A Lack of Private Experimentation, Not Austerity, Is What Holds Europe Back

Though it's highly debatable that European economic weakness is what's "rattling" global stock markets, to the New York Times this bit of conventional wisdom makes perfect sense. Forget the IMF's hopeless track record when it comes to predicting much of anything, to the Times the IMF's assertion about weakness has been accepted without protest.

Not surprisingly, the Times is similarly accepting of the view that says a lack of government spending is the source of European hardship. In a front page story last Friday Times reporters Jim Yardley and Jack Ewing wrote that "the largest European countries are now rebelling against the German gospel of belt-tightening and demanding more radical steps to reverse their slumping fortunes." What might interest readers is the ‘who' behind the ‘rebelling.'

Was it or is it the average European citizen or worker blanching at alleged "austerity" from Europe's political class? Not at all. Instead, and speaking to the broad Times view that economic growth is the creation of wise politicians and central bankers, Yardley and Ewing proceeded to report on the dislike European leaders have with reduced government spending.

They quoted Italian prime minister Matteo Renzi's as saying that "We need to show that Europe is capable of investing in growth, and not only in rigor and austerity." They referenced European Central Bank president Mario Draghi's belief that Germany must "temper its insistence on budgetary discipline and to spend more on public works to stimulate the eurozone economy." And then presumably eager to create the perception of balance in their accounting of the European situation, they quoted Nicola Leibinger-Kammiller, CEO of Trumpf, a Germany company, as saying that "The private sector in Germany has the feeling the government is not doing the right things." What the "right things" are in the eyes of Leibinger-Kammiller is up for question, but then the largest European companies are known to have close relations with politicians.

Not considered by Yardley and Ewing is the simple truth that economies aren't living, breathing blobs, rather they're a collection of individuals. With the latter in mind, it's worth asking how their article would have read had they asked the average private sector French or Italian citizen if their personal economies are improved when politicians penalize their work with taxes on income, not to mention whether or not they enjoy increased living standards when their leaders spend with abandon resources extracted from them.

In the U.S. government spending has soared since the early 2000s, but the dirty little secret about all this alleged stimulus is that Washington, D.C. is presently booming, and has been for quite some time. Despite broad economic difficulties around the U.S. since at least 2007, one would be hard pressed to notice the troubles if one's perspective was limited to D.C. and its environs.

Back to Europe, is it any wonder that European politicians want more political spending in the name of economic growth? These people are human like the rest of us, and because they are it's only natural that they'd rebel against spending cuts that would harm their own personal economies. But what about the average European citizen, and what if Yardley and Ewing had done a better job as reporters and asked the average European if his personal economy would be enhanced by lower taxes on income? If so, the Times reporters might have filed a different story totally free of ‘European rebelling.'

Taking this further, what if Yardley and Ewing had proceeded to ask various private sector Europeans a basic question: are European politicians better investors than are the heads of SAP, LVMH, Porsche and Ferrari? Only the most deluded of Europeans would say with a straight face that politicians can achieve growth better than the business heads whose doings are judged by the broad markets on a daily basis.

Yardley and Ewing naturally accept the conventional view that "austerity," whereby politicians have less to spend is the cause of European weakness. Of course what they miss, and in their defense most economists miss it too, is the simple truth that governments tautologically have no resources. The latter isn't some kind of ideological assertion, or some evidence-free libertarian slogan, it's just fact.

And with the above fact in mind, we have to ask what drives prosperity. It's not just success, and if it were, Silicon Valley would be very impoverished. What drives prosperity is constant, market-disciplined experimentation with new ideas. It's 2,000 carmakers sprouting up in the early part of the 20th century in the U.S. Just about every one of them failed, but rather than implode based on all the bankruptcies, the economy soared. Fast forward to the end of the 20th century, most internet companies similarly went belly up, but no sane individual would suggest that the U.S. economy was set back by all the bad ideas that eventually vanished.

When businesses are forming the economy experiences a surge of information about what works and what doesn't such that we all benefit. Success doesn't power prosperity, but information does. Our experimentation teaches us how to improve what we do, in much the same way that Henry Ford's tinkering with an assembly-line concept eventually revolutionized the manufacture of nearly everything. Ford notoriously re-invested his limited profits back into his eponymous company such that he was able to perfect his manufacturing vision, but what if the rates of individual and corporate taxation, along with government spending in general that prevail today were the norm back in 1903?

Assuming European leaders could actually invest in profitable ideas, or even if they solely invested in that which is known to be viable, the economy over there would still suffer their largesse with the money of others. With government spending the ‘unseen' has to always be considered, first and foremost. In particular, we must ask what experimentation is not taking place that would provide entrepreneurs and investors with essential information about what hasn't been tried yet, but that would have the potential to fully transform the economy. What Ford-like advances are not taking place precisely because politicians are so spendthrift with the money of others?

In short, the only European "austerity" is that which empowers politicians to allocate the always limited resources created in the private economy. The latter is a barrier to the very experimentation that is necessary for an economy to evolve in prosperous fashion.