Europe’s leaders say they want austerity with growth, Nathan Lewis notes:
Governments find that they bounce back and forth between these “austerity” and “stimulus” strategies, discovering that they are both unsuccessful.
What tends to happen is that “stimulus” means more government spending. Soon, people discover that this “stimulus” spending tends to be directed to abject waste and crony capitalists, and the government’s debt burden explodes. Thus, the political system careens back toward “austerity.”
“Austerity” usually means less spending and higher taxes. The higher taxes are implemented, but it is soon discovered that nobody wants to reduce spending, especially when the economy is crumbling due to the higher taxes. What small reductions in spending there are tend to be directed toward genuinely beneficial services, while the waste, graft and crony capitalist payoffs continue unabated. The sagging economy leads to shortfalls in tax revenues, and the deficit may even expand.
The public soon complains that important services are being cut, while the excessive bureaucrat headcount and absurd benefits continue unchanged. And the crony capitalists – today the banking and defense industries in particular – still receive a river of unearned largesse. Taxes, already too high to begin with, head higher – as if the problem was insufficient taxation! The economy crumbles, and the public begins to complain. The government immediately spins this into a story: “see, we can’t reduce spending one little bit!” And we lunge back into a cycle of “stimulus.”
The end result is: higher spending (from “stimulus”), and higher taxes (from “austerity”). This eventually leads to a moribund economy and sovereign default, as we have seen so clearly.
Lewis recommends lower taxes and less spending:
There’s nothing new about this strategy. It’s the same as Ronald Reagan and Margaret Thatcher tried to implement (with varying degrees of success) in the 1980s.
It’s the same strategy the Japanese leaders used soon after the Meiji Restoration in 1868. A tax code containing 1500 taxes was discarded and replaced with a minimalist system that derived almost all revenue from a simple property tax. Most of the remaining revenue was raised by a tax on alcoholic beverages.
The new Japanese leaders then eliminated their unneeded government bureaucrats in one mass purge.
The Japanese leaders also introduced a new, uniform national currency, the yen, which was linked to gold and originally worth the same as the U.S. dollar (1/20.67 of an ounce of gold.)
The result? The first great era of industrial expansion in Japan. Even today, almost 150 years later, Japan remains the only ethnically non-European country to be fully and completely considered a “developed economy.”