Europe’s Long-Term Economic Woes—and America’s

Europe’s current economic crisis is being attributed to its having a common currency but no common fiscal authority. It’s as if the United States had no Treasury Department, and a state that had borrowed heavily from banks in other states got into serious financial trouble, like Greece. It could not reduce its debt burden by devaluing its currency (and thus repaying its debts to the banks in other states in cheaper dollars), which would have the further benefit of stimulating exports (by enabling the same amount of foreign currency to buy more U.S. products) and discouraging imports (because it would take more dollars to buy products denominated in a foreign currency). The state could not expect to receive any transfer payments from other states, and the federal government would not be authorized to transfer money to the state (remember that I’m assuming that the federal government has no Treasury Department). So the state probably would default on its bank debt (“restructure” the debt is the current euphemism), and this might bring down the banks that had made the loans that were now in default.

 

That is the current economic situation, with Greece taking the place of the defaulting state, and the European Union taking the place of the U.S. government, in my hypothetical example. And the situation will be resolved, one way or another. One way would be by a default, perhaps accompanied by a bailout of banks whose solvency is endangered by the default. Another way would be by Greece’s abandoning the euro in favor of its own currency, And a third way would be by fiscal measures (“austerity”) that would restore the government’s solvency.

 

The current European economic crisis is thus the product of an encounter between a defective institutional structure (a common currency but no common fiscal authority) and an overindebted member state of the supranational institution. These problems are solvable in a variety of ways, including by dropping the euro or creating an EU fiscal authority, comparable to our Treasury Department, as well as by a default or austerity measures. But the financial crisis is short term and tends to mask Europe’s longer-term economic problems, well discussed in a recent article in the New York Times: “Europeans Fear Crisis Threatens Liberal Benefits,” May 22, 2010, www.nytimes.com/2010/05/23/world/europe/23europe.html?pagewanted=1&hp.

 

The basic problem is often said to be the conjunction of an aging population, low birthrates, and extravagant social welfare benefits (mainly pensions, early retirement, and publicly subsidized health care). For example, these benefits consume 31 percent of the Gross Domestic Product of France—twice as much as such benefits consume of the U.S. GDP (these are 2005 figures). But I think we need to dig deeper for a satisfactory explanation.

 

It is true that improvements in health care (including nonmedical preventive measures such as diet and exercise) are increasing longevity, but they are also increasing (along with the decline in manual labor as a percentage of all work) the age at which people are no longer healthy or fit enough to work. And it is true that birthrates are very low in most of Europe, which increases the percentage of old people, but that of course is not because of some biological impairment of European fertility. Nor would low birthrates matter much if Europe were more welcoming than it is to immigration, because immigrants tend to be young.

 

The major cause of Europe’s long-run economic problems is political, though the political is in turn shaped by cultural factors, including historical memory; maybe the best way to describe the major cause of the problems is Europe’s “political culture.” Government has greater prestige in Europe than in the United States and (a related point) socialism retains substantial support in Europe; individualism, with related notions such as self-reliance, freedom to fail, entrepreneurship, the “self-made” man, and the Horatio Alger story do not grip the public imagination of many Europeans. Government in Europe employs a higher percentage of the working population and engages in more redistribution of income, resulting in high taxes to fund retirement at earlier ages than in the United States, generous pensions and family leave, unemployment benefits generous enough to discourage work, and medical care. Lavish redistribution of wealth in turn entails barriers to immigration, lest the social safety net become an immigration magnet. Unions are strong in Europe, and they push up wages and (worse) encourage featherbedding, short hours, and other inefficient practices. Unions of government workers are especially pernicious, as they reinforce the natural tendency of government to overpay its employees because they are voters as well as employees. A third of the Greek work force is government-employed, for example, and much of it appears to be both overpaid and underworked relative to employees in the private sector.

 

Because socialist policies reduce economic efficiency, European countries (with some exceptions, notably Germany) have difficulty competing in foreign markets with China, Indian, Brazil, and other rapidly growing economies, and so have difficulty maintaining a positive trade balance. And because tax rates in Europe are already very high, government deficits cannot easily be reduced by raising taxes. The aging of the population increases the demand for public spending, and the demand can be met only by increased borrowing, which is also necessary to close the gap between exports and imports.

