Yesterday I asked if libertarianism has failed as a political theory. The question is merited: in a world where government is involved in everything from health care and education to “saving” for your retirement, and where government involvement is increasing, one has to wonder why the libertarian movement has not been able to move the needle in the right direction.
Despite this pessimistic review of the lack of libertarian accomplishments, the answer to yesterday’s question is actually: No.
The libertarian movement has not failed. But its list of accomplishments is way too short. If all libertarians share the common goal of saving – and restoring – individual and economic freedom, then our combined efforts thus far have missed the target by a big margin. If we are going to reach the ultimate goal of a minimal state with a maximum of freedom, we need to reboot our operations and get back to work, but do so under two very important conditions.
Before we get to the two conditions, though, let us acknowledge what is actually on the list of libertarian accomplishments. Globally, the movement helped bring down the Soviet empire. It provided moral inspiration to liberty-minded people from Greifswald to the Black Sea. Economic literature on free-market Capitalism were studied behind the Iron Curtain long before the Wall fell in Berlin. Even Robert Nozick, who himself had Polish ancestry, influenced thinkers and inspired people to challenge the prevailing communist order.
Domestically, though, the accomplishments in Thatcher’s Britain and Reagan’s America were more of a temporary nature. They are in fact difficult to see today. The United States reaped the harvests of the Reagan tax cuts all the way through the 1990s, but unrelenting growth in government spending eventually neutralized and overwhelmed the positive effects of the tax cuts.
In retrospect, the Reagan era and its surge in the intellectual, political and economic pursuit of liberty looks less and less like a corner turned in modern American history. In the context of the decades before and after his presidency, Reagan appears to have inspired a temporary halt to, but not a termination of, a very long trend of welfare statism.
The first condition for future success is that libertarians revise their political methodology. the need for revision is well explained by the Niskanen Center, a newly founded libertarian think tank in Washington, DC. In their conspectus, declaring their raison d’etre, the Center explains:
Despite having invested tremendous time, energy, and resources in achieving political change, libertarians have produced little policy change. Of the 509 significant domestic legislative policy changes since World War II, more than half (265) expanded government while only four percent (20) contracted government. When policymakers act, they have, on balance, acted to expand state power.
They also analyze the “mechanics” of policy change in Washington, DC and how libertarians, despite major investments, thus far have failed to correctly identify and successfully use those mechanics to turn libertarian ideas into legislative practice.
In addition to misunderstanding the legislative mechanics, libertarians have also failed to fully comprehend the nature of government spending. This brings us to the second condition for future success. The Reagan-era tax cuts were accompanied by 7+ percent annual federal spending increases; the George W Bush administration repeated the pattern, combining tax cuts with 6.7-percent annual spending increases. The libertarian movement has failed to fully comprehend the reasons behind, and the complexity of, those spending increases. Therefore, they have lost the debate over government spending to the welfare statists.
This is a general observation; there are bright exceptions to it who pursue actionable reforms to welfare-state entitlement programs. But they are just that – exceptions. Their voices are simply not strong enough to set the tone for the libertarian movement in general. Instead, libertarians tend to fragment their analysis and policy approach, and in too many cases they leave the entitlement sector of our society altogether. Those who do tend to end up fighting the battle of eclectic flea killing, a.k.a., legalization of recreational drugs.
While some libertarians turn on, tune in a and drop out of the fight for economic freedom, the welfare state eats its way deeper into the flesh of the free market. The time to change course is now – and it begins with:
a) following the advice of aforementioned Niskanen Center, i.e., revising the political methodology and learning to master legislative mechanics; and
b) studying and intellectually conquering the welfare state.
I cannot stress enough how important the second condition is. Libertarians in general – again, there are exceptions – dismiss the welfare state by saying either that “just cut spending darn it” and the welfare state will go away; or by refocusing on issues that are not as intellectually intimidating or hard to navigate in terms of policy and actionable reform legislation.
In other words, there is an enormous amount of work to be done. But all is not lost. On the contrary, looking at the young generation in this great country, there are glimmers of hope. A fledgling libertarian grassroots movement has risen as a result of the Tea Party reaction. It consists for the most part of regular Americans whose interest in politics and willingness to become activists are fueled by clearly visible government over-reach.
More specifically, the Obama presidency is actually a gift to the libertarian movement. After having promised “hope” and “change” and rallied millions of young voters and activists, the 44th president burdened job creators with massive regulations that made it very difficult for young workers and professionals to find jobs; he put health insurance out of reach for many of those who got jobs; and he vigorously defended government surveillance programs, invading the electronic integrity of a young generation who takes the privacy of their cell phones as seriously as the privacy of their own pockets.
Young voters turned away from Obama in his re-election bid. Thanks only to an unbelievably out-of-touch Romney campaign, Obama managed to prevail. But this has not made disappointment among the young go away – on the contrary. When today’s 20-somethings look at the career opportunities their parents had, and when they know that the government is intercepting and storing their text messages, their minds are open to arguments on government over-reach, individual freedom – and libertarianism.
The growing interest in individual liberty is a promising platform for a renewed effort to end America’s slow but steady transformation into a European welfare state. High school and college students are flocking in growing numbers to internships and educational offerings by liberty-promoting organizations. Dedicated donors provide financial support, and sharp minds at think tanks and advocacy groups can turn that money into intellectual firepower.
Only two pieces are missing. One of them is the right use of the legislative mechanics. Explains Niskanen Center president Jerry Taylor, whose operational credo “terrain dictates tactics” sets the prelude for his verdict:
The political terrain could not be clearer. Despite our best efforts, America is a center-left nation. Libertarians constitute no more than 5 percent of the public. And if a Republican manages to win the White House in 2016, the recent erosion in the public support for more government will almost certainly reverse.
