Echoes of the Great Depression: Europe
For all of my life the nations of Europe have been very much to the left of center. I suppose this condition is the legacy of dirigisme and socialism in France, Bismarck’s welfare state in Germany, and socialism and utilitarianism in Great Britain. Whatever the reasons, Europeans in general have not shied from enabling the state to control a nation’s economy. In particular the modern welfare state and labor market regulation are well developed throughout Europe. With this kind of background, one should not be surprised that non-socialist economic thought centers around Keynesianism.
Recently, we have seen how the British electorate has returned the Conservatives back to office, primarily because they have done a far better job in maintaining a better than average economy. Not that the performance was especially brilliant (GDP growth of 2.6% and unemployment of 5.6% last year), but it was a lot better than the rest of Europe. The unemployment rate of Britain was roughly half the unemployment rate of France and Italy last year. In addition weekly earnings are up 8% overall and 10% in the private sector. This is certainly a lot better than the United States can boast!
What Britain points out by contrast is how lame the economies of most of the rest of Europe are. In late October of last year, the British magazine The Economist stated that Germany’s economy was stumbling, and the Euro area was beginning to tip into its third recession in six years. France and Italy have avoided any structural reforms that would liberalize their rigid labor markets and lessen the burden of their welfare states. Meanwhile, the Eurozone is experiencing deflation with eight European countries producing falling prices. The Economist declares “A region that makes up almost a fifth of world output is marching towards stagnation and deflation.”
So what is causing the European economic malaise? If you recall from our discussion of the conflict between Keynesian and neoclassical ideas (see here and here), we noted that an economy becomes sick when somehow an imbalance is introduced between the demand of a good and its supply. Sometimes the imbalance is produced by a diminished demand for a good ( Keynesians would have you believe this is almost always the case in recessions/depressions), but it could also be caused by diminished supply at the same prices. For example increasing taxes or a greater governmental regulatory burden could increase prices. Anything that increases the cost of producing a good will generally increase its price. To the extent that the price increase is accommodated by demand, the change has the effect of directing economic resources toward the purposes of the entity (government bureaucracy?) causing the price increase and away from the producer’s investments. To the extent that the market can not bear the price increases, demand is reduced and suppliers must lay-off employees, and reduce output. In the first case there are “opportunity costs” that reduce what would have been greater output; in the second case – consistent with Keynesian dogma – reduced demand leads to more unemployment and less output. However, because the cause of the malady is whatever increased costs, merely giving a government stimulus that temporarily boosts the demand and prices of goods will not solve the problem. Only removing the source(s) of the extra costs will suffice.
These thoughts allow us to recast the main question of the last paragraph in a different way. Are the European governments doing anything that increases costs of delivering goods to consumers over the entire economy? The answer is very much in the affirmative.
- A huge tax burden is placed upon the economies to finance their inefficient Keynesian stimulus and welfare programs.
- Rising European national debts are stunting economic growth.
- The labor markets in Europe have been made very rigid, which costs would-be-workers employment opportunities and companies labor to produce their products.
- European price controls on agricultural output, pharmaceutical companies, health services, wages, and energy, to name a few.
European nations tax their citizens not only with income taxes, but with a kind of sales tax called a Value Added Tax, or VAT. The maximum income tax rates range from a low of 10% in Albania and Bulgaria to a high of 70% in Belgium, with most rates ranging between 20% and 50%. Most VAT taxes produce effective taxes on buying a good that lie in the range between 17% and 25%. In some European nations (particularly Austria, Belgium, Denmark, Finland, France, Greece, Iceland, Italy, the Netherlands, Norway, Portugal, and Sweden), if you were in the lower economic classes that have to spend most of their disposable income to live, you would have to surrender most of your income to the government. The power to tax is the power to destroy, and Europe is on the track to destroying their own economies.
If one were to consider the entire Euro area as a single country with a single GDP and national debt, the country’s national debt to GDP ratio gives the debt as 91.9% of GDP in 2014. This percentage is increasing with time. It is the considered opinion of many economists, supported by historical data, that once debt to GDP passes 90%, the costs of servicing that debt steadily increase enough to stunt economic growth.
Labor markets have been made very rigid to protect workers (and to obtain their votes in elections). Whether or not a company can hire or fire an employee is subject to very strict rules in most European nations. Many countries mandate rules that impose high penalties on companies for dismissing workers. As a result, a company will be very careful in determining whether they actually need a worker before they hire him. This has the effect of holding down the total amount of labor used and therefore the total amount of economic output.
Finally, there is the plethora of European price controls shown in the list above. As we noted in discussing the law of supply and demand, anything that fixes a price at anything other than the current equilibrium price creates an economic imbalance that produces either shortages or surpluses of the good. If the non-equilibrium price is held fixed by government fiat, the workings of Adam Smith’s invisible hand in sending information on what should be produced and at what quantities are not effective. If an economy is sick and the invisible hand no longer tells us how to right the disequilibria, a sick economy can not find its way to health.
Some of the dis-equilibrating forces during the Great Depression are not present in today’s European economies. In particular the central bank of Europe is not drastically reducing the money supply the way the Fed did in depression era America. Some of forces, however, such as wage-price controls are quite similar. Whatever similarity or dissimilarity in details between the Great Depression and the Europe of today, what is most similar is the determination of politicians and bureaucrats to deeply intrude themselves in the workings of the economy. Unless I missed something, such government functionaries are no more capable of solving nonlinear optimization problems involving hundreds of millions, perhaps billions of variables with unknown constraints, than were the group of functionaries in Franklin Roosevelt’s administration,
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