Europe Vs. America

Brad DeLong recently compared the economic performance of communist countries with their capitalist neighbors and found, surprise surprise, that capitalism works a lot better than communism:

DeLong comments:

Eschewing markets robs you of between 80% and 90% of your potential economic productivity.

DeLong’s argument is persuasive, but it also seems a bit dated. Outside of a few English departments pretty much everyone recognizes that communism was a flop. Heck, even Fidel Castro admits that it doesn’t work. Today the pressing question is not America vs. the Soviet Union but America vs. the European Union, i.e. the relatively free market system of the United States vs. the relatively more social democratic system of many European countries.

Here is some recent OCED data on median income by country, from the mid 2000S

(I choose median income rather than DeLong’s GDP per capita so you can’t say that inequality is biasing the numbers in America’s favor). The number in brackets is the percentage gap between the country’s median income and the U.S.’s:

United States $27,768 (0%)
Austria $22,916 (17%)
Belgium $20,388 (27%)
Denmark $22,796 (18%)
Finland $20,915 (25%)
France $19,047 (28%)
Germany $20,586 (26%)
Italy $16,140 (42%)
Luxembourg $35,000 (-26%)
Norway $27,098 (3%)
Netherlands $25,876 (8%)
Spain $16,456 (41%)
Sweden $19,895 (28%)
Switzerland $27,228 (2%)
UK $22,306 (20%)

Of the countries listed, Luxembourg actually has a higher median income, which I suppose speaks to the advantages of being a small tax haven. The gap is insignificant in oil rich Norway and capitalist-minded Switzerland. In the rest of Europe, however, the income gap is substantial, ranging from 8% in The Netherlands to 42% in Italy, and tending towards the 20+% range.

Granted, the U.S. vs. Europe comparison isn’t quite the “natural experiment” that you have in DeLong’s example, since there are lots of historical, cultural, and demographic differences between the U.S. and Europe that aren’t present in a comparison of, say, North and South Korea or East and West Germany. However, not controlling for these factors is likely to understate the U.S. advantage, since the median income for European-Americans is significantly higher than for all Americans. DeLong’s method thus provides a strong argument in favor of the American economic model as opposed to the European one.

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20 Responses to Europe Vs. America

  1. c matt says:

    Interesting. But income is really only half the picture for approximating a standard of living – how does expense figure in (in particular, including health care costs which seem to be a rather big issue of late)?

  2. John Henry says:

    Interesting post. While I recognize it’s probably the best comparison we have, I still think there are too many other variables between the U.S. and most European countries for this to be conclusive, particularly as the former achieved economic dominance during a period in which the latter was recovering from war-related devastation. Incidentally, did this post start as a deleted comment to one of Delong’s posts (j/k)?

  3. Russell King says:

    Another problem with the comparison: most of the counties listed on the communist side are not communist. Currently, there are only 5 communist counties: China, Cuba, Laos, North Korea and Vietnam.

    http://www.infoplease.com/ipa/A0933874.html

  4. John Henry says:

    Russell – the comparison for communism is from 1991. Many of those countries are no longer communist – but that supports rather than undercuts the argument against communism.

  5. WJ says:

    Blackadder, it seems as though this chart actually gives the lie to an easy opposition between “free market” America and “socialist” Europe, insofar as both Norway and Switzerland have much greater social safety nets than does the United States and yet also have a median income approximiating that of the US. Given that the GDP of America is so much larger than these countries, wouldn’t we expect to see an even higher disparity in median income between them?

  6. Catholicus says:

    Yes, DeLong’s data are twenty years old, and such comparison is baloney. It also assumes that maximization of per capita income is the goal of economic life, which for Catholics it certainly is not. Compare happiness indices, human development indices, health and life expectancy indices, etc., and the U.S. by far underperforms Europe. No Catholic (“American Catholic</i?) should ever be so idolatrous as to put mammon before other goods. Why do we Americans also want to appear better, which nobody around the world believes anyway? Particularly if we are not … ? Catholics should be beyond such games.

  7. Catholicus says:

    Yes, DeLong’s data are twenty years old, and such comparison is baloney. It also assumes that maximization of per capita income is the goal of economic life, which for Catholics it certainly is not. Compare happiness indices, human development indices, health and life expectancy indices, etc., and the U.S. by far underperforms Europe. No Catholic (“American Catholic) should ever be so idolatrous as to put mammon before other goods. Why do we Americans also want to appear better, which nobody around the world believes anyway? Particularly if we are not … ? Catholics should be beyond such games.

  8. Paul D. says:

    Its not a matter of putting mammon first, its a matter of which system allows man to use his talents to the fullest. One measure of that would be GDP per capita.

  9. Blackadder says:

    C matt,

    The median income numbers are adjusted for PPP.

  10. Catholicus says:

    Paul — Only for consumables. How about leisure time (which Benedict XVI has repeatedly declared to be indispensable for human flourishing)? We Americans (every American carries around a baggage of Calvinism, even Catholics) dismiss non-pecuniary factors of wellbeing too easily. I do not doubt that market economies outperform any other form of economic organization on allowing for human development (as Caritas in Veritate also argues), but the causality is one not measured through GDP. Socialism provides bad incentive structures, leads to distorted families and human misery, often does not allow individuals to see value in their work. As an economist I would summarize it by saying: market economies have a microeconomic advantage, which typically translates into a macroeconomic advantage. But it makes little sense to measure the latter in isolation and then assume, well, it must be due to an unspecified superiority of the system.

