Predator, or Terminator?
Posted on 11/14/2006 6:32:42 AM PST by .cnI redruM
IN AMERICA, arguments about the health of Europe's economy are a proxy for arguments about the shape that American economic policy should take. Intercountry comparisons of such things as income and health statistics are always fraught . . . differences between the ways the statistics are collected can seriously skew the data*. This does not, however, keep both opponents and proponents of European-style social democracy from looking to the Old World for confirmation of their beliefs about the costs and benefits of the welfare state.
Tyler Cowen, a broadly libertarian economics professor who blogs at Marginal Revolution, has been the instigator of a long series of blog posts between himself and left-wing academic bloggers John Quiggin and Chris Bertram at Crooked Timber. You can follow the debate with the links below:
In a discussion of Sheri Berman's new book on Crooked Timber, Mr Cowen asks whether social democracy is a viable model for Europe's future, given the way the rapid ageing of many populations promises to undermine its health and pension provision. Commenters react.
On his own blog, Mr Cowen links to the earlier post in the course of discussing Barry Eichengreen's new book, which argues that centralised European systems did very well at rapidly industrialising, but are having trouble coping now that constant technological change is a prime source of growth. Mr Cowen then answers interlocutors who argued, variously, that Europe's lifestyle is undermeasured by GDP, that the growth rates aren't that different, and that its demographics aren't really a problem. John Quiggin says that a libertarian approach to demographics is warranted, and that an aging population actually produces various demographic dividends. Chris Bertram says that income inequalities between countries don't matter as long as income inequality within country is supressed. Mr Cowen responds that his chief worry is not hordes of Germans consumed by envy. Many of his critics seem to have missed the thrust of Mr Cowen's argument, or at least what I take to be his argument, in their haste to defend this or that aspect of European welfare states. It seems to me that Mr Cowen is saying, basically, that Europe's rapidly ageing societies will put an increasingly heavy burden on its labour force, as an ever-smaller number of workers has to support an ever-larger number of retirees†. In order to shoulder this burden, societies need to increase the production of their labour force, either by increasing the number of workers, increasing the number of hours worked, or by increasing the productivity of the workers. For everyone in society to stay happy, productivity in European states has to grow fast enough that workers experience rising living standards even while supporting more retirees, who at least must not see a substantial drop in their consumption.
However, the welfare state acts as a serious drag on any of these solutions.
Generous welfare states tend to reduce the number of hours worked: high taxes mean that workers take more of their pay as untaxed leisure; unemployment tends to stretch out, thanks to generous benefits and reemployment schemes; sick leave and disability insurance reduce the cost of absenteeism; high pensions encourage healthy seniors to retire; and welfare benefits and family leave policies encourage women to spend more time with their children.
An expensive welfare state also tends to reduce the size of the workforce. In arguing for a "libertarian approach" to fertility, Mr Quiggin seems to be implicitly assuming that Europe's birthrate is an exogenous variable, unaffected by the policies in question. However, there is substantial evidence that in modelling the welfare state, fertility is an endogenous variable: the more secure the safety net, the less likely people are to have children.
Governments have largely nationalised the traditional functions of the family, but in doing so they have not eliminated the need for future generations to care for the current ones in their dotage. Unfortunately, the assumption of family duties by the state allows people to free ride on the fertility of others—which they seem to be trying to do in massive numbers. As we've mentioned before, a society where everyone tries to free ride on everyone else is headed for disaster. Europe's safety nets, or at least the pension systems, may contain the seeds of their own destruction.
Large welfare states keep the labour force small in another way: they make societies more reluctant to admit immigrants, who tend to be a net drain on the government, at least during the early years of their stay.
More controversial is whether a generous welfare state lowers productivity growth. In theory, generous benefits could free people to try more new things, by lowering the cost of failure. In practice, however, the European welfare states are lagging American growth on most measures: GDP, GDP per capita, GDP per hour worked. This is not a problem now; GDP is at best an imperfect measure of welfare, and most European countries are only 15-30% behind America. But as Mr Cowen points out, will it still be all right in 50 years? A 1% differential in growth rates over a 50 year time period will leave the slower-growing country with roughly a third the income of the faster growing one. And contra Mr Bertram, Benjamin Friedman has recently argued that people do care what happens in other countries, and that one of the side effects of globalisation has been to make citizens of relatively poorer countries less contented with their lot. I myself remember some consternation in Britain when the nation seemed poised to replace Italy at the bottom of the EU league tables.
When Europe's income, relative to the United States, is the same as that of present-day Lithuania, will the citizens of once-mighty nations really think that ten weeks of vacation is adequate recompense? GDP growth is not just cell phones and flat screen televisions and Princess Diana commemorative plates; it is MRI machines and soft mattresses and books and other things that everyone, left and right, agree are important to have.
There is another question to be asked, of course: even if Europe can survive the costs of its own large welfare state, could it survive America's adopting the same model? There is an argument to be made that Europe's risk averse culture free rides on innovations developed for America's less regulated markets—particularly in pharmaceuticals and medical equipment. If this is true, Europeans enamoured of their generous safety nets should not be urging the same on the US. The greatest good for the greatest number would be best served by keeping quiet and letting those foolish Americans take the bullet for the rest of the world.
Liberals like Hillary (godbless her cylon soul) worship Europe and want us to be just like them.
Socialism and liberalism in a nutshell...
She's too fugly to be a Cylon.
She's more like a Predator.
That does just about say it...
The fight becomes one of who eats the negative consequences.
-bflr-
It seems to me that Mr Cowen is saying, basically, that Europe's rapidly ageing societies will put an increasingly heavy burden on its labour force, as an ever-smaller number of workers has to support an ever-larger number of retirees
This effect will be exacerbated as less risk-averse Europeans -- who are more inclined to be more entrepreneurial -- make their way to the US and the UK so that they can keep more of what their adventurous experiments earn.
There is an argument to be made that Europe's risk averse culture free rides on innovations developed for America's less regulated markets—particularly in pharmaceuticals and medical equipment.
I am very glad to see this show up in an outlet as important as the Economist. After reading a study in an economics journal, I blogged on this exact topic last month.
We should have an airlift drop fliers all over Europe with this statement written on them.
And Canada.
btt
That problem is always underestimated by fans of large government. Just ask GWB why he didn't see what was coming last week.
People who know the story will look for ways to get out from under governmental mandates.
btt
btt
Bump
Childless people should pay special taxes to compensate those who raise children.
We could start with abolishing child penalty tax - ie with providing the same tax exemption for each child as for the grown ups. After all children are 100% human too!
The size of retirement/social security benefits should be related to the contribution in raising the next generation.
"Liberals.... worship Europe and want us to be just like them."
Don't forget the crusaders at the NYT.
Our Catholic, Jewish, Muslim and other religious counterparts should be wary of the continuous attacks that the NYT makes on Evangelicals...This is how Religion was all but eradicated from the places of faith in Europe.
(They came for my neighbor first and I did nothing)
For Evangelicals, Supporting Israel Is ‘God’s Foreign Policy’ NYT 11/14/06.
"letting those foolish Americans take the bullet for the rest of the world."
It's not like you'd not desperatly beg to do just that.
Well try to call him but he's very busy talking to the german prime minister.
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