Thursday, July 14, 2011

US vs EU Economic Growth

The right wing understands the appeal of the welfare state. Sure, it would be great to help people that are struggling. It would be great to provide health care for everyone, pay salaries and retrain those that lose their jobs, etc. The problem is when you do that you slow economic growth. So in the end everyone is worse off. If people have incentives to goof off that's what they do. If they have incentives to work (like if they recognize that there are serious consequences to not having a job, like no food, no health care, etc) that lights a fire under them and they work hard. This is why America has so much better economic growth than Europe does. You may not have much of a safety net and we may be highly unequal. But that's the price you pay for rapid growth.

When HP makes these claims, I just assume he's right that EU growth lags US growth. I mean, people don't just make this stuff up, do they? But then I recall that he'd told me that South Korea developed economically via neoliberalism. That looks to be about the opposite of the truth. I'm sure he believed it. Maybe he was told this by an expert. But it turned out to be wrong.

So you know what I'm going to do? I'm just going to see what economic growth in Western Europe has been over the last few decades. Sure, they have a much more extensive welfare state. Maybe that's not a bad thing. It seems plausible that if people fear the loss of their job they'll work hard. But here's what else seems plausible. If people don't fear losing their job then that produces dynamism as well. Suppose I work in a dying industry. If there's a strong welfare state, where my food and health care are covered and where I can be retrained if I work in an industry that dies, I may not fight tooth and nail to retain a dying job that sticks with old technology. Innovation doesn't scare me. I might embrace it.

Well, that's just a theory. The data is what I'd like to see. So I went over to Gapminder where they have all the GDP data. I recorded GDP/capita for the US and also various EU countries at the years indicated. The data is GDP/capita as adjusted for inflation and by Purchasing Power Parity (PPP). That's a value that adjusts for the cost of living. For instance you might get paid more in Norway but if everything also costs more you aren't living any better. PPP adjusts for those factors so you are really measuring output in terms of what you can purchase where you live. Here are the values.

United States15856181752334627838330773947441256
Czech Republic669197641235915256162701682321968
United Kingdom9767121671515418200231242864531042

I know that's kind of tough to read with numbers running together. I'll present it in a simpler manner below. But let's note a couple of things from the above. The US is crushing EU in 1950. But by 2009 the gap has closed. In fact in a couple of cases (Norway, Luxembourg by a long way) the US has been passed.

Here's another way to look at this data. What I've done below is divide the US GDP/Capita by that of the various EU countries. This shows the US income as a multiple of the income of the other country. So in 1950 the US had an income 2.77 times that of Austria. Watch how it progresses through the years.

Czech Republic2.371.861.891.822.032.351.88
United Kingdom1.621.491.541.531.431.381.33

Across the board every EU country has closed the gap in GDP/person with the United States since 1950. This means in every country their economic growth has exceeded that of the US over this time period. And all this with a massive welfare state that gives people peace of mind. And the growth is more egalitarian.

Look at Greece. In 1950 the American is making more than 5 times what they are making. Today? A mere 1.5 times. They are killing us. Look at Austria, Spain, Portugal. They've made enormous gains. How can someone looking at this conclude that a large welfare state is detrimental to economic growth?

HP is loathe to question consensus and expert opinion. He has limited time and wants to learn in an efficient manner. The problem is this leads to erroneous views. Further studies which build on that prior erroneous knowledge will be time wasted. I say in the case of economists checking the claims of experts is an efficient use of time.


Here's the same data but in chart format. Even easier to read. It's interesting to note the rapid improvement in Europe from 1950 to 1980. It flattens a bit from 1980 but EU seems to still be gaining. Just more slightly. Click to enlarge.


Chad said...

When the dollar is devaluated 92% over the same time frame you reference, wouldn't you agree that your chart would make sense? You've managed to uncover a rather logical outcome based on the dollar losing it's mustard.

In addition, didn't a Great War of some kind destroy that area of the world requiring it to be rebuilt from the ground up? That stimulates economies for decades.

How about Unions/Progressives Putting a artificial value on their labor driving business out of the US and into Europe for a time - that plays major role in your graph. Our attitude sent away good paying jobs to countries that needed to work.

The outcome is very predictable based on all factors.

Last - I am eager to see what the graph looks like after the complete collapse of Greece, Spain and France. The Socialist experiment has gone terribly wrong and now they are in huge trouble.

