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What's the real European growth rate?
During my visits in England and Spain -- admittedly two of the winners -- I was wondering if we haven't underestimated European growth rates. It is well known that when new commodities are entering the market, measured growth rates can significantly understate the real increase in well-being. (Imagine that the price of an iPod fell from infinity in 1995 to $200 or so today; measuring this gain in terms of "more bundles of $200 in value" is missing some of the very high gains from those people who love iPods but were previously "at a corner" of no purchases, due to unavailability.)
So how does this apply to Europe? I'm not mainly talking about iPods. Rather migration is rampant. When a Pole moves to London he can buy many more goods and services. It's a big move up in real income plus lots of new goods are introduced to the consumption basket. So when there is lots of voluntary movement from poorer to richer regions, changes in measured income will understate some of the true gains.
Frequently I stressed to Spanish reporters just how big a success their country and economy has been; they almost didn't believe me. When I said things like: "Spain is in a much better competitive position than China, which still doesn't have half the per capita income of Mexico" they were truly shocked.
Posted by Tyler Cowen on March 3, 2008 at 06:59 AM in Economics | Permalink
Comments
But migration is tricky. Migration into much of Western Europe is easier today than 30-40 years ago. So some of the gains may just be transfers from native born to immigrants and not net welfare gains, especially in places like Scandinavia, where restrictions definitely helped produce rents for the population. There may still be a net gain, but it's hard to net it out properly. The large movement of skilled workers out of Europe to North America (e.g. Germany and the UK) is evidence that the upper middle class does not see Europe's future positively. Moreover, this group is traditionally the one least likely to move because they are beneficiaries of the elite meritocracy. So just on migration, you have small but wealthy and educated elites moving out and larger numbers of mostly less skilled/poorer workers moving in. You don't see the same proportional outmigration of skilled Americans, especially not from long-established families (not just second generation returning to Mexico or Asia).
Posted by: jj at Mar 3, 2008 7:58:55 AM
Things are upside down. Ironically, Europe is moving towards capitalism as US moves to Socialism, especially Eastern Europe. As tax rates fall in Europe, growth will increase.
Posted by: jorod at Mar 3, 2008 10:48:37 AM
"When a Pole moves to London he can buy many more goods and services. It's a big move up in real income plus lots of new goods are introduced to the consumption basket."
London may be a particularly bad example given the very high cost of living there. Change it to Manchester and the sentence is fine.
Posted by: LemmusLemmus at Mar 3, 2008 11:03:19 AM
"When a Pole moves to London he can buy many more goods and services. It's a big move up in real income plus lots of new goods are introduced to the consumption basket."
Not in London. So I'll consider that you meant the UK in general, outside of London. And even with that change the trend is in the opposite direction, as the UK taxes its citizens into slower growth and lower wealth creation and Poland's economy grows with the help of its lower taxes and the more entrepreneurial spirit of its people.
Posted by: Flash Gordon at Mar 3, 2008 11:37:33 AM
We should all be glad to know that we're doing our part to help our poor European cousins: The EADS' air tanker contract win on Friday ensures that our USAF will soon be flying French Airbus. That’s a $35-100 Billion deal and a loss of ~9000 American jobs. (Don't try to say the EADS front, Northrup Grumman will get equal American jobs to Boeing). What are we thinking? Why not Aeroflot? Or better yet - the Chinese -- we might have gotten Boeing planes made with cheap Chinese labor and helped reduce their unemployment!
Posted by: George at Mar 3, 2008 1:39:12 PM
I agree jorod, the major candidates will be going to play the simplistic populist zero sum card of x amount of jobs are moving overseas, therefore we have x less jobs in existence. Thus we will be in stupid trade war and only hurt our own industries (since they also rely on cheaper imports and exports).
Type "offshoring creates jobs" in google and you'll find about 1,000 hits.
Posted by: mr. anon at Mar 3, 2008 1:48:27 PM
I think the braindrain is more a product of more attractive jobs in USA because the economy is bigger and tax rates are still higher in western europe than in US.
Posted by: Sune at Mar 3, 2008 2:11:30 PM
Don't know, but Italy also seemed to be doing quite well when I was there last fall.
