I found this great article and hope you find it very interesting.
Worldwide markets will soon close out a brutal month, thanks to a realization
among traders and economists that spending by governments across the globe has
threatened many economies with running out of cash.
What started as a cautious eye toward problems in a marginally important
economy in Greece became a full-blown crisis, when ratings firms cut debt outlooks for fellow eurozone economies Spain and Portugal. There were
concerns that the euro itself would collapse, or at least break into pieces,
either because Greece was thrown out or more stable economies like Germany
pulled out.
But it isn’t just a European problem. Spending in the U.S. threatens to
leverage the domestic economy so much that it faces, within just a few years, a
debt level that represents the country’s entire gross domestic product. And,
since the U.S. is a relatively strong world economy, even with unemployment
near 10% and uneven signs of recovery, American taxpayers have been forced to
dig deep to help out the rest of the world.
Indeed, the bailout of Greece couldn’t happen without two American
contributions: the U.S.’s funding of nearly 20% of the International Monetary Fund, which is helping to keep Greece afloat, and the
move by the Federal Reserve to swap dollars for euros, thus helping prop up
European banks.
So how did we get here? It is a combination of factors, but boils down to five
main themes.
Is the World Broke?
Entitlements. Worldwide, governments have made commitments they cannot keep. In
the U.S., 19% of wages are paid by the government, according to the Bureau of
Economic Analysis. Government job growth has outpaced that from the private
sector. Many European governments already have bloated bureaucracies and
government-spending rates that are well ahead of those here.
And the government in the U.S. is taking on broader responsibilities for health
care, as well as seemingly endless extensions of jobless benefits – once
designed to be merely temporary stopgaps until people found work.
Overseas, the entitlement culture has rotted some economies from within.
Spain’s 20% unemployment rate, for instance, is tolerated because of the public
benefits the unemployed receive, thereby killing incentives to find new work.
Unions. “Austerity measures” is the new catchphrase in Europe nowadays, as
governments scramble to get their fiscal houses in some semblance of order. But
labor unions – notably the public ones – have reacted by holding massive
protests. They have become regular events on the streets of Athens – even the
Greek Air Force at one point was hit by a pilot sick-out.
Same issues domestically. In the U.S., New Jersey Gov. Chris Christie has faced
the toughest resistance to his own budget cuts from the teachers unions, who
have largely fought calls to make contributions to their own retirement and
health-care plans.
Spending. Government debt and deficits have been driven by over-spending for
years, but, lately, that has accelerated. In fact, it’s part of the plan: the
way to get out of a crisis built on spending has been to spend even more now,
with the promise that more responsibility will come later. Indeed, White House economic advisor Christina Romer said in Europe this past week that
governments still have “fiscal room” to spend to reduce unemployment. Indeed,
she has warned that cutting back now will hurt, not help.
“It would be penny wise but pound foolish to deal with our long-term problems
by significantly tightening fiscal policy immediately or foregoing additional
spending to reduce unemployment,” she told the Organisation forEconomic Co-operation and Development 2010 Forum in Paris. “Immediate fiscal
contraction would inevitably nip the nascent economic recovery in the bud.”
Corruption and Lack of Ethics. As Greece gets its house in order, some
startling revelations are coming to light. Widespread tax evasion costs the
country an estimated $27 billion annually, and it is happening even among the
government officials charged with being stewards of its economy. Greece’s
Finance Ministry, has found 70
government tax officials who make about $70,000 on average a year, but own
millions of dollars in real estate.
Another 234 tax workers
never filed taxes for 2007 to 2008. The Ministry is also investigating 50
complaints brought against tax workers in 41 government offices, alleging
bribery, forgery, and corruption. One out of 7 people in Greece paid a bribe,
and a quarter of all taxes owed in Greece goes unpaid, versus an average 7%
here in the U.S.
Breaking the rules is common throughout Europe. All 16 eurozone countries have
just two requirements: keep debt to 60% of gross domestic product and keep
budget deficits to 3% of GDP. Turns out, the track record was never so good.
Overall, according to an analysis by Bloomberg News, countries only met the
requirements 57% of the time. Greece never met the requirements in all nine
years it was in the eurozone. Belgium and Italy missed one or both requirements
in all 11 years. Only Finland and Luxembourg met the goals every year.
Over-regulation and Over-taxation. The response among some governments, most
notably that in the U.S., has been to increase regulation and taxes. The big
highlight has been the financial-services regulatory revamp that passed the
Senate, and now faces negotiations with the House. An estimate by Goldman Sachs suggests the bill would take 19% of profits out of the banking system, because of new rules and restrictions against certain business activities. Europe is considering new bank rules and, notably, a new banking tax. The European Commission on Wednesday proposed that each European Union government assess a special tax on banks to create a fund dedicated to ensuring the “orderly failure” of troubled banks.
And, no matter where there’s a budget problem, a common solution has emerged:
tax the rich. On Thursday, Secretary of State Hillary Clinton said wealthy
Americans don’t pay enough taxes. “The rich are not paying their fair share in
any nation that is facing the kind of employment issues [America currently
does] — whether it’s individual, corporate or whatever [form of] taxation
forms,” Clinton told an audience at the Brookings Institution.
The numbers don’t bear out that hypothesis: The top 1% of tax returns paid
40.4% of all federal individual income taxes and earned 22.8% of adjusted gross
income. Going down the list, the top fifth of households made 56% of pre-tax
income but paid 86% of all individual income tax revenue collected, according
to the Congressional Budget Office. According to the Tax Policy Center, about
45% of Americans pay no federal income taxes at all.
It’s worldwide, at all levels of government. In Spain, José Luis Rodríguez
Zapatero, Spain’s Socialist prime minister, said the government planned a new
tax on the rich as part of a campaign to reduce the budget deficit. Democrats
in New York and New Jersey have floated a special tax on earners making more
than $1 million a year. And the UK’s new government is trying to push through a
new capital gains tax.
Tags: Greece, health care reform, Socialists
