A good example of a dangerous prescription from a wrong diagnosis

Prof Philip Booth writes for Europe's World

Prof Philip Booth writes for Europe's World magazine, commenting on an article by former Danish Prime Minister Poul Nyrup Rasmussen, in which Rasmussen blames the recent economic crash on an adherance to neo-liberal rules and calls for a new type of social democracy to be followed.

In economics, false policy prescriptions arise from false premises. This is one of many problems with the article by Poul Nyrup Rasmussen. He argues that adherence to neo-liberal rules led to the financial carnage. It is difficult to believe that anyone familiar with international banking regulation, European Union regulation or the millions of paragraphs of national regulation can seriously believe that it was neo-liberalism that led to the financial crash. Yes, there was bad regulation – the socialist regulatory approach certainly did fail – but it is not true that there was no regulation.

Closer to the truth is that US corporatism created a tinder box in the banking system. Throughout the US financial system, risk is underwritten by the taxpayer. This arises from weak personal bankruptcy law; the state mortgage securitisation houses Fannie Mae and Freddie Mac; Federal and State requirements to provide loans to poor risks; and the continual bailing out – over several decades - of financial institutions. It is true that financial institutions made huge mistakes. But it is no wonder they made huge mistakes given the incentives they faced. Regulation and the tax system further distorted the decisions of banks, discouraging good risk management and encouraging gearing.

To be fair to Poul Nyrup Rasmussen, this is not caused by socialism. But it is not neo-liberalism either. The “welfare state for bankers” has had predictable effects and has its roots in US corporatism and misguided social policy.

Rasmussen also ignores the serious problems that have been caused by the growth of the state in recent years. He argues that cuts will put the EU economy to sleep. There is simply no evidence for that. Fiscal expansions over long periods have failed to produce economic growth in Japan. Fiscal retrenchments, as the EU’s own evidence shows, have quickly led to renewed economic growth. In many EU countries, the growth of state spending has been relentless and structural – it has had nothing to do with the financial crisis. In Britain the government now spends 54% of national income and 25% of national income is spent on welfare transfers. When is this policy going to succeed in dealing with dire problems such as poverty, family breakdown and hopelessness? Will it be when our politicians are spending 56%, 60%, 65% or the people’s incomes? The idea that a relentless centralisation and socialisation – taking power out of the hands of the people – will actually improve the condition of the people has been proven wrong time and time again.

Poul Nyrup Rasmussen suggests that we should move taxes from labour to financial institutions and the environment so as to lower the burden on workers. Socialists seem so obsessed with institutions that they totally ignore the fact that the burden of all taxes fall on persons. There may be justifications for taxes on financial transactions or on carbon emissions – though I do not support them. However, we have to recognise that such taxes are taxes on people. Carbon taxes tax those who emit carbon (and the poor often emit proportionately more than the rich) and financial institution taxes are taxes on the workers and others who use financial institutions as well as on those who own them (generally pensioners, savers and insurance policy beneficiaries).

Ultimately job creation can only come as a result of businesses producing go