One of the hallmarks of wisdom is to learn from one's mistakes. But even better is to learn from the mistakes of others. Those of us looking on from the side as President Obama crashes the American economy can only wonder why more Americans have not drawn the lessons from the current European meltdown.
Europe's economic turmoil has not yet injected a note of urgency into America's budget debate. While fifty-five per cent of Americans today think that "socialist" is a fair description of President Obama, they have not fully absorbed the implications of that label.
European elites have long satisfied themselves that while the United States is a military superpower and China an emerging economic superpower, Europe represents the epitome of la dolce vita, the sweet life. "An apartment, small car, state job, good pension, and peace" for one and all seemed to have been achieved, writes Victor Davis Hanson. The only problem is that somebody has to pay for this, and the ever dwindling and aging Western European work force can no longer pay for all those government workers who retire on full pensions at fifty-five.
The vast surge in wealth after World War II convinced Europeans that they no longer had to work so hard, and so they don't. Nobel Prize winning economist Edward Prescott found that the average per capital output of Americans between 1993-1996 was 75% higher than Italians, 50% higher than Britons, and 35% higher than Germans and French. The difference is not that productivity per hour is higher in America, but that Americans work more hours. The average European takes six weeks vacation a year; the average American slightly over two. In addition, Americans work on average for six more years before retiring.
Americans have traditionally been less eager to live off someone else's labor than Europeans. Fifty percent of Europeans view one of the major goals of government as redistribution of wealth versus only one-third of Americans.
But what the current European economic travails have shown is that one cannot continue sitting in the hammock forever. Greece has already had to be bailed out of its deficit crisis by a massive infusion of hundreds of billions of dollars, and at least four other members of the so-called PIIGS group – Portugal, Ireland, Italy, Greece and Spain – face the possibility of default on their government bonds. Britain has just instituted one of the most drastic austerity programs ever undertaken by a leading economic nation. At the recent G-20, President Obama found no takers for his prescription of further economic stimulus. Every major economy is in an austerity mode.
In just 500 days, President Obama has locked America into an European future. Harvard economic historian Niall Ferguson speaks of trillion dollar budget deficits as far as the eye can see. The United States deficit as a percentage of Gross Domestic Product (GDP) is equal to that of a number of the PIIGS, and its accumulated debt as percentage of GDP is headed towards theirs. A recent Congressional Budget Office projection showed the ratio of debt-to-GDP as tripling over the next twenty-two years. Within five years, America's annual interest payments on the national debt will be higher than the entire military budget.
At the level of the states – which, unlike the federal government, do not have the luxury of printing money -- the situation is even more grave. California ran a twenty billion dollar deficit this year, and the unfunded pensions for the country's highest paid teachers and huge public employees unions are half a trillion dollars, according to James Glassman in the current Commentary. Illinois is over a half a year behind meeting its current obligations, and many other states are in little better shape.
Charles Krauthammer frets that President Obama, even if he does nothing else, has already effected one of the largest transfers of wealth in history. The new entitlements under Obamacare entail a $500,000,000 cut in Medicare and $600,000,000 in new taxes. (Actually the Medicare cuts are unlikely to be sustained, as doctors flee from Medicare as payments are cut.) That leaves little room for the government to maneuver to restore any semblance of order to the budget, and will likely lead to imposition of a European-style Value Added Tax (over 20% in many European countries.)
Here it is important to recall that Prescott found in his Nobel-prize winning research cited above that higher taxes are th primary reason that Europeans work so much less than Americans. It simply does not pay. High tax states, like California, are witnessing both higher than national average unemployment and an outflow of both residents and jobs to low tax states like Texas.
THE MASSIVE EXPANSION OF THE federal bureaucracy under Obama will turn us into a nation of lawyers or their moral equivalent. The 2,300 page financial industry bill passed last week will dramatically increase the government's power in the financial marketplace. The 243 new regulations in the bill affect not only Wall Street, but almost every other financial institution of any kind. These follow upon nationalization of student loans, regulation of carbon emissions via EPA bureaucratic fiat, and a partial takeover of the auto industry at the expense of bondholders to preserve union pensions. And we have not even mentioned the variety of new bureaucracies that Obamacare will entail.
