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Sunday, December 30, 2007

US and EU Economic Performances: An Exchange with Others

There's a good economics blog called the Marginal Revolution, run by a libertarian economist at George Mason Univeristy, Tyler Cowan --- George Mason itself a citadel of libertarian economists, something the buggy prof is not. He's a lifelong moderate Democrat, recently soured on the party's radical and ultra-liberal left-wings, and now regards himself as an independent. Still, despite some ideological differences, the buggy prof respects Tyler's academic work and his blog . . . not least, please note, because Tyler has uncommon, wide-ranging interests for an economist (or political scientist) in art, music, literature, foreign languages, and the cinema as well, surprisingly, in haute cuisine. Note the stress on uncommon. Most academics in these professions, at any rate these days, seems so preoccupied with their professional research and writing and rushing off to conferences that their tastes, alas, have regrettably narrowed --- a trend that has been at work for 30 or 40 years now, showing little sign of changing.


At the Marginal Revolution the other day, more specifically December 28th, 2007, the buggy prof expounded on a theme that was touched on briefly by Professor Cowan, followed by a lengthy set of comments where this expounding went on. If you go to that comments' section, you'll probably be pleasantly surprised by the high-quality of the posters . . . knowledgeable, polite, and literate (some, of course, are not native-speaking Americans or Englishmen and hence some allowance has to be shown). A few seem to be professional economists themselves or at least grad and undergrad students in the discipline. The theme that started this long thread there?


"Megan McArdle writes:

'It is hard for high levels of taxation to survive a right of exit; Europe has mostly been protected (so far) by its many languages, which make it harder to move. But as the EU increases labor mobility, expect to hear more about harmful tax competition.'

"The story is about skilled Danes leaving the country so as to avoid higher taxes."The last time I was in Denmark I was struck how many service workers could not speak Danish (will a Spaniard or Hungarian really learn that language?) and in the workplace communicated in English. Greater policy competition is one of the most important results of so many Europeans speaking good English. High taxes and differential incomes, in turn, increase the incentive for people to learn good English, thereby creating a self-reinforcing dynamic. I've long thought that Europe will become more like the United States than vice versa, most of all through mobility and diversity, but I don't think that is a very popular view."

Click on the continue button here to find bug's views, expressed in a couple of lengthy posts at Tyler's blog --- along with some rejoinders by others.

First Buggy Post

1) Denmark, as it happens, is hardly unusual in West Europe for the number of native Europeans deciding to pick up and emigrate. Holland has experienced a steady, increasingly large outflow of middle class Dutch the last decade as conflict, violence, criminality, and growing Muslim fundamentalism have been on the increase. Germany is not far behind. For that matter, 52% of German university students said not long ago that they would like to leave Germany for another country. French Jews, deciding there's no future for them in a country racked by ethnic violence and growing anti-Semitism, have been emigrating by the tens of thousands to Israel for several years now. Click here for fairly up-to-date data: http://www.hudson.org/index.cfm?fuseaction=publication_details&id=4948&pubType=HI_Articles

Some of those picking up have been moving to Britain and Ireland, mainly for jobs and may return to their countries of origins. But many too simply want to leave what they regard as an increasingly older, rapidly changing West Europe marked by these tensions, conflicts, slow economic growth except in Scandinavia and Ireland, declining native-European populations, growing Muslim immigrant communities hard to integrate, and --- contrary to what Europeans and Americans believe --- generally worse violent crime: rape, assault, armed robbery, homicide (the one exception), suicide, and mugging. That trend has been captured ever since the late 1980s by UN surveys of crime victims carried out four times by a Dutch university team, with collaborators world-wide. Australia was ranked the worst in such violent crime; Britain second (with a rapidly growing homicide rate too); the US 15th out of about 22 industrial countries; France and Germany ranked noticeably worse than the US, and Italy too. In London these days, you are 5 times more likely to be mugged on the streets than in New York.

2) Were there more risk-taking Europeans full of initiative and ambition, emigration out of the Continent would no doubt be soaring. Instead, though it's on the upswing, almost all the risk-takers seemed to leave by the tens of millions in the 19th and early 20th century. The remaining, probably Jews and others deemed fit for extermination by the Nazis (and their widespread European collaborators), were largely killed off in WWII in genocidal rage.

3) What remains is a rapidly aging European population, increasingly risk-averse, who largely resists the changes needed to switch their economies from making things to creating, using, and manipulating information and innovating new high-tech businesses whose productivity surges are diffused throughout the national and regional economies. The US has largely managed this epochal transition; only three or four very small EU countries --- all under 10 million each (Sweden, Denmark, Finland, and Ireland) --- have come close.

