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A wise guy's opinion on Europe and the world economy

Why do individuals and countries engage in self-destructive behavior? Many books have been written on the topic, but given the U.S. election campaign, it is worth examining why some politicians and other opinion leaders advocate policies contrary to both good theory and empirical evidence. During the last 25 years, most countries on the globe went through an economic renaissance as Austrian and Chicago school economists gained the upper hand from the old Keynesian and socialist policymakers. This was due to the political triumphs of Ronald Reagan and Margaret Thatcher and their many disciples around the globe. The successes of lower tax rates, deregulation, privatization, and freer trade are obvious to all who care to look, yet both in Europe and the United States many in the political class are running from these successful policies.

Reduction in both maximum individual tax rates and corporate rates for the world's freest and most successful countries, such as Singapore, New Zealand, Ireland, the US, and others has resulted in much greater tax revenues for the governments as tax impediments to work, save and invest are diminished. Despite this evidence of success, Senators Hillary Clinton and Barack Obama want to increase the top tax rates, though there is no evidence that raising the top rates will result in any more revenue but there is evidence it will result in slower growth. The "rich" they want to tax have more options than most people as to how much they make and in what form they take their income, and history shows they will go to great lengths to avoid paying high rates. The U.S. now has the highest corporate tax rate in the world (including the average of the states" corporate tax rates) and is increasingly noncompetitive, yet only the Republican candidates are arguing for a reduction.

In Europe, we find a similar situation where, despite the success of the tax rate reductions, many politicians and opinion leaders are pushing for higher taxes. The reason politicians get away with putting forward economically counterproductive proposals and often just plain nonsense is that many student textbooks, particularly in Europe, and only to a lesser degree in the U.S., have a strong anti-capitalist, pro-government or socialist bias. Business people are often portrayed as greedy and evil, rather than the providers of the goods and services most people want. In European textbooks, one can easily find capitalism described as "brutal," "savage," "neo-liberal" and "American." Some American college economic textbooks (and left-leaning professors) still ignore key issues, such as revenue and welfare-maximizing tax rates, cost-benefit analysis applied to government spending programs, regulatory costs, etc.

So is it no wonder that when politicians and others propose "economic stimulus" spending programs there is little discussion of the cost of sucking the revenue out of the private sector for the "new spending," or serious cost-benefit analysis of how the money should be spent? Since education in almost all countries these days is chiefly in public institutions, except for relatively small numbers of students educated in North American private schools and universities, it should come as no surprise that the government employees doing the "educating" are biased toward the public sector and are anti-business.

The most risk-adverse individuals in society naturally seek out positions where there is little chance of job loss (tenure or civil service protections). Given human nature, they are envious and resentful of those who, by willing to accept higher risks, earn more. They naturally infect students with their own risk-adverse and pro-government security blanket attitudes. This, in turn, results in an economically ignorant electorate. As Mr. Reagan and Mrs. Thatcher showed, all is not lost. Knowledgeable and strong political leaders can educate the public. Business leaders, business associations, and public policy organizations also can teach the public the importance and virtues of free enterprise. Anti-business, anti-free market politicians gain control of political bodies when those who know better fail to put enough of their own time and money into educating the public. Argentina, in the first decades of the 20th century, had the third-highest per capita income on the planet; but its politicians, starting with Juan Peron seven decades ago, ran from success by imposing destructive economic policies. Argentina now ranks number 86 despite being rich in resources. Switzerland, by contrast, has ranked near the top in per capita income for several decades despite having few natural resources. What does this tell us about the long-run perspective and commitment of the Swiss business and civic leaders to sound economic policies versus those in Argentina?

As I gaze out on the prosperous and exquisite "old town" of the ancient city of Ljubljana, Slovenia, now in the European Union, it seems far removed from the country of Yugoslavia of which it was part until 1991 when, after a brief battle, Slovenia won its independence. The tensions between Serbia and Kosovo, the final remnants of Yugoslavia, are felt not much more deeply here than in most other parts of the EU. Most of the EU countries have endorsed the independence of Kosovo, but Spain and few others remain - so much for the common EU foreign policy. Slovenia will formally endorse Kosovo's independence, while many of its citizens, including most of those of Serbian heritage, remain opposed. Thus, it is a bit ironic that the current president of the Council of the EU - which rotates every six months - is the president of Slovenia, which was the first of the former communist states to be a member of the EU in 2004 and also adopt the euro as its currency at the beginning of 2007.

