Brussels, the capital of Belgium but also of the European Union and of NATO, is not prepared for a terrorist attack. After a warning by the chief of the Brussels fire brigade that his men would never be able to cope with an attack on more than one underground station, Véronique Paulus de Châtelet, the Governor of Brussels, confirmed on Tuesday that Brussels does not have an emergency plan in case of an attack by al-Qaeda or other likeminded criminal organisations.
Tocqueville (1805-1859) was born 200 years ago, on 29 July 1805. He became known through his books “Democracy in America” (published in 1835 and 1840 in two volumes after a visit to the United States) and “The Old Regime and the Revolution” (a history of the French Revolution of 1789, published in 1856).
“The European Union [...] has ceased to be completely reliable.” So says Robert Cottrell, formerly of The Economist, a couple of days ago in The Financial Times, arguing that one has to “set the euro loose from the EU.” According to Cottrell the strict links between the EU and the European Central Bank (ECB) and thus the Eurozone should be broken. This would allow the currency to float freely and would allow countries such as Ukraine or Turkey, or even Paraguay to join the Eurozone, without joining the EU. However, there would be one strict rule governing this new free floating currency zone. No bail outs for basket cases. This all seems eminently sensible, but I did notice one small flaw in the argument. If anybody can join the ‘zone,’ then surely anybody can leave as well?
America is not a democracy, but an oligarchy of nine unelected old men (and women) dressed in robes.
According to Richard Miniter, an American investigative journalist who is an expert on Islamic terrorism, the West is capable of winning the war on terror. In fact, he thinks it is winning. Miniter, who is a weekly guest on Fox News, has travelled extensively all over the globe and was in Brussels early this week on his way to Afghanistan. The Brussels Journal interviewed him.
Paul Belien: Rich, you have written two bestselling books about terrorism so far. The first one, “Losing Bin Laden,” is a chronicle of what happened under Bill Clinton’s presidency and the second one, “Shadow War,” is about the war on terror during the first term of George W. Bush. In this last book you argue that America is winning the war on terror. Europeans find this hard to believe. Given the London bombing early this month, do you still think that we are winning the war on terror?
PB: Some people, however, say that we have called terrorism upon ourselves by the invasion of Iraq. It seems that the threat of terrorism is worse now than ever before.
RM: I don’t think that is true. I have a minority contrarian view, but here it is: The death toll on September 11, 2001 of the attacks on New York, the Pentagon and Pennsylvania was more than 3,000 people. The Bali bombing on October 12, 2002 killed 202 people. In the Madrid bombing of March 11, 2004 191 people perished. That is one order of magnitude less than on 9/11. In London earlier this month 53 people died. That is a second order of magnitude less than on 9/11. If anything, the lethality of al Qaeda is decreasing over time. The terrorists are losing their ability to carry out large, complicated operations, where they need perfect surprise in order to succeed and perfect coordination in order to have mass casualties. With the exception of the bombings in 2003 in Turkey, no al Qaeda cell has been able to strike twice in quick succession in the same country. American, European and Allied governments have been very successful in breaking up these cells.
As for this idea that Iraq has brought terrorism onto Europe and onto America, do not forget that 9/11 occurred before the Iraq war. Let us also remember what happened in the 1990s when we had a series of al Qaeda attacks on American, British and French interests from 1992 onwards. In one of these attacks, on August 7, 1988, two U.S. embassies were hit, one in Kenya, the other in Tanzania, killing hundreds of people, mostly Muslim Africans. That certainly was not brought on by the Iraq war. The November 13, 1995 attack in Riyadh which killed five Americans, two Indian nationals and an unknown number of Saudis, that was not brought on by Iraq either. Nor were the attack on U.S. forces in Somalia on October 3, 1993, which we now know was organised by elements of al Qaeda, the 1993 WTC bombing, which killed seven people (I say seven because I also count the unborn son of Monica Smith), the attack on the USS Cole in October 2000, the attempt to destroy the Eifel Tower by driving a plane into it in 1994, and the attempt to kill the Pope in the Philippines in 1994.
PB: Some people say we have exacerbated the hostile feelings among Muslims by invading Iraq.
