Bleg: Why Hasn’t Europe Caught Up?
(For blog non-cognoscenti: that’s a combination of blog and beg.)
I’ve pointed out with tiresome regularity that since Europe got back on its feet after World War II, even with its higher taxes, larger social support systems, etc., it’s grown just as fast as the U.S.
But the champions of our smaller-government system have a very good reply: the U.S. is still way ahead. Europe caught up fast in the thirty years after the war. But then they stopped, and have been hovering at about 73% of U.S. GDP per capita for thirty-five years. (OECD data.*)
One of the best-evidenced effects in international growth economics is the catch-up effect (a.k.a. “conditional convergence”). Countries with lesser economic development that have trade ties to more-developed countries benefit from transfers of technology, management systems, capital, etc. So in general they grow faster. (How did the Huns defeat the Romans? They learned from them.)
Small-government advocates keep prattling on with their economic growth argument (which has no legs; the U.S. and Europe have been growing at the same rate for decades), and don’t seem to realize that this is their killer rhetorical question:
Why hasn’t Europe caught up? Why hasn’t it grown faster than we have? It should have.
It has, actually, in some senses (see next graph), but it’s still behind. The “obvious” explanations for small-government advocates, of course, are 1. deadweight loss from higher taxes and 2. the burden of government (they’re not the same thing). But (see Manzi on “causal density”) there are many other plausible explanations.
The first and truly most obvious answer: Europeans work less — averaged over 15 years, about 1,646 hours a year, to Americans’ 1,820 (10%, or 4-1/2 weeks per year, less). They’ve chosen leisure over lucre. This explains a chunk of the difference:
You can see that catch-up effect at work here in spades — at least until the early 2000s. (And yes, that “productivity” catch-up has been going on for decades, as predicted by conditional convergence theory.)
But still. They haven’t caught up. (Maybe they will, but they haven’t yet.)
So here’s the bleg: which of the following explanations make sense? Which make more sense? Most importantly, which ones have I missed?
A whole new continent. We only starting building it out a couple of hundred years ago, and really to any great extent since World War I or II. From natural resources to just sheer space, to what extent are we still benefiting from that? To me, this seems huge. Try finding a location for a big box store in Europe, then hop a plane from New York to L.A. and check out the wide-open spaces. (It’s actually kind of amazing that they’ve managed to create rights of way for their high-speed rail, given the difficulties we run into, and the interests — entrenched over millennia — that are their legacy.)
Regulation. It’s crucial to distinguish this from redistribution in the “big government” discussion. Europe has more of both. Labor and trade/commerce, in particular, have real — and occasionally ridiculous — regulatory rigidities compared to the U.S. If you read The Economist, you’ll hear them constantly pointing to regulatory (a.k.a. “structural”) issues, not redistribution, as the constraints on European growth. Europe’s higher level of redistribution — its stronger social support system and resultant greater economic security for individuals — should give them the freedom to enact more efficient but arguably more draconian labor and trade policies without screwing over tens of millions of people who are just working and living their lives. (They’ll still have health care, for instance.) To some extent that has happened over the decades, and it continues. But major rigidities remain compared to the U.S.
National character. I spent time with two French women in the U.S. recently, and both cited what I’ll call “freedom of mind” as the main reason they wanted to be here. They weren’t talking about regulation; they were talking about a culture that embraces and encourages out-of-the-box thinking and the mental freedom to try new things. There are other ways to characterize the American character difference, of course: “Americans are shallow money-grubbers.” “Americans have a stronger work ethic.” Etc. Thoughts? How significant a factor is this cultural, character difference in keeping America ahead?
Demographics and immigration. I’m very poorly versed on these issues, and not inclined to dig up statistics for this post. But there are certainly huge differences here between the U.S. and Europe, and one would expect those differences to have huge effects.
It seems to me that these issues — and undoubtedly others that I haven’t listed here or perhaps even thought of — would massively overwhelm the hot-button issues of small-government advocates: the fairly narrow theoretical and empirically somewhat iffy notion of deadweight loss from taxation, and the incentive effects of redistribution. (Especially since the incentive from our largest cash-transfer program — the Earned Income Tax Credit — is for people, in aggregate, to work more.)
What say ye? What have I missed?
* Comparison in US dollars corrected for purchasing power parity, in “current dollars” (not adjusted for inflation). EU14= Western European countries excluding the UK and Ireland (because of their Anglo models), Norway (oil), Luxembourg (banking and size), and Iceland (size). Adding Luxembourg and Norway makes Europe look somewhat more prosperous overall.