Having failed to form a government across three ballots, the Greeks will vote in a snap election later this month. The far-left party who promises to renegotiate the last bailout deal – the last time the Greeks were in the news – is leading at the polls.
And now Germany is saying they are prepared to stand by as Greece leaves the Euro. There is no telling where this will end, but it is certain to end badly. The Europeans are groping hopelessly for a way out. Some think outright U.S.-style ‘Quantitative Easing’ is the answer. Its failure here should disabuse Europe of the folly.
The answer is actually right in front of them. It’s called work.
Upon visiting Strasbourg recently, Pope Francis spoke of his hope for Europe:
“How, then, can hope in the future be restored, so that, beginning with the younger generation, there can be a rediscovery of that confidence needed to pursue the great ideal of a united and peaceful Europe, a Europe which is creative and resourceful, respectful of rights and conscious of its duties?”
Francis’ description of a future where its people are confident, “creative and resourceful” is a place to pivot on the cultural differences between Europe and America. Europe’s fiscal challenges are posed principally by its cultural orientation toward political society (the State, its organs of government and their constituent bureaucracies) to secure those conditions.
Finding Security in Work
It has been widely observed that Europeans work significantly fewer hours than Americans. The easy explanation for this has been that Americans value “stuff” (the “accumulation” of “wealth”) where Europeans value time and leisure (la dolce vita – or “the sweet life” in Italian). But this supposed difference in priorities is skewed by the degree to which European society depends on government benefits to make “the sweet life” possible.
Each of those benefits – and “the sweet life” as an aggregation of benefits – represents something which otherwise would have required transacting in the economy – working – to obtain. And among those benefits, political society’s priorities are determined by the short-term ambitions of those in office. When benefits are principally obtained by transacting in the real economy, individuals calibrate their priorities very differently than bureaucracies.
In an article published by the Minneapolis Federal Reserve, data from Organization for Economic Cooperation and Development (OECD) countries showed that GDP discrepancies between Europe and America are best explained by the disparity in hours worked. That, in turn, is best explained by Europe’s relatively larger “wedge” between labor and its wages – also known as taxes.
It is important at this point to understand that a “tax” is a price attached to a transaction. It might be a percentage of the price (a “sales tax” on goods or services or an “income” tax on salary) or it might be a fixed price by volume (an “excise” tax on a gallon or liter of gasoline).
For example, it is a common myth that gasoline is more expensive in Europe than in America. It is not. When government subsidies, relative labor costs and taxes are accounted for, the price of the gasoline itself appears relatively stable between the U.S. and Europe. The taxes are not part of the price of the gasoline; they are the price of the transaction.
This, then, gives way to an immutable law of economics Europe’s political elite seem to understand quite well on other issues. If you want more of something, you make it less expensive. If you want less of something (e.g. carbon emissions) you make it more expensive. Since a tax is a price attached to a transaction, making those transactions more expensive will only guarantee you get fewer transactions in the economy. The larger income tax rates in Europe simply make work (transacting one’s time and skills) more expensive than la dolce vita. Europe’s cultural preferences have followed this math quite logically.
Work and Wealth
At the heart of the difference between American and European attitudes toward work is how it relates to wealth. Europeans tend to think Americans are caught up in the accumulation of wealth because they equate wealth to consumer goods. Americans, on the other hand, speak often of the creation of wealth. The American preference for work cannot be understood apart from the underlying idea of creating wealth, as opposed to merely accumulating it.
A place to live is an example. Next time you drive up to either your house or apartment/flat, imagine the place before anything was built. Nearby hillsides will probably give you an idea of what it looked like. Then a builder brought in “utilities” like water, sewer, electricity, and in some places natural gas. These things are rightly called “utilities” – they make the land useful for stable shelter.
Then the developer builds homes or apartments/flats. Once the development is complete, the value of the land with these improvements – utilities and a place to live – has increased because it has been made more useful. The difference between that new, higher value and the prior value of the land “unimproved” is exactly what new wealth is.
