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Blaming the Victims of Our Advice: Why Europe’s Woes Show That the Regressive Policies It Imported From the United States Are Wrong, and That Progressive Policies Are Right

As the competition among the Republican presidential candidates heats up, we should not be surprised to see the contestants engage in excesses that spill over into outright silliness.  We already have seen the obligatory “regular guy” posturing from multimillionaires, along with one-upmanship in denying the validity of scientific evidence—and the value of scientific thought itself—as well as fatuous claims about the supposed economic damage from even the most basic regulations to protect public safety and health.

With the Republican Party’s base more extreme than ever, all of this is unsurprising.  We should not, however, lose sight of just how skewed the discussion has become.  We must not, moreover, allow the broader debate to become an evidence-free playground, lacking in all logic and reasoning, with bizarre and dangerous claims dismissed as merely “the new normal” in American politics.

One particularly odd turn in the public discussion came in last week’s Republican presidential debate, when former Massachusetts Governor Mitt Romney attacked President Obama’s newfound passion for progressive taxation.  Suggesting that Obama’s proposals had been inspired by “socialist democrats” in Europe, Romney smirked and said: “Guess what?  Europe isn’t working in Europe.  It’s not going to work here.”

Romney is plowing fertile and familiar political ground, of course.  Even mentioning Europe is a red flag to his intended audience, evoking visions of strange foreigners with dastardly ideas that all good Americans should reject.  (Even worse than Europe in general, in the eyes of many conservative thinkers and voters, is France.  A Washington-based conservative policy group, for example, once attacked a tax proposal based on a system that is found in virtually all advanced economies in the world, including France, by asking: “Should the U.S. adopt a French tax?”)

Romney’s sophomoric jab at Europe—as well as his dark, Orwellian reference to “socialist democrats”—should not mislead us into dismissing his statement as mere political rhetoric.  Romney is arguing that, as a matter of policy, European governments have adopted policies that Democrats in the United States would also like to adopt, and that those policies have led to disastrous consequences.

This contention is simply false.  The policies that have ruined Europe’s economies—and that now threaten to bring down the entire global economy—are not, in reality, the social-democratic policies that Romney asks us to imagine.  In fact, Europe’s troubles can be directly traced to that continent’s abandonment of its traditional policies, and its adoption of U.S.-style economic policies—the very policies that Romney and his kindred spirits enthusiastically endorse.

The answer to the current economic problems, both here and in Europe, is to abandon the regressive policies that were hatched in the United States, and to return to the progressive policies that used to be followed by governments on both sides of the Atlantic.

The Great Recession Was Made in America

The most fundamental problem with Romney’s comment is his insinuation that Europe’s current troubles were caused in Europe itself.  In fact, prior to the financial crisis of 2008, Europe’s economies were uniformly quite strong.

Of course, we are all now grimly familiar with the sequence of events that brought the global economy to its knees, beginning with the collapse of Lehman Brothers—a global financial services company headquartered in New York City.  Lehman’s collapse then led to market gyrations that exposed as worthless the financially engineered assets that were, in turn, the basis for the paper wealth on which modern finance was built.

When that house of cards fell, the global financial system shuddered, and it required concerted action by the Federal Reserve, Congress, and similar bodies in Europe and Japan to prevent a second Great Depression.  In the years since, the United States and most of the rest of the world have experienced pain and hopelessness, with little hope of recovery.

That European countries, individually and as a group succumbed to an externally created disaster is hardly an indictment of those countries’ long-term policy choices.

There is, however, at least some blame that should be laid at the feet of some European governments, whose policies made their economies especially vulnerable to the effects of the American-caused financial collapse.  Ireland and Iceland had become hotbeds of hyperactive financial capitalism, with banking regulations stripped away in order to make those countries competitive in luring financial firms to their shores.  Spain’s housing bubble was similarly enabled by that country’s decision to ape the policies and practices that were seen in U.S. financial markets.

It is no accident that Ireland and Spain are among the four euro-zone countries (Italy and Greece being the others) that are now most at risk of collapse.  While the entire world suffered the consequences of America’s abandonment of financial protections that had been embodied in the Depression-era Glass-Steagall Act, the countries that tried to play most aggressively on the new, unregulated playing field also suffered the most severe consequences.

If we were to ask what went wrong in Europe, therefore, we would be right to say, “Guess what?  American financial policies were a disaster in America.  And they ruined Europe, too.”

Why Did Europe Adopt the Euro?  A Disastrous Belief in U.S. Economic Orthodoxy

Starting in 1999, American travelers to Europe no longer had to worry about exchanging francs for marks when they traveled from Paris to Munich.  While the convenience of a single currency is obvious to tourists, it is not at all obvious why the euro zone was created.  Why did Germany, France, Italy, Spain, and so many other countries abandon their sovereign right to coin their own money, handing over that responsibility to the new European Central Bank?

