The rights of American decline
Democrats scramble to find an argument, any argument, that sells their $ 5,000 billion spending plan to a skeptical public. The latest and surprising attempt is President Biden’s claim that all of his new rights will make America greater.
“To oppose these investments is to be complicit in America’s decline,” Biden said on Tuesday, adding that “other countries are accelerating and America is falling behind.” Got it, Senators Joe Manchin and Kyrsten Sinema? You are complicit in the impending failure of the country.
You have to admire the audacity to propose higher taxes and more social welfare as the path to national renewal, especially when the global evidence is to the contrary. The result of Mr Biden’s rights expansion is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and reduced tax room for essential public goods like National Defense.
This is the lesson of European welfare states from cradle to grave, which Bernie Sanders explicitly presents as role models. Most have populations older than the United States, but that alone does not explain their lower work participation rates and much higher structural unemployment. Unemployment rates in Europe tend to be much higher than in the United States, especially for young people. In 2019, the activity rate was 62.6% in the United States against 49.7% in Italy, 55% in France, 57.7% in Spain, 59.3% in Portugal and 61.3% in Germany.
Lower participation rates in Europe contributed to the slowdown in growth. While the US economy was slow to recover from the 2008-09 recession amid the uncertainty of Obama’s policy, US GDP growth still averaged 2.3% from 2010 to 2019, overtaking Italy (0.27%), Portugal (0.86%), Spain (1.07%). , France (1.42%) and Germany (1.97%).
Democrats say more generous family leave will encourage more women to work and increase the workforce. But Italy offers 22 weeks of maternity leave at 80% of previous earnings. France plans 16 weeks at 90% and Spain 16 weeks at 100%. Rather, higher payroll taxes to finance these generous benefits reduced the incentive to hire.
Europe’s little-discussed secret is that its cradle-to-grave welfare states are funded by the middle class through value added taxes and wages. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value added taxes in most European economies are around 20%. There are simply not enough rich people to fund their rights.
The Democrats in Washington know this, which is why they are using budget tricks to hide $ 5,000 billion in spending within the 10-year budget window. They plan to pay off a few years of spending with 10 years of tax hikes on businesses and high net worth individuals, but that still only earns them $ 2.1 trillion in estimated new revenue.
Europe’s vast rights also mean less money for security and the military. Only around nine European countries are meeting their NATO commitment to spend 2% or more of their GDP on defense, and only Greece spends more than 3% as the United States does. Germany spends a paltry 1.56%.
The United States succeeded in defeating the Soviet Empire in the 1980s because a booming economy generated enough revenue to rebuild the military. Mr Biden is proposing to cut defense in real terms, and his social spending wedge will rise quickly. There will be no Reagan-style military build-up with the rise of China.
The irony is that some European governments have tried to reform their tax and social systems to become more competitive. In two decades, Germany and Sweden have reformed their social and labor policies. Their participation in the labor market and GDP growth exceeded that of the rest of Europe. Labor force participation in Germany increased to 61.3% in 2019, from 58.1% in 2000.
During the 1970s and 1980s, Sweden’s tax burden reached the highest level in the world as its social protection system became much more generous. The result: Swedes’ real after-tax incomes stagnated while public debt skyrocketed. From 1976 to 1995, GDP growth in Sweden was about half the average for developed countries and a third lower than that of major European economies.
Sweden’s decline led to tax and spending reforms in the early 1990s that increased labor productivity, private employment growth and incomes. The growth rate of disposable income quadrupled from 1996 to 2011. Sweden’s average GDP growth from 2010 to 2019 (2.6%) far exceeded that of most European countries.
Other European governments are also pushing for welfare state reform. French President Emmanuel Macron adopted the pension reform and reduced the corporate tax rate to 26.5% from 33% in 2017; small businesses pay 15%. Greece is emerging from the debt trap with the tax, pension and regulatory reforms of Prime Minister Kyriakos Mitsotakis. The corporate rate is 22%, while Biden wants the combined federal and US state average to be well over 30%.
Mr Biden also argued on Tuesday that the United States needs to spend more on green energy and manufacturing to compete with China. But Beijing’s industrial policy has resulted in misallocation of capital and economic distortions, as evidenced by its current debt difficulties. Since when is China supposed to be an economic model?
America escaped the decline of the 1970s by returning to its historic model of liberation from private initiative and enterprise. Mr Biden’s plan would empower government, increase the burden on the private economy, and erode upward mobility by encouraging people not to work. This is the real recipe for decline.
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