At a day-long conference at the CATO Institute, prominent experts on economic policy discussed the choices available to policymakers for dealing with the ongoing financial crises experienced in both economies that are affecting the prospects for growth for both, looking at the evidence on the effect of the more aggressive intervention in the U.S. compared to the EU and at the prospects for reform.
Big Bird got little sympathy from this audience.
This being CATO, speakers referred to principles espoused by legendary libertarians. For example, on the first panel, Fredrik Erixon, of the European Centre for International Political Economy said he has been reading Milton Friedman lately and has found that the EU may be repeating the experience of the U.S. in the Great Depression in that the money supply is stagnating, and he added that this is occurring despite the best efforts of the authorities to pump it up.
On the second panel, Prof. Pascal Salin, of the Universite Paris-Dauphane recalled that Bastiat had suggested it is wise to cut taxes to encourage savings even when the budget is in deficit. Salin also found wisdom in the Austrian school these that there is a business cycle that needs to be allowed to run its course in order to prepare the way for future growth.
In a keynote speech, Juhan Parts, former head of the coalition government of Estonia explained how Estonia was able to pursue conservative policies and achieve economic growth. He pointedly said that Estonia is European in its point of view, but not for the purpose of seeking support from the other EU countries. He attributed the success in large part to support from the country’s elite, including its star musicians. A listener would quickly realize that the cultural conditions to support a truly austere regime do not exist in the U.S.
The next speaker, Peeter Koppel, a wealth manager from Estonia, recounted a housing boom Estonia experienced in 2007 and how the private sector responded by cutting salaries by 20 percent in order to restore the country’s competitiveness. (One wonders why Koppel did not call his friends in the U.S., who seem somehow to have missed the looming bust, or at least all of the policymakers did.)
CATO’s Chris Edwards reviewed the history of Canada’s development as a country that was able to cut spending and corporate taxes, and many Americans would be surprised to learn that most of Canada’s spending is predominantly at the state and local level, whereas in the US it is at the federal level. Moreover, whereas the U.S. has 1,000 programs for sharing federal revenue with state and local governments, with all the attendant bureaucracy, Canada has just three.
The final panel was the highlight, beginning with a presentation by CATO’s Michael Tanner, who looked at whether the U.S. is following a path toward default, showing a chart of US deficits that shows a 45 percent incline from 2001 forward. He estimated the total US debt at 911 percent of GDP, including all of the unfunded liabilities, which is a higher debt than even that of Greece. To begin to pay this off, the top personal and corporate brackets would have to be raised to 88 percent, which undoubtedly would damage the ability of the economy to grow.
Former IMF economist Desmond Lachman traced the EU crisis to the fundamentally flawed decision to adopt a single currency without following the fiscal rules that had been agreed upon. This damaged Europe’s competitiveness, and the crisis was complicated by housing busts in Spain and Ireland and further by the enactment of pro-cyclical austerity programs.
He finds the U.S. in worse shape, twice as bad as Europe in terms of debt to GDP.
Bank of America economist Mickey Levy asserted that U.S. banks are ahead of EU banks in making needed adjustments, that the EU is ahead of the U.S. in fiscal adjustments, and he finds hope that policymakers will accommodate adjustments, but at the cost of lower standards of living. Levy questioned what marks EU banks are using for sovereign and private debt. He found that 25 percent of Germany’s GDP is accounted for by capital flight from other EU countries. The ECB is trying to buy time by filing the gaps caused by this flight. He called for EU banks to raise more capital and dilute the ownership interests. The prescription for the U.S. is pro-growth policies, but Levy ended his presentation without explaining how these are to be achieved.
Robert Feinberg served on the staff of the House Banking Committee for 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms, and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog, and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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