RM: How do we measure public opinion in Muslim lands when these are all but one, Iraq, dictatorships?
PB: They mean Muslim populations in Western Europe.
RM: This is simply asserted but not proven. How can they possibly know? There has never been a scientific series of polls which has measured Muslim public opinion in Europe over time, using the same methods. I do not know whether to believe or disbelieve this assertion because I do not think there is enough evidence one way or another to know for sure. What is amazing to me is that people make assertions without feeling the obligation to bring forth some kind of evidence that muslim public opinion in Europe or America or anywhere has changed.
PB: Some people fear that if our secret services are going to control the Muslim populations in Europe, then our civil liberties will have to be limited and restricted. There was an article recently by Daniel Pipes in the NY Sun in which he says that France is doing a better job in fighting terrorism than Britain because the British allow too many liberties to Muslim groups. What do you think about that?
RM: I think it is fairly well established that the French have the most restrictive counterterrorist policies in Europe and perhaps in the Western world.
PB: And is it a good thing to have such restrictive policies?
RM: There are two questions here: one, does it work, and two, is it morally justified? I do not know if it works. Certainly the French have stopped a great number of plots, and France has not seen a widespread attack like London, like Madrid, and like New York. So, is it because they are very good or is it because they are lucky? I don’t know. However, France is a wonderful case for those who say we have to diminish civil liberties in order to crack down on terrorism. France has the most restrictive and perhaps the most effective counterterrorism policy, but France is still by and large a free country. The biggest threat journalists face in France is not censorship by the government but lawsuits by interested parties that do not like what they have to say, and that is, of course, a problem in other European countries, too, but is unrelated to the counterterrorism policies. If Britain, Germany, America and other countries were to pursue a more aggressive counterterrorism strategy it would probably look a lot like France, which is not a nightmare scenario. France, for better or worse, is not Nazi Germany, it is not Egypt, it is not Saudi Arabia, it is not Poland in 1981, it is a state with a strong instinct for the survival of its people and, so far, it seems to have been pretty effective.
PB: You are working on a third terrorism book: “Misinformation.” By this, I think, you mean how the Western media are helping the terrorists in certain ways.
RM: I think that is actually overstating my case a little bit. I do not think the media are actively helping, with a few exceptions, the terrorists. However, they have created an environment of poisonous scepticism, raising questions about things where the truth is very easily known and is exactly the opposite of what they are saying. Newsweek recently ran the story of the Quran being flushed down the toilet to intimidate Muslims in the U.S. prison at Guantanamo. Newsweek had this story from what it considered to be a reliable source but the magazine failed to do some basic investigation.
Here are the questions that it did not ask: How many Qurans were distributed by the U.S. military to prisoners in Guantanamo and elsewhere, how many do they have now, are any missing? What are the dimensions of those Qurans? This is important to know whether it is physically possible to flush such a book down the toilet. In fact, the toilets they use at Guantanamo are not flush toilets but chemical toilets. The Qurans could not have been flushed, and even if they were put in a toilet they could not have gone down because the access pipe is too small. If a journalist is given information by sources he has an obligation to check out the facts that are knowable and see whether the assertions are physically possible.
PB: But that is just an example of sloppy journalism. We also had that during the Cold War. Can you give us another example of misinformation?
RM: A classic example is the assertion that Osama bin Laden is on dialysis. This was misinformation put out by the ISI, the Pakistani intelligence service, in late 1998. The Pakistanis were getting a lot of pressure from the Clinton administration to turn over bin Laden for the attacks on the embassies in Africa. Bin Laden was probably in Afghanistan, but the Taliban government in Kabul had been set up by the Pakistanis. In fact, if you talk with Pakistani officials they will very rarely refer to the border between Afghanistan and Pakistan. Instead they refer to the Durand Line. They consider Afghanistan to be an extension of Pakistan. So Pakistan set up the Taliban in order to control that territory. It was a government created and funded by the ISI. The Pakistanis did not want bin Laden to be handed over, because he would reveal the degree of collusion between the Taliban, bin Laden and the Pakistanis themselves. Moreover, they had future uses for him. The Pakistanis were very shrewd. They figured out that if they could give the Clinton administration a plausible excuse not to act, then it would not act. They told the Americans: “Bin Laden is on dialysis and he will probably die anyway.”