 

European economic stagnation and public overindebtedness is in short mainly a political problem, resulting from a swollen and still rapidly expanding demand for government services. It is a political problem rooted in cultural factors summed up in the word “statism,” in contrast to American individualism, as designations of dominant political ideologies. This is an oversimplification but seems to me to get at the heart of the difference between European economies and the U.S. economy.

 

Many of the same economic pathologies that plague Europe plague us, but less seriously. We have an aging population, though it is due mainly to increasing longevity rather than to a low birthrate, for our birthrate is close to the replacement level and immigration brings us over the replacement level; there has been an ominous increase of late in hostility to immigration but this may be a byproduct of the economic crisis and so may pass when the crisis passes. Many of our public employees are overpaid and underworked, but only 8 percent of our labor force is employed by government (federal, state, and local), and this includes our military personnel (almost 1 percent of the labor force), who do not appear to be either overpaid or underworked. We have an alarming public debt, swollen by unfunded spending programs in both the Bush and Obama Administrations (the new health care reform is, realistically understood, unfunded) and by the decline in tax revenues as a result of the economic downturn. But as long as the U.S. dollar remains the dominant international reserve currency (which means that it is used in many transactions in which there is no U.S. party), the demand by foreign central banks for the dollar will remain very high and the resulting volume of U.S. money held abroad will enable us to continue borrowing abroad at low or at least moderate interest rates.

 

But if we continue running huge deficits, continue being unable politically either to cut spending significantly or raise taxes significantly, continue adding huge new spending progams, continue increasing the ratio of elderly to young, continue raising the minimum wage and promoting unionism, turn protectionist, resist immigration, and become even more deeply involved in military operations, we too may eventually go the way of Europe, even the way of Greece. Nowhere is it written that the United States can never decline.

Comments

[IntuitiveEconomics]

Another point is that the low birth rates in Europe (which contribute to the European economic conundrum) are themselves strongly related to the centrally planned socialist state.

If you have ever lived in the typical centrally planned, mandated high density, mandated public transportation environment of the typical European city, trying to raise two kids in the typical 1200sqf European family apartment and trying to then lug the two kids in and out of public transportation to go to school, buy groceries, visit friends etc. then, you will understand that raising children in Europe is, overall, much more difficult than it is in the US. Hence the low birth rates.

[Tom Rekdal]

Judge Posner's analysis is excellent, particularly its emphasis on the cultural factors that distinguish us from Europeans. But, alas, depressing as well, for there is no guarantee that our advantage in individualism, for example, can long endure. Indeed, it has been on the decline for some time. If our present crisis is primarily political (i.e. one of character and willpower rather than economic strategy), it is hard to be optimistic. How does a political leadership in austerity emerge from our present situation?

[a Duoist]

A large reason why the American economy has an advantage over the European economy is the common language unites all fifty members of the USA. Europe has a single currency, but a plethora of languages. It is the language problem which inhibits migration in Europe from low employment areas to high employment areas, and acts as an impediment to the Eurozone's efficiency. Even if Europe makes the necessary reforms in its fiscal and monetary institutions and policies, it still will be faced with the built-in inefficiency of numerous languages trading in the one market.

[IntuitiveEconomics]

Size and homogeneity do not seem to correlate with prosperity. E.g Switzerland and other small, non homogeneous countries.

[Badger]

Switzerland is indeed proof of the dangers of oversimplification. We here in the US have a tendency to underestimate the strengths of the Euro, and I think this complacency is really very dangerous. The European Central Bank is a much better designed central bank than the Federal Reserve. And the crisis in Greece for me is proof that their system is indeed working much better than ours. They are at least receiving the correct market punishment before it's too late.
Here, on the other hand, we just keep running towards the next cliff, without any workable restraint.

[IntuitiveEconomics]

Mr. Posner makes a good analysis by pointing out that Europe’s problem is political and cultural.