Europe’s record is even more disappointing. Anyway, Taylor continues:
Until some political tectonic plate shift occurs, radical libertarian policy change is not in the cards. Repealing the Great Society, much less the New Deal, is unlikely. Business regulation of some sort is not going away. The EPA, FCC, SEC, etc. will not be abolished. Less radical improvements in public policy are possible. But to do that, we need to stop making “the better” the enemy of “the best” and cease complaining that the former commits the unpardonable sin of “compromising on principle.” By definition, advocating anything short of the night watchman state “compromises on principle,” and the night watchman state—for now anyway—is a fantasy.
While Taylor unintentionally overlooks the rekindled interest in libertarian ideas during the Obama years, he is correct in that the road from today’s welfare state to the night watchman state is long and littered with road bumps and uphill battles. But if libertarians can intellectually conquer the welfare state, and if they can learn to master the legislative mechanics that Taylor points to, then no road bump or uphill will stand in their way.
In a four-part series I presented the current state of the U.S. economy. Overall, things look relatively good here: growth is moderately good, private consumption is moderately healthy, business investments are stabilizing at a good rate and government consumption and investment spending is under control.
Generally, the private sector of the U.S. economy is in fairly good shape. So what is there to complain about?
First of all, the growth rates that I refer to as “moderately good” are at least a full percentage point below what we should have at this stage of a recovery, even from a deep recession. There are reasons why we are not at higher growth, one of them being the kind of government spending that does not show up in GDP: entitlements. Another reason is the Obama administration’s affinity for regulations. Without big entitlements and invasive regulations we could easily be growing at 3.5-4 percent per year.
Secondly, the biggest strength of the U.S. economy is relative, not absolute. As I continuously report on this blog, Europe is in a perennial state of stagnation and industrial poverty. The Chinese economy is in what looks like a relatively serious recession; add to that a real estate bubble that they still don’t know how to handle and the growing trend of job migration from China to lower-cost countries like Vietnam. Japan is fledgling but not much more than that.
And third – well, there is always Obamacare… Fortunately it looks like that reform, well-intended as it was, is being reshaped into something more palatable and manageable. It takes time, though, and while the president understandably holds on to his trademark legislative achievement he, too, must come to the conclusion that not all is good in America’s most complicated piece of legislation ever. When that happens, another ball and chain around the ankle of the American economy will fall off and allow free-market Capitalism to grow even bigger.
Bottom line: the U.S. economy is not very impressive when compared to itself a couple of decades ago, but at least from an international perspective it is the best place to be for job seekers, families and businesses.
The big question is why we can’t do better. What is holding us back? As a libertarian my conclusion is “big government”. As an economist my conclusion is “it depends, but big government is a strong candidate”. But that does only begs another question: how is it that the United States, a constitutional republic born from the yearnings of freedom, has fallen for the temptation of the big welfare state?
This is a big question to answer. A good way to start is to ask what has happened to the most freedom-loving movement in recent American history – the libertarian movement – and why it has failed to turn the tide on big government. After all, modern libertarianism is now almost half-a-century old. The intellectual groundwork was laid in part by economists like Milton Friedman and Friedrich von Hayek (who, by the way, allegedly did not get along with one another…) and partly by the great moral philosopher Robert Nozick. In his Anarchy, State and Utopia, originally published in 1971, Nozick challenged the prevailing wisdom of redistributive justice and – by implication – the theoretical foundations of the welfare state. His vision of the minimal state was close in theory to the small government that would be necessary for Hayek’s and Friedman’s free-market Capitalism to work.
The Reagan presidency marked a surge for libertarianism in America. Similarly, the Thatcher era unleashed libertarian thinking and activism in Britain. While its success on continental Europe was more limited, the libertarian movement made its footprints, especially in Scandinavia and eastern Europe, where it helped inspire the liberation from the Soviet empire.
But what looked like a success story back then never translated into policy success. Why?
The question is highly relevant. In a world where government consumes 40 percent or more of GDP; when taxes can take away more than half of a man’s earnings; when government controls or wants to control the education of all children and the health care of all citizens; in that world, libertarianism seems to be little more than a topic for esoteric dinner conversations.
Where are the libertarian victories? Can libertarianism even be saved?
Yes, it can. But only under some very important conditions. For more on this, check in tomorrow.
Yesterday I reported some data showing that the U.S. economy is in good shape from a structural viewpoint. Household spending and business investments – domestic private-sector activity – today absorb a larger share of output than they did under the Bush Jr. administration. Government consumption and investment spending has taken a step back, and the foreign trade balance is in better shape today than at the height of the Bush business cycle.
Today, let’s look at the same macroeconomic data from another perspective.
2. A strong growth pattern
In terms of inflation-adjusted growth, the U.S. economy is doing relatively well. GDP growht is not great – but these numbers from 2009-2014 are far better than what we can find anywhere in the developed world:
- 2009 -2.76 percent
- 2010 2.53 percent
- 2011 1.6 percent
- 2012 2.32 percent
- 2013 2.09 percent
- 2014 2.41 percent
When an economy grows faster than two percent per year it provides opportunities for people to achieve a standard of living higher than what previous generations have accomplished. Growth below causes stagnation or even a decline in the average standard of living.* From this perspective the American economy is just about keeping its nose above the water. It could do much better, but two factors are holding us back: the Obama administration’s affinity for heavy-handed regulations, and the combined global effects of a China in recession, a Europe in stagnation and a Russia in Ukraine.
