Whenever you think that the debate over the merits and demerits of the Anglo-American economic model versus the Western European social democratic model has reached a consensus, it starts up again. The Future of Europe: Reform or Decline, by Alberto Alesina and Francesco Giavazzi, is the latest installment. It ends at a different place than the last book on the subject that I read, David Howell's Fighting Unemployment: The Limits of Free Market Orthodoxy. (Its conclusion was low unemployment can occur in wide variety of settings from the free markets of the US to the regulated markets of Scandinavia.) Instead, The Future of Europe argues that without comprehensive reform continental Europe's over-protected, over-regulated economies will continue to trail the US. This does not mean that all these or even any of these nations will become poor. Relative to developing countries, they will still be wealthy and relative to the United States, they will have a comfortable standard of living. But a slower rate of growth will definitely limit Europe's political influence. It might exacerbate European efforts to absorb their rising number of immigrants into their polity and society. And it raises large challenges in dealing with the pension liabilities and health care costs of an aging population in Western Europe.
So, what are the facts? Since World War II, Europe closed the per capita income gap to within 80% of the US by the close of the eighties. But, over the last two decades, Europe has lost ground, it's now back to 70% -- the percentage it was in at the close of the seventies. Statistics also show that Europeans take more vacations, work less hours and less hard, retire earlier, and experience higher levels of long-term unemployment than Americans. In Portugal and Italy, productivity growth has essentially stopped. Total government spending on average for pre-expansion European Union (EU) nations is now about 50% of GDP. For the US, it's around 29%. With higher levels of growth, Europe would have had less joblessness, lower public spending, and smaller hikes in taxes.
The authors describe well the differing elements of the US and Europe models, as well as summarize helpful polling data, regarding attitudes toward taxes, government, fairness, and so forth. Immigration also raises some tough issues for Europe. As the number of immigrants grow, European attitudes toward its safety net programs are starting to shift toward America's more self-reliant, more limited government ethos. (It is unlikely to converge with US opinion though.)
Immigrant policies in most of these countries are dead-locked as well. This is unfortunate for two reasons. The longer that Europe keeps its borders relatively closed, the harder it will be to deal with the costs of its aging "native" population and its high dependency ratio. Likewise, an influx of skilled immigrants can increase competition, stimulates innovation and productivity, and opens up entrepreneurial opportunities. But increasing numbers of European professions, from plumbers to attorneys, fear this inflow. Consequently, the United States will likely maintain its position as preeminent destination for high skilled immigrants.
Alesina and Giavazzi do not call for full replication of America's well-known, more pinch-penny welfare state or total deregulation. They call for a modified European model.
This still leads to fairly dramatic changes: liberalization of product and service markets to increase competition especially in banking and retail. They propose to reduce firing costs and seek to set some limits on judicial intervention in such cases. Unemployment benefits wage replacement rates (which can run as high as 90%) need to pruned back some, according to the authors. Jobless payments should also be ended for those who are not actively searching for employment and refusing to take a comparable job.
Selective immigration slots should be expanded. Basic fairness and lowered costs would result from curbing open-ended, unconditional government financed higher education, having students and parents pay more, and expand scholarships for disadvantaged applicants. Universities must become more transparent in their spending and focus more attention to research and development priorities.
Going into business in many European countries is time-consuming and too costly. Why does it take 63 days to open a business in Italy, six days in the US, three days in Denmark, 13 days in Sweden, four days in Britain, and 45 days in Germany? Lastly, the book proposes that marginal tax rates need to be cut back some, along with overall spending and debt.
In essence, the authors argue that Europeans can only halt decline by improving marketplace incentives to invest, take risks, work, and do research.
I agree that some reforms are needed. But I believe that they overstate their case to a degree. Let's begin with their claims about the implications of slow income growth. It's true that humans are status conscious. But once incomes rise to about $20,000, increases in happiness slow. Or, to put it more precisely, "higher average income is no guarantee of greater happiness." It can even be erased by increasing rates of crime, mental depression, work stress, less leisure. Economist Richard Layard, an expert on European labor markets and the new science of happiness studies, further, points out that economic growth and materialism can be harmful. He calls for restrictions on advertising to children in his book, Happiness. We should practice "tough love" if we want to lower long term unemployment. But we also need to make workplaces more family friendly and even use tax policies to discourage the rat race.
Lord Layard of the London School of Economics argues that the key question for 21st century economic policy is not: Is your GDP growing rapidly? But, instead: Are we achieving a happier way of life morally, physically, psychologically, and spiritually?