This myth has continued long after 9/11 in the absence of any evidence. In fact, there is lots of evidence to the contrary. After Bin Laden’s personal doctor, who was captured in Pakistan and held in U.S. custody for more than three months, was released he gave a number of interviews. He said that bin Laden had a bad back and other health problems but he certainly was not on dialysis and had no kidney problems. Bin Laden himself has said to a Pakistani journalist that he has no health problems at all. Doctors and intelligence agents with medical backgrounds, who study bin Laden on his tapes, point out that people who are on dialysis for years acquire a discoloration of the skin and certain features none of which bin Laden displays.
PB: You are going to Afghanistan next week. Do you think Afghanistan is the place where bin Laden is hanging around nowadays?
RM: It is certainly possible. The Pakistanis say that he is in Afghanistan. The Afghans say that he is either in Pakistan or in Iran. Certainly the Afghans have a reason to turn him over. The Karzai government is continuously destabilised by elements of al Qaeda and by the Taliban. To this day there is major fighting in the Paktia province and other eastern and southeastern provinces along the border with Pakistan. I do not think that there has been enough scepticism of Pakistan’s role in the war on terror. In one sense they have done a lot. They have captured more than 700 al Qaeda members since 9/11, more than any other nation including Iraq or Afghanistan, but we should be far more critical, not just on the human rights record of Pakistan, but their general behaviour.
PB: Pakistan is not on the list of the rogue states of the United States. So Washington considers it to be an ally.
RM: It is an ally, but it is a very two-sided ally. As in the Cold War, in the war on terror you will have to choose your enemies and your allies, and sometimes you are choosing from the same pool.
PB: That takes us to another traditional ally of the United States: Saudi Arabia. It is said that a group of rich Saudis is actually funding Muslim fundamentalists. This seems to be an ally that is not really an ally. What do you think about the Saudi position regarding the fight against al Qaeda?
RM: They are technically our friends. I do not think the Saudi state has funded al Qaeda since 9/11, but individual sheiks and Saudi princes have continued to fund it.
PB: If the state knows it, it can crack down on them and try to stop the funding of al Qaeda.
RM: Let us first try to understand a little bit about Saudi Arabia. I am not making excuses for them but I am saying that if we are going to criticise them let us do it in an informed way. Saudi Arabia is run by two clouts of people – and I say “clouts” because they are very loosely affiliated and yet they all matter. There are the clerics, about 4,000 of them, and there are the princes, also about 4,000 of them. For anything to get done you need unanimity or near unanimity with these two groups of people. Any kind of crackdown threathens not just that consensus but the legitimacy of the state. What Saudi Arabia has to offer the residents of Arabia is order. That is basic. They provide very little in terms of welfare, in terms of schooling, there still are less than one hundred hospitals, very few universities, very few education opportunities, despite the immense oil wealth. More than one third of the world’s proven oil reserves are in Saudi Arabia, but the per capita income when you take away the money that is used for the princes, is low.
PB: They use the money to fund fundamentalist mosques in Europe.
RM: Yes, but of course the European governments are complicit in that. If Europe was serious about counterterrorism it would say that no religious institution, church, mosque, synagogue, or whatever can receive funding from outside the country, and it would further stipulate that the congregation must provide at least half of the funds necessary before the state could provide any funds. In a more radical view I do not think that the state should finance religion at all. I think state funding of religion is ultimately bad for religion as well as bad for the state. I think the promotion of religion is healthy for a state because something beyond economic self-interest has to hold the country together. There has to be something higher, intangible, mystical, methaphysical, but nonetheless present and real. Religion has traditionally in every society known to man provided some of that connecting tissue that makes a group of people into a nation and a nation into a country. When you finance religion, however, you necessarily change it and warp it to serve the politicians.
PB: In Western Europe it is the state that finances religion. In the United States it is not. If you are a Muslim in the US you can ask the Saudi princes for subsidies.
