28 February 2010

Taxpayers Must Insist On Spending Restraint

WSJ: The Euro's Greek Tragedy, and Its Lessons for America
Nothing short of an antispending upheaval will solve the debt crises in Europe and the United States.

On both sides of the Atlantic, government spending and unfunded retirement commitments continue to hit record highs. This discourages the new private-sector investment needed to create growth and all the good things that go with it: jobs, profits, house purchases and government tax receipts. The fundamental issue is whether government financial crises—in Greece, California, New York or elsewhere—will cause government spending reforms. If not, then growth, the dollar and euro are in further peril as markets force bailouts and waves of defaults.

The Federal Reserve provides the cautionary example. It has fixed short-term interest rates on the dollar at dangerously low levels—in 2003 at 1% and in 2010 near-zero. This allows heavily indebted governments and banks to borrow cheaply at the expense of savers, the dollar and long-term price stability. It also creates harmful distortions in capital flows away from smaller businesses and more productive areas of the economy.

Central governments are moving even deeper into the guarantee/bailout business. This creates short-term stabilization, but at immense cost to long-term growth and currency stability.

The better outcome from 2010's rolling debt crises would be for the taxpayers who will foot the subsidies and loans to insist on spending restraint. Indeed, what's needed is an antispending upheaval within heavily indebted governments.

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