In other words, as the sole engine pulling the industrialized world forward, the United States is doing a reasonably good job. More details from the GDP growth numbers reinforce this conclusion. There is, e.g., private consumption which over the past three years has averaged 2.1 percent in annual growth. For 2014, though, the preliminary growth rate was 2.5 percent, a good but not excellent number. Underneath it, though, is some good news: spending on durable goods – household appliances, automobiles etc – has averaged 6.5 percent per year since 2012. This means two things: American families are improving their credit scores again after taking a beating in the trough of the Great Recession; and they are more optimistic about the future.
This optimism is corroborated by encouraging employment, which we will get to in the fourth and last part of this series.
But there is even more good news in the GDP growth numbers. Gross fixed capital formation (GFCF or business investments) has averaged a growth rate of 5.7 percent per year over the past three years. Even better: the growth rate is stabilizing. In the figure above, investments fluctuate wildly:
- Down 26.4 percent in Q2 of 2009;
- Up 21.1 percent in Q3 od 2010;
- Growth plummets to 1.3 percent in Q3 2011;
- Next growth peak is 13.5 percentin Q1 2012.
From thereon the amplitude declines, forming a “confidence cone” where the annual rate stabilizes around 5.7 percent per year. A good number, the stability of which makes it even more impressive.
At the same time, no story of capital formation is complete without a detailed look at what kinds of investments businesses make. Here, again, there is an encouraging pattern of stability. Fixed investment falls into two categories, non-residential and residential, with the former constituting about 80 percent of total fixed investment. In this group spending is divided into structures, equipment and intellectual property products. Again the proportions between the different categories remain stable over time, with the equipment category representing 45-47 percent of non-residential investments.
While homes construction was weak in 2014 – growing by only 1.64 percent – it finished strongly in the fourth quarter at 2.6 percent over Q4 2013. But the residential investment numbers for 2012 and 2013 were downright impressive: 13.5 and 12 percent, respectively.
Finally, a word about government spending. Many people unfamiliar with national accounts make the mistake of looking at total government outlays as share of GDP, whereupon they understandably get outraged about how big government is. However, in order to understand the role of government properly one has to remove the financial transactions from government spending: GDP only consists of payments for work – by labor or capital – or for products. A financial transaction such as a cash entitlement does not pay for work or products, and therefore has no place in GDP.
The government spending included in GDP is payments for teachers in public school, police officers and tax collectors, as well as products such as tasty lunches for middle-school kids and gasoline for the presidential motorcade. It is also investments such as new highways and faster trucks for the postal service.
This kind of government spending has actually been shrinking in the past few years:
- 2011 -3.04 percent;
- 2012 -1.45 percent;
- 2013 -1.49 percent; and
- 2014 -0.18 percent.
All in all, then, the U.S. economy is in reasonably good shape. This does not mean that cash entitlements such as food stamps are not a problem. They are. But with this stable macroeconomic foundation the U.S. economy is well suited to handle reforms to entitlement programs.
Check back after the weekend for the two remaining installments in this series.
* The two-percent mark is arrived at through an adaptation of Okun’s Law. See:
Larson, Sven: Industrial Poverty – Yesterday Sweden, Today Europe, Tomorrow America; Gower Applied Research, London, UK 2014.
Over the past few years, Hungary has made a name for itself as one of Europe’s most nationalist countries. The nationalism that has been channeled through the Fidesz party has inspired other nationalists in Europe, as well as raised concerns among those who fear the authoritarian flank of the nationalist movement.
I normally do not want to speculate in the relations between economic growth and ideological dynamics – I do, for example, not believe that nationalism can be dismissed as the response of poor, bitter, uneducated rednecks to adverse economic challenges. That narrative is the product of ivory-tower academics suffering from serious real-life comprehension deficiency.
Nationalism is much more complicated than that. It is, on the one hand, a sound patriotic expression of love for your country. I admire American patriotism, which combines a strong belief in the founding values of this great country with a generosity and openness toward everyone willing to respect those values, assimilate and live in peace and harmony with their fellow Americans. British politician Nigel Farage and his UKIP are driven by a similar, British patriotism. Mr. Farage has my full respect and support.
On the other hand, I fear the authoritarian version of nationalism which I see lurking in the shadows behind Marine Le Pen, and which have come out in the open with full force in the Golden Dawn movement in Greece.
I cannot say definitively where Hungary’s Fidesz party stands on the scale between patriotism and authoritarianism, but I think we can get a bit of an idea from looking at what has happened in the Hungarian economy in recent years. But before we get there, let us listen briefly to what the speaker of the Hungarian parliament had to say the other day about his country’s relation to the EU. Euractiv has the story:
If the European Union wants to dictate to Hungary, then the country should consider slowly backing out of the union, Parliamentary Speaker and Fidesz MP László Kövér said on 24 October, as quoted by the Hungarian press. … Kövér said that if Brussels wants to tell a country how it should be governed, then it resembles Moscow before the change of regime in 1989. The speaker reportedly said that if this is the direction the EU takes, then Hungary should consider leaving the union. He added however that this was only “a nightmare” scenario, and that he doubted it would come to that.
There are two, somewhat disparate reasons why Mr. Kövér would say something like this. The first reason is that the EU is indeed a super-state organization that merrily gets involved in every aspect of national politics. Nigel Farage often says that 75 percent of all new laws that apply in Britain are made in Brussels. Regardless of where the exact number is, there is no doubt that the EU continuously expands its powers at the cost of national sovereignty; the EU’s disastrous mishandling of the Great Recession and the debt crises in southern EU states brought out in full force the arrogance, even borderline totalitarian, power grabbing desires that Brussels is home to. From this viewpoint it is entirely understandable that the Hungarians are frustrated with the EU.