So, using the single-family house as an example, the buyer makes arrangements with a bank for a mortgage. While this is certainly a form of debt, the homeowner has a liability on the right side of the sheet and an asset on the left side to balance her finances.
Then, conventionally, over 30 years she will pay principal and interest. The principal part of each payment is her gradual acquisition of this new wealth. Note that this is neither transfer nor accumulation of wealth. This is acquisition of new wealth. Then having secured one of the most fundamental of human needs – stable shelter – the homeowner is freed from a significant demand on her time. She can “retire” to a life of service to others. That life might be as simple as looking after her grandchildren while her children work to acquire new wealth of their own. It can also be a life of working with others in civil society to ensure the dignity of the poor is not overlooked.
Work as a Third Choice
Thus the present European debate between “stimulus” and “austerity” is stale. It offers a false choice, neither of which present a path to the Pope’s vision of a “creative and resourceful” Europe. This future is unattainable among a people who, when faced with civic problems wait for political society to come solve them.
Creativity and resourcefulness in political society expresses itself mainly in devising new ways to spend public money to maintain a future claim on that same public money – that claim being their budget. And when the public’s money runs out supporting 30 year old students and 50 year old retirees, that creativity then turns to finding new ways to tax the few between 30 and 50 who remain in the workforce. The creativity and resourcefulness of civil society – the European people – is then naturally funneled into tax avoidance (rather than wealth creation), furthering the need for more public debt and ever more confiscatory taxation.
And so we see a death spiral: La dolce vita only appears less expensive than work. The sweet life of government benefits has perverted the creativity of political society towards more debt and taxation, and has perverted the creativity of civil society towards leisure and tax avoidance. It has perverted the understanding of wealth, making it synonymous with money and “stuff.” There is no one left to innovate and improve – to actually create wealth. It is especially discouraging to see no less than the Pope himself succumb to these misunderstandings.
Stimulus – which is to double down on government spending to perpetrate the myth that la dolce vita is sustainable – is certainly not the answer. But neither is austerity. A third option commends itself:
Innovate. Improve things. Apply resourcefulness toward the creation of new wealth. This cannot be legislated by political society. It must come from the European people themselves. They must first insist not only on forming organic institutions of civil society, but on civil society owning most of the civic problems for which they have traditionally relied on political society to address.
When something is broken, fixing it is not someone else’s job.
When the people of Europe discover that their own initiative in civil society is far superior to the benefits of political society in improving their own lives and the lives of their neighbors, their creativity and resourcefulness will naturally turn to innovation and improvement of other things in the economy. The new wealth they will create will gradually erode the need for confiscatory taxation and along with it the need for ever-expanding government. But those who depend on social services will not be left to fend for themselves – they will find in the creativity and resourcefulness of civil society the dignity of being lifted up by a neighbor who knows their name.
Alexis de Tocqueville wrote of his observations of 19th Century America:
Everyone works, and the vein is still so rich that all who work it succeed rapidly in gaining the wherewithal to achieve contentment… Restlessness, which harrows our European societies, seems to abet the prosperity of this one. Wealth is the common lure, and a thousand roads lead to it.
But this “common lure” was not just the natural resources of the New World. It was the creativity and resourcefulness required for exploring it. And that creativity and resourcefulness was always turned – and is still turned in America today – toward innovating and improving things. A new orientation away from la dolce vita and towards work to create new wealth offers Europe the future envisioned by the Pope.
At the heart of all of this is the heart of the European person. In America Thomas Jefferson spoke to the heart of the American individual when he cautioned us: “The government big enough to give you everything you need will be powerful enough to take everything you have.” When Europe’s people purpose themselves to work toward the creation of new wealth, and to share that new wealth in civil society, they will see the dawning of a prosperous future. And that dawn will reveal to them that their creativity and resourcefulness will always be superior to any government bureaucracy in securing a prosperous future for their children.