CIAO DATE: 07/2013
Volume: 33, Issue: 2
Spring/Summer 2013
Editor's Note (PDF)
J.A. Dorn
We are grateful to the Harry and Lynde Bradley Foundation and the Carthage Foundation whose support of the October 2012 Cato Conference "Europe's Crisis and the Welfare State: Lessons for the United States" made possible this special issue of the Cato Journal.
Introduction: Europe's Crisis and the Welfare State (PDF)
Michael D. Tanner
Margaret Thatcher once quipped about the problem facing modern social welfare states: "They always run out of other people's money." Today, in country after country, we are seeing that prophetic remark coming true. The headlines have been dominated by the problems of the so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), which face the most immediate economic crisis and have required economic support from the International Monetary Fund and other European countries. However, even countries with relatively robust economies, such as France and Germany, are facing unprecedented levels of debt. Unless the countries of Europe reform their welfare states, they will face some combination of huge tax increases or default on their obligations, both explicit and implicit. The result will be social upheaval and continued economic stagnation. The tough choices facing those countries are playing out today in parliaments and on the streets. The future remains highly uncertain. But how much better off is the United States? Our national debt exceeds $16.4 trillion and is increasing at a rate of more than $3 million per minute. And that only represents the debt that is actually "on the books." If the unfunded liabilities of Medicare and Social Security are included, then U.S. total indebtedness could top 800 percent of GDP.
Europe and the United States: On the Fiscal Brink? (PDF)
Jagadeesh Gokhale, Erin Partin
What are the implications of Europe's economic troubles for America? Several EU economies now face deep private and sovereign debt overhangs-a situation not unlike that in the United States, which also faces its own challenges with fiscal policy. How do the economic conditions in America and the EU compare in the short and longer terms? This article provides an overview of key indicators that summarize and help to project the two regions' economic prospects. It should be noted at the outset, however, that economic conditions and policies in the two regions differ in substantive ways. As in the United States, most European economies-members of the European Monetary Union (EMU)-now participate in a single currency (euro) system operated by the European Central Bank-the counterpart of the U.S. Federal Reserve System. However, the EU lacks a single central fiscal authority that operates a significant cross-nation transfer system. Having surrendered authority over monetary policy and, by the definition of a single currency, exchange rate policy, EMU member nations must depend on national fiscal policies to exert stewardship over their economies.
Is America Becoming Greece? (PDF)
Michael D. Tanner
It does not take more than a glance at the headlines to see that European countries are in trouble. From Greece to Britain, from France to Portugal, it is becoming clear that the modern welfare state is unsustainable, facing fiscal catastrophe, stagnant economic growth, punishing taxes, and prolonged joblessness. European countries are being forced, kicking and screaming, to rethink their approach to social welfare. But how much better off is the United States?
American and European Welfare States: Similar Causes, Similar Effects (PDF)
Pierre Lemieux
The American welfare state is not as different from the European welfare state as conventional wisdom would have it. If we define the welfare state as that part of the state (the whole apparatus of government at all levels) devoted to taking charge of the welfare of the public, welfare-state functions cover social protection (which includes public pensions), health, and education. As shown in Table 1, these functions make up 57 percent of total U.S. government expenditures compared to 63 percent for the typical eurozone country. In this sense, the American welfare state is only about 10 percent smaller than the European welfare state.
Lessons from Europe's Debt Crisis for the United States (PDF)
Desmond Lachman
The European sovereign debt crisis offers a cautionary tale for the United States. This is the case since all too sadly the U.S. public finances appear to be on the same sort of unsustainable path that lies at the heart of the present European crisis. Whereas Europe, taken as a whole, currently has a budget deficit of around 3 percent of GDP and a gross public debt ratio of around 90 percent of GDP, the United States has a budget deficit of around 8 percent of GDP and a gross public debt ratio in excess of 105 percent of GDP. This article attempts to draw out those lessons that are most pertinent to the present U.S. context of worse overall public finances than those in Europe. The first part of this article traces the origins of the European debt crisis. The second part explains why the recent pledge by the European Central Bank "to do whatever it takes to save the euro" through large-scale purchases of Italian and Spanish bonds is unlikely to resolve that crisis. The final part of the article sets out the relevant lessons that the United States might draw from the European crisis with a view to avoiding a similar fate to the struggling countries in the European periphery.
Is Austerity the Answer to Europe's Crisis? (PDF)
Veronique de Rugy
Austerity is a term used to describe debt-reduction policies, but it can mean radically different things. For some people, austerity means adopting a debt-reduction package dominated by tax increases. For others, it means adopting a package made mainly of spending restraint-including reforms of social programs. The lack of a distinction between the two meanings of the word-and hence, the distinction between two different debt-reduction policies-is unfortunate and could also explain the confusion over what is happening in Europe. In this debate there are two important questions to keep in mind. The first question asks, Which of the two types of austerity measures successfully reduces the debt-to-GDP ratio? The second asks, What is the impact of austerity measures on economic growth?