The second reason for the speaker’s lashing out is not quite as easily understood. The Hungarian economy has taken a bad beating during the Great Recession and is still struggling to get moving again. Let us take a look at the most critical GDP component, namely private consumption:
Figure 1 reports two angles of private consumption in the Hungarian economy and the EU. The solid lines, which refer to the left vertical axis, represent the consumption share of GDP in the EU (green) and Hungary (purple). The share has been stable in the EU but declined in Hungary.
If GDP has grown strongly in Hungary, then the decline in the consumption share is not much of a problem. However, from 2007 through 2013 annual inflation-adjusted GDP growth in Hungary was -0.53 percent, on average. That us worse than crisis-ridden Ireland, Spain and Cyprus, and only a hair better than Portugal and Italy. With this in mind, it is hardly a surprise that private consumption in Hungary has exhibited such a deplorable growth record as reported by the purple dashed line (reference the right vertical axis). Average for 2007-2013 is -1.45 percent, worse than all the aforementioned crisis-plagued countries.
Herein lies part of the explanation to why the Hungarian parliamentary speaker is so vocal with his EU criticism. The nationalist government has not been very strong on promoting economic freedom. According to the Heritage Foundation Index of Economic Freedom, Hungary scores poorly in key categories such as government spending, monetary freedom, property rights protection and corruption. Although Fidesz may not be pursuing an open, deliberate statist strategy, the combined effects of their policies is in fact an advancement of government at the expense of the private sector.
It is very likely that statist nationalism is now taking such a toll on the Hungarian economy that voters, taxpayers and even business men are beginning to complain, loudly. In situations like this, it is a well established strategy in politics to turn people’s attention somewhere else. What better object of popular frustration than the EU?
Hungary is a country with a long, rich and fascinating history. Budapest is one of the most beautiful cities in Europe. I wish the Hungarian people all the best, but I do believe it is time for them to take another look at where their nationalist leaders are taking them, politically as well as economically.
I am a strong supporter of the United States armed forces, which are the world’s most powerful force for liberty. But war and other armed conflicts are costly in more ways than one; there is a much more efficient way to break down tyranny.
The world’s largest authoritarian regime, China, is slowly but steadily reforming in the right direction. The underlying force moving China in the right direction is, plainly, economic freedom. When people are free to own property, be entrepreneurial, build wealth and pursue a lifestyle above what a state-run economy can provide, they will eventually demand political freedom as well. The Chinese leaders know this, but they also know that political freedom can be destructive if introduced before a country is ready for it. They wisely and fearfully look at what happened in Russia after the collapse of the Soviet Union, where political freedom preceded economic freedom – and economic freedom was introduced haphazardly.
But the benefits of economic freedom are not just limited to authoritarian nations. Other countries where government plays a destructively large role can also benefit substantially from a new dose of economic freedom. As I explain in my new book Industrial Poverty, Europe is going backwards as an economy because of persistent efforts by the political leadership to preserve the welfare state and all its big spending programs – not to mention its high taxes.
Economic freedom comes in many forms: deregulation, termination of spending programs, tax cuts… and free trade between sovereign nations. Often, free trade can be an inroad for economic freedom to open up heavily regulated economies. In Europe’s case, free trade with more regions of the world could give some entrepreneurs opportunity to thrive when the domestic economy is holding them back.
Therefore, it would be good if the EU could ratify its pending free trade agreements with the United States and Canada. Unfortunately, it does not look like that is about to happen, at least any time soon. And the reason is a section of the trade agreements that protects private investments under certain conditions. The EU Observer reports:
Provisions allowing companies to sue governments to protect their investments must be taken out of an EU-Canada trade agreement (Ceta), German chancellor Angela Merkel’s coalition partners have said. Speaking in the Bundestag on Thursday (25 September), Sigmar Gabriel, who leads the centre-left SPD, noted that “the chapter regarding investment protection is not approvable,” adding that “the last word hasn’t been spoken yet”.
So what is this investment protection that the European left is so passionately opposed to? Here is how the Office of the United States Trade Representative explains it:
[The U.S. government] seek to ensure that Americans investing abroad are provided the same kinds of basic legal protections that we provide in the United States to both Americans and foreigners doing business within our borders. One element we use to achieve that goal is investor-state dispute settlement (ISDS). ISDS creates a fair and transparent process, grounded in established legal principles, for resolving individual investment disputes between investors and states. … Over the last 50 years, nearly 3,200 trade and investment agreements among 180 countries have included investment provisions, and the vast majority of these agreements have included some form of ISDS. The United States entered its first bilateral investment treaty (BIT) in 1982, and is party to 50 agreements currently in force with ISDS provisions.
Another point made by the U.S. Trade Representative is that the ISDS does not allow any government regulations at all. As anyone even remotely familiar with the United States economy would know, that is absolutely false. We have our own (un-)fair share of regulations. All that the ISDS does is protect private investors from arbitrary, authoritarian government intrusions into the realm of free enterprise.
The European interpretation of ISDS is a bit less forthright. The EU Observer again:
celebrations are likely to be muted now that the [Canada-EU trade] agreement, which is widely seen as a trial run for the ongoing trade talks with the US, faces a number of obstacles before it is ratified. The mechanism, known as investor state dispute settlement (ISDS), allows companies to take legal action against governments if their decisions risk undermining their investments. Critics of ISDS claim that investor claims can prevent governments from passing legislation in fields such as environmental and social protection, enabling corporations to claim potentially unlimited damages in “arbitration panels” if their profits are adversely affected by new regulations.
