Thanks, Kenneth!

Kenneth Rogoff, economics professor at Harvard University apparently felt that Europe needed a pat on the back…

“Today, if you really want to get a rise out of top European policymakers and business leaders, don’t berate them about Europe’s well-known economic ills. Don’t mention the rigid labor markets, the aging population, or the weak state-run university systems. Instead, tell them that there is a one in three chance that the world’s leading economic superpower in 2050 will not be the United States or China, but Europe. They’ll stand and stare at you, waiting for the punch line.

The truth is that Europe’s economy is far from hopeless. First, the notion that European firms and workers are much less productive than those in the United States is simply uninformed. The main reason why Europe’s output per capita stands at only 70 percent of U.S. levels is that Europeans work less than Americans?a lot less. Europeans work fewer hours per week, take longer vacations, and retire earlier. When it comes to leisure, it is the Americans, Japanese, and even the Chinese who have plenty of catching up to do. And as they and others start ?consuming? more leisure over the next 50 years, Europe’s relative economic size will expand. Second, Europe still has a spectacularly well-educated and versatile work force, even if dubious labor legislation holds it back, particularly in Germany. Third, recent empirical studies have convincingly shown that strong political and legal institutions drive economic growth. Say what you want about Italian politicians and the EU’s new draft constitution, but European institutions remain models of honesty and transparency compared to those in Asia, Latin America, and the Middle East.”

His entire column for Foreign Policy is available online. Not that we haven’t talked about these issues here before, but it’s nice to hear it from someone like Mr Rogoff. On the other hand, I think Europe’s odds are far better than one-in-three.

12 thoughts on “Thanks, Kenneth!

  1. Sadly, there is absolutely nothing new about the structural, institutional and regulatory impediments to new job creation in Western Europe.

    For a historical perspective prior to recent controversies about European zealotry for over-regulation: “While Western Europe reported no net new jobs from 1973 to 1994, the United States generated 38 million net new jobs.” – Lester Thurow: The Future of Capitalism (1996), p.37, citing: The Economic Report of the US President for 1995.

    As for the present, the Eurozone has higher rates of both unemployment and inflation than Britain, outside the Eurozone, as well as slower GDP growth. The UK’s annual inflation rate is reported at 1.5% by Eurostat, compared with 2.5% in the Eurozone at: http://europa.eu.int/comm/eurostat/Public/datashop/print-product/EN?catalogue=Eurostat&product=2-16062004-EN-AP-EN&mode=download

    The Eurozone’s unemployment rate is reported at 9.0% compared with only 4.7% for the UK, little more than half the rate in the Eurozone: http://europa.eu.int/comm/eurostat/Public/datashop/print-product/EN?catalogue=Eurostat&product=3-02062004-EN-BP-EN&mode=download

    In all, that really doesn’t seem much of an incentive for Britain to join the Euro.

  2. For a historical perspective prior to recent controversies about European zealotry for over-regulation: “While Western Europe reported no net new jobs from 1973 to 1994, the United States generated 38 million net new jobs.” – Lester Thurow: The Future of Capitalism (1996), p.37, citing: The Economic Report of the US President for 1995.

    Might be more convincing if you also listed how much net new working age population Western Europe generated in that time.

    Or to put it differently, if they’ve been doing this for the last 30 yrs and they still seem to have a pretty good life, maybe their system isn’t actually all that bad after all? Cry wolf and all that.

