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.

  1. McDruid
    December 25th, 2010 at 02:24 | #1

    Inefficiencies, particularly health care?

    I may be confused about this, but it seems to me that if your typical Euro-socialist state spends about 9% of GDP on Health Care, when the U.S. spends 18% for the same result, then the extra 9% of U.S. Health care spending gets counted as GDP even though it doesn’t mean we live any better.

  2. December 25th, 2010 at 08:26 | #2

    Damned interesting point, McDruid. If our Gross National Benefit is actually 9% lower than our GDP, Europe is a lot closer to us than is suggested by GDP.

    Which raises the whole problem of GDP. If your house burns down and you pay to have it rebuilt, GDP goes up. If a man marries his maid, GDP goes down. If you remodel your own kitchen or cook your own dinner, GDP is unaffected.

    This argues for the use of a Gross National Happiness or Aggregate Utility measure. Unfortunately nobody’s managed to design one of those that has much empirical standing…

  3. January 18th, 2011 at 02:22 | #3

    “What say ye? What have I missed?”

    One important thing lacking in GDP is “home production.” The French making wine in their cellars, Italians toiling away in their herb gardens and Swedes picking wild mushrooms aren’t counted.

    Also, European cities are works of art compared to the architectural abominations common in the US. There’s no adjustment made for quality considerations. I suspect there is a large quality over quantity effect. A lot of what sells in the US simply wouldn’t sell in Europe.

    Check out the Stiglitz-Sen-Fitoussi GDP study that Nicola Sarkozy commissioned.

    http://www.stiglitz-sen-fitoussi.fr/en/index.htm

    The fact is when comparing across developed countries you need to squint quite a bit. GDP is a very rough measure of well being.

  4. Hamtree
    May 14th, 2012 at 11:40 | #4

    Europe produces less goods then America but Europe uses their goods far more efficiently.
    For example Europe spends around 6,000 less per capital on health care but has better health care outcomes. Europe spends 1,600 less on its military, 800 more on prisons/police despite having less crime, 1,800 less on education despite having higher test scores, 3,400 less on transportation (mostly because they are more dense), 560 on electricity (mostly because of more efficient appliances), and 500 less on phone/internet services despite having faster and more internet, another thing is that Europeans live 3 more years then Americans meaning they will consume 3 more years worth of goods, also Europeans get 120more hours of vacation time then Americans, also Europe has far more equal income, When you include all those things Europe has far superior living standards then America (something around 25% more)

  5. May 14th, 2012 at 11:51 | #5

    Great stuff, Hamtree! Can you give sources? Would be worth a more fleshed-out post of this info.

  6. Hamtree
    May 14th, 2012 at 17:21 | #6

    1) Health care spending.
    USA spends 8,000 per cap.
    Euro spends around 3,600 per cap.
    Euro provides everyone with health care meaning they provide 1,600 more service.
    8,000+1,600-3,600= $6,600
    –USA spends 6,600 more on health care
    http://www.infoplease.com/ipa/A0934556.html
    http://www.oecd.org/document/27/0,3343,en_2649_33717_40902299_1_1_1_1,00.html

    2) Military.
    USA spends 2,350 per cap on military
    Euro spends 670 per cap on military
    2250-670= 1600
    –USA spends 1,600 more on military
    https://www.cia.gov/library/publications/the-world-factbook/

    3) Prison/crime.
    Cost of prisoners 24,000 a year +police/investigations/damages
    United States has 10% of population in jail
    Europe has 1% of population in jail.
    United States has 150% more crime per capita.
    –USA spends 1,600 more for crime.
    http://en.wikipedia.org/wiki/Incarceration
    http://answers.google.com/answers/threadview/id/3231.html

    4) Education.
    United States spends 1,800 per capita on education
    Euro spends 1,100 per capita
    –USA spends 700 more for education
    http://www.oclc.org/reports/escan/economic/educationlibraryspending.htm

    5) Transportation.
    Americans spend 13.2% on transportation.
    Europeans spend 8.1% on transportation.
    Americans spend 6,200 on transportation.
    Europeans spend 2,800 on transportation.
    –USA spends 3,400 more.
    http://www.transact.org/report.asp?id=42

    http://yglesias.thinkprogress.org/2011/04/americas-infrastructure-gap/
    ^Americans commuting time is around 20% larger than other 1st world countries.

    6) Hours worked/free time.
    Europeans get 120 more hours of free vacation while Americans have to work.
    We will assume a pay scale of $13 for these hours.
    120*13
    –USA spends 1,500 more dollars at work.

    7) America spends 560 more on natural gas/electricity
    http://dieoff.org/page230.pdf
    cia factbook
    http://stats.oecd.org/WBOS/Index.aspx?DatasetCode=PDYGTH
    Americans spend 100 more on charity costs.
    http://fpd.gsfc.nasa.gov/diversity/Article_Why_Welfare%20.pdf

    http://www.engadget.com/2011/06/28/why-is-european-broadband-faster-and-cheaper-blame-the-governme/
    ^European internet/phone servicdes cost 500 less desptie being better

  7. Asymptosis
    May 16th, 2012 at 08:23 | #7

    @Hamtree

    Thanks! Great stuff. I’ll try to work this up into a post as some point.

  8. Asymptosis
    May 16th, 2012 at 09:23 | #8

    @Hamtree
    “United States has 10% of population in jail
    Europe has 1% of population in jail.”

    Don’t you mean 1% and .1%?

  1. December 8th, 2012 at 15:51 | #1
  2. January 23rd, 2013 at 10:20 | #2