Evil Forces in the World

Reflections on ''Evil Forces in the World,'' as well as occasional remarks concerning ''Good Forces in the World.''

Saturday, June 07, 2003

I love the New Republic with a virulent passion. It is, to my mind, the sanest and smartest publication of its kind, and I would happily lodge twelve steak knives in my own chest if it meant aiding said magazine in its mission, broadly conceived. As of yet, I haven’t been asked to do so. This is a good thing, as my willingness should not be confused with eagerness.

But yes, it seems that the New Republic has published an article by a fellow called Philippe Legrain that I believe to be deeply wrong in almost every respect. The basic premise of the article is that the European economy is in rather good shape, and that the late lamented American boom masked serious structural problems. And finally, buried at the end of a piece filled with hedging, “Europe's economy has matched America's in recent years. There is every reason to believe it will do even better in years to come.”

Legrain, an economist employed by Britain in Europe, a pro-euro pressure group, has every reason to advance this understanding of Europe’s relative strength. By convincing the British public that the putative European model is, despite appearances to the contrary, superior to the American alternative, Legrain is earning his keep—and I applaud him for it. Perhaps he has children who need to be fed and clothed and sent to posh schools. The problem is that his article is tendentious and misleading in the extreme. With the aid of Jesse Shapiro, my best friend and spiritual guiding light, I will proceed to outline the many ways this is so.

Legrain begins by dismissing US economic triumphalism. This is a shrewd move. In doing so, he manages to tie his questionable thesis to the blindingly obvious fact that triumphalism is almost never called for.

And then Legrain “[a]llows some awkward facts to intrude”; to start, “According to the International Monetary Fund …Europe's has. Over the past three years, living standards, as measured by GDP per person, have risen by 5.8 percent in the European Union but by only 1 percent in the United States. An unfair comparison, perhaps, given America's recent recession? Then look at how the European Union and the United States size up since 1995, a period that includes the go-go late '90s, when America apparently advanced by leaps and bounds. While living standards in the United States have risen by a healthy 16.1 percent over the past eight years, they are up by 18.3 percent in the European Union. Another statistical sleight of hand? Not at all. Pick any year between 1995 and 2000 as your starting point, and the conclusion is the same: Europe's economy has outperformed America's.”

How on earth can this be an awkward fact? Surely Legrain has heard of convergence—leaders tend to grow slower than followers. As Robert J. Barro notes in this week's Businessweek, the South Korean economy has expanded tenfold over the past forty years; it took the United States 130 years to perform the same feat. Does this mean that South Korea is on track to surpass the United States so fast that we will be to the Koreans as Paleolithic hunter-gatherers are to modern Blackberry-wielding corporate titans within the next twenty-five years, scratching at dirt with twigs as the Koreans teleport from one location to another? Of course Europe’s economy will “outperform” America’s—they’re still catching up. They’re still adopting the “best practices” that have been used in America, where capital productivity (never mentioned in the article) vastly surpasses that seen on the other side of the Atlantic, for years. This is a fairly straightforward notion. Being the early adopter has obvious disadvantages: When you’re blazing the trail, all obstacles are unanticipated obstacles. The same can’t be said of those in the rear. In this sense, an innovative US economy is providing a public good.

Legrain goes on to provide the shocking news that Belgium, Austria, Finland, Greece, and Ireland have had faster productivity growth than the United States in recent years. Please see the above paragraph on convergence. While you’re at it, scratch your head and ponder the fact that Legrain only named those economies, when the United States has higher productivity than just about any other economy aside from that of Luxembourg and handful of other economic midgets. (Trust me—the productivity levels of Greenwich or, on a larger scale, Orange County would swamp them all.) Why aren’t the other laggards growing as quickly as convergence would predict? It’s been demonstrated that the logic of convergence doesn’t generally apply to closed economies. North Korea is not the fastest growing economy on earth, and the same is true of Burkina Faso, but there’s no reason to believe that France wouldn’t be growing faster than it is. It is, after all, a country open to innovative technologies. Clearly there’s something shortcutting the process.

This next passage is a gem:

Not only is productivity growth higher in several European countries than in the United States--so too are absolute productivity levels. The average American produces $38.83 of output per hour, measured in 1999 dollars, according to the Conference Board. Average productivity in the European Union is still 8 percent less, largely because of lower productivity in Britain, Spain, Greece, and Portugal--although the gap has closed over the past decade. But six European countries have overtaken the United States: Germany, the Netherlands, Ireland, France, Belgium, and Norway, where output per hour is $45.55, over one-sixth higher than in the United States.

This sounds intriguing … if you manage to exclude those least likely to be productive by creating extremely high barrier to entry, you’ll have high productivity levels. Hot damn! Now I see the logic behind lavish subsidies for idlers and layabouts. But before I lecture Legrain on “composition bias,” he preempts:

Advocates of U.S. ways could point out--correctly--that, even though those six European countries enjoy higher average productivity levels than the United States, they still have lower output per person. One reason is that less of the population works, by choice or because of higher unemployment, in each of those countries except Norway and the Netherlands.

I see.

But the main reason is that Europeans work shorter hours. In some cases, they may be compelled to do so by law: In France, for instance, legislation limits many employees' working weeks to 35 hours. But, typically, they choose to do so.

So the entire legal-institutional context is only part of it. How do we know this? Legrain is a trustworthy fellow, and he does say “typically,” thus suggesting that he must be right. And so there’s no reason to worried about the unemployed youth stewing in the banlieues. They’re choosing not to work. Of course, I’d choose not to work if I could live just as well on the dole. I’d also choose not to work if that were my only choice.

Whereas American workers toil ever longer hours, Europeans prefer to take more time off as they get richer. Working more to earn more is a perfectly valid lifestyle choice. But one should not conclude that Americans' higher output is a result of their greater efficiency, when it mostly reflects greater toil.

And so Legrain has washed his hands of the composition bias problem. Could it be that Europeans would “toil” more if their marginal rates were such that doing so made sense? The question is left unanswered. “Toil” does have an awful ring to it.
Legrain goes on to argue that high taxes and rigid labor markets aren’t that bad. His usual tactic is to use crude economy-wide comparisons that ignore differences in the lived experience of the economies in question. He ends by noting that Lester Thurow, who was among those who believed that Japan would leave America behind in the dust in the 1980s, believed that Europe would leave America behind in the dust in the early 1990s. With that, he pretty much rests his case. All in all, an impressive display.