More on Europe vs. America
Matt Yglesias has a post arguing that when comparing different economic systems, growth rates matter more than levels. This is usually not the case, but sometimes it is. First a brief quotation:
Was this also due to the job-killing impact of universal health care and cap-and-trade? In general, rich countries normally stay rich and poor countries normally stay poor. When you’re asking about policy, you’re either going to be asking questions about growth rates or else you’re going to find very little of interest to say. In particular, the United States has been richer than France or Germany since at least 1820. This fact, on its own, doesn’t have much to say to us about policy.
I think this misses the point. Right-wing economists aren’t arguing that those specific policies explain the difference, but rather that America is richer because it has been more capitalist for a long time. Has it been more capitalist since 1820? It is a long time since I read Tocqueville, but my impression is that the answer is yes. The statism of Europe took many forms. There were trade barriers between German states. The French government has always been more interventionist. UK was pretty capitalist in 1820, but then it was also pretty rich. For a while Europe could use the destruction of WWII as an excuse, and indeed when I was young they were growing faster than us in a “catch-up.” But it is obvious they have plateaued about 25% below us. (As an aside I would distinguish between the North and the South in 1820. Because of slavery, I doubt that average Southern living standards were as high as the GDP data might show.)
Here’s why growth rates are misleading. Once you move to the technological frontier, it is hard to grow faster than about 2% per capita. But poorer countries can grow much faster as they borrow advanced technology. Nobody in their right mind (and Yglesias is very smart) would think India has a superior policy regime to Switzerland because India grows at 8% and the Swiss grow at 2%.
On the other side growth rates can be important, if understood in the proper context. Suppose you have one country with 30% of US income per capita and another with 40% of US income per capita. And suppose the slightly poorer country in growing at 10% and the richer at 3%. Then I’d say the poorer country probably has the better model, and will soon surpass the richer country. An example would be a few decades back, when Korea and Taiwan were still slightly poorer than the big Latin American economies. Today I’d compare Mexico and China in a similar fashion.
So where does that leave US. As I said in a previous post, I agree with many of the complexities that Tyler Cowen mentioned. He recently linked to a very interesting post that compares Europe and the US and shows that Americans of European descent are much richer than the European countries they came from. This is a comparison I’ve always wanted to make, and I’m glad someone did it. Indeed in some ways it’s even worse. Our large Italian-American community came mostly from southern Italy, which is far poorer than Italy as a whole.
But ethnicity also raises a lot of uncomfortable issues for both liberals and conservatives. The comparisons I just referred to could be viewed as conservatives saying; “Heh, don’t blame our system for all the poverty we have, we are stuck with a lot of African Americans, Native Americans and Latinos.” I’m not sure that conservatives want to make that argument. On the other hand liberals would need to ask themselves why southern Italy is so poor. Doesn’t it sort of fit the Thomas Sowell “cultural” explanation? If you say that firms are afraid to invest in Sicily and Naples because of all the crime, then why isn’t that also true of inner city America? And most importantly, unlike inner city America, southern Italy is part of a very high spending European welfare state. One that has poured massive amounts of money into the “Mezzogiorno.” So I don’t see either side gaining much from delving deeply into ethnicity. I try to avoid these issues as you are likely to offend someone (perhaps I’ve already offended all my readers whose name ends with a vowel.)
On balance I slightly prefer the US system. But I don’t see the gap as being nearly as large as the PPP GDP per capita numbers show, for reasons like this:
1. Europeans have longer vacations.
2. Europeans tend to have better public infrastructure (but remember that much if it is now privatized.)
3. Yes, Krugman picked three very misleading cities in Paris, London and Frankfort, but even an average German city looks richer than a deep south state in the US with the same per capita income. This partly reflects our greater inequality.
One final comment, I think many liberal intellectuals think America is poorer than it really is, partly because they think about the issue from the perspective of a resident of NYC/Boston/DC/SF/West LA. As big as these cities are, they are a very modest share of the US population. I just stayed a few days in a house in Katy, Texas (near Houston); a city that is far more typical of America. It was valued in the high $300s, so let’s call it a middle to upper middle class house. It was very large and very attractive (sandstone facade, etc) and would have been well over a million dollars where I live, maybe close to $1.5 million, They have extremely good schools, attractive commercial zones without tacky signs, great highways, etc. In my view their living standards (for families making $100,000 or so) are far higher than for similar families in the areas where the coastal elite lives. A European occupying the same economic position couldn’t come close to touching that lifestyle in purely materialistic terms. But then they’d just say we’re too materialistic . . .