RM: I think there have to be some restrictions. I think that the money should not be able to come from abroad. I do not think that would be a problem if you extend this restriction to the Catholics. In our countries the church money goes to Rome, it does not come from Rome. Hence applying that restriction here would not have deleterious effects. But you have to stop the overseas funding.
I am prepared to believe that most of the Muslims are moderate. They have left a more fundamentalist society to come to the West. If they wanted to be fundamentalist they find more opportunity and scope to do that in their home countries. They are interested in economic opportunity, which means that in some small way they are interested in changing. And maybe they think they are going to change in small ways in terms of improving their economic outlook and improving their education, but in the course of doing these two things, things about you change. Europe has to think about how it wants to make these people assimilate, because they must be made to assimilate or they will become a mortal threat to our societies over time. When I want to frighten Europeans I say: who is going to pay your social security when the average European prays five times a day?
BELGIAN ADMIRATION AND INTEREST IN REAGANOMICS
When I think of Reagan, I'm thinking of Reaganomics and the Laffer curve. (Enthusiastically:) Do you remember: a tax cut could create more revenues! Reagan is dead now, but several of his ideas are now self-evident. The Flemish government lowered the estate and gift taxes. Surprisingly, the government got more income.
Few Belgians have analyzed Reaganomics in such an exhaustive way as the retired financial consultant Willy De Wit from Antwerp. Today, he is a member of the Flemish independent think thank WorkForAll. Recently, he gave a lecture for “FACS” (Free Association for Civilization Studies), a Flemish libertarian think tank lead by Martin De Vlieghere. Loaded with facts and figures, De Wit proved that Reaganomics did deliver results and was a success story.
CRITICS OF REAGAN'S ECONOMIC POLICY
But before summarizing the lecture of Willy De Wit, let us listen to the opponents. Numerous they are and their voices ring loud in the media. In November 2001 Mia Doornaert, a well-known Belgian journalist, wrote: “Ronald Reagan was not a great American President”. In the same leading Flemish newspaper De Standaard, Evita Neefs wrote three days after Reagan's death: "America is losing a sympathetic blockhead. He was not particularly intelligent, but extremely charming". These sentences are typical for the prejudice against Reagan and his economic policy, a policy, that - according to the opponents - made the poor poorer and the rich richer and created a huge budget deficit and a gigantic public debt. Moreover (still in the opinion of the opponents) unemployment could only be reduced by low paid McJobs, or “hamburger jobs” as they are called in Belgium.
Reaganomics is probably the only economic doctrine that made its way into a pop song. In 1985, the British group Simply Red criticized the 'antisocial' policy of Reagan in their song “Money’s Too Tight To Mention” (actually, a cover version of an original American song by the Valentine Brothers from 1982).
I been laid off from work my rent is due
My kids all need brand new shoes
So I went to the bank to see what they could do
They said: son look like bad luck got a hold on you
Money's too tight to mention
I can't get an unemployment extension
Money's too tight to mention
We're talking about Reaganomics
Oh lord down in the Congress
They're passing all kinds of bills
From down Capitol Hill - we've tried them
Money's too tight to mention
Oh money money money money
Money's too tight to mention
The popular perception of Reaganomics is clear: an antisocial policy with a curtailment of social expenses. But criticizing Reaganomics is not the monopoly of the left. Even classical (i.e. pro free market) liberals and libertarians are convinced that although Reagan stimulated the economy, it came at the cost of an enormous budget deficit.
Even George Herbert Walker Bush was initially very sceptical of the economic ideas of Reagan. In 1980 he spoke about “voodoo economics”. He changed course when Reagan chose him as running mate for the presidency.