The part about “unlimited damages” is patently absurd. It would require a forecast for the investment in question that credibly predicts endless profits. But you do not need to study finance or economics to realize that such forecasts simply do not exist. That would require something called “perfect foresight”, an ability of economic agents to predict the world with absolute certainty.
But as the EU Observer reports, reason and good analysis do not prevent leftist hardliners from acting according to their beliefs:
Deputies from the centre-left Socialist and Democrat group and the Liberals have indicated that ISDS would have to be left out in order for them to support Ceta, while the Green and far-left GUE factions have already come out against the treaty. … In a statement on Thursday, the European trades union congress (ETUC) said that it would not support Ceta if ISDS remained part of the agreement. The ETUC also called on officials to include a list of sectors that would not be liberalised by the agreement and for Canada to sign up to the International Labour Organisation Conventions.
The EU Commission appears to be determined to complete the trade agreement with Canada. However, the left-bound winds in the EU Parliament are a guarantee for a protracted battle. This is unfortunate, since the EU is in dire need of strengthening its economy. In lieu of advancements for economic freedom inside the EU, a couple of trans-Altantic free-trade agreements would be of great help.
In the last quarter of the 20th century large parts of the world lifted themselves out of poverty. China and India are the best known but far from the only examples. Countries like Malaysia, Indonesia, Vietnam and Korea elevated themselves to a standard of living that for most of the population meant life in the global middle class. The Soviet sphere collapsed and allowed hundreds of millions of people from Saxony to Sakhalin to pursue happiness unhindered by government.
Now the prosperity train is slowly making its way through the African continent. Its effect is still marginal, but global corporations have discovered pockets of economic environments in Africa where they can actually set up operations with reasonable prospects of stability and profit.
While this is happening, the old industrialized parts of the world have mismanaged their prosperity. Latin America offers a split image with Argentina and Venezuela sinking into the holes of socialism while Chile and Brazil are examples of economic progress. The United States is still an economic superpower but has over the past 25 years allowed its government to grow irresponsibly large. It is still manageable and we are moving forward economically, but not at the pace we could.
Europe is the black sheep of the industrialized family, having squandered its prosperity for the sake of income redistribution. While Europe has not yet sunk into abject poverty, and probably never will, the continent has entered a stage of economic stagnation that it will take a very long time to get out of. In fact, the European economy is beginning to resemble some of the less oppressive countries in the Soviet sphere – not in terms of political oppression, but in terms of the destructive presence of government in the economy. Europe has, partially and unintentionally but nevertheless destructively, adopted the static statism that characterized countries like Poland, Czechoslovakia and Hungary before the Iron Curtain came down.
The stagnant nature of the European economy and the slower-than-capacity growth rates in the United States and Canada are all self inflicted. The fatally erroneous belief that government has a productive role to play in the economy inhibits the creation of prosperity in parts of the world where, fundamentally, the conditions for creating prosperity are better than anywhere else. This structural mismanagement of some of the world’s wealthiest economies have ramifications far beyond their own jurisdictions. By keeping their economies from growing, Europe’s political leaders hold back demand for products from countries on the verge of climbing out of poverty. By holding back the forces of prosperity, America’s political leaders prevent the creation of a surplus that otherwise could provide funds for development and investment projects in developing countries.
Instead of unleashing the prosperity machine we know as capitalism and economic freedom, governments in Europe and North America spend far too much time trying to preserve their welfare states. When their government-run entitlement programs promise more than taxpayers can pay for, they resort to growth-hampering austerity measures, aimed not at reducing the presence of government in the economy but at saving the very structure and philosophy of the welfare state. The result, again, is stagnation and industrial poverty.
The First World’s obsession with the welfare state thus prevents the proliferation of prosperity to parts of the world still struggling in poverty. By means of economic freedom, nationally and globally, the relatively wealthy can help the poor toward a better life. This cannot be stressed strongly enough; if accounts of the demerits of the welfare state are not enough to turn our political leaders in favor of economic freedom, then perhaps a new report on global poverty can help. Published by an organization called ATD Fourth World, Challenge 2015: Towards Sustainable Development that Leaves No One Behind provides a painfully direct account of abject poverty around the globe. The authors do not exhibit any deeper understanding of what causes poverty, but the parts of the report that tell the story of poverty from the “ground level” are definitely worth reading.
More than that, they provide a stark contrast to the destructive policies used in Europe and North America to preserve the welfare state. Instead of raising taxes and putting more of our own people on welfare, we owe it to the rest of the world to maximize our creation of prosperity. We can only do that by relieving our own population of the shackles of artificial redistribution. With more wealth, higher incomes and a growing standard of living we will have more money to trade with developing countries, as well as more surplus to donate to and invest in productive development projects in the poorest parts of the world.
Economic freedom has elevated billions of people from abject poverty to a respectable standard of living. It has elevated millions into true prosperity, and thousands upon thousands to almost unlimited wealth. It can do the same for those still in poverty. All it takes is that we in the most prosperous nations of the world sort out our priorities and responsibilities.
As an institutional economist I focus my research on the role that institutions and policy structures play in our economy. It is a fascinating niche in economics, and when combined with macroeconomics it becomes one of the most powerful analytical tools out there. So far, over the past 2.5 years, everything I have predicted about the European crisis has turned out to be correct; my upcoming book Industrial Poverty makes ample use of institutional economics and macroeconomics to show why Europe’s crisis is far more than just a protracted recession.
