Market insight: While America sleeps, Europe is catching up
By Jason DeSena Trennert
Published: July 16 2007 17:20 Last updated: July 16 2007 17:20
Despite some recent hand-wringing about subprime mortgages and a few wayward hedge funds, Wall Street feels pretty good about itself these days. The S&P 500 index has hit an all-time high and the US economy, by almost any measure, is cruising.
The unemployment rate stands at 4.5 per cent, home ownership is at record levels, inflation is under control and long-term interest rates appear, at least at the moment, to be sustainably low. The economy’s animal spirits are revving up again, a familiar state of affairs for America’s capital markets over the past 25 years.
Success, of course, tends to result in complacency and arrogance. America now, sadly, appears ready to take its economic hegemony, and its reliance on free markets, for granted. Quietly, “Old Europe” is in a race to cut corporate tax rates and embrace the spirit of open markets just as Congress seems intent on raising taxes and closing itself off from global competition.
Americans have long derided Europe’s over-reliance on the state, its comparatively high taxes and its meddling in free markets as the cause for the continent’s structurally high levels of unemployment and sub-par economic performance. France’s 35-hour work week alone gave free-market talking heads enough material to last a generation. But relatively little has been written about the race among many western European nations to attract private investment by cutting corporate tax rates.
For all the chest-thumping about America’s free-market system, a quick scan of corporate tax rates around the world would suggest that America’s success is due to ingenuity and hard work rather than the prescience of its policymakers. While corporate tax rates in the US have remained at 35 per cent, the average corporate tax rate for members of the Organisation for Economic Co-operation and Development has declined from 37.6 per cent in 1996 to 28.3 per cent in 2006, according to KPMG.
America’s corporate tax rates are currently among the highest in the developed world, just as Germany, France, Spain and the UK are all rushing to cut taxes. The markets appear to be figuring this out – the MSCI European stock index is up more than 111 per cent in dollar terms over the past five years, while the S&P is up a respectable 54 per cent. In the context of these higher tax rates and a regulatory regime ushered in by Sarbanes-Oxley, it is no small wonder that London is giving New York a run for its money as the world’s financial capital.
One of the great ironies of the Bush presidency is that its approval ratings on the economy are about the same as its approval ratings on foreign policy. Even the most steadfast Bush opponents would have to admit that this seems unfair. And herein lies one of the central paradoxes of free markets: creative destruction merely ensures an equality of opportunity rather than an equality of outcome. While the average person is better off, he often feels less secure that the good times will last. Regrettably, politicians in the developed world tend to feed off these anxieties, often proposing legislation that gives the common man the illusion of security while damaging his long-term economic prospects.
The only real protection from the economic forces of globalisation and technology lies in pro-growth policies designed to make workers into owners. President Bush’s tax cuts on dividends and capital gains and his Pension Reform Act, which among other things requires pension plans to achieve fully funded status by 2011, further this noble aim. All the while, open labour markets have kept profit margins high and led to ever-greater employment. It would be hard to deny that such policies have contributed to the balmy prosperity on Wall Street.
Still, with an election looming, the US appears dangerously close to losing the plot on how it treats capital, just as many European and Asian economies are beginning to embrace the types of policies that contributed to America’s economic strength. One can only hope that the current Congress and the rogues’ gallery of candidates now running for president wake up in time to understand that America’s place in the world economy is not its manifest destiny.
The writer is managing partner of Strategas Research Partners in New York
By Jason DeSena Trennert
Published: July 16 2007 17:20 Last updated: July 16 2007 17:20
Despite some recent hand-wringing about subprime mortgages and a few wayward hedge funds, Wall Street feels pretty good about itself these days. The S&P 500 index has hit an all-time high and the US economy, by almost any measure, is cruising.
The unemployment rate stands at 4.5 per cent, home ownership is at record levels, inflation is under control and long-term interest rates appear, at least at the moment, to be sustainably low. The economy’s animal spirits are revving up again, a familiar state of affairs for America’s capital markets over the past 25 years.
Success, of course, tends to result in complacency and arrogance. America now, sadly, appears ready to take its economic hegemony, and its reliance on free markets, for granted. Quietly, “Old Europe” is in a race to cut corporate tax rates and embrace the spirit of open markets just as Congress seems intent on raising taxes and closing itself off from global competition.
Americans have long derided Europe’s over-reliance on the state, its comparatively high taxes and its meddling in free markets as the cause for the continent’s structurally high levels of unemployment and sub-par economic performance. France’s 35-hour work week alone gave free-market talking heads enough material to last a generation. But relatively little has been written about the race among many western European nations to attract private investment by cutting corporate tax rates.
For all the chest-thumping about America’s free-market system, a quick scan of corporate tax rates around the world would suggest that America’s success is due to ingenuity and hard work rather than the prescience of its policymakers. While corporate tax rates in the US have remained at 35 per cent, the average corporate tax rate for members of the Organisation for Economic Co-operation and Development has declined from 37.6 per cent in 1996 to 28.3 per cent in 2006, according to KPMG.
America’s corporate tax rates are currently among the highest in the developed world, just as Germany, France, Spain and the UK are all rushing to cut taxes. The markets appear to be figuring this out – the MSCI European stock index is up more than 111 per cent in dollar terms over the past five years, while the S&P is up a respectable 54 per cent. In the context of these higher tax rates and a regulatory regime ushered in by Sarbanes-Oxley, it is no small wonder that London is giving New York a run for its money as the world’s financial capital.
One of the great ironies of the Bush presidency is that its approval ratings on the economy are about the same as its approval ratings on foreign policy. Even the most steadfast Bush opponents would have to admit that this seems unfair. And herein lies one of the central paradoxes of free markets: creative destruction merely ensures an equality of opportunity rather than an equality of outcome. While the average person is better off, he often feels less secure that the good times will last. Regrettably, politicians in the developed world tend to feed off these anxieties, often proposing legislation that gives the common man the illusion of security while damaging his long-term economic prospects.
The only real protection from the economic forces of globalisation and technology lies in pro-growth policies designed to make workers into owners. President Bush’s tax cuts on dividends and capital gains and his Pension Reform Act, which among other things requires pension plans to achieve fully funded status by 2011, further this noble aim. All the while, open labour markets have kept profit margins high and led to ever-greater employment. It would be hard to deny that such policies have contributed to the balmy prosperity on Wall Street.
Still, with an election looming, the US appears dangerously close to losing the plot on how it treats capital, just as many European and Asian economies are beginning to embrace the types of policies that contributed to America’s economic strength. One can only hope that the current Congress and the rogues’ gallery of candidates now running for president wake up in time to understand that America’s place in the world economy is not its manifest destiny.
The writer is managing partner of Strategas Research Partners in New York
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