The United States should not become a European Social Democracy

The Original Post here:

One of the more surreal aspects of the 2016 campaign was watching Bernie Sanders argue that the United States should become more like a European welfare state.

Was he not aware that Europe had major problems such as high unemployment and a fiscal crisis?

Didn’t he know that America’s economy was growing faster (which is a damning indictment since growth in the U.S. was relatively anemicduring the Obama years)?

Here’s a chart from a presentation. by economists from the European Central Bank, and it shows how much the United States has grown since 1999 compared to Japan and euro nations.

We’ve enjoyed nearly twice as much growth as Europe and almost three times as much growth as Japan. Which is remarkable since those countries aren’t as rich as the United States and they should grow faster according to convergence theory.

So while it’s true that Obamanomics hasn’t been good for the United States, it’s apparently not as bad as Abenomics in Japan and Hollandenomics (and Renzinomics and Tsiprasnomics) in Europe.

Allan Meltzer explains why Europe is lagging in an article for the Hoover Institution.

Europe has become the model for how democratic capitalism can give way to the welfare state. Following a surge of market-driven growth after World War II, there was a rise across the continent in income redistribution and regulations intended to protect workers and consumers, and to achieve “fairness.” From the 1960s onward, high tax rates and heavy regulations slowed economic growth. And many welfare state programs became roadblocks to economic progress by resisting reforms and prolonging the current European recession. …France and Italy are not as far along to disaster as Greece, but their welfare systems are also difficult to reduce to regain competitiveness. …Monetary policy cannot overcome real, structural problems. Spain and Ireland showed that EU members can restore growth most effectively by making…painful real changes… Sluggish growth will continue until EU officials adopt policies that encourage private investment.

It’s depressing to think that some American politicians want to copy European failure.

Some of the candidates in the 2016 presidential race offer more welfare state benefits as a remedy for current voter malaise. The promise is that the way to make everyone better off is by taxing high incomes and distributing more to others. That’s the route that many in Europe took. Instead of the promised happy outcome, much of Europe got slow growth and high unemployment and an ever greater need to restore competitiveness by reducing the expanded welfare state. …Prime Minister Thatcher often said, “The welfare state will end when they run out of YOUR money.” If she was right, the end for Europe is here. And the lesson for the United States is to adopt less costly policies before debt markets force the change. …the lesson for the United States is that we will not escape the problems of the welfare state.

Perhaps more important, didn’t he know that Americans enjoy much higher living standards than their European counterparts? Was he not aware that European nations, if they were part of America, would be considered poor states?

If you don’t believe me, here’s a chart I prepared using the “average individual consumption” data from the Organization for Economic Cooperation and Development. These are the numbers that measure the material well-being of households. As you can see, the United States is far ahead of other nations. Indeed, the only three countries that are even close are two admirable tax havens and oil-rich Norway.

What about Denmark and Sweden, the two nations that Bernie Sanders said were role models? Well, the United States could copy them, but only if we wanted our living standards to drop by more than 30 percent.

By the way, since the OECD is a left-leaning bureaucracy that is guilty of periodically rigging numbers against the United States, you can be confident that this AIC data isn’t structured to favor America.

So why does the United States have such a big advantage?

In a new study from the National Bureau of Economic Research, Professor Martin Feldstein addresses why Europe is lagging the United States.

Although the official statistics imply that the rate of growth of real GDP in the United States has declined in recent years, it has still been substantially higher than the real growth rates in Europe and the other industrial countries. The sustained higher rate of real GDP growth in the United States over a longer period of time has resulted in a substantially higher level of real GDP per capita in the United States than in other major industrial countries.

He lists 10 reasons for the growth gap. Here are the ones that are related to public policy, followed by my brief observations.

(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. In the private sector, less than seven percent of the labor force is unionized. There are virtually no state-owned enterprises. While labor laws and regulations affect working conditions and hiring rules, they are much less onerous than in Europe.

Given America’s high ranking in the World Bank’s Doing Business, this makes sense.

(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany.

The U.S. subsidizes leisure, but not nearly as bad as Europe (think of Lazy Robert).

(7) A supply of energy that makes North America energy independent. The private ownership of land and mineral rights has facilitated a rapid development of fracking to expand the supply of oil and gas.

Apparently the United States is one of the few nations where you own minerals under your land. Good for us.

(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.
(9) A smaller size of government than in other industrial countries. According to the OECD, outlays of the U.S. government at the federal, state and local levels totaled 38 percent of GDP while the corresponding figure was 44 percent in Germany, 51 percent in Italy and 57 percent in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. In the United States, …There is no value added tax. State income taxes vary but are generally about five percent… So Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.

A smaller burden of government spending may be America’s biggest advantage. And that’s connected with our other big advantage, which is not being burdened by a government-fueling value-added tax.

(10) The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. The United States political system assigns many legal rules and taxing power to the fifty individual states. The states then compete for businesses and for individual residents by their legal rules and tax regimes. Some states have no income taxes and have labor laws that limit unionization.

We still have some federalism, and that helps.

Overall, Feldstein’s list is impressive, though it fails to note that there are areas where Europe has better policy, such as lower corporate tax rates, lower death taxes, private postal services, and private infrastructure. There are even European nations with school choice and private retirement accounts.

What makes this especially noteworthy is that convergence theory says that poorer nations should automatically catch up to richer nations. Yet Europe’s catch-up period came to halt in the 1980s and the continent has since been losing ground.

And for fans of apples-to-apples comparisons, it’s very illuminating that Americans of Scandinavian descent earn about 40 percent more than those who didn’t emigrate and still live in Scandinavia.

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