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America and Europe, continued
Many readers have asked for more on the U.S.-Europe comparison. In the CT comments, John Quiggin writes:
...the key variable [is] output per hour worked, Europe matched or surpassed the US some time ago. The faster US growth of the past decade is in part catchup.
If we at look at gdp per hour worked, the US has a clear lead over Europe; the broader data link is here. That measure for Europe includes Greece but not the former Communist countries.
Furthermore the greater number of hours worked in the U.S. is not just a labor-leisure preference. Some of the difference stems from the higher tax rates in Europe, as argued by Ed Prescott (plus Europeans have to work harder at shopping and at home, see the link). Admittedly this question is not fully resolved, but it is wrong to attribute the entire hours difference, or even most of it, to preferences. In other words, measured output per hour is not the key variable.
Many stories can be told about why the US is gaining on Europe. Most plausibly they involve greater micro-productivity in R&D, higher education, and the use of information technology. In fact, some of these stories can be told from a pro-government point of view. These stories are not just seen in the statistics, they are confirmed by a wide range of case studies and more impressionistic accounts.
But it is not plausible to suggest that the U.S. has been growing more rapidly because it is playing catch-up to Europe.
There is more, but this post is running long...
It is true that some European nations are at a par with the United States, and Norway (oil) and Luxembourg (financial services and small population) are above the United States. But keep in mind that these figures for the top European performers are averages. Creating low-wage jobs or taking in immigrants will lower such an average butthis effect should not downgrade the true economic performance of the United States.
A further question is how much "cherry-picking" in Europe should be allowed (e.g., ruling out Greece), while not doing the same for within the United States. Louisiana and Mississippi are a drag on U.S. averages, and DC probably looks like Luxembourg.
Note also that high rates of government employment, as we find in many parts of Europe, tend to overstate measured gdp.
If we look at recent rates of growth, whether of productivity or of gdp, the U.S. clearly is ahead of Europe, although a forthcoming U.S. slowdown may change that ranking at least for a while. Much of this seems to stem from information technology, as best we can determine, not "American catch-up." Try also the Lewis book on productivity. The micro-evidence all suggests that the U.S. has obtained an ongoing flexibility lead in certain key categories, most of all retailing.
In short, if we view the numbers in context, they still indicate a serious economic problem for social democracy. Try some demographic projections as well, and their implied economics, a topic on which Quiggin and CT commentators were conspicuously silent.
None of this is counting the America's greater future capacity to either respond to globalization or absorb immigrants. I've heard many a European envying the future of the American economy, but I've never heard of an American envying the future of the French or German economy (except perhaps at CT).
As I said in my original essay, I still see two "plausible" scenarios for Europe not collapsing. Eichengreen is yet more optimistic than I am. But if defenders of social democracy continue to deny the problem, there is no reason to be optimistic at all.
Posted by Tyler Cowen on November 9, 2006 at 06:23 AM in Economics | Permalink
Comments
A further question is how much "cherry-picking" in Europe should be allowed (e.g., ruling out Greece), while not doing the same for within the United States.
One might argue that the very high-wage, high-union, high-unemployment labor market of certain social democratic countries results by itself as a "cherry-picking" in the data in the first place. It is, I reckon, a bit misleading to price out low productivity labor from the market and then brag that the labor that does retain jobs has high productivity and high wages. Well, it is true, at the cost of unemployment for those without skills.
Posted by: John Thacker at Nov 9, 2006 8:02:40 AM
Of course, I see that you have alluded to this in the post with your comments about the average, and the linked article in the Globalist. But I think it's a point that should be stressed, since John Quiggin and others seem evasive on the point.
Posted by: John Thacker at Nov 9, 2006 8:04:45 AM
I wonder why one is not making a risk adjustment here. It is true that both income and output of the average US worker are higher than in Europe. However, with wider and bolder safety nets, european average income is less volatile: unemployement or long-term illness downsides are more limited.
Posted by: mic at Nov 9, 2006 8:11:26 AM
However, with wider and bolder safety nets, european average income is less volatile: unemployment or long-term illness downsides are more limited.
Well, except that unemployment is much more likely to be long-term in Europe too. Less volatile income has its downsides as well. That's the problem when low-productivity labor is denied jobs but put on generous welfare instead. It becomes very difficult to rise out of them. (Though one admits that it can be a comfortable existence on welfare to some degree, they do seem to still riot in the banileues.)
Posted by: John Thacker at Nov 9, 2006 8:16:51 AM
Thanks for continuing this. I have not had a chance to follow the links yet, but I want it known that your effort in clarifying is appreciated.
