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    Falling Behind the "Socialists"

    Many thanks to the dagblog gang for inviting me to guest-blog here. I'm excited to join the dagblog membership, and hope to make a useful contribution if I can. Anyway, without further ado, here's my first shot:


    Yesterday Meet the Press ended with an attempt to discuss the economy; calling it an actual discussion of the economy might be going a bit too far. The participants did manage to conclude that ten percent unemployment is A Big Deal (although they were preoccupied with using it to handicap political horse races), and they stumbled around the notion that we are in the middle of huge economic changes. But how far the chattering classes are from any real grasp of the world economy is illustrated by one quote from Joshua Cooper Ramo, who has a story about unemployment in Time:

    Last week we had the dubious honor of passing Europe in terms of unemployment, which has, you know, long been sort of the pride of the United States; well, at least we're not Europe.


    The jingoism of that sentence originally distracted me from the truly shocking phrase, "at least." Ramo evidently believes, and assumes everyone else believes, that the United States economy has been eclipsed by economic rivals, but <i>at least</i> we have stodgy old socialist Europe to look down on.

    The assumption here is that America is losing out to the more dynamic developing economies of the Pacific Rim, especially China's. It's become an article of faith among the financial press that America cannot compete with the less-regulated Asian economies and their lower labor costs. But the European Union, with its highly-paid workers, elaborate government regulation, and generous national entitlement programs, is imagined as far too handicapped to compete with the United States. China is imagined as the United States' prime economic rival and also as a model for imitation; Europe is imagined as an ineffective rival, and as a model to be avoided.

    Like many long-standing assumptions, this one has gone unexamined well after reality began to contradict it. When the German automaker Daimler buys Chrysler, and later sells it off again as a bad deal, the words "at least we're not Europe" don't strike me as overwhelmingly persuasive. When the Euro climbs relative to the dollar, and the contrast between the exchange rate at the beginning and the end of the Bush Administration is dismaying, the presumption of American superiority seems quite shaky. I don't suggest either of those facts represents the whole economic picture, and I'm sure the American economy still outperforms the European in a number of ways, but the treating Europe as destined to be second-best forever is an enormous mistake. If the Big Three automakers can't compete because Western workers cost too much, how do you explain Daimler? If higher taxes and social programs handicap the EU's economy, are they weathering the recession as well as we are, or better?

    While China is a very real economic rival, with whom the States will have to both compete and cooperate, Europe is also an economic superpower which, over the long term, represents a more direct competitive threat to the United States. Its economy is more analogous to ours and it competes to fulfill the same economic roles that the United States does. Moreover, it represents a far more useful potential model for the United States than China does. China's economic situation is so radically unlike our own that it's hard to draw any broadly-applicable lessons from it, while the European Union represents a different approach to managing an economy broadly like our own.

    China is not simply America without a Food and Drug Administration. It is a huge country building a serious industrial base for the first time, as we did in the 19th century, and its rapid growth is the result of that structural change. We cannot follow that model because we've followed it already. We are not going to transform our economy by taking millions of farm laborers from the countryside and turning them into factory workers. There are actually not that many American farmers left. We are not going to build a transportation infrastructure in a country that doesn't have one; we can only upgrade the one we started building in the 19th century. We are not going to build an industrial base from scratch; we did that already, too. We have opportunities for economic growth, but not the kind of growth that took us from horses and sails to trucks and planes. That kind of transformation only happens once.

    Americans who propose China as a model for development are essentially nostalgic; it is a proposal to repeat our own industrial past. But industrial development cannot be repeated in that way; the circumstances and opportunities are different now. We can be a better economy, but we cannot go back and become a newer economy, as China is.

    The European Union represents a mature developed economy like our own, already industrialized, with modern transportation, modern financing, and a modern workforce. Indeed, Europe has, if anything, an older economy than ours, and represents a possible future (albeit not the only one) rather than a glorified past. In the European model, obviously, there is far more social spending than in the United States, and a far greater socialization of worker benefits. In the current American version of classical economics, this should hamper Europe's economic growth. But in some ways it also removes the burden of labor costs, and especially the burdens of medical and retirement spending, from individual employers, and allows more mobility in the workforce and more flexibility for employers.

    Because European governments provide a greater share of workers' expensive benefits, individual businesses shoulder less of those costs. Every business pays steeper taxes, but large firms do not face massive legacy costs associated the workers of a previous generation, and startups or small businesses do not face prohibitive costs because they must provide health insurance for each new employee. Meanwhile, European workers, complacent and secure as they may be, are free to move to the highest-paying job they can find, and thereby to the sector of the economy where they create the most economic value. American autoworkers have to hold on to their automaking jobs as long as they can, even if the economy has too many autoworkers, because if they change jobs they lose their health insurance. A factory worker who wants to quit and start a small business will either find the capital she's saved devoured by the price of her own insurance, or go uninsured and face financial catastrophe if she falls ill. A European factory worker who thinks she could do better starting a cafe will get more of a shot to do it, and if the cafe fails she can rejoin the workforce without worrying about going uninsured for the rest of her life.

    Does the European model have drawbacks? Yes. But we can no longer afford not to weigh those drawbacks against its advantages. And if we pretend to ourselves that their system cannot possibly compete with ours, even though that system is already competing with us and having real success, one day we may find one that we're no longer worried about falling behind Europe. We'll be worried about catching up.



    Excellent post. The same "socialist" smear is applied to Canada -- though less often these days, since proximity means more Americans have seen first-hand that our system works. If evidence were needed, our current government (which labels itself "Conservative") has made no move to dismantle any part of what right-wingers define as a welfare state. In fact, it might sweeten employment insurance in a bid to retain power.