Jon said...

The numbers are corrected for inflation.

Come up with excuses if you like. Just don't claim that US growth exceeds EU growth. Not that you did, but HP has in the past.

I understand that Iceland and Ireland deregulated their banking industries severely. Iceland's banks collapsed. Ireland was in bad shape but I can't remember what exactly happened. I don't know what's going on in Greece. I'll have to look in to that. But the fact is the period after the second world war where finance was regulated included guess how many banking crises? I've heard zero. Since deregulation and financialization you know how many we've had? Repeated crises. Mexico, the East Asians, US (Savings and Loan), Iceland, I think Japan. Of course the 2008 US crisis. All following deregulation, where there were none before.

HispanicPundit said...


Just got back from Chicago this morning. So my response will be quick and to the point.

First, I never claimed, or atleast never meant to claim, that South Korea, Japan, the United States, etc all grew rich by pure neoliberal policies. I always knew it was through various forms of industrial policy. I don't think anybody denies this. Certainly not right-wing economists. My exception to that general trend, and an exception I have listed often, has always been Hong Kong. If you read the context of my comment, I was arguing that free trade with the United States helped them grow economically. It was a statement with regard to the United States relationship to poor countries - the whole point of the post, specifically do rich help the poor.

This is why I wrote, But it is our general neoliberal policies. Free trade with the United States, competition, and general market oriented changes all contributed to their wealth.

So to be clear: my view with regard to South Korea (or Japan, or the United States, or ...) is exactly like my view with regard to China: yes, they practiced industrial policy, but this likely harmed them..., IOW, they would have grown faster without it (again, the same position Brad DeLong takes). Whether you read it wrong or I wrote it incorrectly, we can let the readers decide.

Second, you make a lot of the fact that Europeans are catching up to the United States in terms of economic growth. But your analysis ignores two caveats (again, where some prior economic understanding would go far in contributing to your analysis): first, Europe experienced most of the brunt of WWII (roughly 1950). In other words, after such an economic disaster, you would expect large gains in economic growth. Look at China's economic growth. Look at India's economic growth. They are HUGE. But they are huge precisely because they are starting from such a low level. You shouldn't read into this that they are necessarily economic models to follow. After bombings, economic isolation's, mass killing, shrinking populations and miss-allocation of resources following the worlds most devastating war, you would expect Europe to catch up atleast somewhat.

HispanicPundit said...

second caveat, and really the more important one, is what really makes the United States economic growth so astonishing is that we are doing it by already being #1. Other countries, for example, have the luxury of copying what rich countries do to increase their economic growth - not so with the leader of the pack. And the fact that we have been #1 and leading the pack on economic growth for so long is itself the real miracle of 'cowboy' capitalism.

Lastly, don't let the 'small' differences in economic growth fool you. Economic growth is the #1 killer of poverty. It swamps what any welfare or social-safety net could do. Yet even very small differences in economic growth can have a dramatic impact on a countries long term standard of living. This is how Tyler Cowen explains it:

The importance of the growth rate increases, the further into the future we look. If a country grows at two percent, as opposed to growing at one percent, the difference in welfare in a single year is relatively small. But over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990. At a growth rate of five percent per annum, it takes just over eighty years for a country to move from a per capita income of $500 to a per capita income of $25,000, defining both in terms of constant real dollars. At a growth rate of one percent, such an improvement takes 393 years.

So you have to have a very strong justification, even from a 'help the poor' perspective, to sacrifice economic-growth. This is, btw, one of the main reason why I lean conservative. Conservatives tend to favor economic-growth over reductions in income inequality, liberals the reverse - but in fact, it's precisely economic-growth that is the most efficient poverty alleviation tool around.

Oh and, it's not just Europe's lower economic growth that conservatives point to, it's also their drastically higher unemployment rates (see here and here), that is a BIG factor.

Jon said...

The key thing to keep in mind regarding Hong Kong is that a major point regarding neoliberalism is that it does not permit the protection of infant industries. If a state has mature industries then it doesn't require protection and free trade works well for it.

Take Britain. They started by protecting their manufactured industry to where it could compete on a global scale. In fact it became the best in the world that way. Subsequently they want to open their markets since they are superior and in fact they want to prevent other states from using the protections they used to enjoy. They want their superior products to have access to all markets.