WILLY DE WIT: REAGANOMICS SAVED THE ECONOMY
THE FUNDAMENTAL FLAW IN KEYNESIAN LOGIC
A lot of recent studies indicate that an increase in public spending (as advocated by Keynes) does not stimulate the economy. The main reason is that money that could otherwise be spent efficiently by the private sector, is instead siphoned off for pork-barreling public works, very often with little or no return. Money to pay for deficit spending must come from somewhere else and, as usual, it is the taxpayer who must pay. The fundamental flaw in Keynesian logic is that it hardly makes sense to tax money away from productive people, thereby reducing their rewards, so as to spend it on unproductive goals. Some call it robbing Peter to pay Paul. The United Kingdom, home of Keynesianism, experimented with this medicine for years - only to get sicker and sicker, until Margaret Thatcher stopped it. A more recent example is Japan. This country has provided one of history’s best demonstrations that the Keynesian demand stimulus is a deeply flawed economic philosophy. Despite huge government outlays, the Japanese economy is still wallowing in the slump that has afflicted it for more than ten years. This point of view is confirmed by a recent study (based on multiple regression analysis) from the Flemish independent think tank WorkForAll. According to their analysis of the relationship between economic growth and the size of governments in 16 European countries, the two main causes leading to poor growth performance are excessive government spending and a demotivating tax structure, which put a heavy burden on work, income and profit.
Moreover, many influential economists have come to the conclusion that the multiplier effect does not exist. See Paul A. Samuelson (“Economics", edition 1973, page 229), Harvard's Robert J. Barro (“Macroeconomics”, third edition page 301) and “The Wall Street Journal", November 3, 1992: ( “Keynes is still dead”)
STAGFLATION BECAME RECESSION, EXPANSION FOLLOWED
Four young economists (Paul Craig Roberts, Robert Mundell, Norman Ture and Steve Entin) and a journalist (Jude Wanniski) convinced Reagan to completely reverse the economic policy of that time. Their point of view was that high marginal tax rates were a disincentive to produce, to take risk, to invest and to save. In their opinion this “economy of discouragement” had to be transformed into an “economy of encouragement”. The reasoning was as follows: people are producing because it pays to do so. Consumption alone will not result in increased production when the incentives to do so are not there. When tax rates are raised, people reduce their participation in taxed activities, such as working, risk taking, saving and investing. When tax rates fall, people increase their participation. Fortunately, Reagan understood this logic immediately. Few people know that Reagan had a major in economics, which he obtained at the Eureka College (Illinois) in 1932. The economic theory he was taught was untouched by Keynesian thinking and, as a consequence, very appropriate to the problems of the eighties. Reagan followed the advice and took action. The top marginal tax rate of 70% was lowered in two phases: to 50% with the “ERTA” (Economic Recovery Tax Act of October 1, 1981) and in a later phase to 28% (The Tax Act of 1986). These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%. One of the longest and strongest economic expansions since World War II had begun, with an average annual growth rate of 3.5%. But the first two years (1981 and 1982) were lost for Reagan. Fed chairman Paul Volcker fought inflation with a tight monetary policy and high interest rates. The Reagan administration urged Volcker to decrease monetary growth by a maximum of 50%, in order not to kill the tax cut program. But as the Federal Reserve is totally independent, Volcker cut money growth by 75% in 1981. The recession became even worse, and unemployment rose further. But after inflation had been defeated, money growth resumed and the Reagan expansion took shape.
DID THE POOR GET POORER AND THE RICH RICHER?
“Reagan gave money away to the rich, at the expense of the poor”, many critics claim. The table below proves the contrary. At the end of the Reagan presidency, the rich paid comparatively more taxes than before. As for the poor, their share in total tax revenues decreased. There was a simple reason for this: the lower tax rates were an important incentive for the rich to expand their economic activity.The tax base had become broader, and the lower rate on the broader tax base resulted in higher tax revenues.
|Percentage of paid income tax|
|Income||Percentage of taxes paid|
|$0 - $15,000||5.8%||4.0%||2.8%|
|$15,000 - $30,000||21.1%||16.8%||14.7%|
|$30,000 - $50,000||29.0%||25.9%||23.0%|
|$50,000 - $100,000||22.0%||24.3%||27.7%|
|$100,000 - $200,000||8.6%||10.2%||11.9%|
In the table below we can see that the poor benefited most from the economic growth. Not only did they pay less taxes, but the 20% poorest people enjoyed an increase in income of 77 % in 9 years.
|Incomes and Social Mobility|
|Average Family Income of 1977 Quintile Members in|
|1977 Quintile||1977||1986||% Change|
|Source: Urban Institute|
Critics claim that the growth in employment was realized mainly through the creation of crappy “hamburger jobs”. De Wit: "This is not correct. Universities could not follow to deliver enough high qualified graduates. As you can see in the following table, job growth was mainly in managerial functions. Low paid jobs in services increased very little and in farming, employment decreased".
|Job Creation in the Eighties|
|Jobs Created, Jan. 1982 – Dec. 1989|
|Job Category||Number (Mils.)||Percentage Increase||1989 Median Earnings|
|Source: Bureau of Labour Statistics (employment), Census Bureau (earnings)|
ENORMOUS PUBLIC DEBT?
