Austerity, And The Failure Of The Governing Elite No organization can possibly survive if it needs geniuses or supermen to manage it. It must be organized in such a way as to be able to get along under a leadership composed of average human beings. Peter Drucker European austerity has failed — fiscally, economically and politically. Even more, austerity is a failure of the governing elite who continue to flail about, believing in their self-anointed right to “manage the economy” and plunder the private sector to keep their power and their government-centric world alive. The implications for the U.S. are clear: the so-called “balanced-approach” to reducing the federal budget deficit with a combination of tax increases and spending cuts advocated by the Obama Administration, its supporters, and a handful of conservative Republicans –would reduce growth and do little to reduce America’s chronic fiscal imbalance. The combination of tax increases and spending cuts has been a disaster throughout Europe. The poster child is Greece, which under the auspices of the elites in Europe and the IMF, imposed a series of austerity measures in exchange for additional loans from other European governments and the IMF. After three years of such measures, Greece defaulted on 200 billion euros of outstanding debt through a debt restructuring in which bond holders in present value terms lost more than an estimated 70% of the value of their bonds. Yet, the Greek budget remains as imbalanced as ever. Here are the grisly details, as reported by Antonis Samaras, the leader of Greece’s New Democracy Party in a Wall Street Journal op-ed. A combination of spending cuts and big tax increases, which cumulatively should have cut the country’s deficit by about 20% of GDP, have been implemented since 2009. At the beginning of the process, the deficit was 15% of GDP. Currently, the government’s deficit is running near 10% of GDP. Why hasn’t the budget returned to surplus? Because austerity has produced a 16% contraction in GDP since 2009. Wrote Samaras: “It took 30 years of frivolous public spending to bring the country to a debt-to-GDP ratio of 120%. Two years of severe austerity brought debt to 168% of GDP. Obviously the medicine didn’t work.” Greece is not alone. Austerity by governments of the left and right in Italy, Spain, Portugal and Britain have led to higher unemployment and shortfalls in revenues. For example, Spain’s conservative party won a landslide victory last November by opposing the socialist government’s austerity policies which had driven the unemployment rate up to 21.5%. But, in the face of a higher than expected deficit, it reneged on its pledge not to raise taxes, and pushed through higher personal income and property tax rates to narrow the deficit. But now Spain’s unemployment rate has jumped to a Depression level 24.4%. As a consequence, the government still has almost no chance of meeting its deficit targets. Last week, Standard and Poor’s lowered Spain’s bond rating two notches to BBB+. The austerity conceit also holds sway over a significant portion of America’s governing elite. President Obama continues to call for tax increases that would total $100 billion next year, completely ignoring the scholarly research of Christina Romer, the first Chair of his Council of Economic Advisors, which indicates such a policy would kill the recovery and cost more than 800,000 jobs. For further evidence, look no further than the President’s home state of Illinois, which in January of last year, raised the flat personal income tax rate to 5% from 3%, and the corporate tax rate to 7% from 4.8%. The $6.8 billion in projected revenue was suppose to eliminate the state’s chronic budget deficit and pay down a backlog of unpaid bills. Instead, the state’s fiscal condition has gotten worse, with its deficit expected to increase by $400 million and total $5 billion. What all of this makes clear is austerity’s so-called shared sacrifice is a loser. The solution lies in restoring the balance between an over-sized public sector and the private sector. The first signs – and limits — of such a movement are evident. Last week, European Central Bank President Mario Draghi called for a European “growth pact” without any relaxation of fiscal discipline, suggesting structural reforms such as the relaxation of laws that interfere with employers’ ability to fire or lay-off workers. Draghi’s focus on structural reforms to spur growth was endorsed by Germany Chancellor Angela Merkel. However, Socialist French Presidential Candidate Francois Hollande embraced the call for more growth by proposing increased government spending on industrial and infrastructure projects financed by newly issued euro-zone bonds, as well as a new tax on financial transactions. Mr. Hollande also advocates raising France’s top personal income tax rate to 75% on incomes above 1 million euros, ignoring evidence of the past three years that increasing the size of government at the expense of the private sector leads to the dead end of increased debt and a shrinking tax base. The new reality is only an increase in economic freedom can restore fiscal balance in Europe and the United States. That means a restoration of sound money, the repeal of overly burdensome and unnecessary regulations, and tax reform that broadens the tax base while lowering marginal tax rates. Each of these initiatives would reduce the government-imposed barriers to private sector employment and production, and by so doing, permit economic activity now blocked by failed government policies to flourish. With economic growth restored, government spending needs to be cut, easing the burden of government while freeing resources that can be better utilized by a rapidly expanding private economy. This means the governing elite will have to abandon the notion the world revolves around them, that government is the center of – if not the universe – then certainly the economy. The hard lesson of the fiscal crisis from Europe to Washington to Illinois is job of top- down government management of the economy exceeds the ability of average human beings and leads to policies that destroy, rather than enhance, the human capacity to flourish. As Friedrich von Hayek concluded in his 1974 Nobel lecture: If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. The time has arrived to curtail the power of the governing elite. They have demonstrated yet again their claim to power is based on the false premise of being superior beings fit to rule their fellow citizens. The moment has arrived to favor the voluntary actions of free men and women to build a better future for themselves, their families and their communities through the free market and to begin the hard work so tragically delegated to government of extending a helping hand to those in need.