I’ve joked on many occasions that bipartisanship occurs in Washington when the evil party and the stupid party come up with an idea that is simultaneously malicious and misguided.
The international version of two-wrongs-don’t-make-a-right occurs whenever the French and the Germans conspire on economic policy. The latest example is a joint proposal for “economic governance” for eurozone nations. Here are some blurbs from the BBC’s report.
The French and German leaders have called for “true economic governance” for the eurozone in response to the euro debt crisis. Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone. …They also advocated a tax on financial transactions to raise more revenues.
I don’t pretend to have any predictive ability, but I’ll bet dollars-to-donuts that “true economic governance” will lead to more spending and higher taxes. Why? Because “economic governance” is just a sanitized way of describing a cartel of governments.
When politicians don’t have to worry as much about jobs and capital migrating to jurisdictions with less oppressive tax law, they will behave in a predictable fashion by raising tax rates. In other words, the weakening of tax competition is a recipe for bigger, more expensive government.
Indeed, the tax on financial transactions is a perfect example. Any one nation would be unlikely to impose this perverse levy for fear of losing business to neighbors. But if there’s a one-size-fits-all eurozone government, then bad policy becomes more feasible.
The only good news is that Merkel hasn’t totally lost her mind. Perhaps because her de facto socialist party is not doing well in the polls against the de jure socialist party in Germany, she is temporarily resisting the idea of “eurobonds.”
Ms Merkel again played down the chances of introducing “eurobonds” – jointly guaranteed debts of the 17 eurozone governments – as a solution to the crisis. The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.
The more profligate European governments like eurobonds for the same reason that California and Illinois would like to jointly issue debt with Texas. It’s a way for the spendthrift to free ride off the frugal.
And speculators like eurobonds because their holdings can dramatically rise in value when downside risk gets transferred to taxpayers (nothing wrong with speculation, by the way, so long as losses aren’t socialized).
Eurobonds might temporarily calm European markets, but only by setting the stage for a bigger collapse in the near future when the Germans are pulled underwater by their reckless neighbors.
For those who want more information, this video is a primer on the importance of jurisdictional competition.
[…] written before about the first bad idea, so let’s focus today on the threat of Brussels-mandated tax […]
[…] a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically […]
[…] other words, Sarkozy is a statist. But you knew that already if you read this, this, this, this, or […]
[…] compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United […]
[…] compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United […]
[…] Read Rest of Article […]
Dan, while I agree with the gist of your article, one thing you failed to mention is that they also agree on requiring Eurozone members to adopt constitutional amendments to the respective states’ constitutions to balance their budgets. While I am always skeptical of politicians promises, the idea at least, seems to be pretty good; I would almost say Tea Party-ish.
I wonder if anyone reads this stuff in this American era of HopeNChange. However,…
This is a good opportunity to separate the forest from the trees and have a World View summary of Europe and what the future holds for American voters who have embarked on a the irreversible process of abandoning the American values that once set them apart from the rest of the world, and are now attracted to the same European path of decline — like a moth is naturally attracted to the light bulb. This is the fundamental global socio-economic change occurring in the 21st century. A change that has the Western world submerging into worldwide averagedom. A change that we are already feeling and which will largely define our lives in the next 2-3 decades.
Europe is a continent that 40-50 years ago, soon after recovering from totalitarianism — a direct result of collectivism and the resulting WWII — transitioned to Social Democracy. Social Democracy was a natural, almost inescapable, transition for Europeans, given the deeply rooted collectivist mentality that has always existed in Europe, and indeed all over the world (America is –probably was– the only exception – indeed how often does it happen that a rather small group of civilized citizens discovers a brand new continent and that historical serendipity happens to seed those initial settlers with the once emerging Anglo-Saxon values of individualism?). So, even a world war was not enough to eradicate the mentality of mandatory collectivism from a European psyche steeped in collectivism for so many centuries. So collectivism rebounded in Europe soon after the war, in a milder, less coercive form by the name of Social Democracy.
Social Democracy is a moderately coercive form of governance whereby, on moral grounds, production must inevitably be discouraged at the top so that those at the bottom can be insulated from the consequences of lifetime mediocrity and often indolence. Whether one agrees that this suppression of incentives to produce is justified by a moral obligation to redistribution, or whether it constitutes a reasonable economic efficiency compromise, is probably another topic.
