The Antidote To Fiscal Crisis Is Cutting Government Spending And Not Raising Taxes

From the Bloomberg article, "U.K. Takes Medicine, Greece Turns Doctor Away" by Kevin Hassett:

The antidote to fiscal crisis is fiscal consolidation, a dramatic change in spending and tax policy that reduces the indebtedness of a nation. Such consolidations have relied on varying degrees of tax increases and spending reductions. Some have successfully reduced debt, some haven’t. The data tell a clear story: What works is cutting government spending. [emphasis added]

A series of influential papers by Harvard University economist Alberto Alesina and various co-authors found decisive evidence that successful consolidations rely almost exclusively on spending reductions, while unsuccessful consolidations seek to close 50 percent or more of the gap with tax increases.

Cutting Is Key

A recent study by the International Monetary Fund supports the principle that cuts, particularly to entitlement programs, are key.

Also see my earlier blog post on this topic, "History Shows Cutting Spending And Taxes Spurs Economic Growth."

Hidden Costs Of Free Government Health Care: The French Example

City Journal has an article about the true cost of having free government health care in France. Read "Paying for Le Treatment" by Guy Sorman, City Journal, 24 August 2009.

Sorman writes:

France’s costly national health insurance is mostly financed by taxes on labor. A Frenchman making a monthly salary of 3,000 euros will pay approximately 350 of them (deducted by his employer) for health insurance. Then the employer will add approximately 1,200 euros, making the total monthly cost to the employer of this individual’s services not 3,000 euros but 4,200. High labor costs in France affect not only consumer prices but also unemployment rates, since employers are reluctant to pay so much for low-skill workers. Economists agree that unemployment rates and the cost of national health insurance are directly related everywhere, which partly explains why even in periods of economic growth, the average French unemployment rate hovers around 10 percent.

High as they are, taxes on wages are not enough to cover the constant deficits that national health insurance runs. France imposes an additional levy to try to close the insurance deficit—the CSG (contribution sociale généralisée)—which applies to all income, including dividends, and which Parliament increases every year.

The French system negatively affects employment in France and increases the cost of drugs in the US for Americans.

Read the entire article here.