More from Germany - Bad Example This Time

This is an article from Kevin Brekke - a switzerland based editor at Casey Research. Like the previous article stated - So we want to be more like Europe?

As a note for a future post that I will make in a few days, I am reading a great interview regarding The Fourth Turning. I am interested in the book, but this article explains a lot about President Obama and the recent election and upcoming elections for that matter.

There Will Always Be Takers of Free Money
By Kevin Brekke

Well, Sunday was national election day in Germany (why can’t Americans vote on the weekend?), and although the results will produce a decided shift in German coalition government, they also mark the culmination of another story told by the voters that likely will go unnoticed. Bear with me here – this has relevance to an upcoming event in the U.S. Congress.
In 2002, a commission was formed to examine the German social safety net system of programs and make recommendations on how to reform them – kinda like the American Congress putting together a blue-ribbon commission for this or that study. The commission was headed by Peter Hartz, an executive at Volkswagen, and hence was known as the Hartz Commission, and the eventual legislation that was passed by parliament was named Hartz IV (there were four stages of changes phased in over a few years).

One impetus for the commission’s forming was to explore possible changes to the unemployment scheme in Germany. At the time, unemployment benefits were high, at about two-thirds of your previous wage, and lasted 18-24 months. However, there was no minimum benefit guarantee, and for those low-wage earners who lost their jobs the benefit was very small. The German government was under pressure to change the law and implement a lower benefit percentage, a “minimum livable benefit” floor, and to extend the term that benefits could be drawn. And, no surprise, the commission’s recommendations conformed to the government’s concern.
Changes were made to unemployment benefits that included a minimum monthly guarantee, a lowered monthly benefit percentage, and essentially extended the benefits to an unlimited term. Uh-oh.

Nationwide street protests took place in reaction to the lowering of the benefit amount.

Let’s now return to Sunday’s election. The party that pushed hard for the passage of the Hartz IV amendments was the SPD, the Social Democrat Party. And they have been losing voter support and political power since. The SPD’s support fell to 23% from 33% in the last national election, a phenomenal drop in a multi-party system, and they will be replaced by another, far smaller party in the ruling coalition government formed with the CDU/CSU, the biggest party in Deutschland. Voters always want smaller government, just don't touch my sacred benefit. The SPD is a fading party due to its backing of more restrictive government benefits.

And here’s a telling anecdote showing how the jobless game the system. After the last national elections, one of the TV stations was polling voters asking about their choices and their feelings about the elections. One gentleman, after sharing his thoughts, was asked by the interviewer about his personal situation, and his profession.

“I’m a Hartz IV man,” was his reply. My jaw went slack. His chosen profession was unemployed. And under the new rules, he had likely figured out how to work the system and stay on the dole for as long as the gravy flowed. A permanent underclass of long-term unemployed now exists in Germany. When governments opt to give away free money, there will always be takers.
Last week the House voted to pass a third extension in unemployment benefits, and the Senate is expected to do the same as early as this week.

Now, I’m as sensitive as the next guy to the hardship suffered when a job is lost. But the path being trodden by Congress is a dangerous one. The longer the unemployed are subsidized, the more likely it is that the “benefit” will come to be seen as an “entitlement,” and entitlements seldom come with expiration dates.

Like Social Security, the question of unemployment benefits is evolving into a parallel third-rail in politics, where neither party nor politician will touch them for fear of political suicide.
I hope that whatever decision is made by Congress, it comes with clear guidelines and a set term. I fear that neither of these is likely to be on the agenda.

Germany

Great article from Brian Wesbury of First Trust -


Much of the modern social welfare state (which liberals in the US seem intent on expanding) dates back to German Chancellor Otto von Bismark in the late 1800s. But now, even as the US moves toward more government, Germany may be on the verge of a giant leap in the opposite direction.

Angela Merkel, the current premier of Germany won re-election this weekend. Back in 2005, Merkel’s party, the Christian Democratic Union (CDU - a “center-slightly right” group), had gained power by forming a coalition with the “liberal” Social Democrats (SDP). This time, the SDP saw their worst election returns in 60 years. This means that Merkel will form a coalition with the Free Democrat Party (FDP - a “somewhat free-market” group). The FDP was nearly extinct just ten years ago, but won 14.6% of the vote this time around, a record for their party.

The Free Democrats ran on a platform that included a significant across-the-board cut in marginal income tax rates – the German equivalent of the Kennedy or Reagan tax cuts. At present, income tax rates range from 14% to 45%. The Free Democrats want three brackets – 10%, 25% and 35%.

Initial news stories suggest the euro will rally and German bond yields rise, as tax cuts would increase economic growth and widen the German budget deficit. We agree that these tax cuts would push up the euro, but don’t think German bond yields will rise much, if at all, and would not worry about the impact on the budget deficit. Lower tax rates would not only accelerate the recovery from the recent economic turmoil but also encourage the work, saving, and investment that Germany needs to raise its long-term growth potential and address its massive Baby Boom-related fiscal imbalance.

Cutting the top income tax rate translates into a healthy 18% increase in the after-tax return to work for those with the highest incomes. (Top-income workers now keep 55% of their income gains; a tax cut would raise this to 65%, an increase of 18%).

Even if the budget deficit did rise – and we doubt it would if the tax cuts are like the Free Democrats want – a larger economy with better incentives would handle a larger deficit better than a weaker economy could handle a smaller one. A 325-pound barbell is always heavier than a 250-pound barbell. But an NFL tackle can lift the first barbell easier than a jockey can lift the second.

These tax cuts would also put pressure on other countries, particularly Germany’s main competitors, to reduce tax rates themselves. After Reagan’s tax cuts in the 1980s, many advanced countries around the world also cut taxes, and not just those with “conservative” governments. Sometimes it was just a defense mechanism to hold onto capital and productive workers.

Given the inclination of many policymakers in the US to look to Europe as a model for where we should head next, the election results in Germany are going to cause a great deal of confusion in Washington, DC.