Italy finally gets how to do austerity right

CATO notes that austerity measures in Europe have not worked up to this point, but caused a deeper recession.  The reason?  The austerity measures have been against private business and investment.  For example a tax increase on first time home buyers implemented in Italy has simply slowed down spending and investment.

So, now Italy recognizes that they need to cut spending by the government. Their new austerity package mostly focuses on cutting their government by several billions of Euros.

Here in the USA, we have also found that austere impositions against the private sector just slows down the economy.  Threat of punishment, more taxation, or regulation keeps businesses from expanding.  Such also keeps over $2 Trillion of money overseas.  Why did Apple pay less than 10% tax? By moving lots of its money overseas in legal loopholes.

Reality is, Medicare and Social Security are going bankrupt.  It is easier to fix them now, rather than wait until they go over the brink. Do we tell 80 year olds now that they cannot have a hip replacement, or do we tell their grandchildren that we cannot afford to deliver a baby or perform a life saving operation on a young person later?

Spending more money has not fixed the economy. As insistent as Paul Krugman is, the world is not going to forever lend us money to spend on everything and anything. Of course, he possibly gave the same advice to Enron. And his advice of borrowing more and more, and entering into greater and greater debt worked until everyone found out that the Emperor had no clothes, and the collapse came swiftly afterward.

It is time we return to small government and free markets.  Let’s insist our Congress and President go in this direction, or replace them.

CATO article

13 thoughts on “Italy finally gets how to do austerity right

  1. Krugman is indeed insistent. But it seems like his strategy is mostly a kick the can down the road approach when it comes to deficits.

    So is there any evidence the new Italian austerity measures actually helping? Seems to me that Italy is still in terrible shape.

  2. So Rame, are you saying that austerity measures should be directed towards people who need hip replacements, and not businesses like Apple?

    I can see your point, but it should also be noted that giving tax breaks and even bailouts to banks don’t increase investment either.

    The fact is, when the economy is weak, nobody invests, regardless of tax rates. It doesn’t matter if you cut their taxes entirely, they still won’t invest. They are waiting for the economy to pick up.

    Why not use that capital which is being tied up in a holding pattern to help reduce current deficits? We can’t afford to wait for businesses to take their sweet time to invest in the economy while deficits balloon.

  3. Recessions of the past occurred because there was a slowdown in demand. Sometimes this was caused by a bubble (often created or at least influenced by government regulation).

    Today’s recession is different in that it is a money bubble. This money bubble was created by government regulations that okayed banks to aggressively lend at 40 to 1 ratios, while promising to bail them out (removing the risk/caution factor) and by pushing banks and lenders to recklessly lend to sub-prime borrowers. It was also caused by people having huge access to cheap money, low interest rates for long periods of time in place by the Federal Reserve to try and artificially stimulate the economy, and finally by the federal government’s deficit spending in the trillions of dollars.

    All of this adds up to a giant recession with only one real way out of it. Krugman’s Keynesian economics will only cause a deeper and longer recession. Eventually, China and others will no longer loan us money at low rates, and then we’ll be bankrupt. We’ll be forced to raise interest rates, and severely cut programs, simply because we cannot afford the programs and the interest on our deficit at the same time. Right now, we’re paying very little in interest on the debt. But if it goes to 6%, we’ll be paying $700 Billion a year on interest payments alone. Suddenly, there is no Medicare or Social Security, as we will no longer have the money to pay for them.

    I’m not into giving anyone tax breaks. I was against bailing out the banks and GM. There are structured bankruptcy they can go through (and in fact, GM went through one even after we gave them money).

    I am into a fair tax system that eliminates loop holes for everyone, where even the poor pay a little into the system, so that they have a stake in America’s success and not in just receiving bribes from politicians to remain useful idiots.

    Then I am into greatly reducing federal government, allowing states to pick up whatever pieces they need to pick up. This increases overall freedom and reduces federal tyranny.

    But to do this means we must have austerity regarding public funds, and leave the private sector alone. Want people to invest? Remove the barriers to enter and exit the market. Right now, there is $2 Trillion sitting overseas, just waiting to return when the climate is friendlier towards business here. Yet we now have the highest business tax rates for any nation in the industrial world. Why do you think I have a big chunk of my 401K working on overseas stocks? Because they have lower taxes and opportunity.

