Lessons to be learned from Europe's debt downgrades

As we watch the Eurozone struggle with its financial challenges Keynesians keep telling us the solution to our economic problems is to spend more money, to pile up bigger debts.

A week and a half ago, Standard & Poor’s downgraded the debt of more than half of the Eurozone's countries, and the failure of those policies should be very obvious by now.

Solving the Greek debt crisis hit yet another snag on Sunday afternoon. New aid for Greece from the IMF, the European Commission and the European Central Bank would have relied on private bondholders “voluntarily” agreeing to a 50 percent cut in the value of the Greek bonds they hold as the Greek government claims it can't afford the interest rates demanded on the remaining debt. Unfortunately, for the Greek government, it lacks the power to abrogate the rights of foreign bondholders.

Greece can't simply apply the Obama administration's method of doing away with the rights of GM's and Chryslers' bondholders.

The European countries that have fared the best, such as Germany and Poland, rejected the Keynesian medicine. In contrast, countries following the Keynesian path with massive deficits to try to "stimulate" the economy -- such as Greece, Portugal, and Ireland -- have done poorly, with low growth and increased government debt.

Many important Democrats, including President Obama and economist and New York Times columnist Paul Krugman, warned Germany that it was folly to cut government spending and reduce their deficits. According to Obama, "Economists on the left and right agree that the last thing the government should do during a recession is cut back on spending."

Krugman criticized the reduction in German government spending in June 2010 as a “huge mistake,” comparing Germany's policies to those of the 1930s, and said “budget cuts will hurt your economy and reduce revenues [by reducing economic growth].” By August 2010, he was saying that it was still too early to evaluate the policy.

Yet, more than a year later, Germany’s unemployment rate continued falling, dropping by 0.7 percentage points between June 2010 and August 2011. And as of June 2011, German GDP over the previous year had grown at 2.7 percent, appreciably better than our own anemic 1.6 percent. Germany accomplished this without burdening future generations with higher debt.

Now, contrast Polish common sense with President Obama claim that ever-more government spending is the solution. Poland apparently found contrary advice from other economists. As revenue has fallen, the Polish government has done precisely what our president said not to do--cut back on government spending. Warsaw lowered government spending by 6 percent last fiscal year, while Mr. Obama's stimulus and supplemental federal spending helped the budget to soar by 18 percent.

Poland stands out because of its commitment to free-market policies. Facing down the global economic crisis, Poland slashed marginal tax rates, cut government spending and temporarily suspended some government regulations. The U.S. and the rest of Europe adopted a Keynesian economic policy and went in the opposite direction.

On January 1, 2009, Poland cut its top marginal tax rate from 40 percent to 32 percent. While our total state and federal corporate tax rates average 39.2 percent, Poland’s is just 19 percent. Companies investing in Poland get to keep 20 cents more out of ever dollar that the earn. What Poland understood is the importance of the marginal tax rate. The less you take from each additional zloty,(the Polish currency) that people earn, the harder they will work, the more they will invest and the bigger the economic pie will become. While our growth rate has been very stagnant, Poland’s soared by 4.2 percent during both 2010 and 2011.

When Standard & Poor’s downgraded the nine European country debts they made it clear that “more fiscal stimulus from the countries with the biggest debt problems . . . to spend their way out of trouble” wasn’t the answer. Americans can learn from other countries’ mistakes. We can continue following Obama’s proposals and follow Greece or we can follow countries such as Germany and Poland.

John R. Lott, Jr. is a FOXNews.com contributor. He is an economist and author of the third edition of More Guns, Less Crime (University of Chicago Press, 2010).