In economics, the institutional methodology is often pinned against econometrics, the mainstream methodological favorite. I don’t see it that way – econometrics has its place in economics – but the mainstream of the academic side of economics has given econometrics a far bigger role than it can handle. This has led to over-confidence among econometricians which, in turn, has led to a downplay or, in many cases, complete disregard for the benefits that other methodologies bring. The worst consequence of this over-reliance on econometrics was the multiplier debacle at the IMF, with serious consequences for the Greek economy. (How many young Greeks are unemployed today because their government implemented austerity policies based on IMF miscalculations?) A wider, better understanding for economic institutions and their interaction with the macroeconomy could help mainstream economists a long way toward a deeper, more complete understanding of the economy and, ultimately, toward giving better policy advice.
As an example of how institutional analysis can inform more traditional analysis, consider this interesting article on the European crisis by Economics Nobel Laureate Michael Spence and David Brady, Deputy Director of the Hoover Institution:
Governments’ inability to act decisively to address their economies’ growth, employment, and distributional challenges has emerged as a major source of concern almost everywhere. In the United States, in particular, political polarization, congressional gridlock, and irresponsible grandstanding have garnered much attention, with many worried about the economic consequences. But, as a recent analysis has shown, there is little correlation between a country’s relative economic performance in several dimensions and how “functional” its government is. In fact, in the six years since the global financial crisis erupted, the US has outperformed advanced countries in terms of growth, unemployment, productivity, and unit labor costs, despite a record-high level of political polarization at the national level.
This is true, and as I demonstrate in Industrial Poverty, a major reason for this is that the American economy is not ensnared in a welfare state like the European. We still lack a couple of major institutional components that they have: general income security and a government-run, single-payer health care system. That said, the U.S. economy is not exactly performing outstandingly either:
Yes, we are currently in better shape than Europe, but we are also doing worse than ourselves 20, 30 or 40 years ago.
Let’s keep this in mind as we continue to listen to Spence and Brady – their discussion about political dysfunction is actually tied to the role of the welfare state in the economy:
[In] terms of overall relative economic performance, the US clearly is not paying a high price for political dysfunction. Without dismissing the potential value of more decisive policymaking, it seems clear that other factors must be at work. Examining them holds important lessons for a wide range of countries. Our premise is that the global integration and economic growth of a wide range of developing countries has triggered a multi-decade process of profound change. These countries’ presence in the tradable sector of the global economy is affecting relative prices of goods and factors of production, including both labor and capital.
And the government structures that aim to redistribute income and wealth within a country. High-tax economies lose out to low-tax economies. The Asian tigers have generally held tax advantages over their European competitors, but they have also held advantages on the other side of the welfare-state equation as well. By not putting in place indolence-inducing entitlement systems they have kept their work force more shaped toward high-productivity labor than is the case in the old, mature welfare states of Europe.
Why does the welfare state not change, then, in response to increased global competition? After all, Japan, China, South Korea and other Asian countries have been on the global market for decades. Enter the political dysfunction that Spence and Brady talk about. Unlike the United States, there is almost universal agreement among Europe’s legislators that the welfare state should be not only preserved but also vigorously defended in times of economic crisis. This has been the motive behind the European version of austerity, with the result that taxes have gone up, spending has gone down and the price of the welfare state for the private sector has increased, not been reduced as would be the logical response to increased global competition.
It is not entirely clear what kind of American political dysfunction Spence and Brady refer to, but if it has to do with fighting the deficit, they are absolutely on target.
In fact, probably without realizing it, Spence and Brady make an important observation about the long-term role of the welfare state:
Relatively myopic policy frameworks may have worked reasonably well in the early postwar period, when the US was dominant, and when a group of structurally similar advanced countries accounted for the vast majority of global output. But they cease working well when sustaining growth requires behavioral and structural adaptation to rapid changes in comparative advantage and the value of various types of human capital.
If understood as a general comment on the institutional structure of an economy, this argument makes a lot of sense. So long as the traditional industrialized world only had to compete with itself, it could expand its welfare states without paying a macroeconomic price for it. Gunnar Myrdal, Swedish economist and a main architect of the Scandinavian welfare-state model, confidently declared back in 1960 that the welfare state had no macroeconomic price tag attached to it. Back then, it was easy to let government sprawl in every direction imaginable without any losses in terms of growth, income and employment. That is no longer possible.
Spence and Brady then make this excellent observation of the American economy:
What, then, accounts for the US economy’s relatively good performance in the post-crisis period? The main factor is the American economy’s underlying structural flexibility. Deleveraging has occurred faster than in other countries and, more important, resources and output have quickly shifted to the tradable sector to fill the gap created by persistently weak domestic demand. This suggests that, whatever the merit of government action, what governments do not do is also important. Many countries have policies that protect sectors or jobs, thereby introducing structural rigidities. The cost of such policies rises with the need for structural change to sustain growth and employment (and to recover from unbalanced growth patterns and shocks).
The move of resources from the domestic to the foreign-trade sector is visible in national accounts data as a rise of gross exports as share of current-price GDP from 9.1 percent in 2003 to 13.5 percent in 2013. Furthermore, actual growth numbers for exports relative private consumption reinforce the point made by Spence and Brady: from 20087 to 2013 private consumption has increased by 15 percent in current prices, while gross exports have increased by more than 22 percent. For every new dollar Americans doled out on cars, food, haircuts and motel nights, foreign buyers added $1.50 to what they spend on our products.