The Buggy Professor, AKA Michael Gordon

Postscript Comment: I should have added a tack-on point about Holland's outflow of middle class Dutch yearly and an inflow of others. In no small part because the Dutch have a more market-oriented use of land for housing --- this despite the huge population-density/square mile of the country --- a fair number of Germans who work near the Dutch border have moved there in the last few years to take advantage of relatively cheaper housing. Germany, far less densely populated, has more regulations about housing developments that make the price of housing more expensive there. (There's a good explanation set out in The Power of Productivity, the highly informative and illuminating book by William L. Lewis of McKinsey and Company's Global Institute (2005).

You can find chapter 1 online: http://economics.gmu.edu/pboettke/workshop/spring05/Lewis.pdf

The Buggy Professor, AKA Michael Gordon


PS For some extensive follow up of this and the previous analysis, go to 1) http://www.thebuggyprofessor.org/archives/00000243.php

2) http://www.thebuggyprofessor.org/archives/00000244.php

3) http://www.thebuggyprofessor.org/archives/00000245.php


Part Two


1) Yes, on the whole, the Swedish economy overall has done a good job of revitalizing itself except in one crucial sense: job creation, or really lack of it. Its official unemployment rate --- 5.6% in 2006 --- is widely regarded even by Swedish and foreign specialists as drastically under-reported.

The chief economist for the Swedish Trade Union Confederation, LO, after a careful study, reported in 2005 that the actual unemployment rate wasn't 6.0%, but rather 22% ---- a figure that would put it at US Great Depression levels! The local Swedish Social Democratic governments would simply inflate, with central government complicity, the early retirement rolls, sick-leave medical rolls, and job-retraining programs that led nowhere, not to mention endless university studies with no jobs at the end, but all of which manipulations are funded by taxes. When the LO balked at publishing the economist's results, he resigned, and a public outcry ensure. A well-known American consulting firm, the McKinsey Global Institute --- which carries out outstanding comparative studies of economic performance of various countries (using both US and foreign specialists) --- used American and Swedish economists and put the real unemployment level lower, but roughly 17% . . . still Great Depression levels for the most part. The electorate voted out the Swedish Social Democrats in the 2006 election. A major reason: everyone seemed to know at least one person who was unemployed.

2) A very good study carried out by Sweden's most prominent economist, Assar Lindbeck (with a couple of colleagues) found three years ago that 70 years of welfare-state cushiness had eaten away at the once legendary Swedish work ethos. The same was true of the impact of high taxes on Swedish workers and the rest of the employed population: the once legendary civic discipline of the Swedes had eroded too, and Sweden (along with Denmark and Finland) were found in an impressive Austrian study --- using a variety of cross-checking techniques --- to have fostered an underground economy of tax evasion (along with other criminality) that added up to about 15-16% of GDP. The US underground economy was reckoned to be the lowest of the industrial countries, at 7.0%. Britain's was about Scandinavian size. France, Germany, Spain, Italy, and some smaller countries averaged around 20%.

For all this, though, the Swedes have done well in GDP growth by tapping the technical and scientific skills of their small population (9 million), itself all the more impressive in view of theses problems. One reason: like Finland, the Swedes do unusually well in international exams for high school students in math and science; Denmark does somewhat less well. No surprise really. All three are small, fairly homogeneous countries in population, despite the big changes being wrought by a very low birth rate for native Scandinavians and rapidly growing, increasingly alienated Muslim immigrant communities. As those communities increase in size, the four small Scandinavian countries --- Norway not in the EU --- will very likely begin to resemble American the performances of American high-school students on these exams. The US Department of Education breaks down our students' results by ethnicity/race, and European or white American students' perform far higher than the average for all US students; those living in the northern US states perform at near East Asian levels in science and math, and in reading near to Swedish and Finnish levels. Already, as a cross-check, French high-school results in these international math and science exams have skidded downwards to average levels . . . France, the EU country with the highest percentage of Muslim (and non-Muslim African) minority populations.

Note one final point about Sweden's economic performance. A startling study by a Swedish Institute showed in 2005 that if Germany, France, Britain, or Italy suddenly joined the US Federal Union, they would rank with the four poorest states in the Union: along with Arkansas, West Virginia, Mississippi, and West Virginia . . . all sparsely populated rural states. Sweden would be ranked 7th from the bottom.

3) Enter Denmark.

Its job creation is much better than Sweden's, and unemployment is probably close to US figures, using standardized international calculations. That's impressive. So too has been the overall revitalized nature of the Danes' growth performance the last few years. But then Denmark has only 4 million people, which means it's smaller in population than Los Angeles, with a remarkably homogeneous ethnicity (that, however, is also rapidly changing, courtesy of a low Danish birth rate and an explosive rate among Muslim immigrants). Denmark, too --- note appreciatively --- is a gutsy little country led by a center-right coalition, which refused to kowtow to extremist Muslim rage and rampage over cartoons a couple of years ago.

