WASHINGTON – We all know that most European economies are doing poorly or very poorly. Indeed, in the new normal of perennial crisis, expectations are low. For example, what now passes as great news is that Spain, after years of horrors, recently recorded a 0.5% growth rate. This passes as a triumph, if compared to Germany at 0.1% or Italy at -0.1%.
Terminal decline
Still, whatever the dismal growth numbers, one thing is clear. This is not a cyclical down turn. Europe is in terminal decline. And it is not due to bad luck. This is the inevitable, cumulative, long-term outcome of a set of disastrous economic and social policies.
If you want a terse and clear account of what went wrong, I urge you to read an excellent WSJ op-ed piece by Jesus Fernandez-Villaverde and Lee E. Ohanian, (European Economic Errors for the US to Avoid, December 30, 2014).
What happened?
So what happened? very simple. Europe’s remarkable post-war economic growth came to a halt when several “progressive” governments passed new laws aimed at increasing taxes and protecting currently employed workers. As the WSJ op-ed authors put it: “The result was a large drop in the number of hours employees worked, in business investment, and in the creation of new economic activity and the adoption and development of new technologies.”
Imagine the cascading effects of this trend. Little new investment led to little innovation, almost no productivity increases, and income stagnation. At the same time, the mostly unproductive public sectors kept on growing. Across Europe the share of GDP absorbed by the states went up. The cost of pension and benefits also grew.
Dismal returns on investments
Just one statistic illustrates the impact of this statist approach to economic management. According to the op-ed authors, in the US average venture capital returns is 13%, in Europe is 2%. And then you wonder why there is little investment in new technologies? If the legal and regulatory system in place creates too many constraints, whereby it is almost impossible to make any money by betting on innovation, no wonder very few are willing to invest. And no private investments in innovation and technology means stagnation, or worse.
The 2008-2009 financial crisis simply exposed the inherent weaknesses of anemic economies. Not every European country is like Greece. But most of them are closer to Greece than to Germany.
There is indeed a “free lunch”
This is not a matter of economics. In the end this is a matter of political ideology and psychology. The main European political forces have tried, with success, to sell voters the idea that there is indeed “a free lunch”. Of course it is possible to work only a little, get long paid vacations, and retire early with comfortable, inflation-adjusted pensions. “We can do all this and we will, if you just vote for us.”
Lessons for America
Compared to semi-comatose Europe, America is still doing fine. But we are trending that way, according to the op-ed authors. Too many regulations, an antiquated corporate tax system, and immigration laws that discourage talented people from coming into America conspire to reduce the number of start-ups and the amount of innovation produced and funded in America.
All this is reversible. However, if we continue along this statist path of hyper regulation and punitive corporate taxation, we should know the outcome. Just look at Europe.