Europe is the continent where prevailing voter preference gives economic growth secondary priority compared to social programs that are typically referred to under the umbrella term of “welfare state”. This perilously ignores the compounding effect of economic growth. E.g. growing at only 2% for 35 years makes a country 50% poorer compared to growing at 4% over the same period ([1.02/1.04]^35=0.51). Even if wealth is more uniformly distributed, after a while, it becomes increasingly difficult to compensate for the 2 to 1 wealth handicap.

Europe is also the continent where a majority of the electorate seems to eternally hope that a strong economy can be built in an environment whereby the most intelligent, most productive, or simply hardest working, will produce and offer not only the fruits of their labor (innovations and/or entrepreneurship and/or simply high output due to hard work) but also share 60-70% of their paycheck with the general public. That hope seems to be springing eternal in Europe. That hope seems to also be taking root in the US. So things do not look that good for the US either. Especially since, typically, voters respond to the economic distress caused by lower growth with requests for more redistribution, thus triggering a vicious cycle.

[IntuitiveEconomics]

Mr. Posner writes: “But as long as the U.S. dollar remains the dominant international reserve currency (which means that it is used in many transactions in which there is no U.S. party), the demand by foreign central banks for the dollar will remain very high and the resulting volume of U.S. money held abroad will enable us to continue borrowing abroad at low or at least moderate interest rates.”

I am not an economist, simply a scientist, so I cannot present my arguments in technical terms. However, it seems to me that the dollar being the dominant international reserve currency is just a technical detail that cannot possibly survive the other eventual adverse fundamentals Mr. Posner warns about in his column (E.g. the US loosing its top spot as the most competitive economy in the world).

In other words, it seems to me that once the US economy gets in trouble, it can only ride the momentum of its currency privilege for a short while, before other countries get around the technicality of using the dollar for transactions. Simply stated, the dollar is the dominant currency because the US has been, and remains, the dominant and most competitive economy in the world. If the US economy stops being competitive and thus looses its dominant position, the dollar will also, inevitably, loose its dominant role in international transactions.

As a matter of fact, hoping that technicalities will keep the US afloat against deteriorating fundamentals, only makes the eventual crisis more dramatic, i.e. it is a recipe for the creation of an expectation bubble (I’m sure there are more precise technical economic terms to describe this phenomenon – but as I said, sorry, I’m not an economist though, I think, intuition gained through other sciences can often be applied to economics).

[Chris Graves]

I think Judge Posner is entirely too sanguine about the prospects of mass immigration saving our economy from the decline into which Europe has sunk. The problem with mass immigration is the loss of social capital as a different people with very different attitudes and folkways replace the currently dominant European population. People are simply not interchangeable. A certain kind of person is an American.

There is also the problem of social cooperation. People who are different culturally, linguistically, ethnically, religiously, and politically find it difficult to form a social union and cooperate with one other. The transactions costs become too high as well as the unwillingness of people to work and sacrifice for a common good when others are not viewed as worth the effort. Many of the political divisions in contemporary American politics can be traced to the differences between the immigrants of 100 years ago and the native population. Consider Lance Morrow's insightful article on this matter, "Cowboys and Immigrants."

http://www.smithsonianmag.com/people-places/Presence-of-Mind-Cowboys-and-Immigrants.html

Judge Posner mentions individualism as a key component of American culture. I agree with him, but we must distinguish as F.A. Hayek did between a true individualism and a false individualism. A true individualism is rooted in a social context of a rooted way of life while a false individualism is atomistic and devoid of social bonds that could spontaneously foster cooperation among people. With our increasingly diverse population, we have seen the rise and even institutionalization of false individualism and consistent efforts by some groups using the state to actively undermine organic social unions that provide a social structure to our individualism.
Incidentally, contrary to Intuitive's comments above, the Swiss are pretty well segregated by language and culture accompanied by a highly decentralized system of governance. So, in daily life, the Swiss are homogeneous.

