Democrats are struggling to find an argument, an argument, that sells their $5 trillion spending plan to a skeptical audience. The last and surprising attempt is President Biden’s claim that all of his new rights will make America bigger.
“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 lagging behind.” Well, Senators Joe Manchin and Kirsten Sinema? You are complicit in the imminent bankruptcy of the country.
Admire the boldness of higher taxes and greater social welfare as a path to national awakening, especially when there is universal evidence to the contrary. Expanded Biden’s rights will likely translate into fewer incentives to work and invest, slower economic growth, lower standards of living, and less fiscal space for essential public goods like national defense.
This is the lesson of the European welfare state from cradle to grave, which Bernie Sanders explicitly presents as models. Most of its population is older than the United States, but that alone does not explain its low labor participation rates and much higher structural unemployment. European unemployment rates tend to be much higher than in the United States, especially among young people. In 2019, work participation was 62.6% in the United States compared to 49.7% in Italy, 55% in France, 57.7% in Spain, 59.3% in Portugal, 61, and 3% in Germany.
Low labor participation rates in Europe contributed to the slowdown in growth. While the US economy was slow to recover from the 2008-2009 recession due to uncertainty about Obama’s policy, US GDP growth averaged 2.3% from 2010 to 2019, outpacing Italy (0.27%), Portugal (0.86%), Spain ( 1.07%)). ), France (1.42%) and Germany (1.97%).
Democrats say a more generous family leave would encourage more women to work and expand the workforce. But Italy offers 22 weeks of maternity leave at 80% of the previous salary. France offers 16 weeks at 90%, Spain offers 16 weeks at 100%. Instead, higher payroll taxes to fund these generous benefits have reduced the incentive to hire.
Europe’s little-discussed secret is that cradle-to-grave welfare states are financed by the middle class through value-added taxes and payroll taxes. The joint employer-employee social security rate is 36% in Spain, 40% in Italy and 65% in France. VAT in most European economies is around 20%. Simply put, there are not enough wealthy people to fund their dues.
Democrats in Washington know this, which is why they resort to budget tricks to disguise $5 trillion in spending in the ten-year budget window. They plan to drive a few years of spending with 10 years of tax increases on corporations and wealthy individuals, but that only brings them $2.1 trillion in estimated new revenue.
The huge benefits for Europe also mean less money for security and the military. Only nine or so European countries meet NATO’s commitment to spend 2% or more of GDP on defense, and only Greece spends more than 3% as does the United States. Germany spends a paltry 1.56%.
The United States was able to defeat the Soviet Empire in the 1980s because the booming economy provided enough revenue to rebuild the army. Biden is proposing to cut defense in real terms and the luxury spending wedge will grow rapidly. There will be no Reagan-style military buildup with the rise of China.
The irony is that some European governments have tried to reform their tax and benefit systems to become more competitive. Over the course of two decades, Germany and Sweden have reformed their social and labor policies. Their labor participation and GDP growth have outpaced the rest of Europe. The labor participation rate in Germany rose to 61.3% in 2019 from 58.1% in 2000.
During the 1970s and 1980s, the Swedish tax burden rose to the highest levels in the world as the welfare system became more generous. The result: Sweden’s real after-tax income has remained stagnant while public debt has risen. From 1976 to 1995, Sweden’s GDP growth was about half the average for developed countries and a third less than that of the large European economies.
Sweden’s decline led to tax and spending reforms in the early 1990s that increased labor productivity, job growth, and private incomes. The growth rate of disposable income quadrupled from 1996 to 2011. The average Swedish GDP growth from 2010 to 2019 (2.6%) exceeded the average growth in most European countries.
Other European governments are also pushing for welfare state reforms. French President Emmanuel Macron agreed to reform the pension system and cut the corporate tax rate to 26.5% from 33% in 2017; Small businesses pay 15%. Greece is emerging from its debt trap with the tax, regulatory and pension reforms of Prime Minister Kyriakos Mitsotakis. The company’s rate is 22%, while Biden wants to bring the combined US federal state well above 30%.
Mr. Biden also said on Tuesday that the United States must spend more on green energy and manufacturing to compete with China. But Beijing’s industrial policy has led to capital misallocation and economic distortions, as the current debt difficulties show. Since when should China be an economic model?
America survived the decline of the 1970s by returning to its historical model of liberation initiative and private enterprise. Mr. Biden’s plan will empower the government, increase the burden on the private economy, and undermine the upward movement by encouraging people not to work. This is the real recipe for withdrawal.
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