March 21, 2005
by Irwin Stelzer
Now that the Soviet Union is no more, there are two economic models offered to the world -- three, if you count Cuba and North Korea, which there is no reason to do since imitators are hardly lining up for that short-cut to impoverishment. The American model can broadly be described as one that emphasizes individual initiative, flexible labor markets, low taxes, and minimal regulation. The European model, which explicitly sees itself as an alternative to the red-in-tooth-and-claw capitalism of the U.S., emphasizes collective responsibility, regulated labor and product markets, and high taxes to fund a generous safety net.
Then we have Great Britain, in which Tony Blair's Labour Party is attempting to find a "third way" between the U.S. and European models. When it comes to economic policy, it is Labour Chancellor of the Exchequer Gordon Brown who has taken on the task of finding that third way.
Brown, a genuine intellectual who rates Gertrude Himmelfarb's The Road To Modernity: The British, French and American Enlightenments the most important book in many years, and can recite large passages of Adam Smith's Theory of Moral Sentiments from memory, is much taken with the energy and innovative drive those results from the U.S. economic system, and appalled by the stagnation that is the consequence of the unworkable fiscal and regulatory policies of the European alternative. He would like to have the advantages of American dynamism and the safety of Europe's welfare state. But -- as the budget he submitted to Parliament last week shows -- there just is no middle ground, and forced to choose, he has decided to head Britain in the direction of sclerotic Old Europe.
Blair's party prefers to call itself New Labour, to distinguish it from the bad old socialist party of yore. But Brown hasn't shaken Old Labour's taste for income redistribution. This redistribution, I assume, is an attempt to relieve the unhappiness that Richard Layard, an economist and long-time Labour guru, describes in his new book, Happiness. Layard attributes human unhappiness to inequality of income -- and proposes to transform unease into contentment by redistributing income. His is a tax system that takes so much from the rich to give to the poor that envy is no longer a scourge on the human psyche.
It didn't take Layard's book to persuade Brown to take from comfortable Peter to give to poor Paul by expanding the welfare state and financing that expansion with higher taxes on the middle class. He admires our work ethic, social mobility, relative lack of class antagonisms, and the optimism that allows Americans to see as opportunities what Europeans see as problems. But he can't grasp the relation of those virtues to the incentives provided by low taxes.
And he feels our safety net is too porous; our government too reluctant to intervene in labor markets to improve the quality of life of groups he thinks should not have their fates determined by employer-employee bargaining; and that our health care system is too costly.
It is a game Brown likes to play -- comparing the UK with the U.S. to show the superiority of what we might call his "third way." But it is a game he can't win.
Start with prudence, a virtue the chancellor is fond of contrasting with American profligacy. Brown is projecting red ink equal to about 2.6% of GDP in fiscal year 2005-2006, almost exactly what the independent Congressional Budget Office (CBO) projects for the U.S. By the end of the decade Brown says his deficit will be down to 1.5% of GDP. By that time, the U.S. figure is projected to be the same. If tax-raising Gordon Brown is prudent, so is tax-cutting George W. Bush.
Unlike Bush, Brown has engineered a massive shift of resources from the private to the public sector. When he moved into the Treasury, the government was spending 37.1% of the nation's income. Brown projects that will rise to 40.5% of GDP by the end of the decade. This is about twice what the U.S. federal government takes. Throw in another ten percentage points for state and local taxes, and Brown is still appropriating about one-third more of what his nation produces than are U.S. governments.
So the chancellor has done what no other major government has done -- raise taxes, and then raise them again, shrinking Britain's competitive advantage. Meanwhile, the Bush administration lowers taxes, setting the stage for protracted, rapid growth.
The chancellor's policy might be defensible if it moved the UK ahead of the U.S. in important indicators. But it hasn't. What the Treasury itself calls "a significant gap" between U.S. and UK productivity is widening -- no surprise, since Brown has expanded the least efficient sector of the UK economy, its public sector. Essentially all of the net new jobs in the UK in the past year were accounted for by the public sector, whereas 2.2 million of the 2.4 million jobs created in the U.S. were in the private sector.
There's worse. Brown's "third way" model hasn't produced greater welfare, broadly defined. Consider health care, the principal beneficiary of the chancellor's largesse.
World Health Organization (WHO) data show that mortality rates from cancer and from circulatory diseases have indeed declined in the UK since 1997, by 19.9% in the case of circulatory diseases, and by 7.1% in the case of cancers. But in both cases the decline started long before Labour came to power, and was arguably more rapid in pre-Labour days. Moreover, despite the huge amounts of money being pumped into the NHS, Britain's rank among the 25 EU countries is unchanged since 1997.
Or compare Britain and the U.S. Survival rates for cancer sufferers are considerably higher in America than in Britain. In the U.S., only 5% of patients wait more than four months for non-emergency surgery; in the UK 36% of patients suffer through such protracted waits, according to data reported by James Bartholomew and presented in his The Welfare State We're In.
Brown is fond of pointing out that America spends a larger portion of its GDP on health care than does the UK. True. But it seems to be money well spent -- primarily because patient choice, opposed by the chancellor, drives the quality of care to higher levels than the monopoly NHS is under compulsion to provide.
That Brown has been a good manager of the UK economy, given the constraints created by his political objectives, is undeniable. But one can't help wondering how much healthier and wealthier Britain's citizens might be if only he had looked more favorably on the American model, flaws and all, for clues to optimal policies. Then, if Old Europe would do the same, America wouldn't have to play the role of the world's economic engine.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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