Streetwise Professor

The vampiric Mario Draghi dropped a big report on how to fix the European economy. It is one of the most ridiculous things I have ever read.

It starts out with a sober summary of how screwed the European economy is, but doesn’t even attempt to diagnose why it is screwed. By failing to do so, it offers prescriptions that will screw it even more.

Draghi is blunt in his assessment at the poor relative performance of the EU economy vis a vis the US over past decades–which is doubly damning because it’s not as if the US economy has grown like gangbusters. This is (correctly) linked to low productivity growth. Draghi attributes this poor performance to underinvestment and a lack of innovation.

But these are mere symptoms. Draghi utterly fails to answer the essential questions. Such as: Why is there underinvestment? Why is innovation so clearly lacking in the EU? What is the underlying disease that is causing these symptoms?

Could it be a heavy tax burden? Huge government indebtedness? Suffocating regulation? Extremely generous welfare and retirement benefits? Climate policies that substantially increase energy costs? If not these, then what?

These questions are not even asked, let alone answered.

It is insane to offer prescriptions–which Draghi does at scale–without first diagnosing the problem. But that’s exactly what he does.

And what prescriptions they are. In brief, a massive increase in investment on the order of $900 billion per year; since the private sector is unlikely (according to Draghi) to stump up this amount, extensive government funding of it; and in addition to government funding, government direction of the investment through industrial policy.

All of which involves more begged questions. The most important of which is if an increase in investment has the huge payoffs that Draghi asserts, why won’t (and why hasn’t) the private sector gladly make (and made) it? And: why must the government direct these investments? Why doesn’t privae capital flow to where it can earn the high returns that Draghi claims exist?

Draghi recognizes that industrial policy historically has largely failed. But again, there’s a failure to ask why in a serious way. Instead, in an echo of “communism has failed everywhere because real communism has never been tried,” he advocates doing industrial policy better. Real industrial policy would involve, for example, targeting sectors, not companies.

But again: why has industrial policy almost always and everywhere been targeted at companies? Draghi doesn’t ask, so of course doesn’t answer. Public choice forces obviously turn industrial policy into rent seeking opportunities which are exploited by companies (which are economic agents) rather than “sectors” (which are not).

Draghi makes the right noises about reducing the regulatory burden in the EU. But seriously–how will a plan that if implemented grant more powers to the centralized EU bureaucracy that is responsible for the existing crushing regulatory structure in Europe magically reduce the regulatory burden? Indeed, industrial policy is all about intervening to produce outcomes that differ from those that the market would produce, and such interventions are inherently coercive, regulatory, and bureaucratic in nature.

“We’ll solve the problem of too many rules by adding more rules” never works out well.

Another illustration of the cluelessness of this plan. According to Draghi, the ~$900 B in annual investment is necessary to achieve both competitiveness and climate objectives. Er, competitiveness and climate goals are inherently antithetical. Again, Draghi fails to consider whether the climate goals, and the policies adopted to achieve them, are one of the main drags on European investment, productivity, and growth.

In essence, Draghi is plumping for Europe to adopt the Chinese economic model. Leverage out the wazoo to spur growth through massive centrally directed increases in investment.

(In the UK this is being referred to as “supply side economics,” presumably because the government will intervene heavily on the supply side through state investment. That is an utter perversion and inversion of the term, which originally meant reducing government tax and regulatory burdens so as to encourage greater supply of capital and labor inputs by private individuals and firms).

Apparently Not So Super Mario hasn’t realized that China is now well and truly shtuped and its vaunted model is predictably (and as predicted by me and a few others) proving unsustainable. Not to mention that Europe definitely cannot benefit from factors that allowed this unsustainable model to persist for as long as it did (notably a vast pool of low wage labor). Indeed, Europe has the same demographic problems that are undermining China’s future prospects.

In sum, by failing even to consider the underlying drivers of Europe’s economic malaise and advocating that Europe implement a model that is becoming more discredited with each passing day to fix it, Mario Draghi is dooming Europe to accelerated decline, rather than offering a roadmap to recovery.

Perhaps luckily for Europe Draghi’s plan was declared DOA by Germany. No country has shown enthusiasm for it. But it’s not as if they are brimming with bright ideas–Germany in particular.

Meaning that if you are discouraged by American economic prospects–cheer up! Could be worse! We could be Europe.