Broback's Blog

The Economist has provided us with a persuasive, well-documented, logical, data-driven(!) essay that aligns with the accepted models of modern economic theory. Their conclusion is unmistakable. To speed recovery, Europe needs to think more like Ronald Reagan, and less like Barack Obama.

The Economist (and OECD economists, McKinsey, University of Groningen, and the Bank of France) contradict the convenient untruth that in advanced economies not enough regulation is a primary cause of economic pain. I am hopeful that this may help some realize that regulation is a true cost that shifts supply curves leftward. (Next I’ll be working to teach the politically active economic “deniers” that supply curves are not vertical lines…)

The piece Smart Work is a component of a set of articles in the Oct 7, 2010 issue focusing on productivity and growth. Below are excerpts (emphasis mine) that provide the logical progression through to the conclusion that the lack of a Regan-esque philosophy toward regulation is stifling European recovery.

1) Productivity is key to recovery:

“Productivity growth is the closest economics gets to a magic elixir, especially for ageing advanced economies.” “As the rich world emerges from the financial crisis, faster productivity growth could counteract the drag from adverse demography. But slower productivity growth could make matters worse.”

2) Government meddling to try and force productivity is not helpful:

“…the politicians’ current focus on fostering productivity growth via exciting high-tech breakthroughs misses a big part of what really drives innovation: the diffusion of better business processes and management methods. This sort of innovation is generally the result of competitive pressure. The best thing that governments can do to foster new ideas is to get out of the way.”

3) The United States has done far better in this arena than Europe:

“Over the past 15 years America’s underlying productivity growth…has outperformed most other rich economies’ by a wide margin…the improvements were extraordinary…”

“The recent history of productivity in Europe is almost the mirror image of America’s. …the main reason for Europe’s disappointing productivity performance was that it failed to squeeze productivity gains from its service sector.”

4) Europe’s problem is regulation and micro-managing of market forces to social ends:

“As the McKinsey report notes, many European countries are rife with anti-competitive rules. Such restrictions limit the ability of efficient newcomers to compete for market share, cosseting incumbents and raising costs across the economy.”

I know what the Utopian Thinkers are saying at this point. Steve, you must be forgetting the the Workers Paradise that is Sweden! It’s a dream world with a nanny government, yet their economy is not that bad at all.

The Economist specifically addresses Sweden. The reason it’s “not that bad” is because they, they, (wait for it…) deregulated.

Sweden is the bright spot, thanks to a Reagan-esqe deregulation campaign:

“Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.”

What some may find the most amazing is how de-regulating the banking (yes, banking!) industry contributed to Sweden’s performance:

“The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels”

PROBLEM: Uh Oh — “The Logic is Simple”??

“The logic is simple: more efficient lawyers, distributors or banks enable firms across the economy to become more productive.”

Sadly my whole argument falls apart here. We all know that “common sense” and “simple” are anathema to those who view these issues as complex and “nuanced.” Brings to mind the old bromide that “Economics is common sense made difficult.”

One Conclusion: Supply curves (as predicted by economic literates) are affected by regulation:

“All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector. A recent study by the Bank of France and the OECD looked at 20 sectors in 15 OECD countries between 1984 and 2007. It found that reducing regulation on “upstream” services would have a marked effect not just on productivity in those sectors but also on other parts of the economy. “

“A smart innovation agenda, in short, would be quite different from the one that most rich governments seem to favour. It would be more about freeing markets and less about picking winners; more about creating the right conditions for bright ideas to emerge and less about promises of things like green jobs. But pursuing that kind of policy requires courage and vision–and most of the rich economies are not displaying enough of either.”

And because I can’t resist:

“Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance.”

I’ll close with a quote from the Gipper himself. May it serve to inspire our European friends:

“Together, we have cut the growth of new Federal regulations nearly in half. In 1981, there were 23,000 fewer pages in the Federal Register, which lists new regulations, than there were in 1980. By deregulating oil, we’ve come closer to achieving energy independence and help bring down the costs of gasoline and heating fuel.”

– Ronald Reagan, First State Of The Union Address January 26, 1982

Where’s my data? I don’t have any. I’m not a researcher. I refer to other people’s data. Here it is.