So looking towards Hong Kong what do we see? This was Britain's major port to China. Their ability to deal with these exchanges was developed by the British. After WWII you had the Communist starvation events in China. The wealthiest and best in China fled to Hong Kong, which was a British protectorate. They took their corporations and operations with them. The best, brightest, and richest are flooding in. Maybe in that condition they don't need the protection for infant industries. In a case where a country doesn't have those advantages, have we seen them pull themselves out of poverty with neoliberalism? I don't see it.

Now, let's look at Europe. We'd expect them to do well relative to us due to WWII. Fine. But then why have you been saying the price of the EU welfare state is lower economic growth? Europe doesn't have lower economic growth. If you want to explain their rapid growth through whatever factors, go ahead. But don't tell me they have low economic growth relative to the US. They don't.

You once again say the US is leading the pack for economic growth. No, we haven't. That's what this post is about. We are not leading the pack for growth. We have retained our lead for the most part. But we are not leading in growth. And of course Luxembourg and Norway have surpassed us, which is a bit surprising when you see how far back they were.

Yeah, economic growth is very important for relieving poverty. That's why we should consider a stronger welfare state. Look at EU. Across the board they are growing faster than us. Relieving poverty. Maybe you are the one that is sacrificing growth by reducing the welfare state.

Higher unemployment isn't necessarily bad. Actually I like the idea of quitting my job for like a year, maybe hike the Appalachian trail or bike across the country. When you have a welfare state that's at least an option. But it's not an option in the US. To be unemployed is to be without health care, and that's a huge risk. If we had higher unemployment, but those that were unemployed didn't suffer as much, and yet on net our GDP/capita was going up even faster, then what's the problem? What's astonishing is how much unemployment we have given how painful it is to be unemployed in this country. People will take absolute crap work just to get minimal health coverage. Germany has lower unemployment and the people aren't motivated as we are to take any old crap job.

HispanicPundit said...

Hey Jon,

British rule was a part of several other countries past as well but few others could boast about the economic growth rate that Hong Kong has endured. So what makes Hong Kong different than other British territories? I would argue that it was the fact that Britain, contrary to it's practice in it's other territories, generally ignored Hong Kong: The British didn't try to control Hong Kong's economy (at the time, there really wasn't one anyway), Britain didn't establish any punitive taxes, no nationalization of industries was attempted, and vast schemes of social engineering was mostly absent - again, completely contrary to what was generally the case in other British territories.

John Cowperthwaite mostly ignored Hong Kong. When he was asked by the British government to help stimulate Hong Kong's growth, he responded: It is growing quite nicely without him. Because of Cowperthwaite's rise in British politics, he was able to ensure that nobody interfered with Hong Kong - simply let it grow on its own. And it did! Hong Kong had no import or export duties, no restrictions on capital flow, no capital-gains tax, no tax on interest, and no sales tax. The personal income tax is a flat 15 percent, and the corporate tax is a flat 16 percent of profits. It's not until a few years ago that they voted in their first minimum wage - and even then, it's paltry compared to any OECD country.

This is neoliberalism at its finest.

HispanicPundit said...

You write, But then why have you been saying the price of the EU welfare state is lower economic growth? Europe doesn't have lower economic growth.

But it does! Your post shows that. The ratio of the United States to almost every European country (except of course, oil exporting countries like Norway - which btw, also heavily restricts immigration) is a ratio greater than 1 - ie, a lower gdp/capita. ie, lower economic growth.

Wait, you say! You then make a subtle argument when you write: Across the board every EU country has closed the gap in GDP/person with the United States since 1950. This means in every country their economic growth has exceeded that of the US over this time period.

But this is misleading. The 'closing of the gap' has not been a continuously growing phenomena. Just take the last 10 years, for example - 2000 vs 2009. You no longer see a closing of the gap. Look at the giant truly welfare-type European economies, for example, France, actually got worse, it used to be 1.38 in 2000, in 2009 it was 1.39. Germany got slightly better, going from 1.33 in 2000 to 1.32 in 2009. A gain sure, but nothing to brag about. Italy too, got worse, going from 1.45 in 2000 to 1.58 in 2009.

Of course, you see significant gains in the outliers: countries like the Czech Republic (the president is a long time fan of Milton Friedman, and has close ties to CATO, and the country continues to have a centre-right government), Ireland (for a long time, a right-wing example - lower taxes than Europe in general), and then there is Portugal and Spain - but the recent economic recession has shown just how stable their growth really was.

