Low productivity, slow innovation and high unemployment–THAT could be the U.S. if it implements European-style economic policies.
President Joe Biden received a royal welcome in Europe as European bureaucrats welcomed a return to normality.
Most importantly, Biden seems to share their values; including economic values like free college and child care, minimum wage hikes, stipends and the need for huge Federal budget. Paying for these perks, as Europe has learned, requires high taxes and mounting deficits.
If Biden were to be successful in his economic endeavors, the U.S. would soon become a “social democracy”; a European-style cradle-to-grave welfare state.
It sounds good… “free this, free that,” but would Americans ultimately like it?
They would not.
A Less Productive Economy
While the generous social security system seems promising to many, it’s filled with unintended consequences. Productivity levels in a socialist state, for example, typically decline.
At present, Americans are significantly more productive than Europeans. The average GDP per hour worked is $64.1 in the United States as opposed to $52.9 in the Euro area.
During the tech boom years, between 1995 and 2005, the U.S. saw a sharp acceleration of growth of total factor productivity. There was no equivalent growth in Europe.
At the time, cconomists expected Europe to catch up — as Europeans took advantage of new technologies. Instead, the gap just kept widening.
Two factors are put forth to explain the productivity gap: Lack of investment in new information technologies (ICT) and a rigid regulatory framework.
Government red tape in Europe has suffocated innovation and an over-bureaucratized Europe is just moving too slowly for the globalized marketplace.
This should be concerning for Europeans. Ultimately, slow productivity will translate to lower standards of living.
Upward Mobility Stagnate in Europe
The increased regulations and red tape has a direct effect on small companies and startups — which is one of the reasons why European companies are slow to adopt new technologies.
With high barriers to entry for newcomers, old and established companies face little disruptive competition.
This goes for individuals and families as well. Just as European companies are mostly old, so are their plutocrats. A relatively high share of the wealthy in Europe owe their financial position to inheritance.
One baffling fact is that the richest families in Florence are the same families that were the richest in 1427, during the time of the Medicis!
It’s easy to understand why Europeans want to tax their billionaires more. After all, the system seems to be working in favor of those who are already rich.
Workers Don’t Have It That Good
But hey, at least Europeans have their safety nets. Such as workers’ protection.
It’s much harder to fire a European than it is an American. While this may sound great for workers, that’s not the whole story.
The generous workers’ protection could be one of the reasons why Europeans are less productive than Americans. If companies can’t get rid of unproductive workers, they become less efficient. Lower efficiency translates to lower salaries or higher output prices.
Aside from lower salaries, it’s also harder for Europeans to find work. European companies are not as eager to hire, as every hiring decision becomes a potential liability.
Unemployment in Europe is consistently above that of the U.S. Aside from the pandemic spike, the U.S. unemployment rate was often twice as lower as that of the 19 countries of the Eurozone.
Where Would You Rather Be?
But to really see the profound difference between the two systems, we need to look at values. Which system is fairer? What do the Europeans say about their economic system?
European countries are more “equal” than the U.S. in economic terms. Top earners in Europe don’t make that much more than the median, relative to what the situation is in the U.S.
However, that doesn’t mean that the European system is fairer.
In fact, Europeans don’t seem to think that it’s very fair at all. In a 2012 Pew research survey, 72% of Germans said they believed that success in life is due to forces outside one’s own control. Only 36% of Americans agreed. The difference is startling.
Americans believe that everyone has the opportunity to get ahead. Indeed, 77% of Americans said they believed that the U.S. offers more individual freedoms than other developed countries, which includes Europe. A majority also believed that the U.S. provides better quality of life and the opportunity to get ahead.
This is important because it shows that Americans believe the system is fair, even if it leads to unequal outcomes.
Despite workers’ protections, progressive taxation and welfare, Europeans still think their system is unfair. This should be a wake-up call for Americans.
If Americans prefer to earn less, have more difficulty finding a job or get ahead, have fewer options and less opportunity for their children, they should copy Europe.