Time to Reverse an Unprecedented Success?

Johnny Munkhammar is a Swedish writer and entrepreneur, also Research Director at European Enterprise Institute and the author of “The Guide to Reform”.

Thirty years after Margaret Thatcher came to power and 20 years after the fall of the Berlin Wall, economic freedom has decreased in half of the major economies last year. Governments are intensely chasing banks, tax havens, hedge funds, corporations and tax.

New regulations, increased public spending and protectionist measures are rife in the policy agendas of the Western world. Is ever increasing government the new trend, a reverse of the past decades of economic freedom?

So it would seem. The stimulus response to the crisis is a major step, building debt, which has to be paid for by future taxes. The demographic development and consumer demands will lead to a massive cost increase in several public systems for decades to come.

Actually, the so-called Anglo-Saxon countries – supposedly the freest major economies – had already begun to expand government before the crisis. Public spending in the US increased between 2000 and 2008 from 35 to 39 per cent of GDP, and in the UK from 37 to 47 per cent.

Costs for health care and elderly care are rising, as well as pensions. In Japan, Italy and Spain, costs for pensions will explode. Even the United States seems to be unable to avoid a rise in public expenditure, due to so-called entitlements, to today’s French or German levels.

For a number of reasons, this would be a very harmful development. First, there is no sign that the stimulus packages improved long-term growth. Huge amounts of the tax-payer’s money were thus wasted, increasing debt, which will increase future tax burdens.

Second, the past quarter-century of increased economic freedom has been an unprecedented success. Global GDP per capita rose by 50 per cent, extreme poverty was cut in half and more people than ever enjoy western-style living standards.

Third, economic freedom is strongly correlated with other important aims, such as environmental protection, social progress and indicators of quality of life.

Fourth, despite the crisis, the results of liberalization remain. Since 1990, GDP per capita has increased by 64 per cent in the US and 47 per cent in the UK – but only by 35 per cent in France, 23 per cent in Germany and 16 per cent in Japan.

And finally, if there is one lesson Europeans should have learned, it is to avoid big government. Since Eastern and Central Europe abandoned the command economies, their living standards improved more than anyone dared to imagine in 1989.

It would be devastating for our living standards to ignore this lesson and return to pre-Thatcher policies. But is that not the apparent direction right now? Happily, not. The way the policy tide has turned around may be described in one word: Massachusetts.

As voters made Republican Scott Brown the senator to succeed Ted Kennedy, Democrats lost the necessary majority to pass their health care reform. It was like a referendum on big government and it lost.

Major changes can often be traced to minor events like this. President Obama will now have to move to the center. And though American voters are different from European voters, it is unlikely that this will pass unnoticed in Europe.

Several European countries responded to the crisis by continuing free-market reforms, especially in Eastern and Central Europe, but also Sweden, for example. Their success will put more pressure on the countries that chose the fraught path of big government.

In the end, facing the economic power of the BRIC countries, even reluctant reformers like EU President Herman van Rompuy see reform as a matter of survival. Europe has reformed during the past two decades, and must continue to do so.

The stimulus should be rolled back, but the main challenge arises in the long term, and includes the US and Japan too. To avoid exploding costs in health care, elderly care and pensions, public expenditures must be transformed into private expenditures.

This is the only way to avoid ever-bigger government, with all its problems. And it would actually bring many benefits. People would be allowed more choice, suppliers would compete, and that should improve quality as well as efficiency.

Transforming the welfare state into a welfare society may not be easy or quick, which is exactly why the debate about how to do it must take place now. Politicians may fear public opinion and prefer to wait. But we have already waited far too long.

And regarding public opinion – let Massachusetts strengthen our resolve.

About the author

Johnny Munkhammar wrote 2 articles on this blog.