However, let us once again remember that the adaptation of the American economy should be viewed against the backdrop of a smaller welfare state. As I have discussed on several occasions, European countries are also making big efforts at increasing exports. They are not as lucky in using foreign sales as a demand-pull mechanism for restarting their economies. One reason, again, is the rigor oeconomicus that the welfare state injects into the economy.
Spence and Brady also compare the United States to a number of other countries, noting that:
Removing structural rigidities is easier said than done. Some stem from social-protection mechanisms, focused on jobs and sectors rather than individuals and families. Others reflect policies that simply protect sectors from competition and generate rents and vested interests. In short, resistance to reform can be substantial precisely because the results have distributional effects. Such reform is not market fundamentalism. The goal is not to privatize everything or to uphold the mistaken belief that unregulated markets are self-regulating. On the contrary, government has a significant role in structural transitions. But it must also get out of the way.
In short – and my words, not theirs: reform away the welfare state. Its detrimental influence actually stretches deeper than perhaps Spence and Brady recognize: it does indeed protect large sectors from competition by simply monopolizing them. Health care is a good example, with a government monopoly spilling over on medical-technology products. Another good example is income security, where many European countries have de facto monopolized every aspect from parental-leave benefits to retirement security. Education is a third example, where the United States, despite its heavily socialized K-12 system has a very strong private sector for academic education. This sector is almost entirely absent in many European countries.
Again, it is good to see a different approach to economic analysis than the traditional one based on econometrics and often irresponsibly simplified quantitative analysis. In a situation like the European crisis, it is very important for economists and other social-science scholars (Brady is a political scientist) to broaden the analysis and focus on such variables that rarely change. Among those are economic institutions such as the welfare state, and the political and economic incentives at work in Europe to preserve it, even in the face of mounting global competition.
There is no bigger threat to economic freedom than an authoritarian government. It destroys property rights and economic incentives. It crushes the pillars of entrepreneurship and makes it practically impossible for people to make an honorable living on their own. Gradually, an authoritarian government destroys free-market capitalism, and when the destruction has reached a critical point the most obvious economic result is the inevitable decline in the standard of living for all.
Misery replaces opportunity. Poverty replaces prosperity. Government dependency replaces self determination.
There is nothing new in this. The history of the 20th century is filled to the brim with evidence of the destructive effects of authoritarianism, including its devastating power to destroy well-functioning economies and the prosperity they produce. It would be logical to conclude that we have learned the lessons of the Soviet empire, of the collapse of collectivist economic projects in Latin America and of the slow but unrelenting stagnation of Europe’s welfare states.
You would expect that those lessons would be loud and clear, available to everyone.
Unfortunately, that is not the case. Socialism is on a worldwide rebound. It is not new: already eight years ago I warned about the resurrection of communism in Europe. At that time it was a topic that nobody really paid any attention to. This is understandable. The economy was in pretty good shape, both in the United States and in Europe – in other words there was no reason to worry about depression-driven support for extremism of the kind we can witness in Europe today. The terror attacks of 9/11 were in fresh memory, as were the attacks in London in the summer of 2005. The only extremism that made its way into the public debate had an islamist trademark.
Nevertheless, my warning was timely. Communism and its ideological affiliates have been on the rise for a long time. After a decade in disarray following the fall of the Soviet empire, socialists regained strength and confidence after 9/11. In addition to their support for Saddam Hussein’s regime and opposition to any efforts to topple it, they started lining up their political assets in parliamentary democracies to advance their ideology on democratic terms. In the mid-2000s, the global left was becoming politically savvy thanks in part to idolized authoritarians like Hugo Chavez in Venezuela.
Today, socialism has made dangerous inroads on several fronts around the world. The socialist power structure that Chavez put in place is still in charge of Venezuela, and perhaps even more radical now than under his reign. The “Chavista” version of Latin American socialism has spun off at least two other authoritarian leaders in the region, Evo Morales in Bolivia and Rafael Correa in Ecuador. In a separate but parallel advancement of socialism in Latin America, Cristina Kirchner has driven Argentina into the same ditch on the left side of the road as the gentlemen Chavez, Morales and Correa have done with their countries.
In Europe, the last few years of serious economic crisis has pushed large groups of voters into the arms of socialist parties. It is a remarkably broad phenomenon that has made Chavez-admiring Syriza one of the largest parties in Greece; it led to the sweeping French socialist election victories a couple of years ago; in September it will probably carry the surging left-wing coalition in Sweden to a strong election victory (on a message that the world’s highest taxes are not high enough!).
Even the nationalist movement in Europe is a form of socialism. Hungary’s Fidesz and Jobbik adhere to the same economic collectivism as do Golden Dawn in Greece, Front National in France and an assortment of smaller, nationalist parties in the Netherlands, Belgium, Germany, Denmark and Sweden. The difference between socialists and nationalists in Europe is, essentially, that the former want to expand the welfare state with no inhibitions while the latter want to reserve the services of the welfare state for the people of their individual countries, and not share them with immigrants from – primarily – Africa and the Middle East.
(Disclaimer: UKIP, Britain’s patriotic movement, is basically a libertarian party. They are opposed to the welfare state and to immigration aimed at living off it, but unlike continental and Scandinavian nationalist parties they also want to ultimately dismantle the welfare state. As such they are rather alone on the European political scene. Now back to our regular broadcast.)
The rebound of socialism is not limited to Europe and Latin America. The Obama administration was carried into office by a warped belief that government can take care of people from cradle to grave. Obama and his fervent supporters soon found that Americans still have a strong sense of individualism and skepticism toward government as a partner through life. It is fair to say that on a broad scale, Obama’s aggressive statist agenda has peaked and so has collectivism in America. The question is how we as a country will downsize government, and whether or not it will happen on fiscally sustainable terms.
