TWO CEREMONIAL events occurred in Washington on Tuesday evening that shone a spotlight on one of the most important but paradoxical features of a modern democratic society.

The more widely reported was President Bush’s State of the Union address, a weak and defensive speech even by his undemanding standards. At the other end of Washington, meanwhile, Alan Greenspan, the retiring chairman of the Federal Reserve Board, was bidding farewell to the institution whose skilful management of US monetary policy made him the dominant figure in the world economy for the past 18 years. What connects these two events is a paradox that has baffled many people, especially in Europe, ever since George W. Bush became President.

For the past five years, America has been led by a president who is clearly not up to the job — a man who is not just inarticulate, but lacking in judgment, intelligence, integrity, charisma or staying power. Yet America as a nation seems to be stronger, more prosperous and self-confident than ever.

As the State of the Union address made clear, President Bush has more or less given up on all the grand goals that were supposed to define his presidency: social security reform, peace in the Middle East, even the axis of evil doctrine, which was supposed to disarm North Korea and Iran. Most embarrassingly, President Bush seems to have given up on capturing Osama bin Laden or bringing to justice the perpetrators of 9/11.

But now comes the paradox. While America has been run by one of the most doltishly ineffectual governments in history, it has forged ever further ahead of Europe in terms of wealth, science, technology, artistic creativity and cultural dominance.

Why does America’s prosperity and self-confidence seem to bear so little relationship to the competence of its government? The obvious answer is that America, founded on a libertarian theory of minimal government, has always had low expectations of politicians. In America, it is not just business that thrives independently of government, perhaps even in spite of government. The same is also true of other areas of excellence which in Britain are considered quintessentially in the public domain — higher education, leading-edge science, culture and academic research. Because Americans expect so little of their government, they are rarely disappointed. They do not slump into German-style angst when their governments fail to find solutions to the nation’s problems.

This anarchic spirit was summed up by Ronald Reagan: “The ten most dangerous words in the English language are ‘I’m from the government and I’m here to help you’.” In Europe, by contrast, the public expect government to solve all problems, and the media try to hold politicians accountable for everything. The result is a culture of dependency that extends far beyond the welfare state, to business and to the worlds of education, medicine, arts and science.

The American approach has a powerful advantage rooted in human nature: private sector activity is powered by economic incentives, while the State must operate by rules and sanctions. Since incentives, as Adam Smith observed, are much more likely to stimulate creativity and effort than sanctions, private enterprise tends to achieve ambitious objectives, while government often fails.

But while the weakness of US government may in some ways have helped to widen the gulf of achievement between America and Europe, there is another and opposite side to the story — which is where we must return to Mr Greenspan. American politicians may be incompetent and venal, even by European standards, but this is not true of the public realm as a whole. America has a host of public institutions, ranging from government bodies such as the Federal Reserve and the National Institutes of Health to charities such as the great universities, museums and hospitals, that are driven by a sense of public service that puts British and European bureaucracies to shame.

The American system recognises that a capitalist economy has areas of market failure where incentives alone will not produce socially desirable results. But American public institutions try to maximise private activity and incentives, rather than rein them in, within their realms — whether it is universities encouraging professors to start businesses, or health administrators creating incentives for drugs companies to do medical research. It is in this respect that Mr Greenspan most clearly represented the genius of the American system.

Mr Greenspan realised that his job at the Fed was not just to control inflation, the goal that other central bankers recognise. His real task, he explained last year, was “to achieve the maximum sustainable economic growth, with price stability pursued as a necessary condition to promote that goal”. Although a passionate advocate of small government, he realised that well-judged public intervention was necessary, not just to maintain stable prices but also to create the incentives for private enterprise to accelerate economic growth. He also understood that the best way to deal with the imbalances in the changing world economy was by supporting growth and allowing the greatest possible freedom for financial markets. Private investors, he believed, were more likely to find solutions to the complex challenges created by globalisation than central bankers or politicians.

But while Mr Greenspan believed that private incentives solve economic problems more successfully than government diktats, he also understood that capitalism works at its best if it operates in a sound, simple framework of ambitiously pro-growth monetary policy. His genius was to understand that public policy could be simultaneously minimalist and ambitious. In a sense, this is the genius of the American system. And this is why America does not need a genius in the White House.

a.kaletsky@thetimes.co.uk

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