Choosing the Best Policy Mix to Cure Europe's Stagnation (PDF)
Pascal Salin
A great number of European governments have decided on austerity policies to reduce their fiscal deficits and public debt. In order to evaluate such policies, it is necessary to analyze the present and past economic situation of European countries, and to recognize the important role that savings plays in understanding this economic situation and possible future developments. After examining the economic background of austerity policies and the role of savings, this article discusses the choice of different types of austerity policies and policy mixes.
Challenges for the German Welfare State before and after the Global Financial Crisis (PDF)
Mark Hallerberg
Germany has a northern European welfare state. This means that social benefits are extensive compared not only to the American standards but compared to other European countries, such as Italy or Spain. In the early 2000s, both foreign observers and Germans themselves considered the country the “sick man of Europe.” Its firms seemed increasingly uncompetitive, due especially to its costly labor. Economic growth in this period was stagnant. This “exporting giant” even had a slight current account deficit.
Estonia and the European Debt Crisis (PDF)
Juhan Parts
Estonia has had a quick recovery from the recent recession and its economy is in better shape than before the crisis. It is now much leaner and significantly more capable of handling international shocks. After a sharp contraction, in which GDP contracted by over 14 percent in 2009, GDP growth rebounded quickly, growing at a rate of 3.1 percent in 2010 and 8.3 percent in 2011. Labor productivity has grown faster than real wages, which has increased the competitiveness of Estonian firms in the world markets. Estonian exports grew 22 percent in 2010 and 25 percent in 2011. This is a result of the rapid increase of high value-added exports by the manufacturing sector, which has also been the main job creator since the crisis. Indeed, export growth has been the main driver of the Estonian economic recovery.
The Welfare State as an Underlying Cause of Spain's Debt Crisis (PDF)
Pedro Schwartz
The ongoing crisis that so dramatically hit Spain in 2008 was at least in part caused by the countercyclical monetary policy the Federal Reserve and the European Central Bank applied in the first years of the new century. Their artificially low interest rates must in part be responsible for the excessive leveraging in banks, businesses, and households. Their unwarranted use of monetary policy to foster growth has recoiled on them with a vengeance. Now central bankers and their political masters find that they cannot perform as expected. A constant feature of financial crises in the past two centuries, as Reinhart and Rogoff (2010) have noted, is that, when banks collapse, companies fail, and families go insolvent they all turn to the central bank and the government to bail them out. The authorities usually find it difficult to answer those anguished calls even when they have the power to print money, so that devaluations and write-offs ensue.
Market Failures, Government Solutions, and Moral Perceptions (PDF)
J. R. Clark, Dwight R. Lee
It should be obvious to even the casual observer that both markets and governments fail—neither comes close to achieving perfection. Externalities, both positive and negative, are the most common explanation for market failures. The undersupply of public goods, for example, is seen as a market failure, and is the direct result of a positive externality being generated when a person contributes to a public good which, by definition, benefits others whether they contribute or not. Similarly, excess pollution is seen as a market failure resulting from the negative externality of people imposing uncompensated costs on others by emitting pollutants into the environment. But externalities are just as commonly the result of government activity as they are market activity. For example, many government transfers are best seen as negative externalities motivated by the desire of politically influential groups to benefit at the expense of others.
Canada's Fiscal Reforms (PDF)
Chris Edwards
Two decades ago Canada suffered a deep recession and teetered on the brink of a debt crisis caused by rising government spending. The Wall Street Journal said that growing debt was making Canada an "honorary member of the third world" with the "northern peso" as its currency. However, Canada reversed course and cut government spending, balanced its budget, and enacted pro-market reforms. It reduced trade barriers, privatized businesses, and slashed its corporate tax rate. The economy boomed, unemployment plunged, and the formerly weak Canadian dollar soared to reach parity with the U.S. dollar. The Canadian reforms were hugely successful. Today,
the United States is in as bad or worse fiscal shape than Canada was in. U.S. leaders need to make major fiscal and economic reforms, and they can learn many lessons from Canadian efforts to restrain government and create a more competitive economy.
Red Ink: Inside the High-Stakes Politics of the Federal Budget (PDF)
Daniel J. Mitchell
Red Ink: Inside the High-Stakes Politics of the Federal Budget David Wessel New York: Crown Business, 2012, 224 pp.
The Righteous Mind: Why Good People Are Divided by Politics and Religion (PDF)
Aaron Ross Powell
The Righteous Mind: Why Good People Are Divided by
Politics and Religion
Jonathan Haidt
New York: Pantheon, 2012, 419 pp
Curbing Campaign Cash: Henry Ford, Truman Newberry, and the Politics of Progressive Reform (PDF)
John Samples
Curbing Campaign Cash: Henry Ford, Truman Newberry,
and the Politics of Progressive Reform
Paula Baker
Lawrence, Kans.: University Press of Kansas, 2012, 190 pp.