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The European Economy Since 1945
An excellent book appeared on my doorstep yesterday, by Barry Eichengreen:
Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on. The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth. Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted. The generous employment protections and heavy welfare-state charges that had given labor the security to accept the installation of mass-production technologies now became an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies became the agents of job creation and productivity improvement. Systems of worker co-determination, in which union representatives occupied seats on big firms' supervisory boards, had been ideal for helping labor to verify that owners were investing the profits resulting from its wage restraint but now discouraged bosses from taking the tough measures needed to restructure in preparation for the adoption of radical new technologies. State holding companies that had been engines of investment and technical progress were no longer efficient mechanisms for allocating resources in this new era of heightened technological uncertainty. They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries.
I have never read a better paragraph on what the European economies have done right and subsequently did wrong. Note that Eichengreen is, broadly, a social democrat. Eichengreen (who is more optimistic about Europe than I am) believes that Europe can turn things around, without chucking the basic model, but he doesn't for a moment deny that Europe faces an economic crisis relative to the American model.
I am still shocked by the response of the CrookedTimber commentators to my short essay on social democracy over there. It is not just a question of how one reads the productivity and growth numbers, but also there is a commonly accepted narrative of what is wrong with the major European economies. Eichengreen is the one doing service to the social democratic cause.
Posted by Tyler Cowen on November 8, 2006 at 06:30 AM in Books, Economics, History | Permalink
Comments
Tyler
I wouldn't worry too much about the commentators at CrookedTimber. Whether or not they represent the mainstream in academia, they certainly do not represent the mainstream in economic policy making.
I think there are some ground for optimism in Europe, but none for complacency.
Posted by: Mark Hannam at Nov 8, 2006 9:05:59 AM
There are a lot of commentators at CT. John Quiggin, for example seems to make a valid point. Growth means nothing -- it is a side effect of Productivity.
And the concept of exponential growth seems to be an extremely misguided way of viewing long term growth of a collection of nations.
The knowledge and technology that lead to increased productivity are at the very least semi-transferable.
Personally, I would be interested in more detailed responses to John Quiggin, and I do not quite understand "there is a commonly accepted narrative of what is wrong with the major European economies."
Is this an assertion that we should take the commonly accepted view whether right or wrong? That the commonly accepted narrative is correct? (which seems to conflict with the previous assertion that the productivity numbers do not matter). Just confused about what is shocking here. Is there a case to be made that growth has more weight than productivity that I am missing?
Posted by: theCoach at Nov 8, 2006 9:36:43 AM
If the numbers and analysis in Eichengreen don't convince you, try *Europe at the Crossroads*, recently reviewed on MR. A few of the CT commentators point to other good sources.
Posted by: Tyler Cowen at Nov 8, 2006 9:49:19 AM
That paragraph seems to suggest that European institutions resist productivity improvements, but France and Germany have higher productivity than the US.
Unemployment is much more of a problem.
I think that it's still probably the case that job security reduces resistance to productivity improvements, but that it also prevents job creation.
OTOH, there are weird things that I just can't explain, such as the fact that a Paris McDonalds seems to cost less than half as much as it's nearest Paris competitors for similar goods. I assumed that the high prices were due to regulatory burden, but then how does McDonalds make burgers cheap? Maybe there's just too much resistance (status based?) among producers to price competition in Paris?
Posted by: michael vassar at Nov 8, 2006 11:13:23 AM
I agree with TC about the disappointing comments on Crooked Timber. But when I was a young chap I would have been saying the same things.
I argued bitterly against the economic reforms of the 1980s - which, contrary to my expectations, suceeded in turning-around decades of economic decline in the UK to make us currently the fourth economy in the world.
This was a truly amazing achievement, still unappreciated, which I and most of the UK intelligentsia argued was impossible. Has any other mature country done this kind of turn-around?
But I would guess that the Crooked T commentators are mostly young men in their late teens and early twenties, who havent been around long enough to have their wishful thinking and good intentions contradicted by experience, in the way that I did. It takes a long time.
One strong argument in support of TC is the UK. The UK is in-between Europe and the US in terms of its social model, and also in between Europe and the US in terms of economic indicators.
It is hard to be optimistic about France, Germany and Italy when reading the news; but it is probable that they will find ways to sort out their economic problems. Liberal democracy is a powerful problem-solving process.
Posted by: Bruce G Charlton at Nov 8, 2006 11:16:14 AM
Still confused, but I assure you this is nothing new.
