WEALTH OF NATIONS
U.S. Versus Europe: No Winner
Which has the superior model? It turns out that each side has things to teach the other.
by Clive Crook
Saturday, Jan. 16, 2010
Which has the superior economic model, the United States or Europe? The question keeps coming up and never gets resolved. It is having another go-round at the moment, with the adversaries lining up as usual. Conservatives say that Europe's social-democratic model is bound for the landfill of history. Progressives defend the model, even if they usually stop short of recommending it outright.
As a British import, allow me to join in. My answer, to cut to the chase -- one picks up these expressions -- is that neither model is objectively better. You can guess which I prefer, because like many other Europeans I have chosen to live in the United States. But the European approach is perfectly viable, and I can see why many Americans might like it. (For some reason, not many seem to move to Europe. The traffic seems to be mainly in the other direction. A mystery.) To be sure, each side has things to teach the other.
In the newest turn of this discussion, Jim Manzi of the Manhattan Institute and Ross Douthat of The New York Times point to Europe's slower economic growth. Jonathan Chait of The New Republic and The Times's Paul Krugman reply that this is a statistical illusion: The U.S. is growing faster only because its population is rising faster, not because its living standards are improving any more quickly.
Then Greg Mankiw of Harvard (who was chairman of President George W. Bush's Council of Economic Advisers) and Mark Perry of the University of Michigan piped up, saying that the level of living standards in United States is still a lot higher. Moreover, as Manzi said, population matters if you are comparing relative economic power. Europe's stagnant or diminishing populations are a harbinger of decline. Switzerland is rich but small. The United States is not content to be Switzerland.
In what follows, bear in mind that "Europe" is a dangerous generalization, whichever side in this discussion you intend to take. It is not one country, but many. You cannot even say exactly how many, because the region is a fluctuating idea that depends on your notions of geography and the period under consideration. Within Europe -- as within the United States -- there are rich areas and poor areas; places that are growing and places in decline. And within Europe, political borders still matter a lot. Forms of government and economic arrangements -- levels of taxation and public spending, the role of trade unions, the scope of economic regulation -- all vary.
With that caveat in mind, put growth rates and population to one side for the moment and consider living standards and productivity. As Mankiw says, living standards in the United States are much higher on average than in Europe, as measured by per capita income. On the other hand, productivity is not. This is the most interesting and surprising point of comparison.
As Mankiw notes, average income in the U.S. is around $47,000. Adjusting for purchasing power, in Britain and Germany it is around $36,000; in France, $34,000; in Italy, $31,000. Overall, U.S. living standards are more than one-third higher than in Europe.
Perry underlines the point by comparing European countries with American states. "Although [the] Netherlands, Sweden, and Denmark are among Europe's wealthiest countries, as U.S. states they would be between 14.5 percent and 18 percent below the U.S. average.... If France became a U.S. state, it would rank No. 48 out of 51 by per capita [gross domestic product], just barely ahead of America's two poorest states, West Virginia and Mississippi.... Belgium, Finland, Britain, Germany, and Spain would rank in the bottom 20 percent of U.S. states by per capita GDP, just barely ahead of Arkansas but below Kentucky."
In a recent column, Krugman urged readers to trust their eyes more than dry statistics (something you could rarely accuse him of doing, which I honestly mean as a compliment). Don't people seem well off in London, Paris, and Frankfurt, he asks? They do. Milan is also really nice: all those Ferraris. But these places are not exactly at the European mean. He should try comparing Bolton, Lancashire (my hometown) with Princeton, N.J. That would remind him that statistics can be useful. But if superficial impressions are allowed, here is mine gleaned from traveling around the U.S.: Americans live in bigger houses than their European counterparts, eat better food, drive bigger cars, wear better clothes, and are surrounded by more and better stuff.
Put it this way: If America's living standards suddenly descended to Europe's, rather than the other way round, it would be a calamity that would make the country's present economic difficulties look trivial.
And yet, as I say, higher U.S. productivity is not the main reason for this prosperity gap. Comparing America with the richest European countries, output per hour worked is not that different. In levels of productivity, Europe's most successful economies have caught up. Then why are they still so much poorer? Because Europeans work less. A higher proportion of the U.S. population is employed, and Americans work longer hours. Effort, not efficiency, is why Americans are richer.
The interesting question is, how much does this subtract from the claim that Americans are truly better off? This is not easy to answer. Europe has higher unemployment, which is obviously bad -- a consequence of labor-market policies that the U.S. would be wise to avoid. But what about working hours? Perhaps Europeans are happy to work fewer hours in return for less pay -- because they are lazy, or, to put it more kindly, because they value their leisure more highly. If so, good luck to them. But perhaps they work less hard because taxes are higher and they think, why bother? In that case, they really are worse off, even though they may value the public services and income redistribution that taxes pay for. Maybe it is some of both.
Now consider growth, which is really to ask how the two models will compare 10 or 20 years from now. The Europhiles are correct that Europe's per capita incomes have grown about as quickly as the United States' over the past few decades, and correct that in many countries Europe's productivity (output per hour worked) has grown faster. But this is what you would expect, because its economies were catching up. The richer they get, the harder it is for European countries to match, let alone surpass, U.S. performance. Meanwhile, the surprising thing is just how persistent American economic leadership, based on its supposedly inferior model, has proved.
In Europe, euro-optimism is out of style. The European Union's economic problems are becoming more apparent. I mentioned that if Europe had not narrowed the gap in the postwar decades, something would have been wrong: Over the more recent past, Europe's governments have come to believe that something is.
Increasingly, they worry that U.S. pre-eminence in innovation is unchallenged -- by Europe, anyway. They worry that Europe has been much slower to realize the benefits of the information-technology revolution. They worry that creaking labor markets and ill-adapted employment policies will delay recovery from the recession. Lack of competitiveness with respect to the U.S. is a constant preoccupation -- too much so, in fact, but there it is. When European policy makers get together, they talk of little else but their next abortive push to spur competition and make Europe a bit more like the U.S. So far as I can see, Washington's policy makers are not losing much sleep over the emerging economic threat from Europe.
I have one other quarrel with the Europhiles. Their view, as The New Republic's Chait put it, is that social democracy provides greater social cohesion; if you discount the growth penalty, it must be the superior model. Agreed, American Europhobes exaggerate the growth penalty, although I think that Europe's governments, looking ahead, are right to believe it is not zero. Beyond that, however, the other claim also needs thinking about. Does Europe really have greater social cohesion?
Europe has less inequality, thanks to its high taxes and welfare states. It has stronger unions and labor-market protections -- and the higher unemployment that go with them. Its public schools are often better, and in some European countries, social mobility is higher than in the United States. All European governments, in different ways, manage to provide universal health care at comparatively modest cost. That is surely the most important thing that Europe can teach America.
More than the United States, though, many of Europe's countries are socially divided. Unassimilated immigrants are an enormous and still-growing problem across the European Union. Again, look to labor markets for one reason why. Despite the worsening polarization of its politics and the astounding variety of its cultures, ethnicities, and religious traditions, the United States binds its people together more harmoniously than most European countries do. Everywhere, the Stars and Stripes: That, too, is social cohesion.
The idea of America, with its emphasis on individualism and the market, is a remarkably powerful unifier. This is a paradox that social democrats need to ponder.