It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years. But between 1981 and 1989 the budget deficit increased only slightly, from 2.6% to 2.9% of GDP. The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money). During the same years the Belgian budget deficit varied between 7% and 13% of GDP. The average budget deficit for the G-7 countries was only slightly lower than that of the US.
The public debt of the US as a percentage of GDP, remained below that of the G-7 countries, i.e. below 32% of GDP. But Belgian public debt, the result of years of Keynesian policy, was higher than 100% of GDP and remains around 100% at this moment.
|Net Public Debt as a percentage of GDP|
WHY THE CRITICISM?
It seems strange that these figures and these facts are not better known, says Willy De Wit. But probably it is not surprising, when we consider that a right wing ("conservative") president discredited the left wing ("liberal") economic policy. Increasing social outlays doesn’t make sense when you have previously created unemployment and poverty with a wrong economic policy. Reagan has shown that the redistribution of wealth with high tax rates brings no solution. Instead of redistributing wealth, it distributes poverty. The main reason for the opposition to Reagan’s economic policy, however, was that this policy was completely misunderstood at that time, mainly by the economic establishment. They did not see the fundamental difference between Keynesian thinking to stimulate demand, and the new supply-side approach by Ronald Reagan.
Keynesian thinking explained the economic achievement in terms of the level of spending. Deficit spending will keep employment high and will stimulate the economy. Cutting the deficit (for the Keynesians) would reduce spending and throw people out of work, raising the unemployment rate, reduce national income and hence produce less tax revenues. Reagan on the contrary brought a totally new perspective to economic policy. Instead of putting the emphasis on spending, supply-side economists showed that tax rates directly affect the supply of goods and services. Lowering tax rates mean better incentives to produce, to save, to invest and to take risks. In other words lower tax rates stimulate supply and not demand. The broader tax base will compensate at least partially for the lost revenue caused by the tax cut. Higher savings will result in increased investment and unemployment will disappear. Instead of pumping up demand to stimulate the economy, reliance would be placed on improving incentives on the supply side.
The entire economic profession, along with the media could not believe that a former movie actor could come up with a revolutionary economic policy that completely contradicted the famous Keynesian theory. The reaction was fierce.
Another reason is that public opinion and most of the politicians in Europe are against the US. Roland Leuschel, a Belgian investment stategist with German roots and a good friend of Jack Kemp with whom he wrote a book in German, "Die Amerikanische Idee" (which was also published in Dutch but is out of print), dedicated a complete chapter of this book to this phenomenon: “the favorite sport of the European intelligentsia: anti-Americanism”.
REAGAN, NOT THE FIRST AND NOT THE ONLY ONE
Later on Erhard, as secretary for the economy, cut the high marginal tax rate in two steps: first from 95% to 63% and afterwards to 53%. The first 8000 DM earned became tax free.
The decisions taken by Ludwig Erhard allowed West-Germany to rebuild itself at a pace never seen. No surprise that he was called the “father of the wirtschaftswunder”.
The German economic miracle cannot be explained by the Marshall Plan. Britain and France received Marshall money too, but they wasted their chances. Britain voted Labour, which brought rationing and price controls. France opted for economic protectionism, which prevented Marshal help to be used in an efficient way.
After Reagan, the theory of supply-side economics was applied in numerous countries. In Iceland, David Oddson became prime minister in 1991. He inherited a poorly performing economy burdened by heavy income taxes. He lowered the corporate tax rate from 50% to 30%. During the next five years the economy grew by 5% per year. Government income did not fall and social outlays could be maintained.