Tags: Europe
14. January 2010 at 07:24
yes, you are too materialistic.
14. January 2010 at 08:37
I’m glad you brought up the Mezzogiorno because that’s always fascinated me, and I wish I could find something to read about it. As far as I know, the south of Italy has been poorer than the north since unification, and even before, so you can’t blame the welfare state. Yglesias’ point about rich countries staying rich probably has to do with the persistence of human capital advantages. During the high Middle Ages and Renaissance it was northern Italy that was the rich part. Why that happened I don’t know; maybe it was due to the independence attained by merchant oligarchies in cities like Florence and Venice. Maybe (I’m speculating) the north’s human capital advantages persisted into the period of the industrial revolution. What were those advantages? Maybe greater literacy (again I’m speculating) and a larger more sophisticated business class. These advantages might be reinforced by internal migration within Italy as people moved towards better opportunities.
14. January 2010 at 10:00
“the perspective of a resident of NYC/Boston/DC/SF/West LA. As big as these cities are, they are a very modest share of the US population”
As I reckon it, these metro areas have a combined population of roughly ~20% of the US? Especially if we’re going to add in other major cities like Portland, Seattle, Chicago, etc. Not really what I’d call “very modest”.
But I liked the rest of the article.
14. January 2010 at 11:43
Scott, I’ve worked in London and Frankfurt (10 weeks per year for 4 years) and visited Paris several times recreationally. The cities certainly look richer than many American cities, but a lot of the palaces, museums, cathedrals, and parks were built under monarchical institutions and the large socioeconomic disparities that come with them. Versailles could not be built today because Louis XIV could only spend so lavishly, with the opportunity cost of keeping so many of his people down, as only a king could.
So the fact that an centuries-old European city might look “richer” could actually be an artifact of more oppressive economic systems where despots controlled much of the resource allocation.
14. January 2010 at 12:28
mart, I’m not, but certainly Americans as a whole are pretty materialistic. I rarely go shopping, time is the only “good” I need more of.
PhilP. You said;
“I’m glad you brought up the Mezzogiorno because that’s always fascinated me, and I wish I could find something to read about it. As far as I know, the south of Italy has been poorer than the north since unification, and even before, so you can’t blame the welfare state.”
That’s not what I said at all. I said the welfare state had not eliminated the povery in Sicily. Can anyone deny that? So why expect a European-style welfare state to eliminate poverty in high crime neighborhoods in America? This is a question I have never heard liberals answer convincingly. They keep talking about Sweden as if we could look like Stockholm if only our government spent 55% of GDP.
Your stuff on human capital in Italy is interesting, but it doesn’t relate to US – European differences, which Yglesias is trying to explain. We are not better educated than the Europeans, we are simply richer.
BTW, even if southern Italy is poorer because of human capital differences, it doesn’t really help the liberal argument. The whole point of the welfare state is to overcome those differences by offering the poor better education. Obvious it doesn’t work in Italy, whether it would work here is an open question, but I very much doubt it. If we spent 55% of GDP, we’d still have the same poor high crime inner city neighborhoods we have now.
adam, Yes, 20% is a modest share. BTW, I said “West LA” because that is the expensive part of the metro area. The only way you could even get to 20% is by adding in the entire LA area, including the lower-cost Inland Empire. Chicago housing was half the price of NYC last time I looked. It’s a bit more expensive than Houston, but still nothing like NYC. Replace East LA with Seattle, San Diego and Portland, and we are still around 20% (18m + 7m + 7m + 5m + 12m + 4m + 3m + 2m = 58 million, then add 4 million more if my estimates are off. Now we are at 20%). That’s a modest share. 80% of America is cheap.
caveat bettor, Yes, and also many parts of Europe are more attractive simply because architecture was more beautiful when you had lots of cheap labor (Italian stonecutters) to do ornate work. Even in Paris the modern buildings are ugly, including that over-rated modern art museum.
