Monday, January 2, 2012

The Spanish Perspective

The United States is the only nation that embraces Supply-Side economics seriously.  Thus, the debate in this country is framed in terms of whether we can reduce the deficit by increasing the tax on "job creators".

Now, compare that framework with Spain, where they take Keynesian economics more seriously.  Spain is a nation in a severe recession with extremely high unemployment and crushing national debt, having their credit downgraded several times.  Their debate is framed in terms of whether too much austerity will prevent an economic recovery, which is a legitimate question for nations without a crushing national debt.

Spain has a written goal, i.e., to reduce their budget deficit to 6% of GDP.  (The U.S. has no such agreed-upon goal.)  When the latest reports showed the deficit was running closer to 8%, they didn't take the Supply-Side approach of cutting taxes on high-income earners.  Instead, they increased those taxes.

Wisely, they also cut spending but unwisely took the Tea Party approach of slashing discretionary spending instead of entitlement spending.  In fact, they even preserved inflation adjustments for pensions, which is inexplicable to me.

I wish them well but worry they have framed the debate incorrectly and taken the wrong road.  The well-travelled and well-maintained road of Austrian economics would have raised taxes on everybody and cut both discretionary spending and entitlement spending.