybody else.”

Contrary to popular belief, these income transfers do not have the effect of alleviating poverty and fostering self-reliance, not even in the short term. The very structure of the welfare state as we know it profoundly discourages savings and the investments that would take place as a result of these savings. If it wasn’t for the government actively intervening in every facet of the economy and our everyday lives, such investments would create new and better tools, plants and equipment on which we all depend for increased national productivity, higher real wages, well-paid jobs and economic growth.

However, the so-called welfare state does more than just retard economic progress in general; it also perpetuates the existence of an underclass of people who are unable (and some unwilling) to care for themselves by providing the wrong incentives. The fact that half of unemployment insurance spending ($168 billion)  in the U.S. in fiscal year 2010 went to the long-term unemployed serves to illustrate that point, as well as the fact that nearly ten million new recipients were added to the food stamp rolls in three years. Jobless disability claims also rose, to a record high of $200 billion in January of last year. Across the pond in the UK, government spending on disability living allowance (DLA) more than doubled over the course of nine years from £4.5 billion to almost £10 billion. The system is rife with fraud and abuse as everyone takes whatever he or she can get in a dog-eat-dog kind of system.

The “welfare” state is completely unsustainable
Across the EU, unfunded pension liabilities now average 285 percent of GDP. It is estimated that with current welfare policies, governments in Europe will have to raise taxes by 5 to 15 percentage points of GDP – not 5 to 15 percentage points of current tax rates – just to avoid piling on more debt, amounting to tax rates running from 45 to 60 percent of GDP. Again, this would do nothing to pay off the existing debt. Needless to say, we will have an outright societal collapse before we have such humongous tax rates. A similar picture can be drawn in the case of the United States as only four European countries have larger national debts: Greece, Ireland, Portugal and Italy[1]. When adding the unfunded liabilities of Social Security and Medicare and federal pensions, the actual total U.S. debt is about $87 trillion, or 550% of the entire U.S. GDP.

The so-called welfare state is the biggest Ponzi scheme in the history of mankind. The moment enough of us realize that, the house of cards will come down. Forget all the promises made by politicians and economists, forget all the talk about what you’re “entitled to”, the money just isn’t there. Never has been, never will be. It is time to learn from our mistakes and build a new system. History can point us in the right direction.

More on that in an upcoming blog post!

[1] After the Welfare State (2012). Students for Liberty. Jameson Books: Ottawa, IL. p. 92. Available for download through http://studentsforliberty.org/wp-content/uploads/2012/04/After-the-Welfare-State-PDF1.pdf

Do we live in a capitalist society?

CapitalismAccording to the Merriam-Webster online dictionary, the definition of capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market”. Most people today would probably say that our economic system is capitalism. But is that really true?

The Dutch government recently bailed out another bank, SNS Reaal, after telling taxpayers their taxes had to be raised and benefits reduced to cut the deficit. Doling out billions to Brussels to give to Spain and Greece and bailing out “too big to fail” banks, on the other hand, apparently does not increase the deficit, nor does fighting wars in the Middle East. Meanwhile the media are towing the party line telling everybody how the government had no choice because otherwise people’s savings would have been wiped out. The same old “we’re all in this together” nonsense. Yet nobody ever stops to think: why don’t they just bail out the people who had savings in the bank rather than the bank as a whole? Wouldn’t that be much fairer and cost a lot less taxpayer money?

For the record, I don’t personally agree with that solution either, but if the argument is that you can’t just tell people their hard-earned money went down with the ship, surely this would be a much better solution. Yet, I would argue the government should not be involved at all. In that scenario people would be forced to think twice before putting their money in a bank without knowing how solvent it is. In other words, this sort of system would reward healthy, risk-averse banks and penalize banks that take on excessive risk. You might have heard of this sort of system. It’s called free-market capitalism.

Capitalism, however, is not the system we live in today. That system would be more accurately described as crony capitalism or state capitalism. You won’t hear that from the politicians, economists or media lapdogs though; they are too busy blaming capitalism for everything that’s wrong with the economy.

Another thing they are very good at is giving people the impression that it’s all terribly complex. Oh yes, it’s all so very complicated you had better leave it up to the “experts” to tell you what is going on and what should be done about it. You are just an average Joe, you see, and Paul Krugman knows much, much better than you do. And even though the problem is so incredibly hard to grasp, the solution is simple: more government! That’s right, all we need to do is trust the government to get us out of this mess and pretty soon we’ll all be living in paradise!

Still, a closer look at the role government regulators played in creating the crisis paints a very different picture. As Simon Johnson and James Kwak explain so well in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Wall Street bankers had become one of the most powerful political forces in Washington in the years leading up to the financial crisis (and still are). Their money funded the campaigns of congressional representatives, investment bankers and their allies assumed top positions in the White House and the Treasury Department and the ideology of Wall Street became the political consensus on Capitol Hill. Though the revolving door and campaign contributions gave the bankers an important leg up, the fact that regulators now were convinced that “what’s good for Wall Street is good for America” was by far the most crucial factor. It was this ideological power over those high-up in government that swayed their every decision to favor the bankers over the voters. A culture of mutual dependence was born and its effects were felt across the world when the crisis hit.

The people of Iceland, on the contrary, recognized the system for what it was and put an end to it in 2008. With a debt of $85 billion and a population of only about 300,000, it was quite an understatement to say the system had spun out of control. But the bubble had burst and now the very same people that raked in billions during the expansionary years of the bubble were telling taxpayers they had to pay up or the country would be in ruins. Fortunately for Iceland, the people saw through the scam and chose not to bail out banks, instead jailing the politicians and bankers that conspired to commit the fraud. Today Iceland’s economy outperforms that of both the United States and the European Union, where it was decided the banks were not only “too big to fail”, its executives apparently were too big to jail.

In light of the fact that regulators not only failed to prevent the financial crisis but actively helped cause it, giving them more power to “solve the problem” would be like giving an arsonist a few extra matches to put out the fire he just ignited. Why would we want to do more of the same and expect different results? Einstein called that insanity.

It’s time we try free market capitalism for a change, because history has taught us that is the single most successful system in recorded history when it comes to raising untold millions out of poverty. It’s also a great way of reducing deficits, by the way.