Chicago has the most attractive modern architecture in the world. NYC has the best Art Deco. But there is no denying that the USA has a lot of ugly architecture. Our modern housing developments are usually appalling.
14. January 2010 at 12:55
This argument absolutely destroys Yglesia’s.
http://super-economy.blogspot.com/2010/01/dynamic-america-poor-europe.html
14. January 2010 at 16:03
There are too many points in this article to tackle them effectible so I can only make light impressions:
1) Having lived in both sides of the Atlantic for 15 years on each, I find European cities and infrastructure better. That is whether you compare large cities or small towns. Also let’s remember that Europe has the disadvantage of having to constantly renew very old narrow streets and buildings. In the US, where land is so much cheaper, new towns just popup. For instance in Europe for the fast train lines or a highway, thousands and thousands of houses need to be purchased by governments to be demolished, however in the US, this will usually will only involve buying cheap farm land.
2) Comparing Economic models is hard. America is a massive piece of land with a common market and a single language. Europe has neither. Even now, in the EU, the language has proven to be a difficult barrier for commerce. I always wondered what kind of Capitalism would had developed in the 13 colonies if they spoke different languages, had animosity among all of them from past wars, and feeling constant threat from the neighbors?
3) European in America are richer because a) are motivated people to be successfully and they past the best to prove it… emigrate! and b) the is an innate drive succeed afterwards to prove back home of your right decision (I experience that myself). If they cannot climb the ladder, they compensate with working much harder and much longer hours that they will ever dare in Europe.
4) PPP is definitely far larger in the US but very different is also are on what either continent want to use it for and I don’t see Europeans lagging behind at all on the perception of PPP compared with Americans on a similar social class.
14. January 2010 at 16:54
Before I say anything let me insert the disclaimer that I agree that cross country comparisons are very difficult. That out of the way let me say the following.
Frankly I’m tired of Americans patting themselves on the back for having such a high GDP per capita without the recognition that this advantage is due primarily to one thing: Americans spend all their time working (personally I think working all the time is vastly overated).
The US leads most advanced nations in overall GDP growth rates because of labor force growth and hours worked. In my opinion a better measure is productivity or GDP per hour worked. Detailed productivity data is available for 19 OECD nations going back to 1970. Between 1970 and 2008 productivity growth in the US averaged 1.7% per year ranking it 15th. Only Australia (1.6%), Canada (1.4%), New Zealand (1.2%) and Switzerland (1.1%) fared worse. Ireland was first at 3.9%. Japan ranked 2nd (2.9%), France 4th (2.7%), Germany 7th (2.5%), the UK 11th (2.3%), Italy 13th (1.9%) and Canada 17th (1.4%).
Back in 1970 the US led all 19 of these nations in productivity, with the next nearest being Switzerland at 98.9% of the US level. Because US productivity growth has lagged most of these advanced nations the US now ranks 5th behind Norway (132.7%), Ireland (106.2%), Belgium (101.8%) and Netherlands (101.7%) among these same 19 nations when corrected for cost of living (PPP). France ranked 6th (98.2%), Germany 7th (92.8%), the UK 9th (83.1%), Canada 11th (79.8%), Italy 16th (73.0%) and Japan 17th (70.2%).
To illustrate the importance of productivity and productivity growth let’s take France as an example. Adjusting for cost of living (PPP) in 2008 GDP per capita was $46,700 in the US and $34,400 in France in 2008 according to the OECD.
In the United States total employment was 152.6 million out of a population of 304.1 million in 2008. In France total employment was 25.8 million out of a population 62.3 million. Note that the employment rate in the US was 0.502 whereas in France it was 0.414. This difference is largely accounted for the fact that a lower proportion of women in France choose to participate in the labor force (unlike here, many are still full time homemakers) and people in France spend more time in school (higher tertiary enrollment rates), choose to retire earlier (the benefits are generous) and live longer (about 2.3 years on average). Consequently GDP per employed person was $93,000 in the US and $83,100 in France in 2008.
