Monday, September 14, 2009

Falling Behind the "Socialists"

Yesterday Meet the Press ended with an attempt to discuss the economy; calling it an actual discussion of the economy might be going a bit too far. The participants did manage to conclude that ten percent unemployment is A Big Deal (although they were preoccupied with using it to handicap political horse races), and they stumbled around the notion that we are in the middle of huge economic changes. But how far the chattering classes are from any real grasp of the world economy is illustrated by one quote from Joshua Cooper Ramo, who has a story about unemployment in Time:

Last week we had the dubious honor of passing Europe in terms of unemployment, which has, you know, long been sort of the pride of the United States; well, at least we're not Europe.

The jingoism of that sentence originally distracted me from the truly shocking phrase, "at least." Ramo evidently believes, and assumes everyone else believes, that the United States economy has been eclipsed by economic rivals, but at least we have stodgy old socialist Europe to look down on.

The assumption here is that America is losing out to the more dynamic developing economies of the Pacific Rim, especially China's. It's become an article of faith among the financial press that America cannot compete with the less-regulated Asian economies and their lower labor costs. But the European Union, with its highly-paid workers, elaborate government regulation, and generous national entitlement programs, is imagined as far too handicapped to compete with the United States. China is imagined as the United States' prime economic rival and also as a model for imitation; Europe is imagined as an ineffective rival, and as a model to be avoided.

Like many long-standing assumptions, this one has gone unexamined well after reality began to contradict it. When the German automaker Daimler buys Chrysler, and later sells it off again as a bad deal, the words "at least we're not Europe" don't strike me as overwhelmingly persuasive. When the Euro climbs relative to the dollar, and the contrast between the exchange rate at the beginning and the end of the Bush Administration is dismaying, the presumption of American superiority seems quite shaky. I don't suggest either of those facts represents the whole economic picture, and I'm sure the American economy still outperforms the European in a number of ways, but the treating Europe as destined to be second-best forever is an enormous mistake. If the Big Three automakers can't compete because Western workers cost too much, how do you explain Daimler? If higher taxes and social programs handicap the EU's economy, are they weathering the recession as well as we are, or better?

While China is a very real economic rival, with whom the States will have to both compete and cooperate, Europe is also an economic superpower which, over the long term, represents a more direct competitive threat to the United States. Its economy is more analogous to ours and it competes to fulfill the same economic roles that the United States does. Moreover, it represents a far more useful potential model for the United States than China does. China's economic situation is so radically unlike our own that it's hard to draw any broadly-applicable lessons from it, while the European Union represents a different approach to managing an economy broadly like our own.

China is not simply America without a Food and Drug Administration. It is a huge country building a serious industrial base for the first time, as we did in the 19th century, and its rapid growth is the result of that structural change. We cannot follow that model because we've followed it already. We are not going to transform our economy by taking millions of farm laborers from the countryside and turning them into factory workers. There are actually not that many American farmers left. We are not going to build a transportation infrastructure in a country that doesn't have one; we can only upgrade the one we started building in the 19th century. We are not going to build an industrial base from scratch; we did that already, too. We have opportunities for economic growth, but not the kind of growth that took us from horses and sails to trucks and planes. That kind of transformation only happens once.

Americans who propose China as a model for development are essentially nostalgic; it is a proposal to repeat our own industrial past. But industrial development cannot be repeated in that way; the circumstances and opportunities are different now. We can be a better economy, but we cannot go back and become a newer economy, as China is.

The European Union represents a mature developed economy like our own, already industrialized, with modern transportation, modern financing, and a modern workforce. Indeed, Europe has, if anything, an older economy than ours, and represents a possible future (albeit not the only one) rather than a glorified past. In the European model, obviously, there is far more social spending than in the United States, and a far greater socialization of worker benefits. In the current American version of classical economics, this should hamper Europe's economic growth. But in some ways it also removes the burden of labor costs, and especially the burdens of medical and retirement spending, from individual employers, and allows more mobility in the workforce and more flexibility for employers.

Because European governments provide a greater share of workers' expensive benefits, individual businesses shoulder less of those costs. Every business pays steeper taxes, but large firms do not face massive legacy costs associated the workers of a previous generation, and startups or small businesses do not face prohibitive costs because they must provide health insurance for each new employee. Meanwhile, European workers, complacent and secure as they may be, are free to move to the highest-paying job they can find, and thereby to the sector of the economy where they create the most economic value. American autoworkers have to hold on to their automaking jobs as long as they can, even if the economy has too many autoworkers, because if they change jobs they lose their health insurance. A factory worker who wants to quit and start a small business will either find the capital she's saved devoured by the price of her own insurance, or go uninsured and face financial catastrophe if she falls ill. A European factory worker who thinks she could do better starting a cafe will get more of a shot to do it, and if the cafe fails she can rejoin the workforce without worrying about going uninsured for the rest of her life.

Does the European model have drawbacks? Yes. But we can no longer afford not to weigh those drawbacks against its advantages. And if we pretend to ourselves that their system cannot possibly compete with ours, even though that system is already competing with us and having real success, one day we may find one that we're no longer worried about falling behind Europe. We'll be worried about catching up.

Cross-posted at, where I'm going to be guest-blogging starting today.

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