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Europeans might learn more quickly

May 13, 2012|By TIM ROWLAND | timr@herald-mail.com

Oh, to be a fly on the wall up at Camp David a week from now, when all the former leaders of Europe assemble for what will be half world summit, half Auld Lang Syne.

All right, not quite that bad, but voters in Greece and France dealt significant blows to their ruling parties last week, as les citoyens have become increasingly disillusioned with the policies of deficit reduction — unaffectionately known in Europe as “austerity.”

Whatever it means for Europe, this news will have to please the estimated five remaining people in the United States who believe that we didn’t spend too much on economic stimulus, that we, in fact, spent too little.

This theory holds that governments must spend more in times of recession and less in periods of expansion. Shrinking government in times of economic contraction means there are even fewer jobs, even fewer projects to keep the factories busy and less commerce all around.

For those without an agenda, it’s not terribly hard to understand. If your company has lost a number of private-sector customers, cutting back on government customers at the same time is obviously not going to help.

Yet this is the path being chosen (up until last weekend) in Europe and being pushed in America by the likes of U.S. Rep. Paul Ryan and his “Roadmap for America’s Future.”

To be sure, it is counterintuitive to look at massive public debts and suggest that we need to be spending more. It’s pretty common practice for even very smart people to focus on the dollar value of the debt and be horrified — and to assume that the only way to reduce is to cut.

But like weight loss, fewer calories are only part of the equation; work must be expended as well, to open the furnace and burn off flabby debt. Government spending generates more private spending, which generates more consumption, which generates even more private spending — all of which generates more tax revenue, which is really the key to deficit reduction, and always has been.

It is paradoxical that those who profess to have the most confidence in capitalism and free enterprise are the very ones who doubt the power of business and commerce to rebuild America’s treasury.

Instead, they focus on austerity, which is akin to economic chemotherapy. You kill the bad cells (debt) and the good cells (growth) all at once, and hopefully when the host has been reduced to one smoldering cinder, green shoots will emerge from the ashes.

Maybe this works. But I don’t think anyone’s stuck with it long enough to find out, because the pain can be pretty severe, and usually an election or a revolution or a palace coup puts a stop to things before we can learn the full results of the experiment. (Although in Third World countries, it’s usually a thieving dictator passing out money to his cronies, not massive tax dodges for a select few that drains the public trough dry; either way though, the result is the same.)

But if the right is wrong about deficit reduction, the left has been just as guilty of corrupting the other side of the ledger — that is, cut government when times are good. Instead, the left has used growth as an excuse to raise taxes even more because “people can afford it,” and spend even more because that is what politicians do.

A decade ago, we combined the worst traits of both sides — we cut taxes, while paying for one major new entitlement (prescription drugs) and two wars. I believe we are all familiar with the result by now.

America isn’t Europe, of course, economically or culturally. Our problems are similar, but not the same. Greece is such a mess that it probably should have been allowed to default years ago so the rest of the world could get on with life. The situation in France should be taken more seriously, where it now appears that growth will be emphasized over austerity.

Perhaps France has been watching two nations to the west.

By cutting taxes and allowing the banks to write their own rules (like we did here), Ireland flourished for a decade (like here), in which it became known as the Celtic Tiger and an international economic model for the world. When the sugar rush of tax cuts wore off and the banks turned out to be below-average policemen of themselves, the economy foundered (like here).

Ireland went for austerity; we went for stimulus. And sluggish as it might be, I don’t believe any American would trade our economy at the moment for Ireland’s. Unfortunately, it appears that Europe might learn from this chain of events before we do.

Tim Rowland is a Herald-Mail columnist. His email address is timr@herald-mail.com.

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