In the run-up to this weekends G-8 summit at Camp David journalists have unfavorably compared European austerity with Barack Obamas economic policies.
European spending cuts the argument goes have hurt people and are arousing political opposition while Obamas proposals to keep federal spending at 24 percent of gross domestic product indefinitely are likely to succeed.
Evil Republican spending cuts in contrast would deny the economy needed stimulus and wreak havoc on ordinary people.
But the facts undermine the storyline. Veronique de Rugy of the Mercatus Center at George Mason University took a look at what austerity in Europe actually means.
What she found is that government spending has increased or not appreciably declined in Britain France Italy Spain and Germany. The only significant spending reductions are in Greece where the bond market cut off funding.
In the other countries the big adjustment has been an increase in tax rates. European austerity is an attempt to reduce government budget deficits largely by increasing taxes and only to a small extent by reining in spending.
Which when you come to think about it is the policy not of House Republicans -- who actually passed a budget -- but of Barack Obama.
Over the past three years Obama has pursued the goal of higher tax rates as relentlessly as Captain Ahab pursued the great white whale.
Never mind that by some measures the United States even with the Bush tax cuts already has the most progressive tax system in advanced economies. About 40 percent of federal income tax revenues come from the top 1 percent.
And we know from experience that when top rates are increased above Bill Clintons 39.6 percent the intake is always less than projected. Since World War II federal revenues have never risen much over 20 percent of gross domestic product whether the top rate was 28 percent or 91 percent.
The reason is that when rates get high enough investors animal spirits (John Maynard Keynes term) are directed less at increasing productivity and creating wealth and more at avoiding taxes. And without increased productivity you dont get robust economic growth -- which hurts everyone.
Theres another problem. High tax rates mean a volatile revenue stream as California Gov. Jerry Brown is finding out. When times are bad revenues dry up just when government needs money. Californias budget deficit has zoomed from $9 billion to $16 billion in a few months.
Barack Obama doesnt seem to care about these things. In the 2008 campaign ABC News Charlie Gibson asked him whether he would increase the capital gains tax rate even if it meant reducing government revenue as has happened in the past.
Yes Obama said for purposes of fairness. He wants to take away money from people who have earned it even if government gets less to spend.
Obama argues that government spending can generate growth. But money spent propping up state and local public employee unions and funding supposedly shovel-ready projects -- major features of his 2009 stimulus package -- didnt do much for the economy.
In contrast Obamas former chief economist Christina Romer and her husband David Romer in a 2010 academic paper wrote that exogenous tax increases like letting the Bush tax cuts expire after the recession is over are highly contractionary.
Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by 3 percent the Romers wrote. The effect is highly significant.
Higher taxes are the prime ingredient of European austerity. The danger is that with sluggish growth revenues will languish and the bond market will shut down as in Greece. Then spending gets cut with a meat cleaver not a scalpel.
House Budget Chairman Paul Ryan understands this. House Democrats balanced approach -- with tax rate increases -- just means lets start European austerity right now he told The Washington Examiner last week.
Ryans budget which passed the House would cut tax rates but would also eliminate tax preferences. Many high earners would end up paying more. But because they wouldnt face higher rates on the next dollar they earn there would be no incentive to seek tax shelters.
You can find Democrats who agree with this approach though theyd differ with Ryan on details. But they wont speak up as long as their leader keeps pursuing that great white whale.
Michael Barone senior political analyst for The Washington Examiner (www.washingtonexaminer.com) is a resident fellow at the American Enterprise Institute a Fox News Channel contributor and a co-author of The Almanac of American Politics.
In the run-up to this weekends G-8 summit at Camp David journalists have unfavorably compared European austerity with Barack Obamas economic policies.
European spending cuts the argument goes have hurt people and are arousing political opposition while Obamas proposals to keep federal spending at 24 percent of gross domestic product indefinitely are likely to succeed.
Evil Republican spending cuts in contrast would deny the economy needed stimulus and wreak havoc on ordinary people.
But the facts undermine the storyline. Veronique de Rugy of the Mercatus Center at George Mason University took a look at what austerity in Europe actually means.
What she found is that government spending has increased or not appreciably declined in Britain France Italy Spain and Germany. The only significant spending reductions are in Greece where the bond market cut off funding.
In the other countries the big adjustment has been an increase in tax rates. European austerity is an attempt to reduce government budget deficits largely by increasing taxes and only to a small extent by reining in spending.
Which when you come to think about it is the policy not of House Republicans -- who actually passed a budget -- but of Barack Obama.
Over the past three years Obama has pursued the goal of higher tax rates as relentlessly as Captain Ahab pursued the great white whale.
Never mind that by some measures the United States even with the Bush tax cuts already has the most progressive tax system in advanced economies. About 40 percent of federal income tax revenues come from the top 1 percent.
And we know from experience that when top rates are increased above Bill Clintons 39.6 percent the intake is always less than projected. Since World War II federal revenues have never risen much over 20 percent of gross domestic product whether the top rate was 28 percent or 91 percent.
The reason is that when rates get high enough investors animal spirits (John Maynard Keynes term) are directed less at increasing productivity and creating wealth and more at avoiding taxes. And without increased productivity you dont get robust economic growth -- which hurts everyone.
Theres another problem. High tax rates mean a volatile revenue stream as California Gov. Jerry Brown is finding out. When times are bad revenues dry up just when government needs money. Californias budget deficit has zoomed from $9 billion to $16 billion in a few months.
Barack Obama doesnt seem to care about these things. In the 2008 campaign ABC News Charlie Gibson asked him whether he would increase the capital gains tax rate even if it meant reducing government revenue as has happened in the past.
Yes Obama said for purposes of fairness. He wants to take away money from people who have earned it even if government gets less to spend.
Obama argues that government spending can generate growth. But money spent propping up state and local public employee unions and funding supposedly shovel-ready projects -- major features of his 2009 stimulus package -- didnt do much for the economy.
In contrast Obamas former chief economist Christina Romer and her husband David Romer in a 2010 academic paper wrote that exogenous tax increases like letting the Bush tax cuts expire after the recession is over are highly contractionary.
Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by 3 percent the Romers wrote. The effect is highly significant.
Higher taxes are the prime ingredient of European austerity. The danger is that with sluggish growth revenues will languish and the bond market will shut down as in Greece. Then spending gets cut with a meat cleaver not a scalpel.
House Budget Chairman Paul Ryan understands this. House Democrats balanced approach -- with tax rate increases -- just means lets start European austerity right now he told The Washington Examiner last week.
Ryans budget which passed the House would cut tax rates but would also eliminate tax preferences. Many high earners would end up paying more. But because they wouldnt face higher rates on the next dollar they earn there would be no incentive to seek tax shelters.
You can find Democrats who agree with this approach though theyd differ with Ryan on details. But they wont speak up as long as their leader keeps pursuing that great white whale.
Michael Barone senior political analyst for The Washington Examiner (www.washingtonexaminer.com) is a resident fellow at the American Enterprise Institute a Fox News Channel contributor and a co-author of The Almanac of American Politics.
