American Socialists Should Drop the Illusions About Europe

(Bloomberg Opinion) -- In the 1980s and 1990s, the U.S. and the U.K. took a turn toward free-market policies, cutting taxes, slashing welfare benefits, deregulating the financial industry, and adopting a pro-business stance on labor relations and mergers. Many in those countries now see this as a disastrous turn, and contrast this so-called neoliberal approach with the more robust social protections of many continental European countries. In this telling, the Anglo-American shift was an ideological choice, rather than a response to economic necessity.

But while ideology doubtless played a part, it’s probably not the whole story. Although continental European policy diverged from the Anglo-American model, it has also headed in a more neoliberal direction, especially after 1990. Although reformers in countries such as Germany, France and Sweden haven’t followed the examples of Ronald Reagan or Margaret Thatcher, those countries have adopted their own more muted form of neoliberalism.

One change was tax policy. The U.K. and U.S. cut top marginal income tax rates more than France or Germany, but they started out with higher rates to begin with. Germany and France both made cuts starting in the late 1980s:

In 2014, France was forced to abandon a short-lived top marginal tax rate of 75% on the wealthy after disappointing revenue numbers, a public backlash and a minor exodus of rich individuals.

Meanwhile, wealth taxes, once popular in Europe, began to vanish in the 1990s. At the beginning of that decade, 12 countries taxed individual wealth; by 2018, only Switzerland, Norway and Spain did so. The reason was that the tax raised little revenue while being difficult to enforce; Switzerland has the most effective wealth tax, but it generates only 4% of the country's revenue.

Corporate income taxes have also fallen everywhere, generally replaced with less progressive value-added taxes.

Many European nations have also implemented a series of deregulations, privatizations and other free-market policies. In Germany, the so-called Hartz IV reforms of 2003 substantially reduced welfare benefits for the unemployed, while the corporate system began to shift toward an emphasis on maximizing shareholder value. Germany and Sweden both deregulated their public transportation and energy sectors, as well as other industries.

Of all the continental European countries, Sweden may have made the biggest strides toward neoliberalism, scaling back redistribution, curbing the growth of pensions, running a budget surplus, increasing the role of private health insurance, implementing a school-choice program and abolishing the estate tax.

The Scandinavian countries are now much more pro-market than enthusiastic American socialists would like to believe. By some measures, they even outscore the U.S. on their laissez-faire stance toward the private sector:

This isn't to say that European countries have followed in the U.S.’s free-market footsteps. They maintain higher overall rates of taxation, more social spending, national health-insurance systems, and strong labor unions and collective bargaining rights. European countries’ tax revenue as a percent of gross domestic product is higher than in the U.S.. And their levels of social spending remain well above those of the U.S.:

Nor is it necessarily true that Europe’s neoliberal reforms and tax cuts were good policy. The developed countries of Western Europe have seen a modest rise in inequality since 1990. Although some deregulatory efforts have been successful, others didn’t produce such salutary results.

But the fact that Europe has moved in a free-market direction since 1990 suggests that the even larger moves in the U.S. and U.K. weren’t simply a matter of ideology. It’s unlikely that libertarian economists like Milton Friedman or Friedrich Hayek suddenly gained influence in Sweden and Germany a decade after they became popular in the U.S. Instead, the market shift in continental Europe was probably a result of geopolitical and technological factors.

The chief suspects are the fall of the Soviet Union, globalization and the rise of information technology. The demise of capitalism’s main adversary meant that governments that once lived in Soviet Russia’s shadow were now free to focus on free-market reforms that they believed – rightly or wrongly – would increase growth. Globalization put rich-country workers in competition with poor countries and their cheap abundant labor forces; and by allowing businesses to move between countries, corporations gained leverage to force their governments to make changes in their favor. And the advent of new technology made growth and the creation of new businesses more important than it was in the staid, predictable decades of the mid-20th century.

In other words, even if economic liberalization had negative consequences, there were clear pressures pushing even the most egalitarian countries in the direction of lower taxes and freer markets. Some countries resisted these pressures more than others, while some went overboard with their embrace of cowboy capitalism. But the changes of the 1990s and 2000s can’t be laid entirely at the feet of ideologues.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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