We crave stability as much as we abhor uncertainty but, on every front, inbuilt contradictions render conventional solutions to economic problems unsustainable. They need to be jettisoned. You can’t kick the proverbial can further down the road when the road is a cul-de-sac.
public sector superstructure that, despite all talk of cuts, is still bloated.
We know that economic salvation lies in growth. We know that growth requires the unleashing of enterprise from shackles of state interference. Yet the state is desperate for taxes to fund a public sector superstructure that, despite all talk of cuts, is still bloated. It is being pruned in all the wrong places, leaving front line services in shreds and back-office management intact. (Well, what do you expect when government hands the axe to the managers?) Just as vintners don’t vote for abstinence, bureaucrats will never vote for less government.
Higher taxes, needed to reduce a deficit created by years of state profligacy, strangle the very industries capable of providing a level of growth that will expand the tax base and allow tax rates to fall in a virtuous spiral. In 1988, President Reagan’s bold initiative to replace all higher personal and corporate rates with a top rate of 28% had the dramatic effect of gathering five times as much tax from America’s richest compared with 1980, when the top rate was 70%.
The very reverse
The USA comparison is telling: the Reagan administration’s 4-point formula for reversing economic stagnation was lower government spending, lower taxes, sound money and reduced regulation, and the economy was put on course for 20 years of growth. Today, in an even deeper economic malaise, the equivalent policy is more government spending, increased taxation, debased money and heightened regulation.
Europe is no better. The last thing on the agenda of the EU’s self-seeking leadership is democratic creative thinking. Remember how the Brussels autocrats strived to make their Irish bailout conditional on a hike in Ireland’s corporate tax rate? Despite the fact that its low rate held the key to productivity levels that alone got it out of the mire? To their lasting credit, the Irish refused to budge.
When the EU pushes for acceleration in the process of “tax co-ordination”, just watch out. And watch out doubly when they say their proposals would “boost growth in the EU”. Hungary’s low flat-rate tax is the latest target, but Prime Minister Orban has seen through it: “Hungary’s low tax rate is, for us, a competitive advantage and we cannot do without it.”
Embedded contradictions abound. France and Germany seek budgetary control over Eurozone members to enforce discipline yet, at the same time, they call for a relaxation of the latest “Basel III” bank capital rules, because it suits them. The effect is to allow banks to continue lending to those same governments and get the debt bubble going again.
This pattern will persist for as long as governments think they can do everything. James Madison’s original Bill of Rights in the USA included rights to free speech and religion, and imposed no obligation beyond mutual respect. Compare President Roosevelt’s version – the right to a job, a home, an education. It generated a multitude of reciprocal obligations, to provide, provide, provide.
At the same time it created open season for government meddling, and it’s still with us.