Eichengreen, as far as I can decipher from the excerpt seems to be pointing to a big difference between innovating and using known technologies, and that the Euro model relies on using known technologies.
That would strengthen, as far as I can tell, my point about the tranferrability of the levers of productivity, i.e. , there would be no such thing as relative exponential growth, just that a European model come a little late to the party piggy backing on the any other advances.
Posted by: theCoach at Nov 8, 2006 11:20:52 AM
And another thing...
Perhaps the UK also contradicts TC's thesis in one respect - I have read that the UK is the most secular/ least religious country in the world (lowest proportion of church members and goers). And specifically England (which is the most economically successful of the nations) has lower church membership than Scotland, Wales and Northern Ireland.
Posted by: Bruce G Charlton at Nov 8, 2006 11:23:12 AM
I regard the CT reply to Tyler a big blow for interliberal dialogue on the internet. The best response would have been, "Ok, we don't agree, but we acknowledge the data; let's go some length to presenting the other side."
Instead, the dismissive replies - especially from Quiggin and Berman - demonstrated that market liberals are still eating at the kids table in the eyes of the mainstream egalitarians.
Posted by: Rhadamanthus at Nov 8, 2006 11:35:07 AM
As to Crooked Timber: it's so naïve to expect rational thinking from leftists. Leftism is not only a worldview; rather, it is a quasi-religious sect. Any attempt for a rational debate is doomed from the beginning.
Posted by: PK at Nov 8, 2006 11:39:59 AM
I am clearly missing something here. John Quiggin's replies were dismissive? Can you point that out. Clearly Tyler felt the same way, but for some reason I do not see it.
There is a disagreement about which numbers are important, in which Quiggin mentions that productivity/hour is the important measure, not growth, which seems to me like a needed clarification.
Then he makes a mistake about the grouping of the European Zone, which he later corrects, but is of little consequence.
The Dallas Fed numbers are hard for me to sort out, but as Quiggin's response is certainly on point.
How he could be read as dismissive is beyond me.
Posted by: theCoach at Nov 8, 2006 12:37:32 PM
Bruce,
I believe Tyler's comments about the lack of religiosity in Europe had more to do with the declining birthrates than current economic performance and what that low rate means for the future of the welfare state. And if I am correct in this assumption, then the U.K. is no different than the rest of Europe, with a 1.66 children per woman rate.
Posted by: Shaun M. at Nov 8, 2006 1:52:40 PM
"Dismissive" isn't the right description of Quiggin; "blinded by prejudice" is more like it. It's quite instructive to read his comments in sequence:
1. This is all wrong. GDP/head isn't the relevent figure; GDP/hour worked is. And in output per hour worked, Europe is way ahead of the U.S.
2. Okay, the U.S. may be ahead of the EU-15 in output per hour worked, but the EU-15 includes Poland; I was talking about "old Europe".
3. Okay, the EU-15 may not include Poland, but "old Europe" is only 15% behind the U.S., which is almost the same as ahead. Besides, "old Europe" includes Spain; I was talking about "old, rich Europe".
4. Okay, even "old, rich Europe" is behind the U.S. in output per hour worked, and has been for as far back as the OECD figures go, but if you consider just Norway...
I made up #4, but it fits the pattern. Quiggin is representative of a wide swath of progressives who are so enamoured of the European "social market" that they refuse to accept any measure on which "anglo-saxon capitalism" does better. I recently tried to debate a woman who asserted that "on every measure" (her words) Europeans were doing better than Americans. Needless to say, I didn't get very far.
Posted by: David Wright at Nov 8, 2006 2:14:27 PM
Another trick making european productivity look higher than real is a high rate of government employment :
http://www.project-syndicate.org/commentary/sinn11/English
Posted by: alexandre delaigue at Nov 8, 2006 2:30:47 PM
David,
Thanks for the clarification.
Let's be clear we are talking about blog comments here, not academic papers.
So, someone else brings up specifics of the EU-15. He glances at it, thinks it includes Poland, but it does include a large range of countries. He admits he was wrong about Poland, but that the broader point stands (and I think it does, I mean no one is really saying Grecian model is superior to the US, right?)
And then he points out that within that data, from my memory here, that France is above US and that the UK (most similar to US) is below the Western Europe average.
