Ezra Klein is a blogger/columnist for the Washington Post and an unabashed liberal. Klein has the good fortune of never having had to work a real day in his life. He is younger than my oldest son and hasn’t half my son’s brains. Klein is widely quoted by the left and he regularly pontificates broadly on a wide range of subjects with which he has neither familiarity nor experience.
In a recent column, Klein made an astonishing assertion:
In his column he states:
Speaking of things that the European crisis is not about, while I was in Germany, my colleague Robert Samuelson wrote that “Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically.”
I don’t think that quite works. Take Germany. They have a pretty big welfare state: pensions, health care, paid vacations, unemployment benefits equal to two-thirds of one’s income. Indeed, the Organization for Economic Cooperation and Development keeps track of social spending — unemployment, old-age pensions, health care, etc — as a percentage of GDP. In 2007, Germany spent 25.2 percent of their GDP on such things. Greece spent 21.3 percent on social policies. Yet Greece is in crisis, and Germany is fine.
Germany was an interesting choice as support for his argument. It is true that Germany has survived the economic crisis in far better condition than the rest of the European Union. Knowing why it did is critical, and that has escaped the young Klein entirely.
Note that Klein claims Greece spends only 25.2% of their GDP on social spending. This is misleading on an astronomical scale. Most pensions in the EU are kept off the books and the liabilities of Greece are breathtaking. Greece has a total obligation of 875% of GDP. Germany has a total obligation of 418% of GDP.
Government wages and social benefits actually consume 75% of total public spending.
If one harkened back several years one would see other fascinating events.
Beginning in 2003 Germany, facing a 10% unemployment rate, took bold action. Under Gerhard Schroeder Germany began to trim the welfare state:
The most controversial bills passed Friday entailed reducing unemployment benefits and forcing jobless Germans into work they might not choose but that the government deems “reasonable.” Those who refuse to accept jobs after 12 to 18 months on unemployment compensation could have their incomes cut by more than 50 percent a month.
In 2007 Germany raised its retirement age to 67.
In 2010, Germany again cut welfare:
Germany will cut welfare benefits, introduce new taxes and shed government jobs to save as much as 80 billion euro through 2014 and set an example for the rest of Europe, Chancellor Angela Merkel said Monday.
and it cut spending:
Drastic public spending cuts totalling more than €80bn ($96bn, £66bn) were unveiled by Angela Merkel, German chancellor, on Monday, combined with up to 15,000 job cuts in the public sector, as part of a sweeping austerity package.
At Cato, Michael Tanner demolishes the “increased taxes will solve the deficit” argument:
Greece also provides an object lesson to those who believe that budget deficits are the result of low taxes. Greek taxes run as high as 40 percent on incomes above €70,000 per year. There is also a 19 percent value-added tax (VAT) on all goods and services sold in the country. Corporate tax rates, as is the case with most countries, are lower than those in the United States, but still high at 24 percent. Capital gains are taxed at rates ranging from 5 percent to 20 percent or included in corporate income. Dividends are taxed at 10 percent and are subject to corporate taxes. By far the largest tax, however, is the payroll tax. Employers must contribute 28 percent of wages to the government’s social-insurance schemes, and workers contribute another 16 percent directly, making the total payroll-tax burden 44 percent of wages. Overall, the Greek government takes in more than 38 percent of GDP in taxes.
It’s not low taxes that caused the Greek crisis, but high spending. (Sound familiar?) The Greek government consumes more than half of the country’s GDP. It is difficult for any government to collect enough taxes to support spending at that level.
Oh, and by the way, Ezra, Germany also cut taxes.
So what does Klein’s example teach us?
Raising retirement age, trimming the welfare state, cutting spending and cutting taxes has strengthened Germany.
Sounds like a great plan for the US. Welcome to the right, Ezra.