Sunday, May 20, 2012

The Growing Boycott Against Fiscal Reality

In the recent Greek Election, left wing parties opposed to austerity measures expanded their parliamentary presence, presenting a very real risk that Greece would not be able to move forward with the bailout agreement. While the Greek Government can certainly can repudiate the agreement that provided billions in desperately needed capital, it can no more escape austerity than a man leaping off a skyscraper could escape the laws of gravity. Rescinding the agreement might free Greece from its current debt, but it would cut it off from all future credit, meaning that it face even greater austerity in the future. And if the Greek Government were to turn to the printing press to pay its bill, it would face ruinous inflation. So, the question is not IF, but rather WHEN an indebted nation must face the music and start living within its means. And the longer we are able to delay austerity, the more its burden will fall on the next generation.

 In France, newly elected President François Hollande shifted focus away from austerity towards a "growth compact". What this means is that he believes (or at least claims) that France and other nations can grow their way out of debt, without enacting difficult fiscal and structural reforms." Rather than scale back the bloated French state, which now consumes 52.8% of the GDP, President Hollande plans to: expand public housing by 500,000 units, "create" 150,000 subsidized jobs for youth, hire 60,000 new teachers, scale back the retirement age to 60 and create an infrastructure bank. All of these may be great programs, but inappropriate for a state facing a serious fiscal imbalance. And the fundamental problem with a "government investment in growth" is that its effectiveness is never certain, the costs incurred are inescapable. To pay for this, President Hollande has proposed confiscatory taxes of up to 75% of the top earners, which may satisfy the covetous impulses of his followers, but will certainly not generate sufficient revenue to address France's ballooning debt.

Not surprisingly, the boycott of fiscal reality has spread to the United States. In multiple blogs, the Keynesian Apostle Paul Krugman downplays the hazards of national debt and eschews the need for austerity stating that "Governments don't (have to pay back their debt) - all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation." Refuting this absurd notion merits a separate blog post. To a lesser extent, the core of the Republican Party has partaken in this boycott, through its belief that cuts alone will address the debt issue. Even if this approach were fiscally sound, it would be politically impossible, for the left would clearly use it to support their narrative of "Republican Class Warfare." Only when revenues generated by tax increases were proven to be insufficient, would the nation as a whole would face the reality that bankrupt entitlements must be reformed if we are to save our children and grandchildren from the crushing burden of the national debt.

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