- Jan 17, 2004
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Europe Rides Into the Sunset
by Gary Jason
The New York Times has just concluded a particularly lachrymose series of articles lamenting economic insecurity and inequality in America, problems that presumably never existed before, and presumably will vanish once we elect Hillary president (or perhaps crown her the Virgin Queen). Even the Wall Street Journal recently ran a series on inequality. Amazing. Our economy has shown stunning resilience, and is doing incredibly well even after a stock market correction of colossal proportions, a terrorist attack that killed more civilians than any other attack in our nation's history, the resultant loss of a million jobs, and two wars. But many are unconvinced, and they turn to enlightened Europe for inspiration.
Recently, however, there has been doubt within European nations about the strength of their economies. The EU model of cozy, union-dominated welfare states working within a large trading block, relatively immune from competition, has seemed more and more untenable. The overwhelming rejection of the proposed EU constitution by French and Dutch voters has only intensified the debate. "Cowboy Capitalism," written by a well-respected reporter for Germany's largest economic and business weekly, had an explosive effect on this European internal debate when it was first published in Germany in 2003. The Cato Institute has done us a service in publishing this translation. It is a sustained examination of the myths about American economic life by an outsider, providing a valuable perspective ? we get to see ourselves as (some) others see us.
Olaf Gersemann begins by noting an anomaly: despite the fact that, over the last quarter century, the U.S. economy has enjoyed an average real growth rate of 2.9%, which is a rate of growth 55% greater than that of Germany, 48% more than that of France, and 39% greater than that of the EU as a whole, and despite the fact that the United States has enjoyed lower unemployment rates than have those countries, the Europeans view our economy as a model, not to be copied, but to be avoided at all costs. In Germany, the phrase "amerikanische Verhaltnisse" (roughly "the American way of things") is used as a slur. He finds this puzzling, and while he isn't necessarily in love with our system (a point I will take up later), he thinks that it has aspects that European nations should emulate.
To convince Europeans of this, he compares the economic performance of the U.S. with those of Germany, France, and Italy (which account for half of the economic output of the EU, and over 60% of that of the euro zone). First he looks at economic growth, labor productivity and employment levels. Then he debunks many of the ugly myths about the U.S. economy perpetuated by the European Left and American leftists such as Michael Moore (whose books "Stupid White Men" and "Dude, Where's My Country" have been runaway best-sellers in Germany). Finally, he compares economic security and justice in the United States and the EU.
In America in the late 1970s, Jimmy Carter was talking about our "national malaise" and "crisis of confidence" (never, of course, assigning any blame for this to himself or his political party). The U.S. had high inflation and unemployment rates, and major industries in trouble (especially the auto industry, where Japanese and German auto makers were cutting into the U.S. market). Meanwhile, both Germany and Japan looked like economic miracles. In the second half of the 1970s, for example, American inflation and unemployment rates were triple the German rates. It appeared that Europe was not only going to match us economically, but surpass us.
However, the 1980s saw these rates reverse, and by the late 1990s the gap between America and Europe was wider than at any time since the late 1960s. Gersemann points to a number of factors that account for this. First, Europeans are working fewer hours. Working-age Germans average 2 hours and 35 minutes of work per calendar day, with the French and Italians working even less. More important is the explosive growth in U.S. productivity: between 1996 and 2003, annual labor productivity growth was a phenomenal 3.09%, compared to 1.6% in Germany during the same period. This also reverses an earlier trend, which saw Germany's productivity growth outstrip America's. One of the reasons for our amazing productivity growth is our investment in information technology; another is (horrors!) Wal-Mart, which by itself accounted for 25% of the productivity growth in retail (with another 46% being due to improvements that Wal-Mart's competitors had to make to keep up). He also points to the fact that in the 1980s, the rapid growth in the size of government in the U.S. was slowed, tax rates went down, and the economy was liberalized. Airline, electric, and telecommunications industries were deregulated, and the power of unions was curtailed. In 1996, Congress finally passed welfare reform. The U.S. now ranks near the top of any list of the freest economies, while France, Germany and Italy rank much lower. Governmental expenditures in 2003 as a percent of GDP were 35.9% in the U.S., while they were 48.5%, 49.4% and 54.4% in Italy, Germany, and France respectively.
In passing, Gersemann refutes the oft-heard claim that America is replacing valuable manufacturing and agricultural jobs with lower-quality service sector "McJobs." He points out that the ratio of low-skill to medium- or high-skill workers is much higher in the manufacturing and agricultural sectors than in the service sector. He also shows that service-sector employees are more than twice as likely to have college educations.
It is sometimes said that even a modern economy needs a strong industrial base, because the service sector produces nothing tangible and therefore can't be the foundation of an economy. Even Adam Smith, the otherwise sharp spiritual grandfather of capitalism, thought that only industrial work can be "productive." The work of the service provider "adds to the value of nothing."
Why Smith erred can be shown with an example. In the past, almost everyone who worked for the agricultural sector also worked in agriculture. In today's modern economies, only a small percentage of workers are employed in agriculture. But many service providers support this sector ? for example, software engineers who write programs that help farmers manage their businesses or scientists who develop genetically modified seeds.