Admittedly, there were (and still are) some reasonable economic arguments in favor of adopting the euro.  What has now become abundantly clear, however, is that the underlying political and regulatory foundations necessary to make a common currency function were not in place when the euro was adopted.  While those legal gaps were easy to ignore during the boom, the financial collapse in 2008 exposed the folly of rushing the euro project.

In particular, we are now seeing that the lack of political coordination of different countries’ economic policies has made it nearly impossible for each individual country to respond to its own economic problems.  When countries have their own currencies, some can rely on devaluing their currencies to deal with economic hard times, while others might be willing to tolerate higher levels of inflation as a means to readjust their economies, and still others will be able to squeeze more savings out of their public sectors.  With all relying on the euro, such disparate policies are much harder—if not impossible—to effectively maintain.

As many other analysts have discussed at length, being tied to the euro is strangling the economies of Greece, Italy, and the other weak economies on the continent.  The problem is that leaving the euro is now much more difficult and dangerous than joining it was.  The fallout from a collapse of the euro project could harm not just the countries that need to reestablish their own currencies, but all countries around the world as well, because a collapse of the euro could lead to a global financial panic.

How did some of the richest economies in the world become tethered to such a dangerous system?  One answer is that Europe’s leaders viewed the creation of the euro as an element of their admirable project to integrate the continent politically and socially.  The policy coordination that is still lacking was, it was thought, likely to follow naturally from the recognition that all of Europe would now be together in the same economic boat.

One must not, however, dismiss the role of U.S. economic orthodoxy in the euro project.  The American economy’s long-term strength suggested that it was possible and desirable to coordinate the economic lives of 300 million people through a federated government structure, along with centralized monetary planning and regulation.

Academics in this country were hardly shy about encouraging the Europeans to join in the euro project.  Elite opinion on both sides of the Atlantic treated all national votes against joining the euro as evidence of the backwardness of nationalistic thinking.  The unchallenged idea was that adopting the euro was a step toward stability and prosperity, with anyone who dared to voice opposition to that notion immediately suspected of being either venal, or simply dim.

In the end, of course, it was the Europeans who adopted the euro without first doing what was necessary to make it work.  In that sense, it is indeed true that “Europe isn’t working in Europe,” as Romney put it; but it was Europe’s botched attempt at mimicking the United States that has now gotten it in trouble.  We certainly encouraged them to follow this path.

Redistribution and Government Spending: Austerity’s Damage to Europe

From the standpoint of Romney and his compatriots, the worst European sin lies in Europe’s fiscal policy.  Nearly all European governments impose higher taxes and spend more money, as a percentage of GDP, than does the U.S. government.  The net result of all those policies is to redistribute income in Europe, much more than it is redistributed under U.S. policy.

The dreaded “social democratic” idea, therefore, is to use the government sector to change society in line with egalitarian political ideals that are embraced throughout Europe and elsewhere.  Many conservatives in the 1970’s claimed that this led to “eurosclerosis,” informally defined as long-term stagnation that was caused by an excessively intrusive public sector.  Even after Europe’s economies had once again become competitive, in the 1990’s and in this century, many people continued to talk as if Europe were still somehow being dragged down by its public sector.  Instead, there was widespread prosperity.

American policymakers and opinion leaders were quite influential in creating a movement away from redistributionist policies in Europe—a movement that was, fortunately, only partially successful in causing Europe to moderate its redistributive policies.  With the onset of the Great Recession, European countries now find themselves with smaller public sectors that are overwhelmed with the needs of unemployed workers and other innocent victims of the economic collapse.

Some European countries have been better able to withstand the recession, however, precisely because they have not completely abandoned their longstanding social contracts.  Notwithstanding Germany’s deep plunge in national income (a plunge that is larger, in fact, than the U.S. has endured), Germany’s unemployment rate has stayed relatively low.  The reason for the difference is that labor unions are still quite powerful in Germany, causing the pain of economic contraction not to be visited exclusively on workers—whose American counterparts have been easily tossed aside during the Great Recession.

Germany is hardly, however, a model of enlightened economic policy in other respects.  Even in the face of an ongoing economic disaster, its government has aggressively tried to impose austerity policies—spending cuts and tax increases—on itself and its neighbors, using its position as the country with Europe’s largest economy to force its weaker neighbors to “behave.”  Ireland and Spain—which have not misbehaved at all in terms of fiscal policy, but which saw their finances destroyed by the global economic collapse—are now being treated as spendthrifts, rather than the victims they actually are.

Great Britain has also been engaged in a savage program of spending cuts—raising the costs of higher education by tens of thousands of dollars, laying off large numbers of public workers, and cutting the supports that might have made it possible for Britons to weather the economic collapse without falling into poverty.  The riots in London and other major cities over the summer were hardly, for this reason, a surprise.

The continued pain in Europe, therefore, is directly tied to the adoption by European governments of the Republican economic playbook:  cutting spending, and refusing to allow the monetary authorities to engage in anything remotely resembling economic stimulus.