We can learn from the Fall of Rome as the Romans allowed a similar mass immigration to overtake them. Due to the invasion of parts of Europe by the Huns, enormous numbers of Goths and Vandals entered the Roman Empire fleeing the invading Huns. Over time, these people who did not take up Roman customs and culture overwhelmed an otherwise very stable western Roman Empire by sheer numbers. Historian Peter Heather observes "In my view, it is impossible to escape the fact that the western Empire broke up because too many outside groups established themselves on its territories." Consider his arguments that mass immigration destroyed the Roman Empire in his books on the subject starting with *The Fall of the Roman Empire.*

I do agree with Judge Posner that there is absolutely no reason to believe that the United States is invulnerable from decline and fall.

[Jeff]

raising taxes is rarely if EVER the answer.

[Jim]

The European and American economic woes are not the cause of our national malaise and dissolution but rather the effect, among others. The loss of our culture, morality, community and wisdom are the causes Among others, all probably natural oscillations in civilizations but irreversable once begun. History is full of examples, some ancient, some modern.

[Jim]

And now we have Nick Sarkozy considering using a Gross Domestic Happiness Index to measure France's economic welfare instead of a GDP. Ah yes, solving a problem by calling it something else. My point above exactly; we have descended into fantasy, a sure sign of chaos to come. I am aware that this concept has been around for ten years. Assign negative points for social problems which require resources (prisons, etc) and positive points for things like winning sports teams or flower planting or tree planting, etc. I could probably contribute to the happiness index by medicating myself into a state of unconcern.

[Vivian Darkbloom]

Good analyses. However, I prefer the term "paternalism" to "statism" to distinguish European culture and politics from the relative "individualism" of the United States. Paternalism is a more accurate term because it recognizes the continuing influence of the historical European nobility and the relative elite nature of the European ruling class, even today. This paternalism is reflected in the somewhat more significant role the state plays in the lives of citizens; however, there are subtle, but important differences between the role of the state in Europe and the role of the state in the United States. One key difference is that while Europe has relatively higher taxes, these taxes (including social charges) fall relatively higher on the middle and lower income classes than in the U.S. It is a common misconception among Americans that European workers receive high benefits, but pay low taxes. There is much less income and wealth redistribution than you may think. While top tax rates may be higher, exceptions abound and those high rates are rarely paid by the elite ruling class. Simply stated, the European ruling class deems it advisable to confiscate a larger percentage of wages of the working class to ensure that they don't squander it all at the pub and elsewhere. Much of this is eventually given back in the form of social benefits. Another example of this paternalism is the widespread practice in Europe of paying salaries out 13 times per year (sometimes 14), with the additional month pay intended to fund a vacation. Again, this is a reflection of paternalism exhibited by the ruling class: the lower class worker cannot be trusted to save his money for that annual vacation, which will ensure that he or she returns well rested for another year of work.

Also, there may be studies on this; however, I doubt the statement that European immigrants are relatively young is true. The traditional route to emigration to Europe has been to get one family member legally establshed and then to use that status to bring over other family members (e.g. parents). I've lived in Europe 30 years and a casual visual poll on the streets suggests that the average age of an immigrant is quite old.

[IntuitiveEconomics]

Jim,
As a European immigrant who has lived on both the US and European continents, I am skeptical that supposed lifestyle advantages in Europe compensate for a lower per capita GDP (PPP). As a matter of fact, even if I were to ignore per capita income, I personally find the European mandated urban high-density lifestyle inferior to America’s. But lets pretend for a minute, and take for granted that European lifestyle is superior to American lifestyle.

I already pointed to the rather obvious fact that growing at 4% vs. 2%, after 35 years, makes you 100% richer. Therefore, under the relentless compounding of diverging GDP growth, it will become increasingly difficult for Europe to justify how the claimed lifestyle advantage compensates for an ever increasing financial prosperity gap.

Growing at 1.7%, vs. the 4% world average, by 2040 Europe will have to justify how its lifestyle gains compensate for the fact that the average European’s relative financial position in the world has deteriorated by 50%. Not an easy task.

I hope my adopted country, America, escapes this vicious cycle whereby: {[loss of prosperity] --> [voter discontent triggers anti-business sentiment and calls for redistribution] --> [further loss of prosperity]}. However, current political directions on the left, but also on the right, leave little room for optimism. I’ve seen this movie before. In Europe.

