November 16, 2011
Who can blame him, after all it is hard to get news when you’re buried away in the middle of Washington, DC. Samuelson claims that Europe can’t bail itself out. He calls on the IMF to come to the rescue — at the cost of dismantling Europe’s welfare state.
Of course there is nothing wrong with Europe’s welfare state, as everyone who bothers to look at the data knows. In fact the troubled countries have the weakest welfare states in Europe. The ones with the strongest welfare states, Denmark, Sweden, the Netherlands, and Germany, are doing relatively well.
It is also the case that Europe has plenty of money to bail itself out, it just needs the European Central Bank (ECB) to backstop the debt of the troubled economies. But the folks at Fox on 15th Street, where the guiding philosophy is that a dollar in a worker’s pocket is a dollar that could be in a rich person’s pocket, are so committed to destroying the welfare state that they are prepared to pretend that the ECB does not exist.
The point here is that the problems facing the euro zone today are primarily demand side. If someone from Mars landed in the euro zone with 600 billion euros (roughly 6 percent of GDP) and started spending them all over the place, the main effect would be to increase demand and employment. This would raise tax revenue and reduce transfer payments, alleviating the budget problems facing euro zone countries.
By contrast, the burden of an excessive welfare state is a supply side story. The generosity of benefits discourages people from working, reducing the supply of labor. In addition, the money dished out by governments in benefits creates excess demand, leading to inflation. This story does not at all describe the euro zone countries at present.
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