“Who would have thought, after years and years, even decades, in which the Republican right attacked ‘Old Europe’ that they would embrace the economic policies of the eurozone — austerity and unemployment now at all costs,” former President Clinton joked at a fundraiser for President Obama’s re-election campaign Monday night. It would have been a good line — if only it were true. Yes, unemployment in Europe is high. Yes, that high unemployment is largely due to “austerity” policies brought about by Europe’s crushing debt burden. But Clinton is dead wrong when he compares European austerity to Republican policies.
As Clinton and Obama know full well, Republicans are unlikely to sign off on a debt reduction plan that raises taxes. But that is exactly what most European countries have done. Greece (unemployment rate 21.7 percent) hiked its value-added tax by 77 percent. Spain (unemployment 24.3 percent) raised its investment tax by 44 percent, and Portugal (unemployment 15.2 percent) raised income taxes on the rich and the value-added tax on everybody.
In all, according to a recent European Commission report, up to 40 percent of European deficit reduction has come from tax hikes, not spending cuts. If there is one lesson to be learned from “Old Europe,” it is that raising taxes in the middle of a weak economy, as Obama is proposing, is a recipe for economic disaster.
According to the Congressional Budget Office’s latest Long-Term Budget Outlook, our very own European-style debt nightmare is not too far away. If our government continues its current fiscal policies, mandatory federal spending on health care entitlement programs (Medicare and Medicaid) will almost double from 5.4 percent of gross domestic product today to 10.4 percent in 2037; interest payments on the debt would rise from 1.4 percent of GDP today to 9.5 percent of our entire economy; and publicly held federal debt would reach 93 percent of GDP by 2022, and 200 percent by 2037.
Not that we’d ever get that far — the CBO notes that all of its projections beyond 2035 are suspect, because at roughly that point, “[g]rowing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”
“Unfortunately, there is no way to predict with any confidence whether and when such a fiscal crisis might occur in the United States,” the CBO continued. “All else being equal, however, the larger the debt, the greater the risk of a fiscal crisis.”
In other words, Americans have a choice: They can make the difficult decision to reform entitlement programs now, or they can wait till foreign investors pull the plug and the U.S. is forced to raise taxes and begin the “austerity” that Europe is now experiencing.