In the US the average number of hours worked per employed person was 1703 in 2008. In France the average number of hours per employed person was 1544. This is largely accounted for by the fact that employed people in France generally have shorter work weeks (long boozy al fresco lunches on the rue du Vert-Bois consisting of foie gras, poulet roti and l’entrecote) and have much more vacation time (August in the Riviera). Consequently GDP per hour worked was $54.60 in the US and $53.82 in France in 2008 (despite the noontime buzz).
Now, back in 1970 GDP per hour worked was approximately $28.80 in the US and $19.60 in France. If productivity growth continues at this rate by 2050 GDP per hour worked will be about $110.80 in the US and $164.80 in France. If the rate of participation in the labor force and the number of hours worked remains the same then GDP per capita will be about $94,800 in the US and $105,300 in France. At this rate our lead in GDP per capita will eventually disappear unless we can encourage everybody to join the labor force, leave school, postpone retiring, work evenings and weekends and give up vacationing. (But it will be worth it, right?)
Now, am I arguing that the US should be copying Europe? Not really. All I’m saying is we needn’t be so smug about how “rich” and dynamic we are.
P.S. Super-Economy’s breakdown of GDP by ethnic group is interesting. However its comparison of state GDP per capitas to European GDP per capitas is deeply flawed. It fails to take into account PPP for the US states. Such estimates are available from the BEA. Yhe BEA calls it regional purchasing parity or RPP. For example, California ranks near the top of US states in GDP per capita before correcting for RPP. Afterwards it ranks as one of the poorest. Correcting for RPP generally reduces the variability in GDP per capita in the US, and shows Europe in a much better light. I personally have computed estimates of state productivity levels and on that basis Europe of course does even better. Here is an article containing the BEA’s most recent estimates of RPP:
http://www.bea.gov/scb/pdf/2008/11%20November/1108_spotlight_parities.pdf
14. January 2010 at 19:09
scott,
I’m not going to press this point because it’s somewhat pedantic and uninteresting, BUT…
You originally said “very marginal” which 20% is not, and I’d hesitate to even use “marginal” but I guess that’s a difference in opinion. Furthermore, just because 20% is very expensive doesn’t make the other 80% “cheap”. I’d suppose the graph of “very expensive” to “cheap” is somewhat gaussian, so the cheap bit would be on the other 20-30%.
Finally, the reason I included East LA is because “very expensive” is dependent on the observer – East LA is cheap for those who live in West LA but expensive for those who live there (I believe they have had very high numbers of foreclosure? or am I conflating that with the inland empire area?)
Oh, and I guess I took your point to be other than just property values – my extended family lives in rural areas, and land is certainly cheap there and the dollar goes a lot further, but a lot of it is very rundown. They’re scattered across the west coast/mountain west. Even when I lived in Montana, you’d see places where a nice income would you get you an amazing lifestyle – but not many people had that income.
14. January 2010 at 21:16
Mark – My experience is (as a European who now lives in California) is that Americans mix their home and work lives up more. People spend a huge amount of time during working hours running errands, doing personal stuff online, and hangin’ out, and they knock off early, “work from home” and get in late, but they also work at home in the mornings and evenings. I’ve gotten used to this now, but where I grew up, you worked (really worked) 9-5.30, 5 days a week, but had 25 days off plus holidays and (free) sick leave. I’m sure its different in blue collars jobs, but in white collar jobs its a difference of style more than substance – Americans book a lot of hours, but they work at much lower intensity.
14. January 2010 at 22:17
“Chicago has the most attractive modern architecture in the world. NYC has the best Art Deco. But there is no denying that the USA has a lot of ugly architecture. Our modern housing developments are usually appalling.”
I really like downtown Houston’s glass skyline. And DC’s (near the mall) neoclassical look.
15. January 2010 at 08:03
Doc merlin, Yes, I linked to it in my post.
edel, In some ways it is exactly the opposite. The US can’t build high speed rail from Boston to DC, because it would have to plow through a lot of nice suburbs. The French can do this because once you leave the city it is open farmland, you have compact cities and towns, not endless sprawl.
2. Large country size is actually a disadvantage in the modern world. That is why the richest European economies are small. There are massive diseconomies of scale in governance.
