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Understand Europe's errors or repeat them

Published Oct. 9, 2005

Let's get one thing clear: Governments don't create jobs. Neither are they immune from the laws of economics. This is a lesson politicians refuse to learn. Their efforts to "manage" the economy may last long enough to get them re-elected but usually leaves everyone worse off.

An almost textbook example is provided by Germany. Yes, Germany, that paragon of industrial policy held so high by many in the Clinton administration. When the Berlin Wall came down, the German unions' first concern was how to protect the very high wages of their members. They demanded and received wage parity for East German workers in spite of their much lower productivity. In effect, the government priced East German labor out of the market.

Now there is massive unemployment in the East. The frustration lies in its predictability. Instead of letting the market work, politicians thought they had a better idea. So instead of businesses freely investing in the East to take advantage of a low wage but high skill labor force, they now have to be bribed. The government is spending large sums on subsidies to business and on social welfare for the unemployed. This has fueled inflation which, by German standards, is now dangerously high. So, of course, are interest rates. The resultant stagflation has caused record high unemployment not only in Germany but the rest of Europe as well. The consequence of this policy is not only an economic mess but a demoralized workforce that sometimes vents its anger on targets of convenience: refugees.

Why did Germany adopt such a failed policy? While the specifics are complex, German politics, like those of others in the European Community, are heavily influenced by a tacit alliance. Big business, big labor and big government _ bureaucracies all _ have shaped European industrial policy for much of the post-World War II period. They took credit for the prosperity generated by the economic integration of Europe. The cost of this alliance, the demand for protection and subsidies, the disconnection between wages and productivity _ have resulted in increased taxes and regulations. The burden has fallen most heavily on small- and medium-sized companies. The most flexible and adaptable sector of the economy has been crippled.

One trend in particular has dangerously eroded the flexibility of EC economies. Over the years, most Western European politicians satisfied their constituents' demands for job security, higher wages and benefits through employer mandates. Employers in some countries are regulated to such an extent that their workers have become, in effect, civil servants. Employers were free to hire but not to fire. To fire or lay off workers an employer must negotiate a formidable bureaucratic gantlet. On top of the administrative cost there is the cost of supporting the laid-off worker. But that is coming down, slowly. Sweden recently lowered its unemployment compensation from 90 percent to 80 percent of former pay.

Are there any lessons for us in all this? For one, let's not emulate a failed policy. Let's not let our politicians get away with buying votes and hiding the costs. Whether in Europe or the United States, there is an almost universal temptation among politicians to hide the cost of social programs through employer mandates. In Europe those costs now approach one half of the total labor cost. Is it any wonder employers are very reluctant to hire, that workers are scared to leave and feel trapped in their jobs? All this has caused a high chronic unemployment rate which this year, exacerbated by a recession, is expected to average 11 percent across the European Community.

We in the United States have started down the same path and are in danger of making the same mistakes but with even more disastrous consequences. We know we need health care, child care, education and training as well as help for those in poverty. Let's move beyond the goals and focus our scrutiny on the means. For example, providing earned income tax credits as opposed to welfare encourages work, helping the individual and society. Providing vouchers for services such as child care and education not only empowers the individual but provides more for less. Quality and access would be assured if the vouchers were worth enough to be used by almost everyone, and came with a premium for the poor large enough to entice providers to compete for their business.

These expenditures are indeed investments in people. However, much of the social benefit will be eroded if we let politicians hide the cost by taking investment away from somewhere else through increasing the debt or pretending it can be done by taxing the rich or passing the cost on to employers.

We know from experience that the rich will find ways to avoid most of the tax increase. Employers faced with more regulations and higher costs will simply hire fewer people. The only people to benefit are accountants and lawyers. No, to pay for these investments we must do what families have always done when saving for the future, consume less.

Whether it's "sin" taxes, gasoline taxes, a national sales tax or some other form of consumption tax, the only responsible way is to acknowledge the cost and pay for it upfront.

Christian van Schayk is an independent consultant specializing in the development and transfer of information-based technologies and their application to industrial productivity improvement. Guest columnists write their own views on subjects they choose, which are not necessarily the opinions of this newspaper.