Elections and the Fate of Economic Liberty

By Sam Batkins

This fall, voters in many countries — including this one — will go to the polls and elect their leaders. In making their choices, voters will consider an assortment of issues, including their candidates’ economic proposals.

Here, left-leaning candidates have become skilled at camouflaging their statist economic agendas. While they talk about economic freedom and both national and individual prosperity, they harbor plans for tax hikes and intrusive government regulation.

Voters in other parts of the world, especially in Europe, have seen the effects of high taxes and big government. But it now seems that Europeans may finally be getting the message that when the government taxes and spends for everything from huge social programs to over-regulation to massive bureaucracy, that money rarely spurs economic growth.

Fortunately for those of us in the United States, we can learn from Europe’s experience, and, in making our choices this fall, we can identify and reject candidates whose left-leaning philosophy will inevitably lead them to endorse higher taxes and intrusive government.

What lesson should we learn? Economic liberty, it turns out, is the most important ingredient in creating wealth both for individuals and entire nations — and the data is compelling.

The Swedish think tank Timbro recently published a study comparing the per capita gross domestic product (GDP) of the United States with the nations of the European Union (EU). GDP per capita is simply the total amount of goods and services produced in a country divided by the number of people in that country. The study shows that the amount of wealth most European countries possess is barely on par with some of the poorest of our 50 states. In fact, France, Italy and Germany have a lower per capita GDP than all but five of our states. Overall, U.S. per capita GDP is 33 percent higher than that of the EU. Only the tiny country of Luxembourg approaches the per capita levels of the United States.

The study also found a high correlation between low tax burdens and dynamic economic growth. The U.S. government for example, consumed 15.5 percent of American GDP through taxation in 2002. French taxes, however, amounted to 23.8 percent of GDP in 2002. If France were a U.S. state, it would rank as the fifth poorest, just ahead of Arkansas.

Moreover, given Europe’s lackluster economic growth and unfriendly tax policies, EU nations stand virtually no chance of catching up to the United States. According to the study, even if U.S. economic growth stagnated, it would take some of Europe’s economies, with their higher marginal tax rates and intrusive regulations, a generation to reach American GDP levels.

Fredrik Erixon, chief economist at Timbro, said the European economic mindset has been a "long vacation from reality. On the one hand, they accept or in some cases even prefer, a substantially lower growth than in the U.S. On the other hand, they still want us to enjoy the same luxuries and be able to afford the same welfare as Americans can. Needless to say, that is not possible."

The Swedish study also addressed the dichotomy between the standard of living in the United States and the European Union. "Most Americans have a standard of living which the majority of Europeans will never come anywhere near … [In some regions] the average American can get exactly twice as much of everything as the average European. Which goes to show the importance of an economic policy to stimulate growth," the study concludes. In fact, the average American has close to $10,000 more to spend per year on discretionary items than the average European.

The study also noted that when Americans use their hard-earned dollars, they put their money to better economic use — positively affecting retail sales — a driving force behind most industrialized economies. Overall, the study said, Americans have "far more domestic appliances, televisions sets, computers, telephones and cars than people in most European countries." This spending, while enhancing our standard of living, also promotes economic growth.

Liberal candidates who quietly support higher taxes and more regulation could learn a lesson from Europe’s recent economic history. Emulating the fiscal policies of tax-and-spend European nations with their over-generous social programs and intrusive regulatory regimes would reduce investment and retard economic growth here, just as it has across the Atlantic Ocean.

Several contrasting European countries make the point even more clearly. Though geographically grounded in Europe, Ireland has pursued markedly different economic policy from the rest of Europe and ranks fifth on Heritage Foundation’s ranking of economically free countries. Its tax rates are low, and its government has resisted the temptation to regulate everything it sees. Its recent reduction of corporate income taxes from 16 percent to 12.5 percent — well under the EU average of 30 percent — has greatly enhanced investment and economic growth. As a result, over the last decade, Ireland’s economy grew 80 percent, and nearly doubled in size.

Luxembourg, the European nation with the highest per capita GDP, also maintains a policy of economic freedom that fuels growth. Luxembourg, like the United States, cut income taxes in 2002 and maintains few restrictions on foreign investment. And, just like Ireland, Luxembourg’s economy has grown tremendously over the past decade.

Even Germany is finally starting to reverse course and cut some of the expansive social welfare policies that have undercut that nation’s economic vitality. Facing a revolt from voters fed up with his socialist agenda, Chancellor Gerhard Schröder and his government coalition are moving to reduce the country’s over-generous unemployment benefits. Facing double-digit unemployment (twice that of the so-derided American "jobless" recovery) and anemic economic growth, Schröder also pledged to cut taxes. Perhaps this is an indication that even those European leaders most committed to big government and cradle-to-grave entitlements have recognized that nations cannot tax and spend their way to economic bliss. Or, perhaps it shows that European voters are finally ready to significantly limit government’s reach and insist on spending their own money.

The lesson for Americans is equally clear. As President John F. Kennedy noted, "a rising tide lifts all boats." History has proven that broad economic growth improves the lives of all Americans, not just the haves over the have-nots. And, in order to maintain economic growth, we must continue to ensure that our taxes are low and government stays out of our way so that we may all share in America’s considerable wealth.

Sam Batkins is a Research Associate at the Center for Individual Freedom. He is a summa cum laude graduate of the University of the South.

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