Ireland is another example. In 1987 this country was the “sick man” of Europe, with a public debt of 135 % of GDP. After the elections of 1987 a new economic policy was introduced. Corporate tax rate was reduced from 32% to 12.5% and capital gains tax was lowered from 40% to 20%. Ireland is now the fastest growing country of the EU. Japan, to the contrary, is a classic example of the failure of a Keynesian demand-side policy. The economy has been in shambles for many years and public debt has risen to a gigantic 170% of GDP.
The following graph compares government spending and GDP per capita in Ireland and Belgium between 1960 and 2003. The Irish 'turning point' came with the adoption of supply-side economics.
REAGANOMICS, STILL RELEVANT TODAY
During the Reagan Presidency (1980-1988) an economic revolution unfolded. An unprecedented welfare expansion took place with the creation of 18 million new jobs. The understanding of the mechanism behind this economic miracle is important, because it can offer some tools to revive the economies in countries with overregulation and big governments.
Willy De Wit: "Belgian politicians apparently have no knowledge about supply-side economics. Universities are still teaching the theory of Keynes and the economic establishment does not seem to understand Reaganomics nor supply-side economics. Hence it is not surprising that Belgium has one of the heaviest levels of taxation in the world, a high unemployment rate and an increasing number of companies that are leaving the country. The media are still praising Keynes. Paul D’Hoore, the economics advisor of the Flemish public television service VRT is an admiror of Keynes. His book “De 100 kapitale vragen van Paul D’Hoore over mensen en geld” (100 major questions on people and money) is mainly about micro-economics. The few lines on macroeconomics are completely in line with Keynesian thinking. Meanwhile the economic time-bomb is ticking for Belgium: high unemployment figures, an ageing population and the pension problem, the brain drain and an unbearable tax burden".
A REAGANOMICS PLAN FOR BELGIUM
Willy De Wit has a six point blueprint for the Belgian economy, based on Reaganomics. "My program can create 600.000 jobs", he claims.
- A gradual but considerable cut of the highest marginal tax rates to 28%.
- The complete abolition of corporate taxes, with a repeal of all subsidies to corporations.
- The abolition of taxes on dividends. Investment and risk taking has to be encouraged, not punished. A reduction (or abolition) of tax rates can make investment opportunities profitable that formerly were not.
- The abolition of all agricultural subsidies. At this moment 45% of the total EU budget goes to agricultural subsidies, respresenting the huge amount of 45 billion euro per year. This is not only dramatic for the tax payers, but it is also very harmful for the developing world, mainly for the poor countries in Africa. As a consequence of the subsidies, European agricultural products are dumped (at prices far below the cost) on the markets of these countries, preventing them from competing on the world markets with their own products. To pacify our conscience for this scandalous behaviour, policy makers have created a government department for foreign aid. Allegedly, this is a compensation for the money we stole from the poor countries through agricultural subsidies for our own products. The tax payer has to pay twice: first for the subsidies and then for the foreign aid. It is a shame that Europe is pumping such huge amounts into agriculture, a sector we hardly need.
- A shrinking of the size of government. One out of four Belgians are working for the government. According to an analysis of the independent Flemish think tank Workforall the total cost of government in Belgium could be reduced by 50%.
- Abolition of the transfers of tax money from Flanders to Wallonia. About 10 billion euro is transferred each year from the Flemish tax payers to the French speaking part of Belgium. The reason invoked for these transfers is that Wallonia has an unemployment rate of 18% compared with 8% for Flanders. But the socialist political parties and the unions in Wallonia refuse to take structural measures to reinvogorate their economy. So long as Flanders continues to pay the unemployment benefits for Wallonia the latter have no stimulus to do so. A solution could be the splitup of Belgium into two parts. In a recent study, "The Size of Nations", professors Alesina and Spolaore demonstrate that it is easier for small countries to become rich than for large countries. Of the ten richest countries in the world (in terms of GDP), only four have more than 1 million inhabitants, and only one (the US) has more than 10 million. Flanders, Wallonia and Brussels could prosper more as separate states or as a confederation, compared to the present situation in a united Belgium.
