Thursday, 13 November 2003

Bush Boom, Euro Bust

The package of measures presented at last month’s EU summit in Brussels helped to confirm an impression that most outsiders seem to have of Europe’s policy makers. When faced with a crisis, the instinctive European response seems to be to reach for the wrong solution.

In this case, the problem is a prolonged bout of Euro-sclerosis — Europe’s inability to shake off its problems of mass unemployment, low economic growth, and soaring budget deficits. Europe’s answer to this problem is an attempt at industrial politics on an unprecedented scale. By spending €220 billion over the next decade on research and development and the construction of bridges and railway lines, the policy makers hope to kick-start Europe’s sluggish economies. According to European Commission President Romano Prodi, this New Deal for Europe would create nearly half a million jobs. It is also supposed to boost Europe’s GDP by a full percentage point.

Europe’s New Deal seems a carbon copy of the American original. But as the economic historian Gary Best has demonstrated in his Pride, Prejudice and Politics, the New Deal may have been a success in PR terms; in economic terms it was a failure. Its anti-business rhetoric stifled private productive activity for the better part of a generation. FDR’s massive public spending programs did nothing to tackle the problem of mass unemployment. They did, however, help to bring about a double-dip recession and a near-collapse in industrial productivity. The New Deal was basically a bad deal for the US in the 1930s. There is no reason to assume it would be anything but a bad deal for Europe today. Put simply: these proposals are like a bridge in the wrong direction, to the wrong century.

The joint British, German and French call for a change in focus of the spending — away from infrastructure and towards research and development — is a welcome acknowledgement that tomorrow’s economy would benefit more from investment in high tech industries. But it’s doubtful that this investment should come from European governments or the European Commission, who after all have a record of picking losers and backing failing national champions. In the 1980s and ’90s, the Dutch industrial giant Philips received billions of euro in subsidies from both the Delors Commission and various national governments for research projects on the development of mega-chips, LCD flat-screen technology and High Definition Television. All of these projects turned out to be big commercial failures for the company. But because of its well-developed network of political contacts, Philips continues to receive sizeable subsidies for research and development on other projects. It shows that success in the race for government funding for R&D is a matter of who you know, not what you know.

Instead of spending time and resources trying to predict the winners in tomorrow’s market place, Europe’s policy makers would be better off focusing their legislative efforts on the creation of a business climate that promotes and rewards the taking of risks. Instead of imitating the mistakes of the 1930s Roosevelt administration, they should take their cue from a different American administration, namely that of Ronald Reagan. When Reagan took over in early 1981, he found an economy on its knees, with soaring inflation, almost zero growth, rising unemployment, and most important of all, a country utterly lacking in self-confidence. By the time he left office eight years later, the US had just registered its seventh straight year of 4 percent-plus GDP growth. In that same period, the American economy had created an astounding 16 million new jobs. How did he do it?

Basically: he didn’t. Ordinary working Americans did. Reagan merely got government out of the way and off people’s backs, thereby creating the opportunity for them to get on with the job of improving their lot. By making it easier for people to set up new companies or run existing ones, he boosted the flagging entrepreneurial spirit. By cutting taxes across the board on an almost unprecedented scale, he allowed people to take home a greater share of the fruits of their labor. The real lesson of the Reagan years is that if you make it worth people’s while to work, invest and set up new businesses, they will. And by doing so, they will generate the economic growth and new jobs that no government program could ever create.

The current American president, George W. Bush, certainly seems to have learned this lesson. He took over an economy on the brink of recession, with a stock market in free fall. One of his first acts in office was to propose a record package of tax cuts for both businesses and households. He also made it clear he was unwilling to burdens business with the regulatory and financial burdens of the Kyoto scheme. He has of course made a number of political errors of judgment. Imposing steel tariffs was one of them, increasing farm subsidies another. But his decision to give people a greater incentive to work and invest seems to be paying a handsome dividend three years later. The most recent figures for GDP and employment growth (annualized third quarter growth of 7.2 percent and 120,000 new jobs last month) show that Bush was right to trust the people. As National Review Online commentator Larry Kudlow observed, America looks set for a Bush boom. For next year, he predicts 4 to 5 percent growth and around 2 million new jobs. Beyond that, he envisages a 6 to 8 year period of sustained economic growth.

Meanwhile, Europe’s misery looks set to continue. Euroland GDP continues to shrink, with no real prospect for growth next year. Exports are falling, retail trade volumes are shrinking. Building bridges and picking winners is not the way to break this cycle of failure. Until Europe’s policy makers learn the lessons of Roosevelt’s mistakes and Reagan’s successes, and put their faith in the people they represent, Euro-Bust will be here to stay.

Joshua Livestro

This article first appeared on TechCentralStation.