No more austerity! Judging from recent European election
results, that’s the message presently being shouted at European
politicians all over the old continent. It’s a mantra echoed across
the Atlantic by Americans such as
Paul Krugman. Austerity, they argue, isn’t just ineffective as
a solution to Europe’s economic woes. It’s also providing, so they
say, conservatives with the cover they need to do what they’re
always wanted to do: dismantle by stealth that most sacred of
social democratic cows — the welfare state.
Much depends, of course, on what’s meant by “austerity.”
Strictly speaking, the type of austerity being pursued in most
European countries is primarily focused on long-term government
debt-reduction. This translates into tax increases and spending
cuts. Part of the object of the exercise is to convey to creditors
a serious intent on the part of governments to meet their present
financial obligations, thereby allaying concerns they might default
on their existing — and extensive — liabilities.
Here, however, it’s useful to put European expectations of what
constitutes austerity into perspective. Does France’s raising of
the official retirement age from 60 to 62 really constitute
“hardship”? Does Greece’s effort to reduce its public sector
payroll expenses from a 2009 high of 55 percent of state revenues
to something close to the 40 percent figure recorded in 2000
represent “privation”? Does the British government’s 2010 plan
to return public spending to 2006 levels of a mere 41 percent of
GDP suggest that David Cameron is “gutting” the welfare state?
Please.
Leaving aside, however, many European governments’ modest
conceptions of fiscal restraint, there is a case to be made that
austerity alone won’t be enough to facilitate the growth needed to
pull Europe out of its economic black-hole. Restoring sanity to
public finances is one thing. Wealth creation is quite another.
The standard Keynesian argument is that economic downturns
necessitate government stimulus packages. Unfortunately, the track
record for stimulus programs — Exhibit A being the Obama
Administration’s 2009 injection of a trillion (borrowed) dollars
into America’s economy — doesn’t provide many grounds for
optimism.
But the lesson of successful economic reform programs — Sweden,
ironically,
being a good example — is that stabilizing or reducing
government debt and spending isn’t enough. You also need
substantial economic liberalization: i.e., measures such as
deregulating labor markets and removing other barriers that inhibit
competitiveness, discourage entrepreneurship, and thereby unduly
restrict an economy’s growth-capacity.
There is considerable evidence suggesting that the prevalence of
high labor costs and regulations in many European countries
contributes significantly to their relatively low productivity
levels. Many European businesses actually choose to stay small
because of the heavy regulatory environment and often-compulsory
unionization immediately imposed on many businesses once their
employees exceed a certain number.
According to France’s 3,200 page
Code du Travail, for example, any company inside
France that
exceeds 49 employees is legally obliged to establish no fewer
than three worker councils. If such businesses decide they
need to let go some employees, they’re required to present a
reorganization plan to all three councils. Is it any wonder that
many French businesses simply don’t bother expanding their employee
base, a factor that often inhibits their capacity to generate more
wealth?
Unfortunately for Europe’s other problem children, it’s
precisely in these areas that little reform has occurred. In April,
for instance, Italy’s Prime Minister Mario Monti tried to change
the law that essentially forbade businesses with more than 15
full-time employees from dismissing staff. Monti’s goal was to
substitute a situation of jobs-for-life for some and perpetual
insecurity for others, with severance provisions for people let go
on economic grounds. Under pressure from Italian unions, however,
Monti’s proposal was
watered down to uphold the extensive powers enjoyed by courts
to investigate whether a company’s decision to fire someone was
justified. This guaranteed maintenance of the status quo.
Needless to say, Greece is Europe’s poster child for
reform-failure. Throughout 2011, the Greek parliament passed
reforms that diminished regulations that applied to many
professions in the economy’s service sector. But as two Wall
Street Journal journalists
demonstrated one year later, “despite the change in the law,
the change never became reality. Many professions remain under the
control of professional guilds that uphold old turf rules, fix
prices and restrict opportunities for newcomers.” In the words of
one frustrated advisor to German Chancellor Angela Merkel, “Even
when the Greek Parliament passes laws, nothing changes.”
Politics helps explain many governments’ aversion to reform.
Proposals for substantial deregulation generates opposition from
groups ranging from businesses who benefit from an absence of
competition, union officials who fear losing their middle-man role,
to bureaucrats whose jobs would be rendered irrelevant by
liberalization. The rather meek measures that Europeans call
austerity have already provoked voter backlashes against most of
its implementers. Not surprisingly, many governments calculate that
pursuing serious economic reform will result in ever-greater
electoral punishment.
In any event, America presently has little to boast about in
this area. States such as Wisconsin have successfully implemented
change and are starting to see the benefits. But there’s also
fiscal basket-cases such as (surprise, surprise) California and
Illinois that continue burying themselves under a mountain of debt
and regulations.
America’s national debt situation is even more sobering. The
Congressional Budget Office recently stated that by the end
of 2012 “the federal debt will reach roughly 70 percent of gross
domestic product, the highest percentage since shortly after World
War II.” Without major policy changes, it added, America is on
track to realize a national debt-to-GDP ratio of 93 percent within
ten years. Several studies suggest that it’s at this
level that public debt starts to undermine an economy’s
growth-capacities.
Yet former Administration heavyweights such as Larry Summers are
actually
calling for more government borrowing. As for
deregulation, the current Administration is hardly going to
alienate those interest-groups whose support it desperately needs
in an election year. More importantly, it’s manifestly not
philosophically-inclined to freedom-orientated solutions to
economic problems.
And perhaps, in the end, that’s what it’s all about. Most of
Europe’s political class — and many of their American equivalents
— have no faith in people’s economic creativity or their ability
to assume responsibility for themselves and their families. Nor do
they trust civil society to help those genuinely in need. Moreover,
despite generating unsustainable debt and failing to pursue
growth-orientated reforms, they remain utterly convinced they know
better.
Of course, it may be that many ordinary Europeans also remained
wedded to the social democratic myth of eternal security through
endless government. As Edmund Burke once lamented, “Among a people
generally corrupt, liberty cannot long exist.” If so, then much of
Europe is doomed to steady economic decline and dissatisfaction.
The question is whether enough Americans have effectively succumbed
to European-like expectations, or if they have the gumption to
actually embrace the liberty they talk so much about.
On that issue, I’m afraid, the jury’s still out.