Posted by: theCoach at Nov 9, 2006 8:35:51 AM
It's also simply wrong to say that europe long ago passed the US. There are a only 2 or 3 countries that are ahead of the US in terms of labor productivity, and at any aggregate level, the EU is far behind. Also, there's a fairly strong argument that there are decreasing returns to higher hours, and therefore because the EU has artificially low levels of hours worked, that props up their labor productivity. If you adjust for that effect, no european country is ahead of the US.
Posted by: Ian D-B at Nov 9, 2006 8:44:30 AM
One thing I will grant on the cherry picking front - the US should not be required to include the occupied territories in Iraq.
One other thing that is not clear to me, is exactly what policy differences we are talking about, whether they are all or nothing and whether or not variance in those policies within relative zones provides evidence either way (Ireland and Scandanavian countries seem to be policy outliers, and we can probably atribute more catching up to Ireland. In the US, what weight do you give to the relative difference in policy from the higher productivity areas?)
Posted by: theCoach at Nov 9, 2006 8:47:41 AM
I had once heard that there is a lot of off-the-clock work done in Europe that goes unreported because it violates labor laws. If this is true (and I can't cite any specifics to verify it), that could explain the productivity gap.
Posted by: Ted Craig at Nov 9, 2006 8:53:20 AM
I meant to include in my above comment and example of policy difference - for example, on healthcare, which seems to me to be one of the major pillars of social democracy, the US will soon be moving more toward the European model, and the European model will be making some market reforms. In my estimation I see this as only helping US productivity, but it is a major policy difference that exists now, but probably will not well within the scope of the original article - actually, given current levels of funding, the US, when it moves toward universal care, will likely go in much more thoroughly.
Posted by: theCoach at Nov 9, 2006 8:54:03 AM
Coach: You pose some great questions; by all means keep it up.
Regarding Ireland, its recent growth spurt can certainly be attributed in part to catch-up, but that begs the question of why, 20 years ago, it was languishing. Most economists think that Ireland's effort in the 1990s to remake itself as the business-friendly oasis within Europe is an important factor.
There is, of course, a lot of variation among European countries when you get to the level of specific policies. There is also a lot of variation among U.S. states at the level of minimum wages, taxes, corporate and union law. For the most part, there is not much variation in such policies within the European countries; these issues tend to be handled at a national level, at least for the European countries with which I'm most familiar.
Still, most economists would identify some broad elements of "social democracy" that exist nearly everywhere in Europe: (1) a generous safety net supported by high marginal taxes, (2) strong unions and labor market regulations that create barriers to hiring and/or firing, (3) corporate governance that emphasizes stake-holders more than share-holders; for politically sensitive industries this becomes a sort of light-touch central planning.
As others have pointed out, policies like this are not unheard of in the U.S., too. But it would be hard for anyone to argue that they are not much more pronounced nearly everywhere in western Europe.
Posted by: David Wright at Nov 9, 2006 9:27:54 AM
Another thing that is not clear to me is the sustainability of accumulated wealth, and its relation to higher productivity growth and depreciation.
The assumption seems to be here that it is extremely significant, but it goes strongly against my intuition, an intuition I would gladly concede could be wrong.
Posted by: theCoach at Nov 9, 2006 9:33:10 AM
"I wonder why one is not making a risk adjustment here. It is true that both income and output of the average US worker are higher than in Europe. However, with wider and bolder safety nets, european average income is less volatile: unemployement or long-term illness downsides are more limited. "
I've talked about this before in comments here. Risk adjusted returns are what any mgr worth they pay regards as the metric to measure. Overall higher returns are typically not considered to be attractive on their own.
However, every libertiarian out there is only concerned with optimizing returns. I think that soemtimes they concentrate on the wrong optimization problem. Its not that I think complete stability of returns is optimal, I just recognize, like most humans out there, that returns are not the only factor to consider whan evaluating an economic policy.
Posted by: mickslam at Nov 9, 2006 9:42:11 AM
David,
Thanks for the kind words. I am out of my element here, but I find this stuff fascinating.
On 1) the big one is healthcare no? For the purpose of argument, I am going to assume that european-style healthcare and US style healthcare are equally efficient (I think that is generous to the US, but I am aware of arguments offsetting arguments). In that regard then the US spends significantly more in that area, and if you grant the efficiency argument, it does not matter whether it is in the private or public ledger. As I mention above, the US looks poised for a change in this area toward the Euro model in any event.
The other part of 1) is welfare, where Europe appears o have two different models - the scandanavian make work government jobs and what apears to me badly flawed French-style of relatively high pay for non-workers (although I badly informed about, say, French participation in the economy of the young relative to extending education), and maybe they have a better argument than I am aware of.
2) Strong unions - this is another one where I think things are a bit complicated. I continue to hold out hope for perhaps pony-filled dream that unions can transform into better partners with business giving labor more bargaining power, but also being more flexible. Less defined pensions, but more paid retraining. Regardless of my hopes, the US also seems poised for some sort of a correction to labor/corporate profits.