  3. Maynard,

    I’ve not managed to find any straight forward way of accessing online data for the (working age) population in Western Europe. However, these quotes from the OECD Jobs Study (1994) and relating papers indicate the gist of concerns about the functioning of West European labour markets, which likely motivated the observation in Thurow’s book:

    “The European Community: Weak employment growth, most of it until the mid-1980s in the public sector, has been accompanied by strong productivity growth, achieved mostly through labour-shedding in traditional sectors rather than through shifts of production to high-technology and skill-intensive activities. Unemployment has ratcheted up over successive cycles, resulting in rising long-term unemployment. Inflows into unemployment have been relatively low but outflows even lower – suggesting poorly functioning labour markets.” – at: http://www1.oecd.org/sge/min/job94/part1e.htm

    “in the European Community, Canada and Oceania, the level of structural unemployment has risen over time, to perhaps 7 to 10 per cent of the labour force, and significant cyclical unemployment is currently superimposed upon it” – at:
    http://www1.oecd.org/sge/min/job94/part2b.htm

    “Job growth in the United States and Japan has taken place largely in the private sector. By contrast, some two-thirds of the 10 million jobs created in the EC and EFTA since the early 1970s have been in the public sector. During the 1980s, however, the pace of public sector job growth slowed considerably in Europe, and private sector employment, which had fallen between the mid-1970s and early 1980s, picked up. Private sector employment gains over the past decade were largest in Germany, the Netherlands and the United Kingdom. In Oceania, public employment has fallen since the late 1980s.” – at:
    http://www1.oecd.org/sge/min/job94/part1c.htm

    “Another group of countries to receive favourable assessments were the United Kingdom, New Zealand, the Netherlands and Ireland, which all succeeded in reducing considerably both total and structural rates of unemployment over the 1990s (Chart 1, Panel B). The OECD argues that this reflects primarily the progress they made in implementing policies consistent with the Jobs Strategy in the 1980s and early 1990s.” – at: http://www.treasury.gov.au/documents/201/PDF/Article02.pdf

  4. I remember when I was stationed in Germany, I couldn’t believe how much time people had available for sick leave and vacation, and how often stores were closed. How few young people I knew were married, or of those that were married, planned on having (or had) any children. Anecdotal experience, yes., but it’s a visible difference when you take a quick trip to the US and see what’s going on over here.

    I personally believe that a lot of the drive for people in the US to work so hard is the post-consumption effect of credit cards. We’re all up to our necks in unsecured debt on this side of the ocean, so we’re all effectively bond slaves to financial institutions. Yes, we’re driving new SUVs and living in big houses, wearing trendy clothes and buying whatever the commercials tell us to get – but we owe and owe and owe. I’m curious to know if that’s the way that Europeans in general live their lives – or are they reticent to fall into the same credit trap that holds so many Americans at their jobs (a “productivity” enforced by the spectre of personal debt).

  5. Bob,

    briefly – I think Mr Rogoff’s intent was not to deny structural rigidities in European labour markets – nor was it mine. I just intended this piece to show that the future can be bright if the right steps are taken. This means, in my opinion, mainly pronounced deregulation and a reduced role of corporatism, particularly in Germany and France.

    However, much of the effects you cite is mainly statistical…

    The American job miracle was created by largely stagnating real wages. Productivity growth was kept low as a mirror of the European experience.

    From 1970 to 1990 the working population in West Germany rose from 27 to 31 million, largely a function of more women entering the labour market. This effect has been even more pronounced after the reunification with the GDR, where female labour participation was much, much higher than in the West. Unemployment did not rise proportionally, so the economy did quite well given such a structural shock.

    Europe will naturally have a larger proportion of people in “public” employment, because more economic transactions take place in the pubclic economic sphere – say health insurance. Just take the NHS as an example.

  6. John,

    Europeans by and large do not choose to owe that much, for a number of reasons. There are exceptions, but the German savings rate is absurdly high, as people are scared about the future.

  7. Well. European savings, which is the statistical measure for how much money the population has in the bank are quite a lot higher than american ditto.
    So no, we are not all in hock to the banks.
    But then american domestic savings are freakishly low, both internationally and historically.

    Returning to european prospects for growth I would say that they are actually really good thanks in large part to the recently completed enlargement and the future planned ones. Because the key aspect of enlargement which lots of people overlook is that it exports western european standards of govenrance, bureacracy* and rule of law, especially buisness law to the new members. It is this more than anything else which will spur growth and investment. And a booming eastern europe will be good for all of europe.**

    *Bureacracy is often slammed, but getting it right is one of the things seperating Sweden from any number of third-world countries.

