U.S. at Crucial Crossroads; Are We Becoming European?
By Sasha Cekerevac for Investment Contrarians |
In America, politicians mistakenly believe they can have it all. To stimulate economic growth, politicians have continually made big promises, without any way to pay for them. This type of imbalance has led to a government debt level that now exceeds $16.0 trillion—an absolutely insane amount.
With the government debt limit about to be hit yet again, we must ask ourselves: do Americans want to be European?
With the current level of tax and spending imbalance, government debt is set to grow higher and higher, even with a slight increase in economic growth.
This point was best explained by the Swedish Prime Minister, Fredrik Reinfeldt, when he stated on Bloomberg TV, “It’s not sustainable for a country to try to have European levels of expenditure with taxation levels like the United States has.” (Source: Carlstrom, J., “Sweden Warns U.S. Against Targeting Welfare With Tax Deficit,” Bloomberg Businessweek, January 25, 2013.)
This point is essential for all Americans to consider. Economic growth is flat in the U.S.; and while politicians talk a big game, we must consider how we’re going to pay for all of these promises. The more government debt increases, the more constraint it puts on the future for all Americans, lowering potential economic growth levels.
To put the difference into context, the European commission estimated that the budget deficit for Sweden will be 0.3% of gross domestic product (GDP) in 2013, as compared to a budget deficit for the U.S. of 7.3% of GDP. Even the European Union (EU) as a whole will only have a budget deficit of 3.2% of GDP. (Source: Ibid.)
The advantage of having a lower level of government debt is the ability to be flexible. While America’s debt-to-GDP ratio is just over 100%, Sweden’s is less than 39%. For Sweden, this allows some room for adjustment, which they are currently taking, including cutting corporate taxes from 26.3% down to only 22.0%. This is even lower than America’s corporate tax rate.
Let’s take a look at another European nation that has had a large increase in government debt similar to America’s and with an even worse economic growth trajectory: France. While Sweden has a low government debt level and an essentially balanced budget, France has not been able to balance a single budget since 1981. This has resulted in the government debt ballooning to over 90% of GDP from 22% of GDP during this time period. (Source: “The Time-Bomb at the Heart of Europe,” The Economist, November 17, 2012, last accessed January 28, 2013.)
Shockingly, the French government comprises approximately 57% of GDP, the highest of any eurozone member. Why has economic growth declined and government debt increased? Because of a policy of hostility toward business.
For some reason, the French believe that by increasing public spending, they will increase economic growth and decrease government debt. I have no idea how anyone who can do simple arithmetic believes this nonsense.
France’s policy of hostility toward creating new businesses and expanding existing firms is so prevalent that no new firm has been added to the country’s stock market index, the CAC 40, since 1987! (Source: Ibid.)
Economic growth has been so weak that, over the past 20 years, only once has the unemployment rate fallen below eight percent. By enacting anti-business policies such as strong labor rules and making it costly or almost impossible to fire an employee, companies refuse to expand or even start up.
The lifeblood of an economy is business creation, expansion, and entrepreneurship. By having new companies form and expand, this innovation is stimulated, driving economic growth and job creation; this then leads to lower levels of government debt, as long as spending is less than revenues.
A great example of how government policies kill economic growth is by comparing two European nations with the same currency: France and Germany. France has approximately half as many mid-sized firms in proportion to its population as Germany!
And comparing the level of exports, France has declined significantly, while Germany has increased over the past decade. Considering they both use the same currency, this is a prime example of how economic growth can be stifled through disincentives on business creation.
Where does this leave America?
Clearly, we need stronger economic growth, but the promises being made by American politicians will simply lead to higher levels of government debt and greater problems down the road.
Even if we decide to turn toward the European model, hard decisions will still need to be made. Looking at the differences between European nations and government debt levels, it is obvious that even if we tax everyone much higher, spending must be reined in and dispersed at a level lower than government revenue.
It is not enough to simply raise taxes, as we have seen from France’s pathetic performance with respect to economic growth and government debt.
The question Americans have to ask is: do we want to become a more centralized and socialist society?
Personally, I believe America has grown from literally nothing to the largest economic nation in the world in an amazingly short timeframe because of the original ideals of the settlers and founding fathers, creating an incentive-based system. Hard work, entrepreneurship, and the act of taking responsibility for one’s actions have created a tremendous amount of innovation, job creation, and wealth in America. These ideals are now shifting dramatically.
We need to seriously consider how best to generate economic growth and how to reduce the government debt level. With the government refusing to consider reducing the government debt, we are endangering not only our future, but our children’s future as well.