Europe is struggling, therefore, because it has moved away from the policies that used to form the basis of its ongoing prosperity, and that would have allowed it to weather the storms of the past few years without inflicting so much harm on its citizens.  The problem is that Europe stopped acting like itself, and instead started acting more like the United States.  The bottom line:  America is not working in America, and it is not working in Europe, either.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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  • Anonymous

    Thank you, Mr. Buchanan, for a coherent and literate exposition of the problems foisted on an economically successful western capitalist economy … by and until the conservatives got their hands on it.  I am completely unable to fathom where the mentality of these conservatives is coming from, what their plans are, and where they think they are going. 

    They can’t be so stupid as to not see how their policies are wrecking any chance for a recovery in the near future.  I’d like to know, what is it they are after?  Can it be as simple and stupid as destroying any progressive movement in government?  Can it be so selfish as to enable the wealthy to acquire more wealth while taking from the middle and lower classes?  Are common sense and a sense of cooperation lost arts in our politics?

    I have no doubts about the eventual recovery of western economy.  There is no alternative.  But the machinations and devious hateful politics of the right are going to draw out recovery to the point where millions of people are going to be badly and unnecessarily hurt.  Is there some point at which we may expect them to see the light and change their destructive behavior? 

    Good luck to all of us.

  • Christian Kesselring

    Prof. Buchanan,

    You may not remember me from the spring semester of Tax at GW, but thank you for reminding me of why I enjoyed your interesting asides in class (other, of course, than simply giving me a break from furiously typing notes).  I have to say that your comments on “American economic orthodoxy” struck a chord with me.  As a poli sci student at a large state university in the mid-2000s, I was subject to the kind of indoctrination that supported that orthodoxy.  While academia is maybe not as tough on Europe as the ideological right, there was a sort of rabid enthusiasm for the emerging union in that continent.  I heard often about the wisdom of the federalist model, and the inherent inferiority of decentralization.  Also praised to no end was the introduction of economic liberalism.  This was several years ago, and maybe a different tune is now being sung in the classrooms.

    Christian Kesselring

  • Nt8rx

    This is the dumbest article I have read all year.

    America is not to blame for Europe’s decision to unite behind the Euro. It could have worked, if the individual countries who are now in trouble had not continually spent way, way more than their tax receipts each year. W. R. McBride

    • Aqeel_elamin

      @Nt8rx. Did you not read the article with an open, objective mind, or is that you that you don’t have a mind? The article makes perfectly good sense to me, and should to any rationally thinking person. You represent everything that is wrong with this country, a narrow, constricted thought pattern.

  • Steve Thomas

    “The most fundamental problem with Romney’s comment is his insinuation that Europe’s current troubles were caused in Europe itself.  In fact, prior to the financial crisis of 2008, Europe’s economies were uniformly quite strong.”

    This is simply wrong. Crashes/crises do not happen because of a sudden change in the underlying fundamental, they happen because perception has become completely divorced from reality and when this becomes apparent, the perception changes very rapidly. European economies were not really “strong” before the crash and then suddenly weak afterwards, the strength was predominantly illusory, built on promises and obligations that were never going to be fulfilled (subprime mortgages, ever-expanding house prices, Greeks actually paying taxes to repay their loans to the Germans and French, continual uninterrupted economic growth, etc.) The crash simply stripped this facade away.

    The European model is fundamentally broken. Socialist politicians love to make grandiose promises to their populations particularly on pensions, that only have to be realized long after the politicians have retired and are making millions selling memoirs and touring the middle east as a “peace ambassador”. The financial crash diverted attention from the looming pensions crisis, but pretty soon it’s going to start to bite pretty hard (it’s already biting in Greece where pensions have already been slashed and are likely to be cut further). Much of the supposed “prosperity” in Europe is based on people believing that they will be secure in retirement. What is not considered is that it’s the next generation of taxpayers who will have to be working and paying taxes in order to provide that security. That next generation is currently suffering massive unemployment across Europe and even after the recovery is likely to be significantly poorer and earning significantly less than the older generation. In 20 or 30 years time, the taxpayers of the time will not accept living in crippling poverty in order to pay taxes to support the benefits and living standards of the retired generation, when those benefits were negotiated in many cases long before the payers even left school. Pensions will have to be cut across Europe. The guarantees and security that people are offered across Europe is just another aspect of the illusion of European prosperity and progressiveness. They are promises that cannot possibly be fulfilled: just like subprime mortgages.

  • msbetz

    Interesting article. Just wondering if you have ever considered that the right and the left are part of the same vile and corrupted stinking body that needs to be buried…. Anyone ever considered reinstating the Glass-Steagall Act that Bill Clinton conveniently disposed of? It would wipe out the fraudulent debt crisis and get banks back to honest banking to have a more effective system. The Global Crisis offers death to true democracy. Removing Obama immediately and reinstating Glass-Steagall would at least clean the slate for recovery for the people. The citizens are really the one’s that need a bail out, but the R’s and D’s are blind to real reform.

 

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