I do not know enough about 3) to comment, except to say that I think Europe has pretty wide latitude in this area, and with protectionsim in genreal before I would declassify it as Social Democracy. The big question seems to me, can europe choose leisure over wealth, and redistribution.
Thanks.
PS - Tyler appears to be very concerned about population growth, something that I simply cannot see, except for a brief period where there would be a baloon in the retirees. It strikes me that a decrease in population increases natural resource wealth per capita, and that land will become increasingly valuable, but I am obviously missing something here.
Posted by: theCoach at Nov 9, 2006 9:56:20 AM
Your aside comparing Washington D.C. to Luxemburg may be
more true then you think. If you do state per capita real GDP
Washington is completely off the scale. It is approximately
double the next highest state -- Delaware.
But in D.C. it is because of all the commuters that live in MD & VA
but work in DC. Their output is counted in the DC real gdp,
but they are not residents of DC .
Posted by: spencer at Nov 9, 2006 9:57:59 AM
"However, with wider and bolder safety nets, european average income is less volatile"
How do you mean, volatile? Our average income has been "stagnant" according to critics, not "volatile". However our top wages keep going up.
Or do you mean over a lifetime of an individual? In this case it certainly is less volatile in Europe where it is much more stagnant - i.e. in the US an individual is able to move several income quintiles up during the course of a lifetime corresponding to tens of thousands of dollars per year in real income. In Europe the individual only moves in "relative" income - he moves up compared to his peers of the same age - corresponding usually to almost no change in income (a few thousand dollars per year). It is less "volatile" in Europe because real wages are very low and very stagnant compared to the US.
Posted by: economistatwork at Nov 9, 2006 10:05:54 AM
mickslam: Libertarians are concerned with optimising individual choice. If an individual wants to take some portion of his income and use it to purchase insurance against income volatility, I can't see an libertarian objection to his doing so. The libertarian objection would be to a government policy that forces him to do so.
economistatwork: You are mis-construing the meaning volatility, which is a perfectly well-defined mathematical concept. Income volatility here means individual income volatility, not national income volatility. And volatility measures the scatter arround a trend, so a steadily increasing income would not be "highly volatile" -- it would have precisely zero volatility. I don't know of any comparitive data on income voltility, but would hardly be surprising if income volatility is lower in Europe than in the U.S. In any case, the question of where income volatility is lower is mathematically completely independent of the question of where trend income growth is higher.
Posted by: David Wright at Nov 9, 2006 10:24:12 AM
As Tim Smeeding's work suggests, median and lower incomes in the US are actually quite similar to those for the bulk of Europe. Ditto for wealth. It is at the top where you see huge differences. These numbers are also biased against the US because of the large number of low income immigrants at the bottom of the US distribution. A comparable measure of white, non-immigrant Europeans and Americans from 1980 to 2000 would undoubtedly favor the US even more strongly.
See the following link from Mankiw
http://gregmankiw.blogspot.com/2006/10/us-and-european-inequality.html
"The bottom line: The poor in the United States have about the same real income as the poor in western Europe. The rich in the United States, however, are much richer."
Posted by: Not Gandhi at Nov 9, 2006 10:34:54 AM
Mickslam, libertarians aren't the only ones who are careless about risk costs.
Note "mic", in the comments above, trying to count job security observed in Euro labor markets as a pure benefit. We need John Thacker to remind us that the difficulty of finding a job observed in those markets is a cost. This is not the first time that, in my years on the net, I have seen a leftist cherry-picking the risks to focus on. As you might say, "I think that sometimes they concentrate on the wrong optimization problem.":-|
Or, of those who consider that New Deal's federal deposit insurance is justified by the impressive run of bank failures which caused losses to depositors early in the Great Depression, how many weigh that against the impressive run of S&L failures which caused losses to the federal government around the early eighties? (The only people I've seen even attempt to make the comparison --- e.g., roughly how many months of GDP were lost? and roughly how heavily did it fall on ordinary folk as opposed to disgusting plutocrats? --- were disgusting free-market sympathizers. Is that because I read too little leftist stuff? Anyone want to recommend the go-to source for reality-based thinkers who support deposit insurance without reservation?)
When one's true end is to reduce risk, it seems unwise to wave away those risks which happen to be a side-effect of one's preferred means of shifting economic power from free markets to central authorities.
(Also, even when people aren't distracted by twisting and turning in partisan dogfight maneuvers, it's not so easy to think straight about risk. I did my Ph. D. thesis on Monte Carlo simulations (in chemistry), and I also audited a course on methods for accurately calculating the expected value of derivative securities. It seems clear to me that that stuff is important in understanding securities markets. But not only is it difficult to analyze complex cases even when you're knowledgeable, it is remarkable how hard it is to discuss even very simple probabilistic ideas (like variance) even with people who think full time about the securities markets.)