He is getting at the same point the whole time. There is an argument about growth that should require conclusive evidence. If the French model were really that inferior, France should not be ahead of the US in productivity. It is a pretty major data point agaisnt the claim.
My sense is that Tyler is making the claim about which model will produce more growth, and quiggin is making the claim that there is not reliable evidence either way. In that case, I would assume the burden for evidence to be on Tyler, not Quiggin.
How do you explain France?
Can you explain to me how growth could possibly exponential AND isolated from other countries' results? I really am trying to understand.
Posted by: theCoach at Nov 8, 2006 2:35:03 PM
My sense is that Tyler is making the claim about which model will produce more growth, and quiggin is making the claim that there is not reliable evidence either way.
Actually, I believe the growth in the US is higher, and Prof. Quiggin was arguing that this was because the US was behind to begin with, and so was playing "catch-up." It's therefore entirely fair to rebut that by pointing out that since the US and EU levels are, at the very least, similar, one likely cannot attribute differences in growth to this factor. The difference, as I see it, is that Prof. Cowen was talking about growth, while the CTers wanted to change this relevant metric to levels, which isn't the same thing.
Posted by: Steven Vickers at Nov 8, 2006 3:05:17 PM
Steven,
I am unsure of what 'levels' is.
There are a few claims being made, and I am unsure of the empirical truth to them. Let me see if I can untangle them, and perhaps someone can enlighten me.
Quiggin claims that productivity is the proper metric - is that controversial, or should we be counting, what, GDP percentage growth?
Growth seems like obviously the wrong metric to me - any sustained growth requires increased productivity, whereas large temporary swings in growth could easily be accounted for with population swings.
The claim about US growth is specifically concerned with, I thought, the last decade. Here it would seem that productivity could come in very handy here, and I wish I knew the data better. If US productivity/hour is still below France, and we account for the effects of France's workforce likely being made up of its more efficient members, then quiggin's claim is unquestionably correct, no?
Posted by: theCoach at Nov 8, 2006 3:33:17 PM
I am confused as to why anyone would think that productivity per hour worked is a more important data point than total productivity. As Aesop pointed out (and he was European remember) the tortoise beats the hare.
Higher rates of employment combined with higher average hourly work weeks, means more production and thus more wealth. Over time, greater national wealth means the possibility of greater freedom and higher standards of living for all.
Posted by: Mark Hannam at Nov 8, 2006 3:56:01 PM
Mark,
This brings up a great question to which I wish I knew the answer. What is the real duration/storability of created wealth?
My guess is that it is pretty short, but I do not know.
Illustrative would be the relatively massive European creation of wealth before 1500 to the Americas. I think what matters is what you can produce moving forward, and that is where productivity/hour is crucial.
Posted by: theCoach at Nov 8, 2006 4:10:43 PM
Mark,
To further illusttrate, let me paste and copy from CT commenter soru:
once one starts to think about [exponential growth], it is hard to think about anything else
Obviously exponential growth, as a mathematical model, is a not-completely-wrong approximation of the way modern economies behave.
There is a question to be asked, however, as to how well it actually works when you get down to the level of modelling changes, predicting causal effects.
Specifically, the model would say if that in year 0, society A grew at 4% instead of 3%, that extra growth would translate into not just extra wealth the next year, but extra growth the following year (as 3% of 104 is bigger than 3% of 103), and so on down the years. The total wealth added by one year of 1% higher growth is, after a hundred years, much greater than 1% of the year 0 economy size.
There are a couple of questions to be asked about that mathematical effect:
1. is it true: do economies behave that way?
2. if so, is there a specific causal mechanism by which it works, for example extra R&D in year 0 lowering costs in later years, or infrastructure being built now beingused later?
3. if so, can it really be unconditionally true that a given real-world case of extra growth will lead to ongoing exponential gain? Surely those causal mechanisms only work if the extra money is actually spent that way?
4. What about globalisation? Even if the model works well for total global wealth, why would you expect it to work for political units? What is the mechanism that restricts the ongoing effects of US spending in year 0 to the US?
Posted by soru · October 30th, 2006 at 4:03 pm
Posted by: theCoach at Nov 8, 2006 4:45:08 PM
The McKinsey Global Institute did the most careful productivity comparisons among OECD countries, looking at specific industries and comparing practices. They found that the US had higher absolute levels of labor productivity and total factor productivity in nearly every service industry (I think the French were better at restaurants--they got really high prices which offset their high costs), and significantly higher capital productivity overall. The suggestion that France is more productive (labor, capital, or total factor) than the US is not supported. When you combine that with the French failing to employ their lower-quality labor force, and so biasing their labor numbers upward, the comparison is pretty stark.
