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 . . .