This gutsy behavior of the Danes in defending normal morality and their attachments to human rights isn't new. In World War II, similarly, the Danish underground --- encouraged by the Danish King --- ferried its tiny Jewish community to Sweden rather than comply with the demands of the Nazi occupiers to hand them over for transportation to the death camps. Finland, which ended up by accident as a German ally in order to recover its territory lost to Stalinist Russia in the brief war of 1939, also resisted the demands of the Nazis to hand over their even tinier Jewish population for slated extermination. (Bulgaria, another German ally, did the same.) Norway, occupied earlier by the Nazis and with a collaborating pro-Nazi government, nonetheless developed a strong underground resistance movement. Only Sweden was the exception in WWII. An ostensible neutral, it violated neutrality laws by allowing the Nazis to move German troops across their railway lines from Finland to Norway and vice versa; pro-German sentiment was also powerful in the country at the time. Under international law, the allies could have retaliated by bombing Swedish rail-lines, bridges, train stations, and so on.

4) Back to 2007. As things stand, Finland falls in between its Scandinavian counterparts. Unemployment is reckoned to be officially 7.0%, a rate that the US hasn't experienced since 1941 except for a few months, in the deep but short-lived recession of 1980-81. Still, the Finns --- like Denmark and Norway about 4 million in population (Sweden, recall, 9 million) --- are very adept in technology, and will probably continue to do well in high-tech areas. Where they lag, along with the other Scandavian countries, is in entrepreneurial start-ups to exploit these new technologies. A very good academic study carried out by US and British academics in the late 1990s found that 1 out of 11 US adults created a new business every year; in the EU, the closest were Britain and Italy --- roughly 1 out fo 33 adults; in Germany and Finland (and, if I remember, Sweden) the corresponding figures were about 1 out of 50 . . . which means that hardly anyone in those latter countries even knows someone who started a small successful business. Japan, by the way, ended up like Germany in its entrepreneurial performance.

This point can be elaborated on. Despite the impressive new high-tech companies that Scandinavians have created like Nokia and Sony-Ericsson and the Germans with SAP (the leader worldwide in business software), the EU profile of big companies reads more or less the way it did in 1975, at the start of the big breakthroughs in communications and information technologies. By contrast, 75% of the US Fortune 500 biggest companies these days didn't even exist in that year.

5) Note that the real economic miracle in the EU is Ireland, historically one of the three poorest West European countries in the EU (1972 on for the Irish), along with Greece and Portugal. In the mid- and late-1980s, the Irish government revitalized its economy with low business taxes and other pro- free market policies of sorts that have made Ireland by far the richest country in the EU except for tiny Luxembourg (200,000).

Its per capita income in purchasing power parity terms is actually about US levels today: $43,000! Germany, France, and Britain come in around $33,000 each, and Italy slightly behind. Britain, by the way, has outgrown its three major Continental competitors since the pro-market reforms of the Margaret Thatcher era of the 1980s: it was about 15% in PPP terms in the mid-1980s below Germany and France, and is a tad richer today in per capita income. More to the point, its unemployment level is half that of Germany, France, and Italy, and hundreds of thousands of Continental young people work in London, Dublin, and elsewhere in the British Isles, escaping permanently high structural unemployment in their countries . . . above all for young people under 30 years.

6) Observe finally that like Ireland and Britain and the US, Australia and New Zealand --- foundering with oppressive regulations and high taxes in their economies since 1945 --- scrapped most of their welfare state, pruned their taxes and regulations, and have revitalized themselves impressively since then too. Meanwhile, the gap between the US and virtually all of West Europe (and Japan) continues to widen yearly in productivity growth, per capita income, and GDP growth.


The Buggy Professor, Michael Gordon


PS These sketchy points set out here, by the way, are part of a lengthy 7 article series published at the buggy web site in 2005, which also explains the historical reasons for the lack of a socialist tradition on one side in American life and, on the other, the absence of statist conservatism of the sort that emerged in virtually all of West Europe and Japan in the 19th and early 20th centuries . . . the latter rooted in pre-industrial, pre-democratic values and beliefs hostile to free-market capitalism. In some places during the 1930s, like Germany, Austria, Italy, and to an extent Portugal and Spain, this statist conservatism merged with Fascism or racist Nazism, all militaristic, all ultra-nationalist, all claiming a heritage of organic corporate unity as opposed to rampant capitalist individualism, money-grubbing, and atomistic destruction of the national community. A similar ideology took root, of course, in Japan in the 1930s and early 1940s.

If you want to read these bugged out articles, go to Google and run a search for "Yankee-Twit vs. Euro-Jerk: Or Why the EU's Work Ethos Is Shot". That will take you to an article in the series that will highlight many of these matters, with lots of evidence. You can then do an archives search for its predecessors and its successors.