Saturday, October 29, 2005
How unbelievable? The Euro zone, which did not suffer a single destroyed city all year, expects that its GDP will grow at substantially less than half the pace America set in the third quarter. Imagine how much faster the American economy might have grown had Europe's been stronger.
The American economy is strong because it is flexible. We allow businesses to fail. If an industry looks particularly weak, we usually have the good sense to let it die so that the financial and human capital can go into another business that is more competitive. We know that this will mean unemployment and sometimes poverty, but Americans are also flexible and the smart ones move to another area where they can find a job, or they go back to school so that they can switch profesions. Capital flows efficiently -- there are investors and lenders of every shape and size for any kind of business in any industry imaginable. Uniquely in the world, in the United States there is also capital available for industries that are not imaginable.
All of this flexibility means two things. First, financial and human capital -- money and smart people -- flows in the direction of the United States because it generates higher returns here. Second, we don't weigh down our economy with nearly as much dead weight -- businesses that aren't allowed to fail and employees we aren't allowed to fire -- as the sticky economies of the European Union.
Economic flexibility is a massive advantage that very few countries in the world understand. Remember it whenever somebody proposes subsidizing a business that should die, taxing a business because corporate taxes are hidden from voters, restricting the easy termination of employees, regulating debt or equity capital, or throwing up barriers to free international trade. All of such laws and regulations are designed to confer benefits to specific individuals or businesses at the expense of the general welfare.