3. We don’t work harder because of culture, but because of lower taxes. Back in the 1960s when French tax rates were lower, they worked as long hours as Americans.
Mark, I agree with most of what you say. I pointed out Americans work longer hours, and nobody who reads this blog could think I am a fan of the US model. Just read my post Orientalism. So I hope your comments aren’t addressed at me.
I disagree with the final point about state PPPs. That would make the Deep South states look even richer, since they have a lower cost of living. So the big European economies would fall even farther below places like Arkansas. Or have I made a mistake?
Adam,
You said;
“You originally said “very marginal” which 20% is not”
No I didn’t. I said a very modest share. I consider 20% a very modest share, and 80% a very large share. But I agree, it’s just a matter of opinion.
Foreclosures have nothing to do with whether people can afford to live somewhere, they are caused by house prices falling below the level of the mortgage debts. Certainly Inland Empire houses are “cheap” compared to coastal areas.
You said;
“Oh, and I guess I took your point to be other than just property values – my extended family lives in rural areas, and land is certainly cheap there and the dollar goes a lot further, but a lot of it is very rundown. They’re scattered across the west coast/mountain west. Even when I lived in Montana, you’d see places where a nice income would you get you an amazing lifestyle – but not many people had that income.”
This anecdote is not at all representitive of America. Incomes are somewhat lower in flatland than in the coastal zones. But the gap in income is fall smaller than the gap is house prices. I’d guess the average income might be 60% or 70% of expensive coastal cities, and yet housing prices are a much smaller fraction. So someone with median income in the Midwest can live in a much bigger house than someone with a medium income in SF or NYC, if they both spend the same share of their income on housing.
And yes, rural America still has a few shacks, but big coastal cities still have slums.
Simon, Yes, I’ve noticed that too. In an earlier post I talked about how shopping malls around here are packed during “working hours.” I don’t have the impression that Americans work all that hard.
Doc Merlin, But Chicago has much better architecture than Houston. I like Houston’s highways, which are far better than other big cities.
15. January 2010 at 11:59
1) I will give it an extra thought Scott, while I know well literally all countries in Europe, in the US only Michigan and Arizona so my perception may be distorted on sprawl.
2) However on that the US being a large country had worked in disadvantage I disagree. Is true that many small countries do well, but because they are in the shadow of a large protectorate, whether is US or EU. My point is that US would never have been much successful if where a bunch of countries, nor the Scandinavians if there had not been a mayor powerhouse guaranteeing their security and offering a larger market all along.
3) Finally, I don’t think a reduction of few percentage points is an incentive for people to work 10h less a week, or half the vacation time, at least not with our mentality here… other mayor factors have to be at play.
15. January 2010 at 15:17
Scott,
No my comment wasn’t directed at you per se, I was just using your post as a springboard to discuss international productivity and productivity growth rates as an alternate way of viewing this subject.
Well, correcting for both hours worked and RPP, France, for example, goes from ranking behind 48 states to ranking behind just 23. And yes, Arkansas rises from 48th among the US states to 19th. California on the other hand falls from 7th to 44th.
17. January 2010 at 11:19
edel,
2. I think being large was an advantage at one time, as it provided a large internal market, and defence against invaders. But since WWII I think it has become a disadvantage, as the EU provides a big free trade zone, and rich countries no longer attack each other.
3. I think the disincentive to work is fairly high in some European countries, taking all taxes and subsidies into account. But if you have another theory I’d love to hear it.
Mark, Keep in mind that French labor laws tend to cut off the workers with lowest productivity. Thus immigrants who are young have very high unemployment rates. If we have a lot of immigrants from Mexico doing low wage labor, it lowers our average productivity, but makes us a better country than if they were living on unemployment benefits.
17. January 2010 at 14:09
Scott,
The French labor laws may lead to higher productivity (and lower GDP per capita) compared with us. But does having a lot of immigrants doing low wage labor make us a better country? I’m honestly not sure that is the case.
18. January 2010 at 13:22
Mark, Compared to having a lot of immigrants being unemployed and torching cars in Paris in frustration? I’d say it is pretty obvious. And even if France had no immigrants, isn’t a country that gives millions a chance at a better life a better country than one that closes its doors?