Europe, Welfare States, and Blame for Economic Woes

— Posted by Neil H. Buchanan My latest Verdict column, published today, is mostly a response to a snarky comment by Mitt Romney in a recent debate. (Yes, I realize that the adjective "snarky" is now redundant when describing anything Romney says.) Accusing President Obama of being like European "socialist democrats" in pushing for (slightly) more progressive taxes, Romney said: "Guess what? Europe isn't working in Europe. It's not going to work here." Romney and his colleagues have been saying so many outlandish and utterly false statements at these debates that it was tempting to leave this one alone. This claim, however, was at least a deviation from the usual run of climate change denial, "let 'em die" health care absolutism, and immigrant bashing, so that it was worth taking the time to sort through a few responses. The bottom line was quite obvious: The blame runs in the opposite direction, from the U.S. to Europe. The economic troubles in the U.S. would not be worsened if we tried to imitate Europe, whereas Europe is in trouble now because it imitated us. Specifically, I argue that Europe's recent troubles have been the result of: (1) Collateral damage from the U.S.-initiated global financial collapse, (2) Copycat financial deregulation, especially in countries like Ireland and Britain, that exposed those countries to especially vicious downturns, (3) Unwise attempts to adopt the neoliberal policies advocated by a U.S.-centered academic and policy elite, and (4) Even more foolish commitments (especially by the Germans) to impose short-term fiscal austerity of the type that the Romneys of the world adore. In writing that column, it was especially difficult to describe briefly the last twenty years or so of European economic experience. Prior to the onset of the Great Recession, many (if not most) European governments had actually adopted policies along the lines of the "Washington Consensus," reducing tax rates and partially rolling back their welfare states. This was in response to the conventional wisdom that "eurosclerosis" — long-term economic stagnation — had been caused by bloated government. What most people do not realize is that Europe's economies had generally shaken off their 1970's-era doldrums by the 1990's and 2000's, with unemployment and growth rates at levels that were very competitive with the U.S. (and certainly better than some regions of the U.S.). Of course, this could be used as an advertisement for neoliberalism, at least in a post hoc ergo propter hoc sense: The rollback of the welfare states was followed by prosperity. Under that view, we are not supposed to notice that the welfare states that remain in Europe are still far beyond anything that would be tolerated in the current U.S. political climate (or even in the political climate here in early 2009). And, to be clear, some pruning of those welfare states was undoubtedly appropriate. The New York Times ran an article a couple of weeks ago about some public sector jobs in southern Italy that look an awful lot like pure waste. Similarly, my argument in a Verdict column two weeks ago about the non-effect of taxes on economic activity is based on empirical evidence, which can be quite different when we are talking about tax rates in the 80% range rather than the 30% range. Still, the current reality in Europe is still very "socialist democrat," as Romney would put it. For example, Sweden's welfare state and tax rates are not where they were forty years ago, but it still has a tax-and-transfer system that results in a very egalitarian society. Moreover, Sweden has performed surprisingly well of late, with one analyst referring to it as "the rock star of the recovery." Although that analyst noted that Sweden had been running a budget surplus prior to 2008, every other aspect of the story is a brief against neoliberalism: fiscal deficits during a recession, aggressive monetary policies, flexible exchange rates, and careful financial regulation. Meanwhile, the countries that have most aggressively adopted a U.S.-style austerity approach are either in terrible shape (Britain, which took the austerity route voluntarily, as well as the countries on whom austerity is now being forced), or are in decent shape only because they refused to roll back other social protections (especially Germany, which has actually been doing worse than us in terms of economic growth, but which has no rioting in the streets because labor protections have kept unemployment low). I am not, of course, holding up any particular country as a model. There have been policy mistakes everywhere. Romney's comment, however, captured two assumptions that are simply wrong: (1) Europe is still, as a long-run matter, weaker than the U.S. because of excessively-generous welfare states, and (2) Europe's current, short-run troubles are caused by their welfare states and redistributive policies. The evidence supports neither assumption.

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