Valuable Lessons from Europe ... Stark Choices Ahead for Americans

We can learn valuable lessons from everyone. In fact, we can learn much vicariously if we only take the opportunity to see and properly analyze the mistakes made by others.

This vicarious learning opportunity is available to individuals, companies and countries alike.

In fact, the least costly lessons are provided by those who have done the wrong things and are publicly paying the price for so doing.

Europe has long been an excellent example of what not to do if we want to have a vibrant and growing free market economy.

Europe's Growth Deficit provides a good overview of the many financial problems now facing European countries:

"A large part of the problem is the state of Europe's intellectual debate, which pits government spending against "austerity" as the only two economic policy choices. The Keynesians are blaming Europe's looming slowdown on belt-tightening governments, as if public spending is the only way to spur economic growth. But the problem across most of Europe isn't a lack of government spending that typically represents about half of GDP. It's the failure to create the conditions for private investment and growth.

When the financial panic hit in 2008, the EU and International Monetary Fund urged governments across the Continent to spend like crazy to avoid recession. So they spent, only to discover that such spending is unsustainable. Now the same wise men are urging governments to raise taxes to offset all that spending and even to spend more "in the short term." The one policy none of these leaders has tried is the Reagan-Thatcher model of cutting taxes to spur growth."

The editorial concludes that Europe is entering recession without the necessary and proper focus on private sector jobs and wealth creation. Without growth there's no end in sight to Europe's economic problems.

For a somewhat more optimistic take on Europe's situation, A Silver Lining in Europe argues that Europe is making much needed progress along the road to recovery:

"Yet the fog of crisis obscures what's already changed in Europe. A new social-political bargain has started to form. Though not advertised loudly, the solutions on offer, from Ireland to Italy, all scale back the reach and size of the state. This mental and political shift predates the Greek meltdown. The three Ds—spiraling debt, unsustainable demographics and looming depression—just hastened the reckoning. . . .

Step back to see a bigger picture. The European model isn't pinched by Greece but rather by two related phenomena. In a world of global competition and free trade, EU countries have failed to keep up. Taxes and regulations needed to cover generous unemployment benefits and pensions have sapped their growth and scared capital away, in turn impairing their ability to meet these costs without huge debts. As Princeton historian Harold James notes, "The redistribution game becomes a lot harder to play in an open economy."

So what's the lesson from Europe that is available to America? Actually, it's quite straightforward and can be expressed by the following simple question.

To wit, will we act quickly to encourage wealth creation and job growth in the private sector, or will we continue to ask government officials to play the redistribution game?

The lesson from Europe for Americans is the following:

"There's a lesson here for America. President Obama insists that the U.S. isn't in similar straits (to Europe), and he has a point for now. Yet our public debt surpassed the euro zone's in 2008, and now touches 100% of GDP.

In a paper presented at a Witherspoon Institute conference this week, German finance ministry official Ludger Schuknecht, who previously headed fiscal policy surveillance at the ECB, notes that the U.S. increase in its size of government over the past decade was on par with those of Italy, Spain, Portugal, Greece, Ireland and the U.K. All the others have tried to rein it in, he writes, but the U.S. "stands out as the country that seems to be quite oblivious to the need for adjustment over the near future." Americans can't say the Germans didn't warn them."

Sad but true. Still, there's reason for optimism if we have the political will to take the proper actions.

The article continues hopefully:

"The recent German and Danish experiences—plus those of Australia and Canada in the 1990s—are reassuring. Economic apocalypse isn't the precondition of a reckoning with entitlement overstretch; politicians elsewhere have acted to structurally overhaul the state in ways to boost economic growth before a crisis forced their hands. Adjustment also doesn't mean that established welfare systems must be demolished. Even the classical liberal F.A. Hayek thought prosperous societies ought to help the less fortunate.

But the terms of debate have to shift here, as they did in Europe's success stories. American reformers, in the words of Harvard political scientist Bill English, need "to make the moral argument that you should spend federal monies to pay for poor children's meals and not fluff union pension schemes."

Insolvency may be a symptom of many Western democracies, but democracy isn't the problem. Voters, who aren't stupid, are as likely to reward as to punish leaders who take the necessary hard steps."

So our choices about what the future picture of America will look like are very clear indeed.

If we heed the lessons of Europe and act properly, our problems can and will be addressed and solved. There's still plenty of time to get it right.

However, if we continue to grow government redistribution programs and cater to public sector unions while discouraging private sector growth and investment, we'll have only ourselves to blame.

In either case, we'll get the government, economy, jobs, prosperity and freedoms that we deserve.

Accordingly, our choices are both stark and obvious.

The valuable lessons available from Europe's past and present are equally evident.

Thanks. Bob.