    Fact is, our single-payer health care and robust EI program encourage country-wide labor mobility and lower employer costs, making for a freer job market than in the United States. Stringent rules on mortgages and banking practices generally helped us avoid any sub-prime or lending crash (though rates did follow the U.S. lead). Jobs were lost (many in auto-making) but housing prices barely dipped. Bottom line: our recession is officially over.

    Your point is an important one: knee-jerk ideological revulsion to anything that smacks of socialism has cost (and will cost) the United States dearly. The gutted health-care reforms that remain on the table are a manifestation of that tunnel vision. Even the largely uninformed public senses that the insurance industry is dragging down the economy, but for too many legislators, it's a sacred cow that can't be touched. Too bad. If the States can't solve that straightforward, no-brainer problem, it's fucked.

    Thanks very much, acanuck.

    Absolutely, the same applies to Canada, whose success is also inconvenient for American supply-side ideology. I wrote about Europe because it seemed so obvious to everyone on Meet the Press that Europe was lagging behind us.

    Lots of Americans use China for rhetorical purposes, to build their case for making America an unregulated capitalist libertarian wonderland. But the case isn't sound. And the sad part is, a lot of the people making the case actually seem to believe it.

    Thanks for joining us, Dr. C. I agree with my Canadian friend (much as that pains me), excellent blog. Your point about unquestioned assumptions regarding both Europe and China is very sharp, and I agree that we could learn much from European economic models.

    But if I may quibble, I think that little is gained by regarding competition with either Europe or China as a horse race where one must choose between three monolithic economic models. Europe in particular is very complex, with various models employed by its members. We should certainly emulate German auto industry successes, and for various reasons, we need a stronger safety net, but it doesn't follow that we should seek to become like Germany.

    For instance, it's nice to think that factory workers in Germany can easily start a cafe, but in general, the U.S. offers a much more hospitable environment for entrepreneurs. It's difficult to get high risk loans or investments in Germany, which has a conservative and insular financial community. Moreover, though an unemployed factory worker in Germany would have much better benefits than one in the U.S., it would be harder on average for her to rejoin the workforce because of chronically higher unemployment. When it comes to entrepreneurship, we'd do much better to emulate Israel, which has a more dynamic entrepreneurial environment AND a better safety net.

    As for Canada, we should emulate their wide open spaces.

    Thanks, Genghis. Good points, and well taken. I don't mean to idealize the German system, either, and I'm not calling for its wholesale adoption.

    The point about it being harder to start a business in Germany is excellent, and I'll confess that I was projecting my American assumptions there. I would quibble a bit with your quibble about higher European unemployment. That has been historically true, but at the moment we are hitting European unemployment levels. Whether those levels will fall again to something like the postwar norm or remain consistently higher has yet to be resolved.

    I think the heart of my argument is that most American opinion-makers haven't thought lucidly about the European model at all. But I'm grateful for your thoughts.



    Yeah, I don't dispute the heart of your argument, but I reserve my constitutional right to quibble about the details. German unemployment has dropped below ours, but you're comparing unusually high U.S. unemployment to unusually low German unemployment--which constitutes cherry-picking. It's possible that this change represents a new trend, especially since German's unemployment level has been artificially high because of reunification, but I wouldn't bet on it at this point.

    It's the trends that make people more anxious about China. If the Chinese can maintain their incredible growth rate, they will eventually surge past us regardless of how the U.S. economy performs. Europe, on the other hand, would have to reverse decades of comparatively lethargic growth in order to overtake us. That's not to say that current growth trends can't change, but we just don't have evidence that Europe is moving strongly in that direction, not yet anyway.

    (Of course, there's also a question about the value of economic growth in the first place, but that's for another blog post.)

    Fair enough. I'm a big cherry-picker in this post. The Daimler thing and the exchange rate are also delicious Bings I've picked from an orchard I don't know well.

    And let me be starightforward about my economic knowledge: I have almost none. I'm a layperson groping to understand the economics of the current crisis, and the problems with the conventional wisdom that failed to predict it. I'm always grateful for anything that adds to my udnerstanding of how the world, including the economic world actually works. My blogging contributions to economic debates will mostly be gadfly contributions: I don't have a good model, but I have developed an allergy to certain widely-respected ideological positions that don't seem to describe the world. (And my contempt for the chatterers on Meet the Press expresses my sense that they know even less than I, once you subtract the misinformation. You are better off asking someone at random than listening to Chuck Todd.)

    As for trends, let me simply voice my layman's suspcions. I'm not entirely sure the data for the last several years is entirely accurate (as it is my understanding that a bubble, distorting asset valuation, can create illusory "growth"). More importantly, I am not 100% convinced that previous trends can be projected accurately on the far side of our current mess. There are moments when trends change. I have no idea whether this is one of those moments, but I can't be confident that it isn't.

    And that said, sure. And if Germany (and France, and the rest of the EU) don't overtake us economically, that's fine with me.

    Welcome to Dag, Dr. C.

    Economics is all about scarcity and, therefore, about choices.  It's about weighing advantage versus disadvantage, opportunity against the cost of taking that opportunity.  Anyone who thinks that any system, no matter its composition, is composed of nothing but advantage is simply not acquainted with the most basic economic thinking.  Were people more versed in this sort of understanding, your thesis would be tediously banal.

    Yet we don't live in that world, or at least not that society.  For instance, I recently had someone tell me that producing salt had "zero cost" if one lives near an ocean.

    As such, what you say bears being stated, loudly and often.  Unfortunately, it's difficult to hear what you offer over the cries of "SOCIALISM!!" that have become so prominent, even as the picture of social mobility begins to change both in the US and in Europe.

    Ah, I remember my childhood along the New England coast, and all the free salt.

    Thanks, DF. I aspire to a world where everything I have to say about economics is tedious and banal.

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