Posted by: srp at Nov 8, 2006 4:56:45 PM
Tyler -- You tried to have a good-faith, open discussion with a bunch of academic leftists? Are you out of your mind?
I'm very fond of CT's Chris Bertram, but the rest of that crowd (commenters definitely included) ... Whew. A bunch of thought-police devoted to spending 90% of their energy thought-policing each other. Which, as far as I can remember, was kind of what like being in college was like. Glad to have left it far, far behind...
Posted by: Michael Blowhard at Nov 8, 2006 5:05:09 PM
srp,
I was looking at http://www.mckinsey.com/mgi/rp/CSProductivity/ but could not find a report like that - do you have a link?
Sounds very interesting.
Posted by: theCoach at Nov 8, 2006 5:07:50 PM
Coach: The problem with Quiggin's argument isn't that he forgot Poland. The problem with Quiggin's argument is that he is desperately trying to find some statistic to support his a priori prejudice, and to think up reasons to ignore the broad array of statistics that point the other way. While it's amusing to watch him flail about in the attempt, the friendlier response would be to correct his errors. So here goes:
1. While it's certainly reasonable to look at GDP/hour worked, it's not wrong to look at straight-up GDP/capita. Indeed, the latter is probably closer to what a normal person means by "standard of living".
2. France isn't an especially great example for Quiggin. The OECD figure for its output per hour worked is only 1% higher than the U.S.'s, a difference that really is at the level of statistical noise. As to why it is as high as it is: Social insurance reduces the incentive to work, so labor force participation in France is about 20% lower than in the U.S; the least productive people in France simply aren't working.
3. If we let him cherry-pick countries, Norway (31% higher productivity, mostly due to oil) and Luxembourg (34% higher producivity, mostly due to banking) are much better examples for Quiggin. But if the point is to compare the European and American economic performance, it's not really fair to let Quiggin cherry-pick regions, is it? Any geographical area will display a range of outcomes. If Quiggin gets Norway and Luxembourg, I want California and Manhattan.
4. As Tyler emphasizes, the real story is in not in current output, but in output growth. A growth differential, sustained long enough, will overcome any disparity in initial conditions. It is entirely reasonable to question whether the growth differentials between Europe and the U.S. will persist. Quiggin tries to imply that these differentials are a blip that have "only" been sustained for a decade. That simply isn't true. The OECD tables show that U.S. growth rates have (with the exception of a handfull of recession years) exceed growth rates for the 30 years that the tables go back. (It is true that, in the last decade, in a phenomenon the macroeconomists call the "productivity miracle", the differentials have widened.)
Posted by: David Wright at Nov 8, 2006 5:10:02 PM
Let's take a more "humanist" analysis of US/Europe productivity and employment.
While France bests and Germany meets US GDP per worker per hour worked, they do so with an unemployment rate double that of the US.
The question is who are these 10% unemployed in France and Germany?
I suggest that these 10% are the least productive 10%, the ones with the least human capital (in terms of education and personal connections). French employers don't hire them because of minimum wage and mandatory contract rules that make it either plainly unaffordable to hire them, or an unaffordable risk to hire them.
We know that in France, youth of African heritage have tremendous unemployment rates (~40% in some suburbs). Evidently, they aren't in the "old French boys network."
Meanwhile in the US, we employ most of those least productive people, rather than using Europe's scheme of paying them not to work.
In the US, those least productive people can get the chance to gain human capital through on-the-job experience. In Europe, the unemployed may actually lose human capital during long periods of unemployment, despite potentially being "less poor" than their equivalents in the US because of welfare transfers from the state.
BTW, US black youth unemployment is also 5 times the base unemployment rate, just as in France, except the French base unemployment rate is double that of the US.
So if a minimum wage rise in the US "only" raises unemployment by 1%, it will probably raise black youth unemployment by 5%.
Posted by: Mr. Econotarian at Nov 8, 2006 5:21:32 PM
To take a step back. Does this argument about Europe's structural suitability for "extensive growth in the 1950s and 1960s" but not "intensive growth" also not explain what happened in Japan?
And what may well soon happen in other east asian countries, including China?
Posted by: Patrick at Nov 8, 2006 5:43:17 PM
