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Myth of the Tax-and-Spend Job Killers


And now, back to the crisis that should be commanding our attention: Employment.

American politics has virtually no tolerance for suggestions that we need more government and higher taxes. If you merely propose letting tax rates return to what they were during the Clinton era, Republicans and their allies will denounce you as a socialist job-killer. And they will inevitably do so by pointing to Europe, where much higher taxes and a far more generous welfare state have supposedly stifled economic growth and produced chronically high unemployment.

But have they really had that effect? A new paper from the New York Federal Reserve, available via its Liberty Street Economics blog, reports what many economists have been noticing for a while: Europe doesn't lag in employment anymore. As the graph above shows, the gap has closed. And while I'm not qualified to say whether the study makes a broader point about the effects of taxes and the welfare state on employment, Paul Krugman is.  So I'll let him do the talking:

It’s common — especially on the right, but more broadly too — to see Europe as a land of stagnant economies and lack of jobs. This vision had some truth in the 1990s, but was becoming less and less true even before the crisis, which hit US employment much harder than European employment.
More detailed analysis shows that the remaining gap comes from lower employment rates in Europe for the young and old; prime-age workers, especially men, are if anything more likely to be working in Europe.
And you should note that this European performance comes despite the fact that tax levels and levels of social benefits are vastly higher than they are here. Any US politician proposing even a partial move in Europe’s direction would be accused of being a job-killer. Somehow, though, the jobs survive.