So how would I interpret the data? I would say that countries that were economic powerhouses historically - Germany, France, Britain, Italy etc - all quickly caught up to their pr-war levels then stayed behind.Countries that were really poor even before the war - countries like the Czech Republic and Ireland- experienced even more economic growth precisely because they started from such a fundamentally lower level. Then, once they caught up to roughly where they were before - they too stayed behind. No longer closing that gap with the United States. And this has been the case even since 1995. Remember, this is spectacular precisely because the United States is ahead of the pack.

Now, if you want to make the further observation that the more right-wing countries of Europe have been closing the gap faster - countries like the Czech Republic and Ireland - and extrapolate from that that this points favorably to a lower tax, more laissez-faire and less welfare intensive economy as the way to go, I am fine with that. You won't see me rebutting your argument here. ;-) But you can't point to these outliers and justify the stagnant growth of countries like France, Germany and Italy - the real centers of welfare capitalism.

Regarding unemployment: I don't mean to get racial, but this is really the rub here. Of course, as a middle-class white guy, I'd agree with you: unemployment in Europe is probably not that bad of an issue - in fact, I've conceded previously that for middle class white people, the European economy is probably better at the margins (which is why you see precisely those type of people making the argument). But let's not forget about other people: the unpeople, remember? Those of minority and poor backgrounds, they disproportionately suffer under high unemployment and it is precisely them I was thinking about.

Jon said...

What makes Hong Kong different from other British colonies is exactly what I described. Hong Kong was the port to all of China. It was also a refuge for China's richest. If Britain was hands off, that's also good. Britain tried to impose free trade in most cases. India suffered while the economy in the US soared because we succesfully kicked the British out and we were able to restrict their imports.

Like I've said many times, my point is not that free trade doesn't work. It does work if conditions are right. When conditions are not right, as in the third world today, it's extremely harmful.

Lower GDP/capita does not mean lower economic growth, Mr elitist and well trained expert. Which country has experienced more growth over the last 30 years? China or the US? China has lower GDP/capita but higher growth. You've confused the terms here.

Looking at one narrow window of time you manage to find 2 countries that BARELY were behind the US in terms of growth. But even in that window of time the remaining 15 countries did better, in some cases by significant margins. Is this evidence that the US is growing faster somehow?

Again, explain it away all you like. Say they are right wing. Whatever. My objection is that you've claimed in the past that Europe in generally grows more slowly and this is the price of a large welfare state. What is this claim based on? The data don't support your assertion. Does that mean a large welfare state improves economic performance? There is reason to think so.

You're right that minorities suffer more on unemployment. If we care about them maybe we should take steps to make unemployment less painful, as in Europe. It's much easier to be unemployed in Europe than in the US. I think you're point is if the raw # of unemployed increases, this means more minorities will be unemployed. True. But since unemployment isn't so painful I say that's not so bad. Especially since that welfare state includes training for workers that need skills.

HispanicPundit said...

Let me reiterate my argument just to make sure we are clear: economic growth in the welfare countries of Europe - countries like France, Germany, Italy, etc. has been lagging behind the United States for some time. Certainly the last 20 years. The gap has no longer been closing in these countries. Maybe it has in the less welfare state countries (which really, is an additional rebuttal to your main claim, but I'll leave that alone for now), but not in these European economies.

This is clearly what your data shows above along with extra evidence I have provided (see here). As long as we agree on this, I have nothing more to say. This has really always been the point of the "Europeans grow less" argument, and in fact it is true.

Jon said...

Where do you get that France, Germany, and Italy are lagging the US? I got the data right here. Sure, these three aren't gaining a lot. Germany has slipped a bit since 1980. France has also slipped a tiny bit in that time frame. But it's not enough of a slip to in any way state that EU growth lags the US. They are pretty much keeping pace.

Same with the UK since 1950. They aren't killing us. They're gaining, but slowly.

Belgium isn't a welfare country? Norway isn't a welfare country? Austria? Come on, man. These are all countries with a much more robust welfare state.

HispanicPundit said...

Norway has huge natural resources. Belgium and Luxemburg are tiny countries - truly outliers. The real comparisons are big economies - like Germany & France.

You write, Sure, these three aren't gaining a lot. Germany has slipped a bit since 1980. France has also slipped a tiny bit in that time frame. But it's not enough of a slip to in any way state that EU growth lags the US. They are pretty much keeping pace.

