All Hail President Blair!
This column was written before the president’s Thursday night speech on job creation, but that matters little. The principle behind Obama’s speech — that government can “create” jobs — is well known and utterly flawed.
Government doesn’t create jobs, except in the most banal sense of employing people to meddle in other people’s business. Nor does it create an environment amenable to job creation. Jobs are best created in the absence of bureaucracy. If Washington carries on in the belief that government can do something other than get out of the way, our economy is doomed.
We can get a good idea of what will happen by looking at a country very similar to ours: the United Kingdom, which is farther down that road than we are. In a recent series of reports, aptly titled “Project Armageddon,” Tullett Prebon, one of the world’s largest inter-dealer money brokers, describes the trap in which the UK now finds itself. The final report, ” Thinking the Unthinkable,” makes for a sobering read.
The basic premise should be familiar to anyone who has paid attention to the federal government’s activities over the past decade. The UK’s financial regulators, with the blessing of Labour prime ministers Tony Blair and Gordon Brown, implemented a policy of easy money that allowed the British economy to expand dramatically on a foundation of private debt.
With revenues and growth looking like they would increase forever, Brown hubristically declared that he had brought an end to the boom-and-bust cycle. Public spending increased dramatically on the belief that Britain would enjoy a free ride. When the private borrowing bubble burst, government simply assumed the debt. Adding in contingent liabilities such as unfunded pension schemes, Tullett Prebon reckons that UK debt is now 167 percent of gross domestic product.
The new British coalition government rightly recognizes that this is unsustainable, and has embarked on a deficit reduction program that involves modest tax raises and modest spending cuts of around 3 percent and presumed growth leading to greater revenues. However, Tullett Prebon points out that the British economy, under its current structure, cannot deliver this growth.
Previous growth industries like real estate, financial services, and construction cannot grow now that private borrowing has dried up. The retail industry is constrained by falling consumer incomes. Other important areas, like health care, education, and defense, cannot expand without increases in public spending. All of this means that the UK “is now mired in a high-debt, low-growth trap.” Sound familiar?
The Blair-Brown years also constructed a vast illusion about the economy. The British people were essentially told that “free” and generous public services were their absolute right and that it was immoral to argue otherwise. Public servants developed an arrogance “which was reflected in the pay and perks of senior managers and in a relentless encroachment on the rights and liberties of the individual.” (Themes I develop in the American context in my book, Stealing You Blind: How Government Fatcats Are Getting Rich Off of You).
The result is a British people ignorant of the realities of the economic peril it faces. That is why the modest spending cuts proposed by the coalition government provoked political riots earlier this year (and the sense of entitlement may well have contributed to the recent looting riots).
Tullett Prebon calls this a “very British mess,” but the situation it describes is very similar to the one here — with the exception that far fewer Americans have fallen for the line that government has all the answers.
Government cannot borrow its way out of the problem. That would just defer the inevitable crisis, while deepening it. Interest rates cannot decrease further, public spending has failed to increase economic activity, printing money (or “quantitative easing,” as it is now called) has had no discernible effect beyond increasing household inflation, and the Pound has remained depressed in foreign exchange markets, foreclosing any hope of an increase in exports. In other words, macroeconomic solutions of the sort that President Obama wants to try here, have been exhausted — at great cost and to benefit.
The only plausible solution to keep Britain’s bad situation from getting worse, the firm concludes, is to follow a package of low-cost, supply-side reforms to reduce the burden of government while at the same time producing a more self-reliant people. These reforms would include genuine reforms of entitlement spending, a reduction in the pay and conditions of high-earning public sector workers, significant simplification of the small business tax system, an end to regulatory excess, and a “radical ‘liberty agenda,’ getting government off the backs of the public.”
At the Competitive Enterprise Institute, we have a saying: You don’t need to teach the grass to grow, you just need to move the rocks off the lawn. The president’s philosophy is one of moving the rocks around the yard. Britain has already tried that. It’s time for a liberty agenda.