Posted by: aaron at Mar 3, 2008 3:43:45 PM
One of my favorite argument is when people extrapolate China's growth to the point where their per capita income equals the United State's. "And won't we be screwed then!" For whatever reason (and there could be plenty). The problem is that getting to this per capita income is pretty hard. The only reason why China's growth is newsworthy is b/c of how big China is. But if they could achieve this kind of per capita income with that kind of government, it would be historically unique.
Posted by: mpowell at Mar 3, 2008 5:05:40 PM
JJ, do you have a source for the immigration of skilled people from Europe to North America? I have heard this before, and tried to check some figures, but I couldn't find conclusive answers. For the Netherlands, there appears to be a slight net migration from the US to the Netherlands, and a larger net migration to Canada. The skilled workers issue is harder, both because there is less data and because the a large of highly educated migrants in both directions consists of expats send by their companies, who should probably not count as real migration.
I found some info that European emigrants to the US are relatively high-educated, but I couldn't find similar information on the US emigrants to Europe, so how strong the net effect is, is unclear.
Posted by: greatzamfir at Mar 3, 2008 5:39:01 PM
Even with a high cost of living, a Pole moving to London experiences a quite large increase in their real income. Trust me on this one. I don't think folks realize how big the gap is (roughly similar to Mexico vs. US as a matter of fact).
Posted by: notsneaky at Mar 3, 2008 6:01:01 PM
to get a little micro-
I was speaking with a laid off IT professional in the locker room yesterday, and was at a loss to explain to him how his job being sent to India was just a momentary setback.
He says he wished he had studied auto mechanics or "medical" because those jobs are "safe."
I do feel a little like I'm grasping at abstractions when I try to sell offshoring to the man on the street. I know on paper about comparative advantage, but it just seems gloomy for the average computer professional...
Posted by: Delirious at Mar 3, 2008 8:16:45 PM
Spain is one of the Western European economies that are doing best. Their growth rate has been above the rest of the continent's for decades. There is no underestimation. England has not been as spectacular, but also above EU average growth since Thatcher.
Go to neighbours France or Portugal (which did very well until it got stuck in 1% growth a decade ago) and you'll get a gloomier picture.
Posted by: luispedro at Mar 3, 2008 9:52:39 PM
'The large movement of skilled workers out of Europe to North America'
Yes, there does seem to be some movement. For example, when Siemens set up its streetcar factory in California, it was unable to find welders competent to do the work, so fifty German welders were flown in for 6 months to show how to actually build a streetcar using decades old plans and materials. (Ironically, the reason for the older design is that it essentially shrugs off collisions from larger American vehicles - though Siemens also offers more modern model using composites and large glass windows.) Source - Der Spiegel, German only, a couple of weeks ago.
The same occurred when BMW, Bosch, and Mercedes were establishing their factories in the U.S. - they were unable to find people with the necessary skills, and had to transplant (short to medium term) a number of people to actually teach the American labor force how to work at a level which was acceptable to a German company. Of course, such German companies already have some experience with this process, when setting up factories in such countries as Mexico, Brasil, or South Africa.
I'm not sure I would take comfort in the idea that European talent is flowing to America, since there is at least one other explanation at hand for that flow, and it is not one that supports the idea of America being number one.
Posted by: not_scottbot at Mar 4, 2008 4:23:14 AM
jorod: "As tax rates fall in Europe, growth will increase."
Could happen, but it would be contrary to several decades of empirical experience.
http://trueconservative.typepad.com/trueconservative/2008/02/small-governmen.html
and
http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-2.html
Posted by: Steve Roth at Mar 4, 2008 12:22:31 PM
George,
The USAF bent over backwards in extending and adjusting the criteria of the tanker RFP to get Boiengs', previous generation technology, 767 to qualify. But in the end, as has been evidenced in the commerical market as well whenever these two planes have gone head to head, the superior aircraft in every category, EADS newer 330 based platform won. Frankly, with an all time record order backlog, and new orders for the 787 dreamliner pouring in at the fastest rate of any commerical plane in history. Boiengs workers have no jusification, in demanding I subsidies their income with my hard earned tax dollars, for a less effective tool, of a mission critical item such as military hardware.
You do know this is an Economist Blog!!!
Posted by: nyongesa at Mar 6, 2008 1:29:41 AM
Posted by: 燈光音響 at May 23, 2008 11:29:50 PM
