The High Spend Vs. Low Spend Government Models

When a country actually tries to fix an underperforming economy by moving to a low spend model -- even if low only by comparison with ridiculous overspending by its competitors -- the results are uniformly impressive.  But there are relatively few examples of countries that actually succeed in implementing meaningful spending cuts, and even fewer examples of countries that are able to sustain lowered spending long enough to show the results.  Meanwhile, the effort inevitably runs into powerful headwinds from entrenched interests feeding at the public trough, from a hostile left-wing press, and from idiotic so-called "economists," like those who fill the halls of the IMF.

But then you have the countries of Europe caught in a near-hopeless overspending trap that has brought their economic growth to about zero in the aggregate.  The good news is that they are not all the same in how they deal with the problem, and over time differing policies lead to differing results that can't help but be noticed.  Simon Nixon has something of a roundup in today's Wall Street Journal, somewhat buried at page A11 of the print edition.

Basically Nixon divides the EU countries into three groups, based on their emphasis on private sector versus public sector to drive economic growth:

  The division is between a private-sector culture which believes that sustainable growth depends on exports and investment and therefore emphasizes policies to deliver open and competitive markets and flexible workforces; and a public-sector and trade-union culture which believes growth depends on putting more money in people's pockets and so favors Keynesian demand-side policies to boost government spending and encourage borrowing, and to protect jobs and raise wages.

And then he observes: "It is striking that those countries where the private-sector culture is dominant are currently delivering the strongest growth."  Really, does this surprise anyone other than the IMF and its groupthink supporters?

First up, those where the "private sector culture" is dominant, of which prime examples are Ireland, the U.K., and Germany.  Ireland is forecast to grow 1.7% this year and 3% next; U.K. is now forecasting 3.1% this year (after finally implementing some real spending cuts following several years of talking about it and not doing it).

Over on the side dominated by the public sector, we have France and Italy.  Nixon says that their growth rates this year are forecast at 1% and 0.6% respectively.   Both have public spending well in excess of 50% of GDP, with no meaningful efforts to bring that down.

Well, the good news for France and Italy is that it could be worse -- you could be Venezuela!  An even better WSJ article today on page A16 outlines what's going on there with the ongoing implementation of socialism.  It seems that Venezuela thinks it can make life fair for everybody by subsidizing the cost of basic necessities, such as food and many household items (dishwashing detergent, diapers, sponges and windshield wipers are mentioned in the article).  Thus, the way to make a living in Venezuela today is to buy the subsidized stuff, take it across the border to Colombia, and sell it on the free market for a multiple of what you bought it for.  Result: the subsidized items have all been bought up by the black market traders before you ever get to the market, and the markets are empty.  The WSJ reporter goes to a Colombia border town, and gets this great quote:

Everything you see on this street is Venezuelan," Alejandro Valbuena, a 32-year-old merchant, said on a recent day as a steady stream of loading trucks hauled in crates of dishwashing detergent and diapers behind him. "Looking around here, you can tell why socialism doesn't work."

Meanwhile, the U.S. states are more and more going one of two very different directions on spending.  Unfortunately, it will take a few years before truly unambiguous results are in; but I don't think there's any doubt how this will come out.