I asked Willy De Wit the following question. Public spending increased during the Reagan era, mainly due to the growth of defense expenditures. The Soviet Union could not keep up with the arms race and its economy was slowing down. Within three years after the end of the Reagan Presidency, we saw the iron curtain fall and the Soviet Union collapse. Was this military buildup a Keynesian measure, a disguised subsidy to the defense industry? Surely this defense spending was not a supply-side stimulus, because it created an artificial demand for military equipment?
Willy De Wit: You are completely right. Defense spending is a typical Keynesian demand-side policy and is certainly not a supply-side approach. Supply-side economics has nothing to do with expenses, but with the creation of incentives to produce, to take risk, to work, to invest and to save. Reagan saw the increase of defense expenditures as a necessary evil, to safeguard the security of the US in the long term. Without this defense buildup (which was the main cause of the increase in public spending) government outlays would have been considerably lower, and the success of Reaganomics would have been even more pronounced. Indeed, supply-side economics has taught us that an increase in government spending does not boost economic growth. On the contrary, recent studies have clearly shown that there is an inverse relation between economic growth and the level of public spending. This means that the increase of the defense expenditures during the Reagan era has lowered economic growth. Money invested in defense was lost for more productive investments in the private sector. Anyway, we must keep in mind that the Reagan budget deficit was not caused by the tax cuts, but by the increase in spending (mainly for defense), and paradoxically by an increase in social outlays, i.e. 2.9% per year during the first four years of the Reagan Presidency. That is an indication that Reagan was not an anti-social president.
SUPPLY-SIDE ECONOMICS AND THE LAFFER CURVE
WHAT ABOUT A FLAT TAX?
An even better solution than the above six point program, would be the introduction of a flat tax rate, not only in Belgium, but also in the (original) 15 EU countries. The flat tax is a system with only one tax rate for all income and profits. If for instance a flat tax of 20% were introduced it would apply to all personal income and corporate profits. All reliefs, deductions, allowances and subsidies will be eliminated. Loopholes would be impossible. The system would be so simple that it will perhaps take no more than five minutes to file a tax return. In the last decade, the flat tax system has been introduced in several countries of "the new Europe", namely Romania, Slovakia, Servia, Lithuania, Latvia, Estonia and also in Russia, Ukraine and Georgia with rates varying from 12% to 33% (average rate of 19%). Estonia was the first to introduce this system in 1994 (at a rate of 26 %) and has seen its economy expand at a fast rate.
A low level of a flat tax is important. The well-known Richard K. Armey, previous Majority Leader of the House of Representatives advocates a tariff for the US of maximum 17%. But this rate could even be lower. An analysis by the French economist Philippe Manière indicates that a flat tax rate of 10% in France would maintain the government revenues at the present level.
For Belgium, the introduction of a flat tax rate of maximum 20% would have enormous advantages a.o. :
- The economic growth rate will explode. Indeed a strong incentive is created to produce, to take risk, to work, to invest and to save.
- Unemployment will disappear completely.
- Tax Evasion will belong to the past. People are willing to pay the correct tax burden when tax rates are low.
- An important part of a suffocating government bureaucracy can be eliminated and the employees can be switched to more productive tasks.
Will Reaganomics or supply-side economics ever be applied in Belgium? In the UK, Ireland, Iceland and Eastern Europe current economic policy has strong supply-side influences. Currently Germany is in a worse socio-economic situation than Belgium. Who knows, some day Germany might return to the successful formula of Ludwig Erhard and create a new Wirtschaftswunder, by applying supply-side economics. Such an example could show the way for Belgium and other countries.
MORE READING ON REAGANOMICS
"Reagonomics or 'voodoo economics'?", BBC News, 5 June 2004
Reaganomics on Wikipedia, the free encyclopedia
"Reagan changed the world", Paul Craig Roberts, Townhall.com, 7 June 2004
"Reagonomics -- Then, Now, and Forever", Larry Kudlow and Stephen Moore, The Club for Growth, 12 June 2004
Reaganomics, William A. Niskanen, The Concise Encyclopedia of Economics
The Myths of Reaganomics, Murray N. Rothbard, Ludwig von Mises Institute
Supply Tax Cuts and the Truth About the Reagan Economic Record, William A. Niskanen and Stephen Moore, The Cato Institute
The Seven Fat Years and How to Do It Again, Robert Bartley
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