By almost any measure, Slovenia has been an economic success during the last 18 years, and now enjoys a per capita income (on a purchasing power parity) almost equal to that of the average EU country, and about 60 percent of that enjoyed by the average American. Despite Slovenia's success, it now faces many of the same problems found in the larger EU countries. Back in 1991, Slovenia, tucked up against the Austrian Alps, had the goal to be a little Switzerland with its economic prosperity and personal liberty. Yet, two decades later, the economic system in Slovenia looks more like that of France than Switzerland. The attitude toward foreign capital at best is mixed, and in some cases outright hostile. Many Slovenian politicians argue, as do the French, that there is a "national interest" in keeping many Slovenian companies out of foreign hands. Like in much of "old Europe," unemployment is stubbornly high — more than 7 percent— because of very rigid labor markets, the reluctance to make it easier for foreign companies to invest, and bureaucratic impediments to the formation of new businesses.

The intellectual divide can be seen in the tension between the low-tax rate countries in the EU, consisting primarily of the former communist Central and East European countries with their new flat and low-rate taxes on personal incomes and corporations, and the old high-tax rate, and rigid labor market countries, typified by Germany, France, Italy and Belgium. Last week, we saw this struggle played out in the rather unseemly conflict between Germany and Liechtenstein. The German government paid multimillion-dollar fees or bribes, depending on one's view, to a former employee of a bank in Liechtenstein to report German citizens who might be trying to evade German taxes.

Some in Europe were appalled at the German government's behavior, recalling that the original Swiss bank secrecy laws were put in place in the 1930s to keep the Gestapo from bribing Swiss bank employees, a few who had revealed the ownership of flight money placed in these banks by German Jews and other anti-Hitler Germans. Other Europeans have sided with the Germans against Liechtenstein, arguing it is wrong to use financial privacy provisions to protect tax flight funds. The Germans and other high taxers ignore the fact that humans quite naturally tend to move their companies, funds, and even their bodies from high-tax to low-tax-rate jurisdictions. This is the major reason low-tax-rate states in the United States, such as Texas, Florida, Nevada and New Hampshire, grow much more rapidly than high-tax rate states, such as New York, New Jersey and California.

As the free movement of people and companies speeds up within the EU, and also with its neighbors, the old statist countries are going to find themselves increasingly disadvantaged. Will they resort to the rather questionable German-type reactions, or take constructive actions like reducing destructive tax rates as the Irish have done, and freeing their labor markets as the Danes have done? Many EU countries are torn between these choices. Will those with an old socialist mentality win out, or will those like the young people connected with Slovenia's leading free market think tank, the Free Society Institute, with their dynamic, optimistic view of what is possible, win the struggle for Europe's future?

Deze collage is gebaseerd op verschillende vrije tribunes van Richard Rahn die verschenen zijn bij het Center for Global Economic Growth, het Copenhagen Institute, het Discovery Institute en het Cato Institute, The Brussels Journal en The Washington Times.

Meer teksten van deze auteur op www.copenhagen-institute.org.

4 Reacties:

At 12:13 MICK said...

Oké, die Richard Rahn heeft veel gereisd en veel gelezen, en als ik zijn cv op het internet nalees, is hij misschien inderdaad wel een bekwaam economist, maar zijn reactionnaire ideeën slaan gewoon alles. Zijn roofdierkapitalisme leidt gegarandeerd tot sociale onlusten en dat is nefaster voor de economie dan een zeker (hoge) graad van taxatie. Dat blijkt misschien niet uit de boeken, maar wel uit de praktijk.

 
At 14:18 Anoniem said...

De meest stabiele samenleving is een fascistische of communistische dictatuur. En dat blijkt zowel uit de boeken als uit de praktijk. Wil je dat dan liever, Mick?

 
At 17:30 Geert Van Nauwelaerts said...

Natuurlijk is men in Oost-Europa veel optimistischer dan in het Westen over de (economische) toekomst. In tegenstelling tot de walgelijke moddervette welvaartsstaten van West-Europa heeft men in het Oosten voor een véél dynamischer model gekozen, met ups en downs, maar een ongeziene economische groei naar Westers model. Zij ontdekken elke dag de geneugten van het kapitalisme na een halve eeuw socialistische of communistische roofbouw en koesteren dat nog. West-Europa is zelfgenoegzaam geworden en aanvaardt zonder probleem de toenemende totalitarisering van de maatschappij én de economie, met alle desastreuze gevolgen vandien. De Oost-Europeanen krijgen fiscale zuurstof van hun overheden en dat leidt tot een terecht optimisme. Vingers gekruist dus maar dat de EU-harmoniseringsdrang hun zuurstof niet afneemt...

 
At 19:01 Thomas said...

Geert, ik deel je analyse niet. Oost-Europa is economisch aan het boomen maar tegelijkertijd zie je in recente jaren een tendens van minder conservatisme en liberalisme, en van meer socialisme en rechts-extremisme in de partijpolitiek. De liberale conservatieven à la Vaclav Havel en Mart Laar zijn vervangen door christen-democratische conservatieven die de vrijemarkt niet meer vertrouwen en ijveren voor een vorm van sociale bescherming. Het zal dan ook niet lang duren alvorens ook Oost-Europa in recessie terechtkomt en het optimisme plaats maakt voor pessimisme.

 

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