The government is quickly becoming the employer of choice. With unemployment at close to 10%, and underemployment twice that, the federal government still added 86,000 permanent (non-census) jobs last year. The average federal worker earns 77% more than the average private-sector worker, and enjoys far more job security. The number of federal employees earning over $100,000 annually has increased 50% since the beginning of the recession. Government pensions are typically more generous, involve lower employee contributions, and kick in earlier. California alone has 15,000 retired public employees receiving over $100,000 annually.
These vast new bureaucracies will be a boon for at least one group: lawyers. They will require lots of lawyers to draft their endless stream of regulations, and the private sector will require at least as many lawyers to interpret the regulations to clients and figure out ways around them. That is not good. According to Rosenblum's Law for predicting a country's economic future, the higher the ratio of lawyers to engineers the lower the rate of future growth.
While lawyers have their uses and may be said to function as the grease that allows society to function, they do not produce wealth. Indeed that is true of government in general. While certain functions of government contribute to economic development – e.g., infrastructure, education – bureaucracies do not generate wealth. Thus the greater percentage of the workforce employed by the government, the smaller the percentage producing jobs and wealth.
The problem with lawyers is not only that they do not generate wealth, but that they tend to possess character traits that are antithetical to wealth production. One of the few things I recall from my two years in big firm practice is the huge amount of time lawyers spend discussing why their less bright clients are so much richer than they are. The obvious conclusion – because the clients were willing to take risks – never occurs to them.
Those risk takers are those most likely to generate new inventions and start new businesses. And they are the one to whom the new European-style bureaucracy of lawyerly types has proven least congenial. What John Maynard Keynes called the "animal spirits" that drive capitalism are being stifled.
In an acutely observed piece last week, David Brooks contrasts "princes" and "grinds." Princes, the type of people who graduate elite law schools and attend better business schools, are a pleasure to be around. They are charming, well-read, and have lots of opinions. Perfect for a lunch date.
The grinds, by contrast, are too awkward or too intense to work in large organizations. Over lunch they can be socially inert, offering only monosyllabic response to all attempts to draw them out. They convey the impression that they'd much rather be rather be back at work.
But just because the princes are more impressive -- President Obama is the quintessential prince -- does not mean that we would be well-advised to entrust our future to them. It was the princes at the big investment houses, playing with other peoples' money, who contributed so heavily to the 2008 crash, while many of the loner types, managing hedge funds in which they were personally invested, made fortunes betting against the princes.
"It is often the most narrow, intense, awkward people who start the best companies, employ the most people and create the most value," Brooks observes. He continues that the Obama administration has been fine for the princes at the big corporations, which are posting excellent earnings and sitting on piles of cash. But the "grinds are dead in the water. Small businesses are not growing. They are not hiring."
Brooks is surely right that the "grinds" depend on a wide-open economy with plenty of creative destruction, in which banks are confident enough to lend their money to entrepreneurial types, rather than just horde it. We are currently experiencing just the opposite..
America's entrepreneurial economy is being inexorably being destroyed, as Carnegie Mellon economic professor Allan Meltzer points out in a June 30 Wall Street Journal piece. The prospect of impending tax hikes, not to mention those already included in Obamacare, drains the economy of its vigor. Meltzer notes that the two most successful stimulus programs since World War II, the first under President Kennedy and the second under President Reagan, involved permanent reductions in corporate and marginal tax rates.
In addition, skyrocketing budget deficits suck up much of the money that would go into business investment.
Finally, a heavily regulated, bureaucratic economy creates a climate of uncertainty, in which companies and banks would rather sit on their money than lend it or invest it. In Europe regulations that make it difficult to fire workers also make businesses reluctant to hire them. And something similar is currently taking place in the United States: Employer concerns about the impact of Obamacare on worker health costs are making employers reluctant to hire. Meltzer points to the auto bailouts, which ran roughshod over the rights of Chrysler bondholders, as another example of government intervention that heightens uncertainty and dampens animal spirits.
All this could be foreseen by observing decades of sclerotic economic growth in Europe, and certainly in the wake of the sovereign debt crisis. Hopefully, it is not too late for Americans to take note and switch course.
For a very lengthy and compelling exposition of these themes, which I read after this piece was published, I strongly recommend http://spectator.org/archives/2010/07/16/americas-ruling-class-and-the/print
Related Topics: American Government & Politics, Social Issues
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