16 November 2010

Who Will Save the Drowning Man?

And just who is the drowning man? Is it the US, sinking rapidly into a deepening debt quagmire? Or is it Europe, with its naughty little PIIGS flirting on the edge of permanent insolvency, threatening to pull the rest of the EU down with them?

Ambrose Evans-Pritchard calls Europe's economic situation a "horrible truth."

This NYTimes article suggests that a European debt crisis might spread like a contagion, with dire consequences.

Here is a comparison of the US government's financial situation with that of some European countries:
The French government's revenue stood at an unbelievable 48% of GDP and Greece consumed a little less, but still a high percentage at 37%. By comparison, the U.S. Revenue/GDP ratio was a miniscule 15%, although we still feel that government taxes are too high and wasteful practices don't seem to end. What does that mean? Despite the negative economic impact, the U.S. government can raise taxes and increase revenue, while the European Union has virtually no room to maneuver.

Add austerity plans and public sector jobs cuts like we've seen in the U.K. (a reduction of 500,000 government jobs), and one will wonder how the bills will be paid on the Eastern side of the Atlantic. As 2011 approaches, the spending cuts will start to affect — and infect — the European economic engine. The bloated public sector that was created over the last 50 years cannot be undone in 2 or 3 years without major restructuring and disruption — and that task will take a generation to "correct." _SeekingAlpha
The NYTimes recently provided a nifty interactive puzzle, which allows each reader to attempt to balance the US Federal budget for both 2015 and 2030, using a combination of spending cuts and tax increases. The puzzle lacked the most important ingredient for achieving fiscal health -- the ability to eliminate harmful regulations which are preventing the private sector from growing and thriving. The NYTimes editors likewise neglected to offer the reader the ability to eliminate public sector unions. In addition, the NYTimes feature did not provide the power to institute strong tort reforms -- except in a very modest way for medical malpractise.

I balanced the budget with a combination of 88% spending cuts and 12% tax increases. But what I really wanted to do was to cut the size of government by 50%, as an appetizer. After that preliminary cut, I would begin looking at the tough choices for downsizing government.

A sane existence will involve a certain amount of pain and risk. It is the heedless avoidance of all pain and risk that leads to total extinction.

So, who is the drowning man?

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Blogger Kinuachdrach said...

"The French government's revenue stood at an unbelievable 48% of GDP"

There is probably another layer to this puzzle. The French government may be taking an unbelievable 48% of GNP, but what is the French government doing with it?

If the French government is building up Airbus (and has already successfully run Lockheed & McDonald-Douglas out of the commercial aviation business), or if the French government is building the world's largest nuclear power plant construction industry, then that high percentage may represent a forced (but ultimately beneficial) investment in the future of the French people.

On the other hand, if the US Federal Government is giving out its share of the GDP to Social Security recipients and single mothers to buy gee-gaws from China, the lower Federal Government share of GDP could be much more damaging.

You are right about the need to roll back excessive regulations. Too many talented people in the West today are being paid to kill jobs and reduce tax revenue -- that's an expense no economy can afford.

Tuesday, 16 November, 2010  
Blogger gtg723y said...

Al, I must have made the same choices as you. I got the exact same percentage ratio. But I did find it to be an entertaining exorcise. I didn't even cut the military, I did however cut the civilian support network. As a former civil servant and can honestly tell you there is a lot of fat to be cut from their ranks. People that are unqualified for their jobs because a former supervisor promoted them to get rid of them because it is nearly impossible to fire a government worker. The contractors are more expensive, but if not for them nothing would get done.

Tuesday, 16 November, 2010  

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