[NEH]

An "Oversimplification"? Perhaps a more appropriate analysis of the E.U.'s and Greece's economic problems (and the US's indirectly)could be better explained by the concepts of "Game Theory" such as Zero Sum gaming and Non-Zero Sum gaming. With the rise of the "global mercantilist economy" based on Statist Capitalism coupled with massive use of labor arbitrage and subsidised business operations (China, India and others) has forced the World's Economy into a Zero-sum game. With clear winners and losers and it's consequences of failing national/state budgets due to tax losses, etc. etc. The E.U.'s current problem with Greece and the U.S.'s inability to jump start its own economy and put people back to work and establish a vibrant economy, is just the tip of the iceberg of zero-sum game economics.

A Non-Zero sum game approach would approximate a parity approach to imports and exports among Nations and would go far in correcting the current imbalances. Not too mention, alleviating many of the economic problems confronted the World's Nations today. Like Greece, Europe, U.S. and others. As for the U.S., we should just walkaway from it all and establish a full blown Mecantilist Economy for our own well being.

Has anyone peered into the National Economic Abyss as of late? And reported back on what it means for ourselves and countrymen? It's time we once again began operating economically in our own self interests and not in everyone elses. Economics is "dismal science" and a Zero sum game with clear winners and losers.

[Jim]

Intuitive economics,

I agree completely. Put a little sugar on it and the population will swallow almost anything and/or anyone. In Europe, the "lifestyle" may be better because the folks have no other choice but to avoid working too hard and enjoying some simpler joys like coffee and cake at the sidewalk cafe or talking endlessly about the kale water soup.

[sam vinson]

Both Posner and Becker as usual make incisive comments about the European disease. They do not discuss the importance of one fundamental reality of the past forty years. The Germans have been willing to accept high taxation to subsidize France, particularly French farmers, as an alternative method to the Wehrhmact for running Europe--at least Western Europe. The consequence has been to condemn the French economy to a backward, too rural existence. And the German economy has labored under that heavy burden. With the appearance of New Europe, Germany has moved significant manufacturing east into better, low cost labor climates. That probably permits Germany to carry France a while longer, and it gives German unions notice that they must come to terms with actual values. Nevertheless, until France awakens to its need to take care of itself in modern economic terms, Western Europe faces a period of continued stagnation. Eventually, as the German people sort out the WW II guilt problems, they are likely to slim the French subsidies, and both countries will become more efficient economically. The joker is the EC. Its regulatory bureaucrats are grasping for power and decidedly anti-free market. The best evidence for this case is the opposition to modern agriculture technology, feared by the French peasant farmer and used as a fear tactic by the Greens.

[NEH]

When it comes to "ag. tech." I take it to mean "genetically modified crops". As for Europeans and other regions of the World, they are not entirely convinced that they have no impacts on humans based on consumption. So they are using the U.S. as the great Laboratory to see if there are any negative impacts prior to authorizing their use as food stuff replacements. As for automation, the French and most Europeans as consumers much prefer the old labor intensive products like Camebert as opposed to Velveeta. Another advantge is that it keeps more Family Farms intact and more people working. How many jobs have been lost in the American Ag. Sector with the rise of Agri-business and Corporate Farms?

[Micko]

The Greeks work longer hours than the OECD average. About 23% of the Greek labour force are employed by the government. This includes temporary staff and workers in state industries.
http://www.oecd.org/dataoecd/6/39/44785912.pdf

Historically, European nations outperformed the US in terms of growth in GDP per capita from 1950-73.

In the period 1950-73
US 2.2
France 3.8
Italy 4.8
Germany 4.9
UK 2.5

From 1973-1987
US 1.5
UK 1.5
Germany 2.0
France 1.7
Italy 2.0

SOURCE: Maddison, Angus (1989), The World Economy in the Twentieth Century, OECD.

The EU (exluding Britain) has performed significantly worse than the US in the 'long 1990s' (1991-2007). They appear to have come to the end.