Posted by: William Newman at Nov 9, 2006 10:47:26 AM
"And volatility measures the scatter arround a trend, so a steadily increasing income would not be "highly volatile" -- it would have precisely zero volatility."
But who said that increases in individual incoem in the US are "steady"? In a highly dynamic marketplace, often incomes must be more volatile even as they trend upward over the lifetime - e.g. people lose their jobs but after short term unemployment (at 0 or low income) they get a job that pays higher than the last job. This is because it is a (labor) sellers market with low unemployment and near-zero long-term unemployment. In europe it is a buyers market and people glue themselves to one job at a stagnant wage for a lifetime, to avoid a lifetime of welfare unemployment.
Yes the two concepts are independent, but in reality they may trend together.
Posted by: economistatwork at Nov 9, 2006 10:49:23 AM
"The bottom line: The poor in the United States have about the same real income as the poor in western Europe. The rich in the United States, however, are much richer."
Well, and the fact that the poor become the rich over the course of a single lifetime...
Posted by: economistatwork at Nov 9, 2006 10:51:06 AM
See Revel: Antiamericanism .Or why the USA is the true Social Democracy
Posted by: S at Nov 9, 2006 11:51:47 AM
economistatwork,
Isn't it true though, that over the last decade (the period in question), has seen a reduction in us income mobility?
Here is the first paper that comes up on a search http://www.futureofchildren.org/usr_doc/02_5563_beller-hout.pdf
A quick read says that we are middle of the road in income mobility, and that it has slowed since 1970.
Posted by: thecoach at Nov 9, 2006 11:57:06 AM
Surely the most impoirtant issue for the "end of the European" model is competitiveness. It is whether firms in Europe can compete with firms in other parts of the world or whether the welfare state makes that literally impossible. I don't recall where I read it but I do recall reading that European companies are no less competitive than US companies except at the level of SMEs and that is changing.
A further question is the extent to which the US should have higher productivity and GDP than Europe. The practical barriers to all aspects of business and the distribution of know-how are much greater in the EU than the US and that will not change. A huge single-market with a single culture is obviously advantageous.
I have to say that Tyler seems peculiarly ignorant of the economics of small countries. Go around the EU and the successes and failures of each nation and of many areas of each nation have an awful lot to do with factors beside welfare and labour policies. The idea of a European model misses the important differences that make the difference between the relative success and failure of nations. People often talk of the Nordic model but Finland, Sweden, Norway, Denmark and Iceland all have very different stories to tell about why they are successful that cannot be explained by high taxes. Discussion on the level of EU vs US lack nuance to degree that makes them practically worthless.
Posted by: Finnsense at Nov 9, 2006 11:58:25 AM
But in D.C. it is because of all the commuters that live in MD & VA but work in DC. Their output is counted in the DC real gdp, but they are not residents of DC.
I don't understand how bureaucrats and lobbyists could be said to be generating "product". It may be true that bureaucrats are necessary - although I have my doubts - but I can't see how they're producing anything.
- Josh
Posted by: Wild Pegasus at Nov 9, 2006 12:05:09 PM
"The poor" do not become the rich.
Some percentage of the poor become rich during their lifetime. But the number of people who make the whole leap is vanishingly small. The climb up the economic ladder generally takes more than one generation. The model goes: start poor, work your way into a decent job and save enough money that your kids grow up feeling solid working or low middle class, don't have major nutrition or untreated health problems and have a home to fall back on when they are starting out. They now have a reasonable shot to go to college or do well in a trade. Their kids then become the privileged middle class folks that will sometimes strike it rich. At each stage of the game, making the leap generally requires being smarter, harder working or more frugal than most of your compatriots, and at the last stage a fair bit of luck is required as well.
I'm okay with that. That still represents mobility. True rags to riches stories are extremely rare and the image they foster is highly misleading. A lot of the "rags" aren't poor at all, but people from middle class or even quite wealthy families who are in grad school rather than working. But grad school isn't poverty, it's an investment.
OTOH, this does mean that income stats have to be taken with a grain of salt. Some of our bottom income group are not poor people, but those with very good long term income prospects who happen to be in school, between jobs in volatile high-paying industries, experiencing short term losses in business, etc. Cafe Hayek had a pointer a few months back (that I'm too lazy to look up) to a study that attempted to adjjust for these things. It indicated that the number of poor people is much less than it would seem when just looking at raw income distributions.
Posted by: Michael Sullivan at Nov 9, 2006 12:05:32 PM
