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What Can Brown Do For Them?

Britain's chancellor of the Exchequer Gordon Brown tries to find another third way.

11:00 PM, Mar 21, 2005 • By IRWIN M. STELZER
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NOW THAT THE SOVIET UNION is no more, there are two economic models on offer in the world--three, if you count Cuba and North Korea, which there is no reason to do since imitators are hardly lining up for that short-cut to impoverishment. The American model can broadly be described as one that emphasizes individual initiative, flexible labor markets, low taxes, and minimal regulation. The European model, which explicitly sees itself as an alternative to the red-in-tooth-and-claw capitalism of the United States, emphasizes collective responsibility, regulated labor and product markets, and high taxes to fund a generous safety net.

Then we have Great Britain, in which Tony Blair's Labour party is attempting to find a "third way" between the U.S. and European models. When it comes to economic policy, it is Labour chancellor of the Exchequer Gordon Brown who has taken on the task of finding that third way.

Brown--a genuine intellectual who rates Gertrude Himmelfarb's The Road To Modernity: The British, French and American Enlightenments the most important book in many years, and can recite large passages of Adam Smith's Theory of Moral Sentiments from memory--is much taken with the energy and innovative drive resulting from the U.S. economic system, and appalled by the stagnation that is the consequence of the unworkable fiscal and regulatory policies of the European alternative. He would like to have the advantages of American dynamism and the safety of Europe's welfare state. But--as the budget he submitted to parliament last week shows--there just is no middle ground, and forced to choose, he has decided to head Britain in the direction of sclerotic Old Europe.

Blair's party prefers to call itself New Labour, to distinguish it from the bad old socialist party of yore. But Brown hasn't shaken Old Labour's taste for income redistribution. This redistribution, I assume, is an attempt to relieve the unhappiness that Richard Layard, an economist and long-time Labour guru, describes in his new book, Happiness. Layard attributes human unhappiness to inequality of income--and proposes to transform unease into contentment by redistributing income. His is a tax system that takes so much from the rich to give to the poor that envy is no longer a scourge on the human psyche.

It didn't take Layard's book to persuade Brown to take from comfortable Peter to give to poor Paul by expanding the welfare state and financing that expansion with higher taxes on the middle class. He admires our work ethic, social mobility, relative lack of class antagonisms, and the optimism that allows Americans to see as opportunities what Europeans see as problems. But he can't grasp the relation of those virtues to the incentives provided by low taxes.

And he feels our safety net is too porous; our government too reluctant to intervene in labor markets to improve the quality of life of groups he thinks should not have their fates determined by employer-employee bargaining; and that our health care system is too costly.

It is a game Brown likes to play--comparing the United Kingdom with the United States to show the superiority of what we might call his "third way." But it is a game he can't win.

START WITH PRUDENCE, a virtue the chancellor is fond of contrasting with American profligacy. Brown is projecting red ink equal to about 2.6 percent of GDP in fiscal year 2005-2006, almost exactly what the independent Congressional Budget Office (CBO) projects for the United States. By the end of the decade Brown says his deficit will be down to 1.5 percent of GDP. By that time, the U.S. figure is projected to be the same. If tax-raising Gordon Brown is prudent, so is tax-cutting George W. Bush.

Unlike Bush, Brown has engineered a massive shift of resources from the private to the public sector. When he moved into the Treasury, the government was spending 37.1 percent of the nation's income. Brown projects that will rise to 40.5 percent of GDP by the end of the decade. This is about twice what the US federal government takes. Throw in another ten percentage points for state and local taxes, and Brown is still appropriating about one-third more of what his nation produces than are U.S. governments.

So the chancellor has done what no other major government has done--raise taxes, and then raise them again, shrinking Britain's competitive advantage. Meanwhile, the Bush administration lowers taxes, setting the stage for protracted, rapid growth.