Governments are Never Cheap

Jeff  Carter
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Posted: May 25, 2012 12:01 AM

Two editorials today are interesting when you cross pollinate them. One is David Malpass piece on the Greek government. Governments want austerity for everyone but themselves.

The Greek government has been practicing a particularly aggressive form of antigrowth austerity. While the private sector shrank in 2011, Greece’s government grew to 49.7% of GDP from 49.6% in 2010. To accomplish this bad outcome, Greece’s government increased its value-added tax to 23%—a hidden sales tax so high that no one should be asked to pay it or support it—and created a national property tax that transfers private-sector wealth to the government and through it to foreign creditors.

Meanwhile, Greece’s parliament kept full pay, full benefits, its fleet of BMWs, and a full staff. Greece maintained its sweetheart subsidies for businesses, banks, the army and those who choose not to work. Its sizeable delegations and facilities in Brussels, Vienna, Geneva and Washington are still large, as are the life-time pensions for politicians. Last week, Greek officials suspended work on the sale of government assets, one of the most pro-growth conditions in its IMF program.

Ironically, the US government, state and local governments follow the path of the Greek government behavior. They raise taxes but under the guise of Keynesian stimulus, don’t restrain themselves. Hiring bureaucrats isn’t increasing productivity. In fact, you might say every new bureaucrat hired decreases productivity because of all the extra paperwork they will find for private companies to do.

Did you hear about Maryland?

Readers may recall that when Mr. O’Malley first raised taxes, in 2007, he said he could balance the budget on the backs of the rich. That didn’t work out so well. The number of millionaires fell sharply in the state, whether because of the recession or because they sought tax shelters or simply fled to lower-tax states. Revenues came in far below projections, and the deficit forecast ballooned. (See “Millionaires Go Missing,” May 26, 2009.)

So Mr. O’Malley is now going where the real money is—the middle class. The highest state-local combined income tax rate will rise to 8.95% from 8.7% and 7.95% when Mr. O’Malley became Governor, giving Maryland one of the highest rates in the nation. About 300,000 Maryland filers reported six-figure incomes last year

As Peter Wallison correctly chronicles, whenever government starts to hire bureaucrats, make new regulations and rules, crony capitalism ensues. Because of Dodd-Frank, the US is now contemplating designating insurance companies as too big to fail. How do you think insurance companies will act when they get the implicit backing of the federal government? Do you remember Fannie Mae and Freddie Mac? They also just approved the CME and ICE clearinghouses as too big to fail. Do you feel comfortable having CME($CME) and ICE($ICE) able to run up and borrow at the Fed window if there is a derivatives blow up? I don’t.

The idiots that disrupted CME’s shareholder meeting yesterday yelled about CME getting a tax break from the state of Illinois. Dumb. They should have been screaming to high heaven about the government implicitly backing business activity they shouldn’t be involved in, and don’t understand.

This is why we need less government involvement and less regulation. They screw up economic incentives and bad things happen to taxpayers. This is what Occupy Wall Street ought to be marching against. Instead, they want bigger government to solve the problem of big government. Dumb.

Until we get serious and eliminate entire government agencies and cut employees, not much will change.