This article originally appeared in MarketWatch.
World leaders, beware: President Obama’s political loss last week is not preventing him from proffering economic advice on his travels to China and Australia this week.
Obama has teamed up with IMF Managing Director Christine Lagarde to coordinate an economic message for slow-growing industrial economies, reports the Wall Street Journal.
Solutions include greater infrastructure spending; more aggressive monetary accommodation by the central banks of Europe and Japan; and greater financial oversight of the banking and non-banking financial sectors.
That recipe has achieved only 2% growth in America, with a labor-force-participation rate at Carter-era levels. It is even less likely to work in Europe and Asia, where problems of institutional rigidities (Europe) and corruption and intellectual property theft (Asia) are dampening growth prospects. Monetary accommodation and higher government spending cannot solve those fundamental problems.
Rather than following Obama down the garden path to irrelevance, here are five ideas that foreign leaders could use to revive their economies.
Labor-market deregulation. One reason Europe’s economy is growing so slowly is that employers have little flexibility. Firing someone is practically impossible without extensive paperwork. Employees have to receive extensive benefits, such as five weeks of paid vacation a year, plus federal holidays, in the U.K. As a result, each employee becomes a walking liability. Talk to any employer in Europe: They want to hire as few employees as possible.
French President Francois Hollande should get rid of the 35-hour maximum work week and allow employers discretion over firing. Italy’s archaic labor laws make it exceptionally difficult to fire workers while providing permanent job contracts to inefficient older workers, leaving the country’s youth with an unemployment rate of over 40%. Italian Prime Minister Matteo Renzi knows these regulations are driving Italians on to the black market, out of reach of Italian tax collectors, and is trying to change them.
Lower taxes. Speaking of tax collectors, Hollande’s proposed 75% top income tax rate, which was never signed into law, resulted in an exodus of high-income earners. Other countries also have high individual tax rates, such as Portugal’s top rate of 48% and 50% rates in Austria and Belgium. Plus, European countries have value-added taxes, a form of sales tax, with an average rate of 21%, further reducing consumption. There is little point in advising greater monetary accommodation to spur consumption when the countries’ tax systems discourage consumption.
Similarly, the Bank of Japan is embarking on quantitative easing at the same time that Japan is about to raise its VAT rate from 8% to 10%. If the VAT were to be lowered rather than raised, Japanese families would be more likely to spend. Leaders should lower taxes to stimulate consumption, rather than relying on monetary expansion.
Welfare reform. One reason our competitors have slower growth is the panoply of welfare benefits, from free housing to food to health care to education. In Germany, it is not uncommon for people to be enrolled in university at no charge well into their 30s and retire with generous pensions in their 50s, leaving only 20 to 25 years of productive work. Belgium has indefinite unemployment insurance for those over 50 years old, and generous limits for younger workers, leading to lower incentives for people to rejoin the ranks of the employed.
Although Hollande recently claimed that programs are not expensive if the state pays for them, these programs need higher taxes to fund them and should be reformed. With Europe’s aging population, a shrinking number of younger workers will be supporting an increasing number of retirees, a recipe for economic disaster. Europe needs to trim its welfare programs and open its doors to immigrants who want to take advantage of work opportunities and start companies.
Lower minimum wages. Foreign leaders should consider lowering the minimum wage. Europe and Australia have high minimum wages that discourage the young and unskilled from working. In France, the minimum wage is $11.72 an hour, and the youth (ages 15 to 24) unemployment rate is 23%. In Australia, the minimum wage is about $15 an hour, and the youth unemployment rate is 13%. Australia is in the process of banning unpaid internships, making it even more difficult for the young to get work experience.
End green-energy subsidies. Subsidies for green energy are driving up the cost of electricity in Europe. Foreign leaders should wind down these programs. Ever since Germany started closing its nuclear power plants in 2011, it has had some of the highest electricity prices in the industrialized world. At 18.8 cents/kWh, only Italy (20.56 cents/kWh) has higher electricity prices. By comparison, electricity costs half as much in the U.S.: only 9.33 cents/kWh. It is not surprising that Germany’s manufacturing base is eroding.
In January 2009, Obama justified his stimulus package on the grounds that “I won.” But his policies resulted in stagnant economic growth, shrinking popularity, and the loss of both chambers of Congress for his party. Do foreign leaders really want to go down the same path?
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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