Okay - were pretty much saying the same thing. My point here is that growth in the United States is larger than in the main welfare countries of Europe - it may not be "a lot", but when it comes to economic growth, even a little matters a lot (scroll up and see why). So if you basically agree with this graph, I am essentially arguing the same thing. Growth in the USA > Growth in UK, France and Germany. We can quibble about the magnitudes later - but clearly the sign is in the direction I have claimed.

Jon said...

Since 1980 the UK, Spain, and Italy have gained more than Germany and France have lagged and their combined population exceeds the combined France and Germany. If even a little matters this means we should follow the welfare state types. Factor in the smaller states Belgium (11 million people) Greece (11 million), Switzerland (8 million) that are gaining fast and there's no way to conclude, as you do, that US growth exceeds EU growth.

Your link says were getting GDP growth. It doesn't say GDP/capita, and that's key. You have to measure GDP/capita.

HispanicPundit said...

Now were arguing semantics Jon: when I say Europe, I don't mean all of Europe, I mean specifically the core of Europe. The countries liberals think of when they fantasize about a future United States. Heavily welfare intensive countries with somewhat sizable immigration levels (certainly nothing like ours, but atleast more than basically nothing - like the Nordic countries). So of course I mean France, Germany and Italy.

I don't mean the right-wing countries of Europe. Countries like Britain, Ireland, and the Czech Republic are seen as either fully right-wing, or moderates. Of course, I am going to see them much more favorably (and the fact that it shows in the economic growth chart, speaks volumes about my welfare claims).

Okay - maybe in the future, to be more precise, I wont use the broader term of Europe. I will say something like heavily welfare countries of Europe with sizable immigration levels. Better?

Jon said...

Be honest, HP. You were not aware that EU growth generally looked so good as compared to the US. So what you are doing now is cherry picking the ones that look the best and saying that really you only meant them. When you said Europe you meant Germany and France. Nothing else. And by the way Germany and France are beating us pretty badly from 1950 to today or even from 1960 to today. And from 1970 to today. But if you take a very specific window (1980 to today) you find that they are really close, but just barely behind us. So those are the only two countries you meant when you said Europe.

Here's a proposal going forward. If you mean Germany say Germany. If you mean France say France. If you say Europe, what rational person would take that to be Germany and France and nobody else? Be honest. That's not what you said and no rational person would take you to mean Germany and France when you say Europe.

HispanicPundit said...


Trust me, I did. I knew about Ireland's strong growth. It's a favorite of right-wingers. But of course I wouldn't use Ireland as an example NOW, because of the trouble they are in. I knew about the Czech Republic's (im a big fan of the president) growth. I knew about the former soviet bloc countries. Britain too has always been kinda on the fence. Sometimes USA policies, sometimes not. This is all right-wing talking points (more rightwing countries > economic growth, more welfare countries < economic growth).

Seriously, I am surprised why you find it so hard to swallow. Why would I NOT be specifically referring to countries with the biggest welfare systems? The MAIN countries of Europe? Why would I NOT be talking about specifically Germany, France, Italy and yes, even Spain? When have you heard ANY conservative trash Europe and not specifically mean THESE countries primarily???

Seriously man, the fact that you think I am cherry picking Germany, France, Italy or Spain, is yet another example of why I question your previous right-wing credentials.

Question for you: say going forward I mean the "welfare centric" European countries? Ie, Germany, France, Spain and Italy...what should I say? I don't mean any ONE country - I mean all the countries that generally follow the pattern of pursuing equality over growth, welfare over immigration, etc.

Jon said...

Why would I NOT be specifically referring to countries with the biggest welfare systems?

It's not that you aren't referring to those countries, but I just assumed, since you said Europe, that you meant all of Western Europe. That is the countries with the large welfare states. They all have much higher welfare expenditures than the US, so your argument applies to all of them, right, not just the ones that are at the very top.

And if you are talking about Spain and Italy, their growth since 1980 is higher than the US. They gain more than France and Germany fall behind. France and Germany fall behind a miniscule amount. So if you mean Spain and Italy, fine. Your argument is undermined.

So if the welfare centric countries are Spain, Italy, Germany, and France, then you're wrong. Germany and France are basically keeping pace. Spain and Italy are gaining fast. So which countries do you mean exactly?