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By Philippe Legrain 8 COMMENTS

“Shock! Horror! Cato Institute declares American capitalism superior to European social democracy.” That was my cynical initial reaction to Cowboy Capitalism: European Myths, American Reality, a new book published by the free-market Washington, DC-based think-tank that comes recommended by the usual right-wing suspects: Milton Friedman, James Buchanan and Henry Paulson, the boss of Goldman Sachs.

But my first reaction was slightly unfair. Cowboy Capitalism is written by a German journalist, Olaf Gersemann, and was originally intended for a German audience. Its aim was to shake Germans’ complacent assumptions about the superiority of their economic model and dispel some of the commonly believed myths about the weaknesses of the US economy. There is no denying that Germany’s economy faces serious problems – and the German edition of this book is an important contribution to the debate about how the country should reform.

But the newly published and expanded American edition has a much more ambitious goal. It seeks to demonstrate that the US economy is not only much more successful at delivering higher living standards and employment than Europe’s, but that it does so without causing greater injustice and insecurity. As Gersemann puts it, “The message is simple: While US-style capitalism may or may not have delivered results to be proud of, its performance, as measured by economic and social indicators, has clearly been superior to that of its continental counterparts.” Unfortunately for him, he fails to prove either point convincingly. Repeatedly, when weighing up the evidence, he gives America the benefit of the doubt, while interpreting the facts about Europe in the darkest light.

Consider his dramatic opening paragraph: “Over the last 25 years the US economy has enjoyed an average annual real growth rate of 2.9 percent. That’s 55 percent more than the German economy mustered, 48 percent more than in France.” Game, set and match to Gersemann? Hardly. America’s population is growing by some 1% a year, while Europe’s is broadly stable, so comparing GDP growth rates tell us little about how well each economy is doing at delivering the goods for its citizens. A better yardstick is how fast living standards are rising, for which the growth in GDP per person is a decent proxy. According to my calculations from the IMF’s World Economic Outlook, GDP per person in the US rose by 53.7 percent over the past 25 years – an average of 1.7 percent a year – exactly the same growth rate as in Germany and France, and less than the 2 percent annual rise recorded in Italy.

Admittedly, Germany’s economy, the original subject of Gersemann’s book, has performed poorly in recent years as it struggles with the burden of a botched reunification and the straitjacket of outdated regulations. Over the past seven years, GDP per person in Germany has risen by an average of only 1.3 percent a year, compared with 2.1 percent in the US. But over the same period, France’s economy has notched up gains of 2 percent a year, a statistical deadheat with the US. So it is too soon to write off European social democracy on the basis of GDP statistics alone.

On the contrary. US statistical methods distort the comparison in America’s favour, notably by accounting differently for firms’ spending on information technology. As The Economist, hardly a cheerleader for social democracy, notes in its latest survey of the world economy, studies suggest that Europe’s annual GDP growth would be almost half a percentage point higher if it were measured in the same way as America’s. Presto – Europe is doing as well as, or even better than, America.

America’s economic performance in recent years has also been artificially inflated by an unsustainable fall in its saving rate – driven first by the stockmarket bubble and sustained by the subsequent housing market bubble – which has temporarily boosted GDP growth. When the US saving rate eventually rises, and growth slows, America’s performance will look even less impressive. Europe’s growth rate, on the other hand, is likely to improve as its saving rate falls and it reforms its labour and product markets. So Gersemann’s claim that “looking forward, the picture for the United States looks far brighter than for the continental European countries” is highly dubious.

Nor is it clear than even in absolute terms, America’s economy performs better than Europe. True, according to OECD figures, France’s GDP per person in 2002 was 76% of the US figure, Germany’s 72% and Italy’s 71%, so that, measured in GDP terms, living standards in Europe appear lower. But comparing GDP per hour worked, France’s average productivity levels are 113% of America’s, Germany’s 94% and Italy’s 93%, so European workers perform at least as well as their US counterparts. Part of the reason why America’s GDP per person is higher than Europe’s is that more Europeans are involuntarily unemployed. But most of the gap – according to calculations by the Conference Board, a US business lobby that is scarcely a fan of European ways – is due to Europeans’ shorter working hours. Since the aim of life is happiness, not maximising GDP, and to the extent that Europeans are choosing to work less and enjoy more leisure as they become more productive, rather than slaving away all day at the office, this is a perfectly valid lifestyle choice that does not imply that Europe’s economy is inferior to America’s.

It is simply not true that Europe is a basket case. Nor, therefore, is it true that it needs to remodel itself along American lines – smaller government, lower taxes, less regulation -in order to prosper. Just look at countries like Sweden and Finland that have high taxes, big governments, large welfare states and stringent regulations, yet continue to prosper. They consistently top rankings of countries where it is good to do business, attract huge amounts of foreign investment to match, are masters at pioneering new technologies, and enjoy an enviably high quality of life.

Unfortunately, some European countries have shockingly high unemployment rates – and this is a scourge for both the jobless and the economy as a whole, because valuable talent is going to waste. Whereas the US jobless rate is 5.4%, Italy’s is 8.5%, France’s is 9.9% and Germany’s is 10.7%. Worse, long-term unemployment is much higher than in America, especially in regions such as eastern Germany and southern Italy.

