Addressing the “fiscal cliff” by increasing taxes and failing to cut government spending is exactly the wrong policy. That’s what Europe has been doing for the past four years, and it hasn’t worked, observes Matthew Melchiorre:
Spending cuts have been weak. Today, not a single Euro Zone government is spending less as a percentage of GDP than it did in 2007, according to Eurostat data.
Tax increases, on the other hand, have been rampant. The average cyclically adjusted total tax burden among Euro Zone countries increased by about 5% from 2007 to 2010, according to European Commission data. European politicians continue to reach deeper into their citizens’ pockets. Most recently, the French parliament approved Socialist President Francois Hollande’s proposal for sky-high 75% marginal tax rates on incomes greater than €1 million.
This misguided focus on raising taxes instead of cutting a morass of unaffordable spending has led to prolonged recession. The International Monetary Fund projects that total Euro Zone output in 2013 will remain below potential by 2.7% — worsening from 2.4% this year. Unemployment will rise accordingly.
Grim as they are, these trends aren’t surprising. A 2012 study by Professor Alberto Alesina of Harvard University found that economies undergoing fiscal consolidation centered on spending cuts recovered to pre-austerity output within roughly one year, while economies faced with rising taxes didn’t recover for more than three years. Cutting government largesse also had an immediate boost on business confidence, while asking taxpayers to pony up for more spending caused confidence to plummet. [USA Today, November 13]