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Steve said...

What European price?

U.S. vs Europe15 - GDP annual growth rates

1971-2000: 2.2 vs 2.2
2001-2009: 0.6 vs 0.6

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Mark J. Perry said...

Sure, but there's a $10,000 difference in real GDP per capita: $32,500 in Europe vs. $42,500 in USA.

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Steve said...

Not sure I follow, Dr. Perry. The US has the real GDP per capita it has, and starts there. The alternatives are to (1) grow under a US model (weaker social safety net), or (2) grow under a EU15 model (stronger social safety net).

Since 1 and 2 growth rates seem to be the same, I still don't see the FUTURE price to be paid. in terms of lower future GDP growth rates.

Are you saying that moving to (2) will lower US real GDP per capita, but then grow at comparable rates?

Good coverage of all points:

- http://marginalrevolution.com/marginalrevolution/2010/01/the-chaitmanzi-debate.html

- http://www.economist.com/blogs/freeexchange/2010/01/futility_cross-country_comparisons

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Steve said...

If can we grow at that same rate while also expanding the social safety net - i.e. expanding the social safety net comes at no growth cost - that's even better.

Far less Stuff. And far more time, leisure, and happiness (according to research).

It's different decisions, not better or worse. Europe chooses more leisure, America chooses to work more to buy more stuff. Which decision has a higher marginal utility? To the person making the decision, their own answer probably seems correct for them.

And to bring this discussion back to the point of the post, Lucas is clearly focusing on GDP growth rates, not levels, and the provided data from Carpe Diem refutes the argument that the U.S. grows faster than Europe, at least since 1971. Which seems to refute Lucas' point that that there would be a FUTURE growth price to pay in the U.S. for a stronger safety net.

But as Tyler Cowen shows at the Marginal Revolution link above, it is futile to do this comparison at all, much less try to differentiate regional growth rates as due to some particular variable.

In any event, I fail to see how Lucas' point stands. It's either unanswerable to begin with (c.f. Cowen), or the data doesn't support Lucas' assertion.

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Methinks said...

Steve has obviously never lived in Europe.

"More leisure" is how we're describing high unemployment these days, are we?

And what a lovely goal it is to rob more people in the United States to provide for the comfort of those too lazy to work. We are only starting to do that here, but, as usual, Europe is way ahead of us in providing for people who are forced on the dole due to a debilitating allergy to electricity which prevents them from working. Why, I fear I might be coming down with one of those. I'll just close up shop and live off Morganovich.

It's different decisions, not better or worse. Europe chooses more leisure, America chooses to work more to buy more stuff.

What "choice" are you talking about, Steve? Americans choose more stuff and more work. For Europeans, that "choice" is made for them.

And as long as we're at it, in America you can choose to live at the low standard of living imposed on the European population if you want. Do you know what a motivated, entrepreneurial resident of most European countries, unwilling to submit to the small life imposed on him by the mighty state does to pursue his dreams? He leaves. Haven't you heard of the brain drain? I'm sure the people left behind are plenty "happy" - whatever the hell that means. I've never known "happiness" to be an objective measure, have you?

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PeakTrader said...

GDP is a poor measure of living standards.

In the E.U., the mix of GDP is different than the U.S.. There's more public consumption and less private consumption, some countries have trade surpluses (which add to GDP), and the entire E.U. economy is on the verge of collapse from its bureaucratic weight.

When the government pays a worker $50,000 to redistribute income, that's $50,000 of GDP.

When the government pays a worker $50,000 to produce $20,000 of value to society, that's $50,000 of GDP.

Why is the E.U. so far behind the U.S. in the Information and Biotech Revolutions (actually, way behind in all four major economic revolutions)?

The U.S. not only leads the world in the Information and Biotech revolutions (in both revenues and profits), it leads the rest of the world combined.

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Mark J. Perry said...

One possible complication is that the USDA dataset uses real US Dollars to adjust for inflation in all countries to calculate real GDP per capita. A better comparison might be to use inflation-adjusted national currency units to calculate real GDP, and I'll work on that when I get a chance.

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Steve said...

Which Lucas asserts without proof: that the US would fall to European growth rates (gasp), when the growth rates have been the same for the last 40 years.

For the US GDP per capita lead over the EU15 to decrease in the future, future US GDP growth rates must be lower that future EU15 growth rates.

The data shows that the US and Europe grew at the same % rate over the past 40 years. Why do you, and Lucas, assume the U.S. growth rate would fall because the US social safety net is stronger?

That's what I don't see evidence presented for in Lucas' piece. Did I miss it?

If Lucas' point is true (that social safety net spending is a tax on GDP growth), and the real GDP per capita growth rate for the EU15 (with strong net) has been the same as the US (lesser net), then doesn't that imply the EU15 growth rate, with a US-comparable net, would have been higher than the US?

(Tyler Cowen's arguments of the foolishness of this discussion aside)

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Sprewell said...

