The simple answer to the question ‘Does the West know best?’ is no. As is the case with most answers, however, there is more to be said than merely rejecting the proposition out of hand. In fact, nobody knows best. The constant exchange of ideas, experiences and competing beliefs provides a foundation that enables us to learn from each other.
We now live in an age of globalisation, and with it an enlarged European Union. In this context there is a wealth of experience to draw from to ensure that the policies of the future improve on the outcomes of the past. Is institutional competition, which Dan Mitchell refers to, at work? Failing to recognise the faults of outdated systems seems a sure-fire way of hampering a nation in the 21st century.
What happens if the West does not reform – if we close our minds, if we close our borders and if we stick to the status quo? I think the point is made well in the famous slogan ‘Reform or Die’. We are faced with a clear choice where one of the options is to do nothing. Yet I believe that this would be to deliberately choose a path whereby Europe would become a kind of museum for the rich Indian tourists of the future.
With particular reference to the labour market, not reforming would lead to fewer people in work; more people dependent on government; fewer new and well-paid jobs; slower growth; and, overall, poorer living standards. Much of this can already be seen in Europe.
The average American in every American state is richer than the average European in almost any European state. So western Europe has already been led astray, and the time has come to provide it with new direction.
We all want companies to move here. We all want new, well-paid jobs. We all want more people working and less people dependent on governments. But it takes courage to take the steps necessary for these goals to be achieved.
What do we have to do? Why do we have to do it? What will happen if we reform?
First, we must avoid being counter-productive. Government decisions forcing us to work less, such as shortening the working week from 40 to 35 hours, naturally lead to less work being done, clearly something that would not aid stagnant economies.
Raising the highest levels of taxation in the world, which the Swedish kamikaze government is now proposing to do, would also clearly be a bad idea. It would lead to a sluggish business climate, and slower growth.
Creating new borders for labour mobility within the European Union and stopping tax competition would be a terribly protectionist idea, the worst idea for five hundred years. If Europe is to prosper, we have to avoid these ideas. What do we have to do to improve the situation?
I think the main challenges in Western Europe have names. They are: pensions, social security, welfare and taxes. Let me focus on necessary reforms in these fields and their consequences for the labour market in particular.
The first necessary reform would be to abolish the public pension age. When public pensions were introduced in Sweden the pension age was 67 and life expectancy was 55. Now we retire at 58 and live until we are 80. Under the current system, the working population of ageing Germany will decrease from 56 million to 41 million by 2050. In Italy it will decrease from 39 million to 22 million. The costs of this demographic shift are astronomical. In Spain today 50% of total public expenditure goes on pensions. In 2030 it will be 80%. This is obviously unsustainable.
Attempts at reform have been made. We have had reform in Sweden but the reforms fell short of anything substantial and have had little impact on the impending crisis.
Let me be clear. I do not want to force anyone to work, but the choice not to work must be paid for by oneself, not by government. Consequently, nobody should be forced to retire at a prescribed age either. We could replace the current pension age with a system that offers a basic public pension based on the principle that the earlier a person retires the lower it gets. We do not have to have any pension age at all. And, of course, you could also buy into a private scheme to supplement this income. A pension reform such as this would lead to more work being done, fewer public pensions expenses and lower taxes.
Another necessary reform for Western Europe is reduced benefits from public social insurance schemes. European countries have similar systems of mandatory public social protection for sick leave, unemployment and early retirement. In Sweden there are in practice no limits to how long you can live off these systems. The basic public level of contribution is 80% of your salary, but most people have even higher contributions than that owing to mandatory negotiated benefits on the part of the employer.
A person in Sweden with an average income earns 5 to 10 euros extra a day by going to work instead of living off the public benefit system. This, of course, means that many people choose not to work. Indeed, only 3 million out of 9 million people actually go to work. Over 60% of the adult population is dependent on the government to some extent.
This is a huge, highly destructive problem. If you want to encourage people to enter the labour market, you cannot punish workers while rewarding the unemployed. There should be a limit on how long you can live off the state. There should be a substantial reduction in the levels of contributions so that there is actually an incentive to go to work – much more than 5 to 10 euros a day. Perhaps benefits should be cut in half. Incentives to work would then be of a totally different nature. Public expenses would be substantially lower. The labour supply would increase. In turn, less government intervention would open up a new market for private insurance.
Introducing free enterprise into welfare services is yet another sorely needed reform. In Western Europe, the government finances most welfare services such as schools, hospitals and universities. In many countries these services are almost entirely provided by government. This is a form of planned economy: the same people that finance the system run the system – in other words, it is a total monopoly. Thus the result is lines of people waiting for treatment, inefficiency and a waste of resources. In the context of the labour market the result is people working in the public monopolies on low salaries, with little influence in the workplace, and without the prospect of working in the non-existent private sector.
Today’s public services attempt to be all things to all people but end up falling short. The resources would be better used if a clear line were drawn between what government should and should not provide.
The basic services paid for by the government should always be procured in a market environment. This would lead to better-functioning services and a vast market for private welfare companies. A new service sector could emerge and competition would lead to higher standards for the consumer. The staff would receive better salaries since they would get to choose between various employers, and they could also start up their own welfare service business.
Introducing lower taxes is one of the most essential reforms needed in Western Europe, where taxes are the highest in the world. Naturally this makes our climate for creative business and work less attractive, not least from a global perspective. In Sweden the average wage per hour for a worker in industry is 20 euros. In China it is 1 euro. This is not matched by a difference in productivity, and taxes are of course one explanation for the difference. One in three of Sweden’s major companies have outsourced production in recent years. China, India, Brazil and others present a serious challenge to the West.
Several taxes have already been lowered. Capital taxes have been lowered, because otherwise capital flees to other countries. Corporate taxes, for example in Austria, have been lowered, because otherwise corporations flee. This will have to continue. The total tax take, however, remains stubbornly high and harmful.
The reforms of pensions, social security, insurance and welfare systems that I have described would make radical tax reductions possible. Particularly harmful taxes to business could be abolished totally and tax pressure lowered, inspired by the reforms in eastern and central Europe. This would make work more attractive, improve the business climate and increase economic growth.
These are four reforms necessary in Western Europe. Government is not the solution to our problems. Government is the problem. Government is the main obstacle standing in the way of more jobs, more companies, higher growth and consequently better living standards. Our goal must be the reduction of big government; the reduction of the European social model towards a state with small government, low taxes and private welfare. These are the conditions that could release the creative force of humanity.
In creating big government on the European social model, the West did not know best. Some, such as Hayek, said so from the start. They were right. An open world with numerous success stories shows us the best foundation for a prosperous society.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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