The regulatory function of the European Commission is more to standardise regulations across the European Union to allow the Single Market to function efficiently than to enact anti-market legislation. The Commission's competition policy stance is anti-trust (to use the American term) and the Commission has won significant legal victories against some of the more statist countries in Europe in regard to state support for industries(See European Commission vs. France 2006).

On the point of the modernisation of French agriculture. CAP has enabled a substantial urbanisation of France while supporting aspects of traditional French rural live. About 30% of the work force was engaged in agriculture in the France of the 1950s. It is now 7% (French Ministry of Agriculture). French agriculture policy is more similar to the US than it's neighbours in terms of protectionism (witness inter-European squabbling at WTO talks), but is admittedly small scale.

[sam vinson]

As a young man growing up in the central Illinois of the 1950's, one could see farmers get by with 250 acre farms; by the mid-60's, it was 750 acre farms; and today an efficient farmer requires 2000 acres. Yes, NEH, there were many farm jobs then and less farm production. And that tells the answer. American farmers are highly productive, French farmers just drag down the European economy because they cannot produce enough to live on. Consequently, it will probably take the subsidy well drying up to change France. It might be a grand museum piece, but not an economy. As for agriculture technology, you are clearly right that Europeans are going to watch US technology--and not use it-- for decades. It is unfortunate because a more productive Europe would make the US and the rest of the world more productive and more prosperous. Nevertheless, there is little we can do about about their reconversion to Druidism. And so the only practical economic strategy for the US is to focus on the Pacific rim countries that are engaging in modern technology, productivity, and growth. Europe can still be a sort of museum or theme park for gawking purposes.

[NEH]

Sam, So how's the corn and soybean crops coming along down there in good-ole Normal-Bloomington or Cham-bana? I've seen that Wind Turbines are also now becoming a crop of choice. ;)

[Jim]

A simple way to get a better perception of the US vs Europe life style-economy question would be to do a statistically valid survey in both locations such as, "All things being equal where you live, would you leave and move to the other (emmigrate) country relative to the lifestyle and/or economy?"

[sam vinson]

Crops were planted relatively early; heavy rains required some replanting. On a longer-term note I know farmers wgo emplor low-til practices and averaged--yes I do mean averaged--more than 200 hundred bushels per acre last year. I remember when 125 was considered respectable. And yes there are wind turbine fields in central Illinois. I personally believe the nukes are a better long-term source of energy.

As to polling on immigration, it could be that if you count the immigrants you'll find that the US is by far the most desirable place to live.

[Whitepele]

Well, I agree that the unions in Europe are too strong, and that paternalism from the states can be annoying. Its rather misunderstood though. The safety nets are not there to promote laziness. But yes, lately I have seen friends of mine in the 20`s, who sort of take a year off, being generously paid by the government. That wouldnt happened earlier. But on the large scale, people follow their dreams, and one could complain that too many want to become social anthropologists or philosofers rather than engineers.

Growth is also not something people are too occupied with. People worry more about the state of the planet, and what kind of growth that would enhance the quality of life of the people. Also there is a lack of nationalism. When people see the oath taken by kids at school in america they feel its bizzare.

Consumerism is also considered to be bad culture. An a tv in the kitchen would make you think you have entered a trailer park. Its not a sign of prosperity. If you want to impress a european tell him how many countries you have been to, not how many computers you have in your bed room. Livning in Norway, I would rather move to southern europe enjoying good food and beautiful cities, culture, and a sinificant drop in income rather than slave my ass of in the states for someone else and eat mass produced or gene-modified food.

[book of ra online]

And now we have Nick Sarkozy considering using a Gross Domestic Happiness Index to measure France's economic welfare instead of a GDP. Ah yes, solving a problem by calling it something else. My point above exactly; we have descended into fantasy, a sure sign of chaos to come. I am aware that this concept has been around for ten years. Assign negative points for social problems which require resources (prisons, etc) and positive points for things like winning sports teams or flower planting or tree planting, etc. I could probably contribute to the happiness index by medicating myself into a state of unconcern.

[monster]

raising taxes is probably ALWAYS wrong...