Economic Contractions in the US: A Failure of Government

Economic Contractions in the US: A Failure of Government

By Charles K. Rowley and Nathanael Smith

Introduction
Free enterprise capitalism works as a wealth-creating process. Capitalism works better, in this respect, than any other economic system. The closer the economic system approaches to laissez-faire, the more powerful its wealth-creating impulse. That is the lesson of economics and of economic history since the late 18th century. Social market economies, in the sense of Old Europe, may have beneficial characteristics. But the last three decades in Western Europe have shown that significant, sustainable wealth-creation is not among those characteristics.

A comparison with France and Germany sheds an interesting light on the anti-capitalist rhetoric that has circulated in the past year of economic contraction in the United States. According to the OECD, Germany’s GDP per capita in 2006 was $31,950; France’s, $31,047; and that of the United States, $44,054. U.S. per capita GDP is 27 per cent higher than Germany’s, 29 per cent higher than France’s. The peak-to-trough drop in real incomes during the

Great Depression of 1929-33 was 36 per cent. An “L-shaped” depression, involving continuing high unemployment and a decade or so of stagnant growth, is often cited as a worst-case scenario for the US economy’s immediate future. Yet even if US per capita GDP was to fall by one-quarter, a collapse only slightly less severe than that of 1929-33, its economy would remain ahead of those of France and Germany, even in the unlikely event that the latter remain completely unaffected by the present adverse economic environment. American liberals have long praised Continental Western Europe (as late as 1989, Nobel Laureate, Paul Samuelson actually praised the German Democratic Republic) as economic models that the United States should emulate. One might ask, then, why should the left regard a second Depression as something to be avoided? If France and Germany are really worth emulating, should not such liberals regard a fall in GDP on the scale of the Great Depression as a price worth paying for a European-style social market economy?

It is doubtful, however, whether a majority of Americans really want to trade the capitalist prosperity they have enjoyed for the past generation for the safety and stagnation of European-style social market economies. Rather, politicians and pundits are trying to convince Americans that it is possible to have both American-style prosperity and dynamism and European-Union-style social markets. Recent history suggests that this is a pipe-dream.

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