Thus, as an economy matures, em-ployment tends to shift from the actual production of goods towards jobs that, broadly speaking, help to make the production process more efficient. That's one of the reasons why highly developed economies tend to have a high percentage of service jobs. Therefore, strong growth in service-sector jobs is a sign that the structure of an economy is improving. One unsettling figure in the book shows Germany and Italy lagging far behind in this area.
What's more, the gap between the U.S. and Europe is especially pronounced in business, financial, and other knowledge-intensive services ? in other words, those areas of the service sector that offer the highest proportion of high-paying jobs. In five such knowledge-intensive service industries, real output in the United States grew by at least 195% between 1980 and 2003. He also notes that our research and development spending is significantly higher than our competitors, even per capita, as is the number of high-tech workers. Some indication of the effect of this is given by the statistics on Nobel prizes awarded between 1990 and 2003: in Chemistry, 69.0% of the prizes went to Americans, as opposed to 3.4% for France, Germany and Italy combined; in Physiology and Medicine, 71.0% went to Americans, compared to 9.7% for France, Germany and Italy combined; in Physics, 76.5% went to Americans, compared to 8.8% for France, Germany and Italy combined; and in Economics, 88.5% went to Americans, compared to 3.8% for France, Germany, and Italy combined.
With this foundation in place, Gersemann continues by correcting or outright debunking a number of misconceptions that Europeans frequently hold, and that American leftists ? who desperately want America to become a European-style welfare state ? tend to push. He addresses the myths that American living standards are declining, that Americans are debt-ridden and savings-averse, that Americans are sliding into poverty, that American moms are forced to work to survive, that Americans have to work three jobs just to get by, that American unemployment seems so low because the unemployed here are often incarcerated, and that Americans have little access to health care. Let's glance at two of these.
Consider the claim that American living standards are on the decline. It seems like the critics of the American economic system have a point: while the average hourly wage of production and non-supervisory workers increased in real terms in the 1950s and 1960s, it peaked in the 1970s and declined in the 1980s, though it has been rising again during the 1990s. But this figure is misleading: first, it considers earnings before taxes, and taxes have gone down significantly since the 1960s and 1970s, especially for those with low incomes; second, it doesn't consider the contributions employers make towards health care, retirement and savings benefits; and third, it doesn't consider the fact that more and more earnings come from dividends, capital gains and interest. In 2001, over 50% of American households owned stocks (directly or through pension and mutual funds); even among the lowest fifth of income earners, over 12% owned stock. Moreover, Americans work more than they used to, and more work full-time rather than part-time. If you look instead at the income of American households in real dollars, there is a clear, pronounced upward trend since the 1980s. All in all, the per capita real income of the average American household has risen by over 22% since 1980. Gersemann buttresses his analysis with figures showing dramatic increases in purchasing power, and showing the high rates of consumer goods ownership. For example, while over 68% of American households own homes, only 55% of French households do, and only 41% of German households do. (The rate of home ownership of all German households only equals the rate of the poorest fifth of American households!) And while the average size of the American dwelling is 1,763 square feet, it is less than 950 square feet in France and Germany.
The myth that Americans need to work three jobs to survive (a claim made by Germany's top union leader) is similarly refuted by Gersemann's analysis. In 2003, only 5.3% of employed Americans worked more than one job. Of these, most worked either one full-time and one part-time job, or two part-time jobs ? only one fifth of 1% worked two full-time jobs. This figure is about what it was during the 1970s. It is true that Germany's statistics show only 2.4% of its workforce holding more than one job, but that is a dicey figure, because the size of the underground economy is much bigger there due to the steep income tax rates. And given the higher unemployment rate in Germany, it may be that many Germans would like to work a second job, but can't find one. Furthermore, despite what skeptics might suspect, it is skilled professionals such as teachers who are most likely to hold second jobs ? no surprise, considering that teachers typically have three months off each year.
In the last part of the book, Gersemann takes up the more general issues of equality and justice. Among other things, he shows that global inequality is decreasing, not increasing, due to the rapid growth of industry in China and India. And he devotes considerable effort to make clear that while income inequality within America has grown, it is because the rich have gotten much richer, not because the poor have gotten poorer. Moreover, the increasing unequal distribution of income has not been mirrored by a growing inequality of consumption. That may be due to the fact that measures for income redistribution focus more on the needy in the U.S. than they do in the EU. And the increasing wealth of the rich is due in great measure not to inherited wealth, but to the rise of super-rich entertainment and sports stars, as well as entrepreneurs. If you compare the Forbes list of the wealthiest 400 Americans in 1989 with that of 2001, you see that their average wealth has grown from $920 million to $2.15 billion. Moreover, there is not a great amount of overlap ? 230 of those on the 2001 list weren't on the 1989 list, and of those 230, all but 20 got there by their own work, not by inheritance. Gersemann makes a telling point about filthy rich entrepreneurs: "As for entrepreneurs, it can be assumed that most founders are driven not by some noble ideal but rather by the simple wish to become rich ? filthy rich to be precise. That's the reason why a society that is concerned about its own well-being has to assess whether it might not be better, for all the dangers to the meritocracy ideal, to accept the possibility of successful entrepreneurs amassing gargantuan riches." (p. 163)
Put differently, the income distribution in the United States would surely be more even if the Waltons had remained grocers, the Dells had become high school teachers, and the Ellisons had become journalists. If income inequality is the yardstick, America would be a more "just" country today ? but almost certainly a poorer one, too.