Clearly, France, Germany and Italy need to implement reforms that reduce involuntary unemployment. But there is no basis for Gersemann’s assertion that they must deregulate their labour markets along American lines to do so. Well-devised regulations and active labour market policies can boost workers’ conditions and security without costing jobs. That is how highly regulated Denmark and Sweden enjoy higher employment rates than America (and similar unemployment rates) without the wrenching insecurity of the US labour market, where workers fear losing their healthcare and pensions if they are fired or if their company falls on hard times.

For a German audience, Gersemann’s book is a welcome antidote to lazy anti-American views. But his new edition for the US market simply panders to the prejudices of its right-wing publishers. If only his analysis of the United States was as trenchantly sceptical as his analysis of Europe, he might have written a more balanced – and more persuasive – book.

Posted 25 Nov 2004 in Published articles
  1. Zaki says:

    Hi Philippe. Great blog. Could France’s high productivity be because low-skilled, relatively unproductive workers can’t find jobs. I would like to see like-for-like comparisons in similar industries. How many hours of labour does it take to produce a car in France, the US and the UK?

  2. Philippe Legrain says:

    Hi Zaki
    Thanks for your comment. You make a good point, that France’s high unemployment rate, which disproportionately affects low-skilled workers, may flatter its average productivity rate, because less-skilled workers’ lower produtivity is simply not counted since they are not working. But by the same token, America’s very high incarceration rate, which disproportionately affects low-skilled people, distorts the US unemployment and productivity figures. So I think it’s fair to say that, even if France’s productivity performance may not be as stellar as it seems, some of the gap with America is real.
    Comparisons of individual industries’ labour productivity are not more reliable. The US is stronger in some industries, France in others. Moreover, because French labour is relatively expensive, French industry tends to be more capital intensive, and hence its workers more productive. So France’s labour laws may distort the picture at an industry level too.

  3. Zaki says:

    The large US prison population is 2 million relative to a labour force of 150 million, so it is still relatively small compared with the unemployment rate.
    Also, are the GDP figures used in your productivity statistics based on market exchange rates or purchasing power parity?
    On another topic, I would be interested in your views on the importance of trade balances. Conventional wisdom seems to be that trade surpluses and deficits are destabilising and that the US dollar must fall because of the US trade deficit. I tend to the view that a nation will have a structural trade deficit if it saves less than its trading partners, which could occur for demographic reasons.

  4. Philippe Legrain says:

    OK, look at it another way. The US’s employment rate was 71% in 2004 (the latest figure in the most recent OECD Employment Outlook) while France’s was 63%. Assume France raised its employment rate to US levels, and (unrealistically) that the extra workers employed produce no output, how would French productivity be affected? If output is unchanged, and labour input is raised by a factor of 71/63, then productivity is altered by a factor of 63/71, ie, from 113% of US levels to 100.3% of US levels. In reality, of course, the extra French workers would produce some output, so the difference in employment rates cannot account for all of the gap between French and US average productivity rates.
    Trade balances are a huge issue, and I can’t really do them justice in a short note.

  5. Zaki says:

    Thanks for the clarification, Philippe. I was hoping you might do a post on trade balances but obviously it’s your blog!

  6. Arthur says:

    Hi: I must say that I am slightly disappointed.
    First, I wished that you had mentioned that the European model tends to destroy the work ethic, especially in poor regions of rich countries, like my native Southern Italy.
    Second, it is very wrong to say that Denmark is highly regulated. All I had to do to register my company is to fill in a form, which can be done online. That Denmark is highly taxed is another story, and I do feel that this is damaging the Danish work ethic. I feel it so strongly that I plan to move to Estonia.

  7. vincent says:

    although I agree that Gerseman’s view are sometimes one sided, I think your counter arguments are not always as convincing.
    When you say that “America’s population is growing by some 1% a year, while Europe’s is broadly stable, so comparing GDP growth rates tell us little about how well each economy is doing at delivering the goods for its citizens”, you miss the point that US economy sustains growth for a growing base of citizens, including much more migrants than Europe, #65% of those migrants coming from poor countries with rather low skills.
    So US economy is perhaps not better than old Europe at delivering goods for its existing citizens, but it does so and simultaneously manages to deliver these good to numerous new citizens who thus deeply improve their living conditions. Isn’t that a sign of better performance ?
    When you quote “highly regulated sweden” success, other authors (Like Norberg) think that the way some figures are presented are at least misleading, if not deceiving.
    Nevertheless, it’s perfectly true that US model suffers numerous imperfections, and you’re right to remind them: we can’t of course try to imitate US model in every aspect.

  8. Lee Neil says:

    First of all, your GDP/Capita statistics are fluffy. Looking at statistics since 1980, US GDP/Capita has increased much more than French, German, Swiss, and Italian GDP/Capita. In 1980, France represented 85% of US GDP per Capita, and now its 70%. Same for Germany. Shocking decline.
    And you fail to talk about the long-term outlook. Most of Europe faces a shrinking labor force, whereas America’s is booming. Discounting population growth as a source of economic growth is a mistake. Fact is, as Europe gets smaller it becomes more insignificant. The US will have 400 million people by 2050, making it a beast no matter what happens with China. A shrinking labor force also means a growing problem with respect to gov’t pensions and welfare. Europe will be forced to raise taxes, which will lower growth even more.

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