  11. Blackadder says:

    Blackadder, it seems as though this chart actually gives the lie to an easy opposition between “free market” America and “socialist” Europe, insofar as both Norway and Switzerland have much greater social safety nets than does the United States and yet also have a median income approximiating that of the US.

    The reason Norway does so well is because it has lots of oil. If it didn’t, it would look like Sweden.

    The only country that arguably does about as well as the U.S. is Switzerland. Switzerland, though, is a pretty free market place. Taxes are 29.7% of GDP vs. 28.3% for the U.S. So I would argue that the fact Switzerland does almost as well as the U.S. argues in favor of the “more markets=more prosperity” thesis, not against it.

  12. Blackadder says:

    Compare happiness indices, human development indices, health and life expectancy indices, etc., and the U.S. by far underperforms Europe.

    Here is a list of the percentage of people who say they are very happy by country:

    Venezuela: 55%
    Nigeria: 45%
    Ireland: 42%
    Iceland: 42%
    Netherlands: 40%
    Philippines: 40%
    United States: 39%
    Turkey: 39%
    Australia: 39%
    Switzerland: 38%
    United Kingdom: 38%
    Belgium: 37%
    Sweden: 36%
    Denmark: 36%
    Canada: 32%
    Mexico: 31%
    Austria: 30%
    Chile: 30%
    Norway: 29%

    Two things I would note about this list. First, I don’t think you can really tell much about the quality of a country’s government by its happiness (unless you want to say that Venezuela and Nigeria have the best run governments on earth). Second, contrary to your statement, the U.S. does not far underperform Europe. The U.S. in fact beats all of Europe except for Iceland, Ireland, and The Netherlands.

    The same is true of the other measures you cite. Hong Kong, for example, has the second highest life expectancy in the world. That might be an argument in favor of the laissez faire policies of Hong Kong. Or it might be that Asians tend to have high life expectancies for reasons other than the quality of government.

  13. Jaap says:

    Hm, People work in Europa an average of 36-40 hours and have approximately 20-40 days holiday a year, Americans I have always been told about 2 weeks. How can you compare the figures than only on GDP…………

    We do much more in a shorter time and have lots of FREE time 😉

  14. Blackadder says:

    Jaap,

    I actually addressed that argument previously.

  15. T. Shaw says:

    A couple points.

    One, look at the nose dives in per cap figures like GDP, income, etc. for Nicaragua and Venezuela when they went the Red Way.

    Two, the unemployment figures for the western euro welfare states were about 8% consistently while US were 5% and under with Dubya. Oh, they had unlimited unemployment benefits!

    Someone smarter than me (that would be everyone) once wrote that the “appeasers” will cite free health and etc. while ignoring that jackboot jammed up against the people’s collective, supine throat.

  16. RL says:

    At first glance the concern about Europe having to rebuild after the war seems important, but upon reflection I don’t think so at all. True they felt most of the destruction, but the US pumped in about $25B for reconstruction. That was free money and a direct stimulus to their economy while it was a heavy loss to the US (I think that was close to 5% of our GDP over 6 years or so). Also, due to the way the global powers realigned, Europe was spared heavy military spending and the US assumed the responsibility. Never mind the reasoning that if the European model was truly better they should be further along than us anyway. It has been over 60 years now.

    However, I confess to not finding much use in the Europe vs US economic debates. Frankly, they make no sense to me. I find most arguments from Europeans and American leftists that the US should be more like Europe to be quite lacking and naive. In fact, I often find them aggrevating because they’re usually founded on ignorance and inflated with arrogance. Likewise with Americans claim that Europe should be organized like the US.

    These are very different cultures with different histories and sensibilities. Some things are going to work well in Europe but not in the US and vice versa. It’s okay for the US and Europe to be different.

  17. Donna V says:

    Jaap and Blackadder: A parish friend of mine is married to a French-born engineer who started his own consulting firm in the States. He works many more hours than he did when he was employed by a pretty well-known company in Paris – but he loves his work, enjoys being his own boss, and for him, that more than equals time spent drinking pastis on some nude beach in Provence. I think the guy is an American born on the wrong Continent. I personally envy the pleasure he derives from work. There are native-born Americans who would be much happier with 35 hour weeks and 6 weeks of vacation time.

    The question is not what is more enjoyable or morally desirable, it’s what is sustainable. I am afraid that Jaap will find the European social welfare state is not sustainable because of demographics. He may presently enjoy its’ perks; his children and grandchildren (if he has any) will not.

  18. Do these figures include the East’s notorious black market economy?

    A significant amount of dollars is exchanged off the books in the US, too.

  19. Jaap says:

    Donna V,

    Lots of people here work more than 40 hours a week, that was not my point, the point is that we have almost the same GDP in much less hours. And therefore if we would be working more than 40 hours we would surpass the US 😉 (although it might also be the case that working more than 40 hours you lose productivity). Also there is a difference working for yourself doing what you like (which is preferable but not possible for all of us) and then working more than 40 hours, or having to work for somebody elses profits. Slavery is long gone in Europe and also gone in the US. Please enjoy life. Working more than 40 hours for somebody else is not my way of fun. (also i do NOT get paid a dime more for every hour above 36 hours).

    And about “European social welfare state is not sustainable” where I live (the Netherlands) a lot has already been changed to make it affordable again. You are right, the way is was was not affordable. I think however you have a wrong image about our wellfare these days. People have to keep working until 67 very soon (used to be 55-60). We will do what is necessary, do not think we are stupid or something. 😉

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