The fact is that, burdened with such dis-incentives to production for high value work at the top (taxation) and less valuable work at the bottom (insulation from the consequences of lifetime mediocrity and indolence) European citizens have been mired into a sub-par 1-2% annual growth trendline. This in spite of the amazing fact that, as individuals, Europeans are probably the most capable people in the world. But the production dis-incentives of the Welfare State have made growth expectations in Europe so pathetic that amongst European nations a 2% growth trendline earns a nation “Tiger Economy” status. This low growth, while always pernicious to prosperity, was less of an existential threat when the remaining, roughly 3+ billion people of planet earth were under the shackles of Mao Zedong, Soviet Communism and the mandatory hippie commune of Mahatma Gandhi. But, as we can now all already feel, this has all changed in the last 2-3 decades. Now, slow economic growth in the West has become mathematically equivalent to a path to economic extinction. These days, even under the moderate amounts of economic freedom granted to the once hapless 3+ billion third world socialists, the world is experiencing the exhilarating growth of billions of people finally climbing out of their forced economic hibernation at growth trendlines of 7%+.
So we have 0.8 billion Westerners growing at 1-2% (yes, that will also be the American growth trendline once the full incentives and vicious cycle of HopeNChange fundamentally transform America into a European incentive to production and regulation environment) while 3+ billion people are growing at 7%. The end result is that westerners are relentlessly loosing relative prosperity at an annual 5% rate — a certain path to being absorbed into world averagedom within a few short decades.
Enter the European Union which is now proposing a further reduction to European incentives to produce, by enveloping the existing Intra-National redistribution inside the member states with an additional layer of Intra-European cross border redistribution. Now the productive German or Dutch individual will have to support not only his own indolent countrymen, but also Greek, Portuguese and Spaniard unknowns in an even more distant land. How long are those still remaining productive Europeans going to last before many of them at the margin start going Laffer? Triggering a new vicious cycle, and probably the final chapter, of European decline? Another decade?
—————————————————————————–
There is a good article in today’s WSJ by Bret Stephens:
http://online.wsj.com/article/SB10001424053111903480904576510200756243420.html?mod=opinion_newsreel
But, in my view, Mr. Stephens fails to put it all together by pointing out that the overriding central theme of Europe’s destiny of economic decline can be summarized in three words: “sub-par economic growth”, which, in turn, is a direct result of low incentives to produce, for both rich and poor.
And when it comes to America, I am in fundamental disagreement with Mr. Stephens over whether the Tea Party has inoculated the US from the fate of European Decline — as he calims. Not only is the Tea Party in danger of being absorbed into the Borg of collectivism as time goes by and the economy “improves” to a 1-2% growth trendline, but the Tea party also represents a small minority of voters. The Tea Party is nothing more than the predictable and expected scream of a minority, in a nation headed to the waterfall (actually, descent through the rapids of HopeNChange to the Valley of Decline is what comes to mind).
Of course, Paul Krugman, NPR and the Obama Administration are fighting the Tea Party tooth and nail since it represents the last obstacle to the American electorate’s irreversible and suicidal dream: The Europeanization of America; the capitulation of the American Individual to the European master of collectivism he once sought to escape by migrating to the new continent.
But there is little hope, as I find that most Americans are fundamentally oblivious to the reasons that made them most prosperous people on earth. And even those Americans that still uphold the American values of Self-Determination and Self-Reliance seem to be doing so for reasons of tradition and momentum, not out of rational thought and/or because of the direct relation to economic efficiency and prosperity. I hope I’m wrong but, as an ominous sign of the impending economic decline, a large proportion (perhaps even a majority) of voters who are either Tea Party supporters or upholders of distinct unique American values are either bigots or uneducated rednecks. The majority of the American intelligentsia has apparently not made the obvious connection been HopeNChange and economic decline. They are thus resting their hope in maintaining exceptional prosperity to the Krugmanesque pixie dust delusion of ”Our central planning will be better than theirs and everyone else’s. So 6x world prosperity will continue.”
For the majority of voters, Social Democracy represents an irresistible and delusional shortcut to prosperity. Once exposed to its seductive message, the voter finds the delusion impossible to resist. Rational arguments that hampering incentives to produce — when your economic growth is already sub-par by world standards — will only lead to certain economic decline, are useless against the irresistible seduction of a redistributive Social Democracy shortcut to a cheaper lunch. But, alas, the cheaper lunch that the American middle class voter moth sees, is no other than the 100W incandescent light bulb that he has banned — in yet another delusional hope that he can also decarbonise his economy, and continue to command an economic efficiency that justifies a prosperity level 6x world average.
Iff Americans prove me wrong. Iff they manage to arrest the vicious cycle or America’s Europeanization and restore those incentives that will lead to 5% growth then, sure, I’ll happily eat crow and believe once again in some fundamental American exceptionalism.
Until then, America’s follows Europe in decline…