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Brave Old World

The U.K. and U.S. retreat to pre-Reagan-Thatcher economic policies.

12:00 AM, May 8, 2009 • By RYAN STREETER
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Thirty years ago this week, Margaret Thatcher became Prime Minister in the UK, promising a new future of growth and prosperity. She ushered in an era in which policymakers took for granted their role not as managers of the economy, but as custodians of the conditions in which economic prosperity could occur. Shortly after her ascendancy to the top spot in British government, she was joined by Ronald Reagan in the United States, and the rest is history.

In almost no time at all, however, the Anglosphere has changed dramatically. Two months ago, President Obama and current UK Prime Minister Gordon Brown met in Washington to showcase a united commitment to combat the global economic crisis. Brown spoke of a "global New Deal," and Obama said the "special relationship" was strong. Since then, the UK has marched in step with Obama's cadence-call to spend its way out of the crisis. While other European leaders have expressed reservations about increased public spending, Brown has joined Obama in an all-out attempt to redefine how the world views the two historic (and possibly erstwhile) defenders of economic liberalization.

The under-reported admission last week by UK Chancellor Alistair Darling that he essentially made up the new 50 percent tax rate on high earners in the recently-released UK budget best encapsulates just how far the Anglosphere has come. "There was no science, just my judgment," he said while defending his decision to raise the tax rate from 40 to 50 percent on people earning more than £150,000 (approximately $224,000).

How can such a scandalous admission escape castigation in the public square? The easy answer is that the tax hike was a politically popular attempt "soak the rich." The tax increase was highly popular with British voters. Another likely answer, though, is that policymakers have grown so accustomed to the rationale of free-market economics in the past 30 years that they have forgotten to study and protect it, and as a result, when a crisis hits, they have rushed for solutions that stifle growth in an attempt to stimulate it without reflecting on what they are doing. Analysts expect more than 70,000 jobs to disappear from the UK financial sector because of the crisis, so many of the targets of the tax will not be around to pay it. More than this, virtually no one across the ideological spectrum has tried to defend "Darling's Decision" as good policy. It will raise very little public revenue, if any, compared to the taxable incomes it will drive away. But this has not seemed to matter in the public debate in the UK, because caring about the fundamentals of growth has all but disappeared. Political cynicism and a misunderstanding of how entrepreneurs and investors think are the only possible explanations for how and why such a massive tax increase and accompanying tax rate are conceivable today.

The UK budget was in effect the Labour government's application of the values and principles inherent in President Obama's far-reaching budget and stimulus spending. There is no evidence that Labour was mimetically following Obama; rather, Obama's far-reaching budget earlier this year, which includes tax increases of $1 trillion, combined with Obama's popularity, made justifying a UK-style budget easy. Nearly two-thirds of Obama's new taxes would fall on affluent families, just as the UK's new budget hammers "the rich." Obama's popularity has sold his policies abroad, so mimicking them has a certain appeal for a government with the ability to do so.

The UK budget, which reveals its core values in a manner less complicated than its U.S. counterpart, is worth examination for anyone interested in just how sharply the public philosophy is changing in the land that gave us the Magna Carta. It is a crystal-clear distillation of a shared new world that the U.S. and UK are practically creating together: a world in which policymakers attempt to remove the vagaries of risk from everyday life by quenching the kind of risk-taking that is necessary for sustained growth. It is one thing for European-style socialism to blunder along in cash-strapped continental economies. It is quite another to recreate the same types of goals in an Anglosphere that is accustomed to social mobility through enterprise and risk.

In what appears to be an unflagging commitment to failed policies, the UK budget promises guaranteed employment and staggering levels of public indebtedness. It essentially creates a universal employment scheme for people under 25 years old, promising to create jobs or provide training in sectors such as "social care" or "other high demand sectors," in Darling's words. To finance its ambitions in these and other areas, the government is raising its borrowing levels to blindingly high peaks, projecting that its debt will account for 80 percent of the British economy in four years.

Because it understands that it needs to commercialize innovation in order to grow, the UK's new budget creates a fund of nearly $1.1 billion for emerging technologies. Then, it raises the tax rate to 50 percent on exactly the population of entrepreneurs that one hopes would be able to create new jobs with the high-tech funds. In short, the UK budget has it all: a robust confidence in the "cool" high-tech sectors of the economy, and an elementary misunderstanding of the incentive structure needed make those sectors grow. Why wouldn't entrepreneurs in high-tech sectors move to the United States, where Obama's increased taxes on the rich actually look good by comparison? Or, might they not move to Hong Kong, or even Finland, where innovating (and speaking English) is encouraged and easier to do?

The U.S. has enjoyed a stable alliance (the so-called "special relationship") with the UK on economic and security matters for a long time. In the past three decades Margaret Thatcher and Tony Blair in particular have solidified the UK's joint commitment with the U.S. to liberalization at home and abroad. The two countries have grown accustomed over the past 30 years to defining the Anglosphere's position on trade, liberty, and democracy while an admiring world attempts to emulate their example. Before our very eyes, the UK is retreating quickly to 1970s-style policies as the U.S. advances to a 21st century version of the Great Society. The progress of the past quarter century is at risk. The UK's recent budget package paints a clear picture of just how precarious things are, and it issues a call--however unintentionally--to citizens, policymakers, and entrepreneurs to recover the fundamentals of growth that have sustained the common economic interests of the "special relationship" since Margaret Thatcher walked through the door of 10 Downing Street thirty years ago.

Ryan Streeter is Senior Fellow at the London-based Legatum Institute.