Gersemann finishes with some interesting tidbits. First, that there is still more social mobility in the U.S. than in the EU. Second, the ridiculous employment protection laws that characterize EU economies not only result in higher unemployment, but much longer periods of unemployment ? so it's not surprising that surveys show higher rates of optimism and security in America than in the EU. Third, the rich in America pay a higher share of tax revenue, and receive less in income transfers from the government, than do the rich in Germany.
As an insightful and wide-ranging comparative analysis of the European and American economic models, this book is hard to beat. Keep in mind, though, that Gersemann did the bulk of his analysis in 2001?2002, publishing the original German edition in 2003. Imagine how much starker the contrast would appear now that we've emerged from the 9/11 recession, created 3 million new jobs, and lowered unemployment to 5.1%. Our growth rate is currently 3.6%, three times that of the euro zone. And, as reported recently in the Wall Street Journal, in 2004 the net average household wealth of Americans reached an all-time high, with the number of net millionaires ? people worth a million dollars or more, minus all debt, and excluding the value of their primary residences ? rising by 21% to hit a historic high of 7.5 million households. (If that figure included equity in primary residences it would surely be at least 10 million.) The number of U.S. households with $20 million or more in liquid assets is increasing by 3,000 households per year, and the rate of home ownership just hit a new high of 70%.
Gersemann overlooks or understates some points that make the European model come off even worse. First, the Europeans get a free ride from the United States when it comes to defense. If America pulled its troops and equipment out of Europe, forcing the Europeans to pay the full price for their own defense, the European economies would face even greater problems. Second, while the population of Europe has been shrinking, we have steadily taken in millions of very poor immigrants, and given them the opportunity to move up the economic ladder. Indeed, over the last 20 years, we have taken in a number of immigrants equal to the entire population of Canada, and assimilated them. Third, he overlooks the fact that "McJobs" are typically first jobs that teach people valuable work habits. Just look at some of the people who got their first job at McDonald's: comedian Jay Leno, Amazon founder Jeff Bezos, astronaut Leroy Chiao, White House chief of staff Andy Card, actress Andie McDowell, former governor of Illinois Joe Kernan, and Representative Pat Tiberi. Over 1200 owners of McDonald's restaurants started as crew members there, as did 20 of the top 50 worldwide McDonald's managers ? including the current CEO.
More critically, at times he is somewhat sketchy on data, confining himself to economic statistics (as opposed to broader sociological measures). For instance, the only data to support the view that Americans are more satisfieds with their lot in life than Europeans is Harris Interactive polling data. That is good as far as it goes, but it would be possible to get a more accurate picture by looking at a greater variety of data, such as rates of application to emigrate, or perhaps rates of alcoholism or depression. But it has to be admitted that it is difficult to explore the superiority of the American model in only 200 pages.
Somewhat distressingly, he takes pains throughout to explain that he is not advocating that Europeans adopt the American model, but only that they reform. "American conditions?" he asks. "In Europe? Of course not. No one would seriously suggest copying one economic model, no matter which, in another country." (208?9)
But why not pursue reforms that would allow the inhabitants of countries such as France, Germany, and Italy to reap the benefits of the American model? The problems that come along with American capitalism could for the most part be avoided, because, after all, they have little or nothing to do with cowboy capitalism itself.
European economic systems need not be as "American" as the American system itself. The success of the American model doesn't stand or fall with the fact that only some Americans enjoy six weeks of vacation every year. Nor do all employee protections have to be chucked in order to provide firms and employees with the flexibility they need in these Schumpeterian times. Maybe I'm just too much of a cowboy, but yippie-ki-yay, pardner, this strikes me a downright wimpy conclusion. What moderate compromise is he suggesting here? To take the most obvious issue: how could Europe possibly have our lower tax rates and their cradle-to-grave state-paid health care?
All told, however, Gersemann has written an audacious book, and written it well. Its message is important for Germans, of course, but it needs to be taken to heart by Americans as well. Our system is working well ? not perfectly, but well ? and now is not the time to go all wobbly about free-market economics. We need to combat the continuing push from leftist journalists and academics to turn our country into a giant Euro-sclerotic welfare state.
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I'm sick and tired of hearing the left talk about how great Europe is with all of its work regulations and overwhelming tax rates. The truth of the matter is that prosperity for all is born from free and unhampered enterprise, not government interventions. Sadly, I feel that with every passing day the U.S. is becoming more like Europe. We are already 90% of the way there.
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