Steve, interesting stat. Peak does raise an important point though, that with the EU govts spending a much bigger chunk of their GDP, likely financed through borrowing, one has to wonder how sustainable EU growth is, particularly as we see now with Greece and the other PIIGS flaming out. There's also an argument to be made that Europe free-rides its growth off of the US, with technological and pharma discoveries made and largely paid for here. The question I have to ask you is, if not for such govt involvement: why is it that everybody else perpetually lags behind the US? If we give Europe and Japan 50 years to recover from WWII, why is it they can never seem to catch up? Japan had a nice spurt in the late '80s and early '90s, why weren't they able to surge enough to pull even? Natives of these various countries are all of roughly the same innate capability, what is it about Europe or Japan's native institutions that they simply can't hit US levels of GDP per capita or innovation? I think you will find it tough to argue that a preference for leisure explains those gaps away.

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Methinks said...

Steve,

let me explain to you how important GDP growth rates are to your standard of living:

In the Soviet Union, or GDP growth rates were enormous - measured in tanks and ten ton nails and paper thin shoes.

Shampoo was a luxury and fruit was a novelty. Sometimes any food was a novelty.

This is how we lived:

http://englishrussia.com/2009/07/17/kommunal-apartments-in-russia/

I suggest you reconsider your reliance on GDP as an indicator of a country's prosperity - unless you take particular enjoyment from personal sacrifice to the state.

In an extreme example: if the tax rate on the next dollar you earn will be 100%, will you give up your leisure time (time with family, your kids, etc.) to work to earn it? I don't know anyone who will.

At virtually all but the lowest levels of taxation, there will be people who are unwilling to work the additional hour.

You will find more people who will work the additional hour if you drop the rate to 90%, still more if you drop it to 80% and vastly more if you drop it to 20%. With every increase, fewer people are willing to work the marginal hour. If nobody is willing produce enough wealth to tax away to pay for this robust social welfare, then how will it happen?

Thus, the promises of the social net are vastly exaggerated compared to the ability to make good on those promises.

Everyone is very motivated to take advantage of the easy living a social net provides and very much unmotivated to work to pay for it. As Bastiat said: "The state is the great fiction by which everyone attempts to live at the expense of Everyone else".

Take Germany, for example. In the late 90's I recall reading a WSJ article about the "sick man of Europe". Its social net was extremely robust, necessitating an equally robust, severely robust taxation program. The result?

Over a period of three decades, the people depending on the social net grew by 400%. The people paying into the social net grew by 4% over the same time period. Clearly, the robust social net was unsustainable.

All of the Germans lived much more poorly as a result. The average German's material wealth is about on par with the average Louisianan. Louisiana is the poorest state in the United States.

But, even with this generally impoverished life (compared to the U.S.), the social net was still unsustainable. Germany had to make changes. It did. It's still poorer than America. GDP growth and all.

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PeakTrader said...

It should be noted, population growth tends to slow when GDP growth slows.

And a 2% rise of a quality good is not the same as a 2% rise of an inferior good.

Robert Lucas is correct that lower U.S. GDP growth is needed to become more like the E.U..

A safety net and labor standards are important. However, full employment is also important.

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Ron H. said...

"A safety net and labor standards are important. However, full employment is also important."

Speaking of mutually exclusive...

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PeakTrader said...

Ron, reaching an optimal level is not a zero sum game, although there are trade-offs.

Why settle for a suboptimal level?

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Steve said...

In general, I just want to reiterate that my point is that Lucas made a specific argument regarding US v EU gdp growth rates, that argument was unsupported, and in fact the data seems to indicate Luca's starting assertion is invalid. That's what I'm focusing on.

By far, by very far, the #1 concern of businesses is lack of end demand (see reporting on business surveys). Not regulatory uncertainty, not lack of confidence in anything other than lack of confidence that customers will come. Capital underinvestment: the US is in a output-gap environment (read: low capacity utilization), has surplus capacity and no need for new factories or much equipment, and tons of cash sitting on their balance sheet with a ROI hurdle rate that is dropping by the quarter. Business are not investing or hiring because businesses have no need to invest or hire. For most US businesses, that's not due to regulatory concerns or some unspecific "lack of confidence", it's due to concerns about selling what they make.

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PeakTrader said...

Steve, Lucas is correct, because you're using per capita real GDP growth and assuming the U.S. and the E.U. economies are the same.

U.S. GDP growth has to slow to be more like E.U. GDP growth.

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Steve said...

@PeakTrader: "U.S. GDP growth has to slow to be more like E.U. GDP growth."

Just wanted to point out: Assuming a larger social safety net is a drag on growth (and I agree, it seems like it would be, but I don't see where Lucas supports that with evidence), then since [the EU15 with that drag] has grown at the same rate as [the US without that drag], then wouldn't [the EU15 without that drag] have grown faster than the [US without that drag]?

What does THAT say about the competitiveness of the US economy? Even without the drag we only matched the EU15.

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PeakTrader said...

Steve, for the U.S. to be more like the E.U., taxes need to be much higher, government has to be even larger, unemployment has to stay high, with a limited workweek, real GDP growth has to slow (which will also slow population growth), limited resources into emerging industries need to almost stop, consumption has to fall (from 70% to 60% of GDP), rich Americans will flee to Australia, and those not working will choose:

1. A government job.
2. Government benefits.
3. A private job.

In that order, unless it's a union job, then a private job is fourth.

If per capita real GDP growth is unchanged, then it's an illusion.

Winston Churchill:

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

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