    **And will that ever create funny political incentives. “why should we force through unpopular economic reforms if we can get growth by assimilating a few more countries?”
    /Casts hungry gaze at world map/

  8. John,

    Unlike Germmany but more like America, there is a similar pattern of escalating personal borrowing in Britain:

    “Britain’s personal debt is increasing by ?1m every four minutes and is set to break through the ?1 trillion barrier within days, official data released yesterday suggests. The Bank of England said total lending to individuals – which includes mortgages, credit cards and personal loans – rose by ?11.1bn to ?984.8bn in April, with mortgage lending surging by a record amount.” – from: http://money.guardian.co.uk/news_/story/0,1456,1230091,00.html

    Naturally, the low Eurozone interest rates would be highly attractive to borrowers in Britain but we already have a serious problem with a house price bubble, which would certainly get much worse.

  9. Anglosphere debt finances the world’s overproduction. The message here in America from government, advertising, is buy, buy, buy. I don’t like it one little bit.

  10. Lynne: “Anglosphere debt finances the world’s overproduction”

    Sorry, but I really don’t understand how we can speak meaningfully of “overproduction” when I read this:

    “[EU] Enlargement will transform the social composition of the EU. It will add 100 million – more than a quarter – to the population, and poverty and inequality will surge.

    “At present all the 15 member states have living standards within 25% of the EU average. But the largest candidate state, Poland, with a population larger than 10 of the current EU members, has a GDP per head of less than half the EU average. Bulgaria, Latvia, Lithuania and Romania have about one-quarter the GDP per head of the current members.” – from: http://news.bbc.co.uk/2/hi/europe/1901293.stm

    Or this:

    “Poverty is analysed in this report from a relative point of view. In each Member State, the income threshold used to define the risk of poverty has been fixed at 60% of the national median income per equivalent adult. It therefore varies from one country to another. Based on this measure, 15% of EU inhabitants in 1999 (around 56 million people) were at risk of poverty, i.e. living in households with a disposable income below the poverty threshold. This share was lowest in Sweden (9%), and Denmark, Germany, Netherlands and Finland (all 11%), and highest in Greece and Portugal (both 21%).” – from: http://www.cijdelors.pt/_update_/pdf/Assuntossociais/pobreza.pdf

    And that is before we get to the truly miserable, average living standards in World 3 countries. A government minister in Britain has been making a series of speeches with this telling line:

    “The [EU’s] Common Agricultural Policy currently pays out $2 a day for every cow in Europe. Yet more than a billion people around the world live on half that amount.” – from: http://www.dti.gov.uk/ministers/speeches/hewitt050903.html

  11. Kenneth talks about possibilities in 2050 – over 45 years – people not born yet will be grandparents by then. He is correct about considering today’s economic landscape and attitudes irrelevant. To me his predictions revolve around two issues: will people in “hard working” countries such as the US by then demand the right to leisure now demanded by Europeans; and, will Europe have the political environment and demographics permitting more productivity.

    My feeling is that the next few generations in America could easily lose the desire for “wealth” at the expense of free time and debt. Similarly, it is quite possible that Eastern Europe can become an economic engine dragging the rest of the continent along.

    However, we are still talking about less that 15% of the world’s population and the other 85% could have something to say about things. My money is on India…

    Michael.

  12. Michael wrote: “My money is on India”

    A book a few years ago, The Rise and Fall of the Great Powers, blamed Austria-Hungary’s failure on excessive ethnic diversity. India of course bears the burden of more ethnic diversity than any other country on Earth. It seems to me that China is more likely to be a super power than India, assuming the one-child policy is modified reasonably soon.

    There seems to be an inverse relation between a country’s size and its per-capita income. Perhaps the future will see the rise of more Singapores.

    America seems to be dying too, crippled by excessive levels of non-Anglo, non-assimilating immigration.

Comments are closed.