Another Reagan-Thatcher moment

Larry Kudlow
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Posted: Nov 09, 2003 12:00 AM

Is there an English-speaking interest-rate hike sweeping the world? More important, will English-speaking economic growth principles rule the waves? Most likely, both are correct.

The Reserve Bank of Australia raised its policy rate a quarter of a percentage point this week, and the venerable Bank of England quickly followed suit. These precautionary moves to maintain price stability actually caused stock markets to rally in both countries. Using history as a guide, the U.S. Federal Reserve may be next in line to up its target interest rate.

It doesn't always happen, but U.S. rates frequently follow British rates. And while interest-rate futures are suggesting a Fed rate hike next winter, the Fed should follow rising real interest rates as economic growth, investment returns and jobs rapidly pick up steam in the Bush boom.

Of course, the English-speaking countries have more in common than interest rates. Freedom-loving Great Britain and Australia were of significant help to the United States in ridding the world of Saddam Hussein and fighting the global war on terrorism. Seeing them in stride with the United States economically is also a good thing -- particularly when they sound the pro-growth siren.

Aussie Prime Minister John Howard has led the way with his tax-cut and deregulation moves. This is why Australian unemployment is an enviable 5.6 percent. And in Britain, Finance Minister Gordon Brown has been teeing off on European Union (EU) bureaucrats for being completely wrong on growth policies.

Brown noted that the European Central Bank has only lowered interest rates seven times (compared to 10 for Britain and 1 for the United States). He's right -- EU monetary policy is too tight. While year-to-date gold prices in U.S. dollar terms have increased 10 percent -- indicating a looser monetary policy -- Euro gold is essentially unchanged on the year, despite the fact that the European economy is in worse shape than America's.

Filling out this strong position on growth, both Brown and Prime Minister Tony Blair have flatly told the European Union that Britain will never enter the Eurozone if English tax-and-welfare and labor-market regulations have to be harmonized with the European Union.

This would clearly be an economic step backward. The Margaret Thatcher legacy has given the United Kingdom a much more pro-growth tax-rate structure and an environment of social-service spending restraint. In addition, there is now a much more balanced labor-market/labor-union strike policy in Britain. This is why unemployment in Europe is about 9 percent, while British unemployment is 5.9 percent.

At a recent media breakfast in New York City, EU president Romano Prodi criticized an op-ed in the Financial Times co-authored by the prime ministers of Britain and Estonia. In the piece, the two leaders argued strenuously for competitive tax and budget policies as a means of exerting pro-growth policy pressures on "old Europe." But Prodi labeled this "unfair competition," and insisted on harmonization among tax and welfare policies.

Does old Europe want Britain to flounder with it? Not only is tax-and-welfare spending too high in old Europe, labor-market rules are so inflexible that it is too expensive to hire and illegal to fire.

The free-market English-speaking world, with economic policies that are still to this day driven primarily by Reagan-Thatcher capitalist principles, has persistently outgrown Europe over the past 20 years. The latter is stuck in a big-government central-planning time warp that favors income leveling over entrepreneurship and maintains deep bootprints on all manner of private enterprise.

The 10 new Eastern European countries recently liberated from Stalinism are scheduled to enter the European Union soon. But this group knows full well that it has more in common with the anti-terrorist foreign and pro-growth economic policies of the English-speaking nations than with old-world Europe.

These recently democratized countries have been slashing taxes and rolling back Soviet-style central planning everywhere. Their low-cost, free-market incentivized economies will pose strong competition to old Europe's stodgy state-planning. It is precisely this competition that socialist-leaning Romano Prodi and his fellow Eurocrats wish to avoid.

In old Europe, top personal tax rates are nearly 60 percent in France, almost 50 percent in Germany and 45 percent in Italy. But in new Europe, the top individual rate is 32 percent in the Czech Republic, 25 percent in Latvia, 33 percent in Lithuania and 38 percent in the Slovak Republic. Why should these supply-side countries be forced to strangle their new economic progress?

Geographic proximity is one thing, but the principles of political and economic freedom are quite another. A free-trade union between new Europe and Anglo-America would probably make more sense than "harmonizing" recession and high unemployment.