    When left alone to correct itself, our history shows that the economy has always roared back within 3-4 years. But the tinkering done by Hoover and FDR helped create the Great Depression, and then extended it for a decade. Now, we’re doing the same thing, with Paul Krugman insisting it isn’t working because we need to spend several trillion dollars more.

    We need a new federal government that is smaller and less intrusive. But the way we’re going, we’ll end up like California and Greece are going.

  4. Italy has a problem with inefficient government spending, but let’s not neglect the role of private fraud and abuse. Italy’s “submerged economy” is estimated to be worth about 16% of GDP.

  5. Peter, that is probably true. I wonder how much of the underground economy is due to people trying to avoid the penalties imposed by the government?

    When I was a missionary, Bolivia had huge import taxes. This created a huge black market. On the Bolivia/Argentina border near Yacuiba, the nations were separated by a bridge over a ravine. Many vehicles and others sat by the bridge waiting to pass into Bolivia and pay the expensive tariffs. At the same time, many would hand carry boxes of stuff down the ravine and around the bridge to awaiting vehicles on the other side. Invariably this was almost 100% one way traffic into Bolivia. Yes, a bribe was often expected, but it was much smaller than the tariffs.

    The Church sent thousands of Books of Mormon to Bolivia, which sat in storage for months, because they wanted a $5 per book tariff, which the Church refused to pay. For over 6 months, we literally had a shortage of Books of Mormon in the nation. Finally, the Bolivian government called us to take the books, because they needed the space for other imports. Suddenly, there were 10,000 copies of the BoM for us to use.

    The issue is, onerous rules, regulations and taxation create underground economies.

  6. Well, among federal employees it would rise. ;)

    However, if we reduce the size of government, we do two things: 1. free up money to pay down the deficit, 2. reduces regulation which frees up private sector.

    You’ll notice, I have not talked about tax cuts. I do not think we can afford tax cuts at this time, because we have a huge deficit to pay off.

    I will note that when Reagan reduced regulation it caused a 20 year economic boom with a couple small dips along the way. Unemployment for most of that time was between 4-6%. That is a doable number, and what I hope we would get back to. However, our current efforts will, at best, see us languish as the Japanese did in the 1990s; and at worst, go the way of the Weimar Republic with vast unemployment and hyperinflation.

  7. I wouldn’t count on reducing the government resulting in reduced regulation. Many government hoops and hurdles are interactive, and fewer bureaucrats to answer the phones and fill out paperwork could mean more time in limbo struggling with the same regulations. I say this as someone who spent dozens of hours in 2010 to straighten out an error by the IRS that was going to cost me several thousand dollars, and then a couple hours in 2011 on a different error that shorted me a few hundred. Just think of running a business and finding that the federal regulatory agency that is always running you in circles has laid off half its staff.

  8. John M, one example of decreasing regulations would be a flat tax without deductions (or with very few), like many countries have. This has even been proposed by Democrats, such as Jerry Brown when he ran for president in 1992. Such a proposal would solve your IRS problem. As Will Rogers said, “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

    Read more at http://www.brainyquote.com/quotes/keywords/congress.html#PlySVuYSSu9HP68d.99

  9. Agreed, Geoff, Congress can flatten all those hills that it has piled up in our paths. At the same time, only Congress can undo what it has done. If there’s a law that doing X requires permit Y, it doesn’t help us to just defund agency Z that issues permit Y.

  10. John, I agree that some common sense must be applied to systemically reduce government, including regulation. As Geoff stated, a flat tax or FAIR tax would do this quite effectively. Whereas Pres Obama has just given $500 Million to the IRS to hire more workers to ensure compliance to Obamacare! (Yikes!).

    Here on this issue: if Obamacare continues, but the IRS was not funded to ensure compliance, would end up being a regulation with no teeth – kind of like no need to strictly obey the 55 mph speed limit, when almost everywhere you can go 10 over and not get a ticket?

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