This week’s State of the Union address was full of plans for government action and spending to combat U.S. economic malaise. At the same time, the President claimed that there were drastic cuts to the federal budget on the way (referring to sequestration, under which spending actually continues to grow but at a slower rate). This doublespeak mirrors that of European politicians and hides reality: more government isn’t making the economy any better.
Illustrating this point is the dichotomy in economic performance between Western European countries — whose politicians claim to have made cuts but in reality have increased budgets each year since the Eurocrisis began in 2009 — and their Baltic counterparts — which underwent actual cuts in the size of government.
Eurostat just released fourth quarter 2012 data on economic growth this week, and it follows the three-year trend of Baltic over-performance relative to the rest of Europe. The Euro Zone as a whole registered dismal Q4 2012 growth of -0.6 percent while Latvia and Estonia grew by 5.7 and 3.4 percent, respectively.
As I wrote in National Review last month, there is a world of difference between austerity that leaves out the public sector while businesses suffer from recession, and austerity that forces government to tighten its belt along with the private sector. The first strategy, which I like to call “phony-austerity,” doesn’t work. The second one, which I like to call “real austerity,” does.
President Obama should take note.
His calls for federally planned “manufacturing hubs” and more investment into renewable energy won’t jump start growth. Trimming back the federal budget and leaving more money in the pockets of entrepreneurs will.
When crisis hit the Baltics, countries cut public wages and administration, discretionary spending, and social services. Governments felt it best to reduce their burden upon businesses, so that private enterprise could more easily adapt to hard economic times and bounce back quickly. Since the end of austerity in 2010, the Baltic economies have been the fastest growing in Europe.
On the other hand, Western and Southern European countries have decided to prolong the pain of recession by either belaboring cuts to government budgets or avoiding them altogether. In fact, many countries (those not receiving bailout funding) have actually increased spending and taxes since the start of the crisis. And they have had persistently low or negative levels of growth ever since.
A new report by Catholic charity Caritas Europa indicates that the persistent unemployment and increases in taxation in Greece, Spain, Ireland, Italy, and Portugal have been especially harmful to low- and fixed-income individuals. Instead of following the Baltic example of strong but short-lived economic pain, these countries instead decided to prolong agonizing economic hardship by refusing to cut government largesse sharply and swiftly and by inhibiting creative destruction within the private sector by propping up inefficient businesses. Wealthier European countries like France and the U.K. have also been undergoing similar, though less severe, long-lasting economic hardship.
Instead of following where Europe has failed in the West, President Obama should learn from where it has succeeded in the East. Reforming costly entitlements, lowering taxes, and cutting red tape is the way to create jobs — and more importantly, wealth.