Others are not so lucky. South Africa is a good example. After two decades of European-inspired welfare statism, South African voters have grown a bit weary of the ANC. Their hold on power is not yet in jeopardy, but it has weakened in recent years. As I have explained in numerous articles, the reasons for this weakened support for the ANC are obvious to any sober observer of the South African economy. Poverty is pandemic among black South Africans and has slowly but steadily spread to colored and white South Africans as well. Unemployment and crime have become permanent phenomena, especially – but not exclusively – in the large areas of the country that still live in abject poverty.
Despite 20 years of promises, the ANC has delivered precisely what socialism always delivers: decline, deprivation and despair. As a result, many South Africans are turning to alternative political movements, and one of the first to capitalize on this is Julius Malema. The former president of the ANC’s youth league has formed his own political movement, an outright communist party that pervertedly calls itself the “Economic Freedom Fighters”. Here is some of what they want to do to South Africa:
A supposition that the South African economy can be transformed to address the massive unemployment, poverty and inequality crisis without transfer of wealth from those who currently own it to the people as a whole is illusory. The transfer of wealth from the minority should fundamentally focus on the commanding heights of the economy. This should include minerals, metals, banks, energy production, and telecommunications and retain the ownership of central transport and logistics modes such as Transnet, Sasol, Mittal Steel, Eskom, Telkom and all harbours and airports.
They have similar plans for agricultural land, with the intent to redistribute it from current owners and users to others, ostensibly based on racial preferences. The miserable consequences of land expropriation in Zimbabwe have apparently not deterred them. Nor has the economic disaster created by Chavez in Venezuela, where government has gotten itself involved in everything from utilities to the production and distribution of food. Not surprisingly, Julius Malema, South Africa’s premier communist, wants to do the same.
A communist government is just about the last thing South Africa needs. By the same token, Europe is absolutely not in any need of more collectivist policies. Latin America’s socialist experiments must end now, so the continent can reap the harvests of its full economic potential under economic freedom.
Currently, much of the global socialist rebound is currently flying under the radar of freedom-minded scholars, activists and politicians. Let’s hope that changes.
I got some really positive feedback on my first austerity video. Thank you! The topic is timely, especially with reference to the crisis in Europe. After the elections in May when statist parties on the left gained seats in the European Parliament, the debate over how to handle the perennial economic slump has intensified. Austerity critics have become more vocal, and the funniest part of that is that they do not even realize that the kind of austerity they criticize is really the kind I define as “Government-First” austerity in my video.
This is telling of what the debate over austerity in Europe is really about, and who the participants are. Proponents of the European version of austerity are not out to reduce the size of government, but to make sure government – the welfare state to be precise – survives the recession as unharmed as possible. As I point out on the video, if they had a “Limited Government” purpose behind their austerity they would use private-sector growth, or lack thereof, as their metrics for whether or not austerity was successful. But since private-sector activity has been plunging in the countries hit worst by the European version of austerity, it is clear that the purpose behind austerity as applied in the EU is of the “Government First” kind.
This puts an absurd light on far-leftist criticism of austerity. Since there are no limited-government proponents on the scene in the European debate, statists are bashing statists over not using the right tools to save the welfare state. With the noise from their fight rising, it is becoming increasingly likely that my predictions for Europe’s future will come true: the continent is bound for a new form of stagnation. So long as Europe does not dispose of the welfare state, they will end up right there, in the economic wasteland of industrial poverty.
The harder the far left works to end government-first austerity, the farther to the left they will pull economic policy in Europe. Instead of trying to balance government budgets as a means toward saving the welfare state, the far left does not even want to have to worry about the budget. Their attacks on the EU’s constitutional stability and growth pact are symptomatic of this.
Austerity criticism is not limited to the EU level. Wherever socialists have made headway in national parliamentary elections they raise their anti-austerity voices. Italy is a case in point, as illustrated by an article in the EU Observer:
The EU is at a “crossroads” between accepting a long period of austerity and high unemployment or taking steps to boost an economic recovery, Italian prime minister Matteo Renzi has warned. Speaking in national parliament on Tuesday (24 June), Renzi told deputies that “high priests and prophets of austerity” were stifling the European economy. Renzi’s government takes control of the EU’s six month rotating presidency next week and has indicated that migration and the bloc’s stability and growth pact will be its main policy priorities. The Italian prime minister has led calls for the pact’s rules on budget deficits to be interpreted in a way that encourages more public investment.
In other words, what they want to be able to do is to spend more on government-run, tax-funded education, on more roads, mass transit and so called research and development programs. They also want to pour more money into non-fossil energy, the kind of complete waste that has been Germany’s failed attempt at replacing nuclear energy with “renewable” energy sources. (Out of utter panic over rising energy prices, Germany is now building coal power plants almost as fast as the Chinese.)
None of that spending would help the economy grow. If you tax the private sector into oblivion, it does not matter if it can ship its products on four-lane highways or six-lane highways. There won’t be anyone there to buy their products in the first place. It matters even less if the energy that manufacturers would use is from sometimes-producing wind turbines or sometimes-producing solar panels. If the energy is too expensive to make manufacturing competitive, nobody is going to want to buy it in the first place.
Europe does not need more government. It does not need more government-first austerity either. It needs limited-government austerity. And soon. Otherwise, it is basically over for Europe as a first-world continent.
Here is the first in a four-part series on austerity, its theory, its application and its consequences: