Friday, April 27, 2012

Can Conservatives And Liberals Solve America's Economic Problems

Dr. Blanchard points to this Robert Samuelson column praising Sweden for successfully implementing both spending cuts and tax increases to solve its economic woes in the 1990s.  Samuelson writes,
Conservatives can take heart that many post-crisis policies came right from their playbook. Sweden’s income tax base was broadened and tax rates were sharply reduced. (In 1996, the average marginal rate — the rate on the last bit of income — was 46 percent; in 2010, it was 33 percent.) Spending was cut on old-age pensions, child allowances, unemployment benefits and housing subsidies. Union power over wages was reduced. Many markets (banking, air travel, telecommunications, electricity production) were deregulated. Low inflation and balanced budgets became broadly embraced popular goals.
On the other hand, liberals will also be reassured. Although Sweden trimmed social benefits, it hardly abandoned the welfare state. Overall government spending is still about 50 percent of the economy (gross domestic product), much higher than in the United States ,where the usual ratio is about 35 percent. To reduce income tax rates, the government raised other taxes. Gasoline and cigarette taxes were increased; so were taxes on dividends and capital gains, hitting the rich. Altogether, deficit reduction totaled a huge 12 percent of GDP from 1991 to 1998. Slightly more than a third of that came from higher taxes.
Blanchard claims "there is a lot more there to please conservatives, but it also shows liberals how a welfare state can be sustained."

I'm going to disagree for a couple of reasons.  First, as I posted in the comments on South Dakota Politics, Republicans have replaced "Thou shalt have no other gods before me with "Thou shalt never raise capital gains taxes."  It's not just the number of compromises or concessions that one is asked to make; it's the fervor with with which the positions that one is asked to compromise are held.  In the US, conservatives seemingly hold eliminating capital gains taxes sacred.

The second reason that I disagree with Blanchard comes from a point that both he and Samuelson seem to ignore.  Samuelson writes,
Unfortunately, in one crucial respect, the Swedish experience can’t be duplicated. In the early 1990s, the rest of the world economy was relatively healthy. Sweden could offset the depressing effects of its domestic policies by exporting more — and that’s what happened, aided by a huge devaluation of its currency, the krona. The devaluation made its exports more price-competitive.
Samuelson doesn't point out that Sweden reduces military spending as a share of GDP.  Conservatives in the United States seem unwilling to do that.


That refusal seems important because military spending makes up 20% of the U.S. budget as this chart from the Center on Budget and Policy Priorities points out.


The federal government was once elegantly described by Ezra Klein as a big fat insurance company surrounded by a standing army. It's a useful quip, because our government is basically in the business of security. Social Security, income security, health care security for the elderly, poor and veterans, and guns-and-helmets security account for about 80% of government spending. That's what we pay for when we pay taxes.
I would guess that all governments fit that description. Sweden cut income, health, and "guns-and-helmets" security.  If American leaders seriously want to solve the country's fiscal problems, they will have to do the same.  I don't see either conservative leaders, or liberal leaders for that matter, willing to make those tough decisions.

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