Thursday, October 25, 2012

Bruce Bartlett's The New American Economy 7: Europe, and Concluding Thoughts

I finished Bruce Bartlett's The New American Economy: The Failure of Reaganomics and a New Way Forward.

In my latest reading, Bartlett continued to promote the Value Added Tax (VAT) as a way for the federal government to raise revenue and thereby offset the problem of ballooning entitlements.  I especially appreciated what Bartlett said on pages 183-184 about Europe.

First of all, Bartlett says that European countries have higher tax/GDP rations than what the U.S. has, and yet they have not suffered significantly.  Rather, the standard of living in European countries is not that much lower than what exists in the U.S.  Bartlett also notes that countries in Europe have a VAT and higher taxes on gasoline and alcohol, and these taxes bring in a significant amount of revenue.  At the same time, Bartlett says that "European countries also generally tax capital more lightly than the United States does" (page 184)----and Bartlett's observation here may correspond to a point that he makes earlier in the book: that mainstream economics has incorporated the insights of supply-side economics.  Bartlett cited countries' reduction in individual and corporate taxes as evidence for this phenomenon.  From what Bartlett says, I gather that Europe is a place that has a solid safety net, and yet it has welcomed the parts of supply-side economics that can be conducive to economic growth.  I like that sort of ideological openness and flexibility. 

Second, Bartlett denies that government spending on benefits leads to a "creeping totalitarianism" (page 183).  A number of conservatives and libertarians aver that it does, but we don't see that sort of totalitarianism in Europe, with its generous welfare states.  By contrast, Bartlett states, "Many of the world's most oppressive states, especially in Africa, have very small governments based on taxes and spending as a share of GDP" (page 183).

Third, Bartlett explains why big government in Europe has not been deleterious to society.  People get back their tax money in the form of benefits, so, unlike many in America, many Europeans don't feel as if their tax dollars are going down a "rat hole", for they get their money's worth (page 184).  Moreover, Bartlett states that "government spending in Europe tends to be more growth-enhancing than spending in the United States" (pages 183-184).

I thought that those were valuable points to note.  Now, onto my general assessment of the book.  I got a lot out of the book, even though there were plenty of times when I was not following what Bartlett was saying.  I think that those who are better versed in economics, however, may get more out of those parts----for Bartlett details the economic mistakes that were made in the past, yet he also explains what the rationales behind those mistakes were.  I just wish that he broke things down into easier chunks, at times.

Another problem that I had: I was going into this book expecting a critique of Reaganomics.  The title, after all, says that Reaganomics was a failure.  But, after reading this book, I'm unclear as to how Bartlett regards it as a failure.  He still appears to agree with many of its insights----that there are tax cuts that result in growth.  When he criticizes Republicans, he contends that they are not entirely faithful to what the supply-siders themselves said----that Republicans support tax cuts that even supply-siders did not think would generate growth, and that George W. Bush diverged from supply-side, in key areas.  So I don't see how supply-side failed, in Bartlett's opinion, at least in reading this book.  Bartlett did note that even certain supply-siders are saying that a tax increase may be inevitable due to entitlements, and that may call into question the notion that tax cuts are the end-all-be-all when it comes to fixing the economy.  And yet, even here, Bartlett appears to assume supply-side principles: he prefers a VAT to higher taxes that could discourage investment, which implies that (like supply-siders) he does believe that certain taxes have ill economic effects.

I once read Bartlett say elsewhere that tax cuts would not be as stimulative now as they were in the 1980s because, early in the 1980s, the initial top income tax rate was really high, and so Reagan's dramatic tax cuts had quite an impact.  But, now, the income tax rate is not that high, and so a tax cut would not be overly stimulative.  I wish I saw more of this sort of insight in Bartlett's book.

Overall, though, I'm glad that I read this book.  It detailed the rise and fall of Keynesianism----and why it rose and fell.  I found that to be helpful.  I also enjoyed the book's narrative of how prominent figures in American history, such as Woodrow Wilson, heralded supply-side principles (i.e., that there can come a point where taxes are so high that they actually decrease revenue) before supply-siders articulated them.  This book also taught me some economic insights that I did not know before----that inflation can lead to high interest rates, for example.

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