Europe Has an Economics Lesson for Obama

Published July 19, 2008

Wall Street Journal

Democratic activists and European intellectuals are ecstatic about Barack Obama’s trip to Europe. Europeans see a man they hope will win the presidency (a recent poll found 72% of Germans backing Sen. Obama). U.S. Democratic activists see their nominee gaining the experience of a continent whose policies–more pacifist, statist and secular than America’s–they would prefer to emulate. Both sets of people hope Mr. Obama will be influenced by what he sees and emerge a man whose message of change will be informed by stereotypical European aspirations and experiences.

But the Europe Mr. Obama will visit is quite different from the one Americans often hear about. Over the last decade, much of Europe has very quietly embraced market-based reforms that either draw inspiration from American successes or–on issues like retirement security–are even more market-oriented than many U.S. Republicans support.

What’s more, these changes have been adopted and implemented by parties left and right. This Europe is a shining example of exactly the sort of postpartisan government action that the Obama campaign says it is about.

The cutting of corporate income-tax rates is an excellent example of European market-friendly bipartisanship. Germany’s right-left coalition of Christian and Social Democrats implemented a large rate cut earlier this year, reducing the top marginal corporate rate to about 30% from 39%. Spain’s Socialist and Britain’s Labor governments have followed suit, reducing their countries’ top corporate rates.

These traditionally left-of-center parties understand that in a globalized economy, wealth and investment are mobile, flowing to those countries that provide hospitable investment climates. As part of a European Union where center-right governments in Greece, Denmark, Ireland and Eastern Europe have dramatically reduced corporate tax rates, they understand that they cannot help workers if they drive away the capital that employs and pays them.

Many European countries are also ahead of America when it comes to pension reform. Mr. Obama’s main solution to the looming Social Security bankruptcy is to raise taxes on the well-off. To date, he has eschewed other solutions such as raising the retirement age or creating private Social Security accounts. But European center-left parties have no such reservations.

Take Sweden, for example. In the 1990s, a series of center-right and Social Democratic governments reached agreement on wide ranging pension reforms that include a private account option not too different than the one proposed by President George W. Bush.

Under the Swedish plan, workers can put aside up to 2.5% of their salary into one or more of nearly 800 competing private-sector accounts. Swedish workers own these accounts and direct their investment options, earning the rewards if their investment choices increase faster than do average wages. Both political coalitions now support the basic contour of this approach, and retirement policy was not a contentious issue in Sweden’s 2006 elections.

Sweden is not the only European example of market-friendly, bipartisan entitlement reform. In the 1990s, Holland had one of the most generous disability insurance systems in the world. At its height, about one in 10 Dutch working-age adults were drawing government disability checks rather than working. Recognizing this was unsustainable, Christian Democrats, Liberals and Social Democrats came together to cut benefits and tighten eligibility criteria.

The intent was to cut the disability rolls and push people back into the workforce, much like America’s 1996 welfare-reform law. The effect has been dramatic: Disability rolls have dropped by almost 20% since 2002.

This new European consensus is founded, like all political calculations, partly on conviction and partly on necessity. European center-left politicians have slowly come to respect the power of markets. Much like the so-called “Rubin Democrats,” they recognize that the energy and innovation of market actors can better produce wealth than more traditional social democratic economic theory.

They have also come to the recognition that the task of center-left governments is to minimize the negative externalities of market action while using government to more equitably distribute the resulting economic gains. These progressives believe in reforming and guiding, not restricting or reviling, the private sector.

European center-left approval of market reforms is also rooted in economic and political necessity. Even social democratic countries benefit from a global economy and hence must compete in it. Experience has proven that center-left parties obtain and keep power if they emphasize the center rather than the left. They have found that their electorates want redistribution of a growing economic pie.

Again, Sweden is an excellent example of this. Since 1932, Social Democrats have governed the country mostly without significant coalition partners, with the exception of the years when Sweden’s economy stalled and they had to cede power–1976-82, 1991-94 and again in 2006 when the current center-right government took over. Even in egalitarian Sweden, voters will turn to the right if jobs are scarce and incomes stagnant.

Mr. Obama’s postpartisan, “let us all come together” message is perhaps the most important reason for his meteoric rise. Many conservatives and Republicans fear this rhetoric is divorced from reality and that an Obama presidency with a Democratic Congress would soon drop the mantle of unity and press for a purely liberal agenda.

By adopting the modern European model, a President Obama would go a long away toward alleviating those fears and fulfilling his promise.

Henry Olsen is a senior fellow at the Ethics and Public Policy Center.

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