The European Model Is Also Doomed (February 7, 2009)
Given the abject collapse of "American-style Capitalism" based on "financial innovation," many now tout the superiority of the European version of Capitalism (i.e. one with a stronger social welfare safety net). But the unpleasant demographic and structural truth is that model is equally incapable of paying promised retirement and healthcare.
New correspondent Philip B. recently offered this report on the status if small business taxes and pension prospects in The Netherlands. The questions his report raises can be applied to all of Western Europe and indeed the entire European model of Capitalism: high tax rates supporting a generous welfare/retirement/healthcare system.
Iīll tell you a little story of mine, as it parallels the American situation at the moment in terms of working and realising the only institution working against you is the government.
Thank you, Philip, for this eye-opening report. Peculiar as it may seem to some, the demographics of two workers supporting generous pension and healthcare benefits for one retiree are unsustainable in every economy, not just an "American model" one.
As always, we must consider two factors:
1. What are the incentives and disincentives for small enterprises?
2. What's different now from 1929-1941?
Starting with point 2: What's very different is the overhead/social welfare costs expected of small business, not just in the EU nations but in the U.S.
In France (for example), my brother pays 85 euros in direct social and other taxes on every 100 euros he pays his sole employee. The listing of all the various taxes accompanying each paystub runs over half a standard page in length. Then there are income taxes and a host of other business taxes.
Could a small business owner who squeaked through the Great Depression survive this one? No, for the simple reason that the social welfare and tax burdens are implicitly designed for endless prosperity.
Even more difficult for small business, it is essentially impossible to shed workers in the EU in any other way other than simply closing the doors of the enterprise. Yes, you can quibble about the details, but that is the practical reality.
If we examine the incentives and disincentives of such an "only prosperity" system, we are not surprised to find the informal or "black" economy thriving in the EU--"legitimate" small enterprise is simply too burdened to function except in very high-profit, high-productivity niches of any economy.
We should also not be surprised by the shuttering of tens of thousands of small businesses in both the EU and U.S. economies. The incentives and disincentives currently in place make it almost impossible to start or continue a small business while making informal work while drawing some social welfare benefits extremely attractive--not just financially, but psychologically. Why toss and turn all night wondering how you can meet next month's payroll? Close your business and either pursue it informally, paying no social welfare costs, or do so as a sole proprietor/partnership with zero employees.
As unemployment continues to rise, we might profitably look beneath the numbers at the pernicious set of
incentives and disincentives and the unfavorable deomographics which doom high-overhead/fixed cost economies
to insolvency and structurally high unemployment.
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