Friday, March 16, 2012

How Socialism Has Harmed Europe

From the Wall Street Journal:
“Jobs and economic growth” will be the focus at today’s crisis summit in Brussels, but judging by recent meetings European leaders will address the financial symptoms rather than the causes of their economic woes. For insight into the latter, they might do well to read a report on Europe published last week by the World Bank, of all unlikely places.

The study’s lead authors, World Bank economists Indermit Gill and Martin Raiser, conclude that the Continent’s basic growth model of the last half-century is seriously amiss, and that it will take more than well-meaning summitry to fix it.

Some of the news in the report is good. Europe, despite its woes, still accounts for one-third of world GDP with only one-tenth of world population. Before the financial crisis, half of the world’s $15 trillion in trade in goods and services involved Europe. Within the Continent, the single market has created a boom in cross-border trade and investment, raising the incomes of millions of Southern and Eastern Europeans over the last few decades.

As for the bad news, the first source of trouble is the labor market. European workers aren’t nearly as productive as they ought to be, especially in the South. Labor participation is low, and those who are employed are working less than they used to. In the 1970s, the French worked the longest hours among advanced economies. By 2000, they worked a month and a half less than Americans each year.

Europe’s demographics also aren’t on the side of growth. Populations across the developed world are graying, but Europe’s low productivity growth means that its future labor shortfall will be especially acute. It doesn’t help that Europeans draw social security benefits earlier and more easily than their developed-world peers. Pension commitments will strain national budgets even if Angela Merkel gets her way on handcuffing euro-zone public debt.

Which brings Messrs. Gill and Raiser to the other serious drain on European growth. Big government, by their calculation, shaves about two percentage points off growth once public spending passes 40% of GDP. Some welfare states are better-run than others—think Sweden and Germany—but the World Bank report highlights a few important connections between the welfare state and growth.

Today, European governments spend more on social protection than the rest of the world combined, thereby entrenching powerful disincentives to work and enterprise. Social protections have also come at huge direct cost to taxpayers. Europe’s giant debts arose because of “public spending to protect societies from the rougher facets of private enterprise,” the authors write. It’s rare to hear an institution such as the World Bank that is typically sympathetic to its political bosses put the matter so clearly.

A few policy fixes suggest themselves. Labor is still not as mobile within the EU as once envisioned. Easing restrictions on immigration from outside the EU is highly controversial, but it would help Europe face its demographic and economic shortfalls. Wealthy European countries have suffered a net drain of 1.5 million highly educated people to the U.S. alone in the last few decades.

But something deeper that needs adjustment. “From North Americans,” the authors write, “Europe could learn that economic liberty and social security have to be balanced with care: nations that sacrifice too much economic freedom for social security can end up with neither, impairing both enterprise and government.”

Messrs. Gill and Raiser call Europe a “lifestyle superpower”: It attracts tourists in droves, and its residents enjoy peace and a high standard of living. But it’s not getting richer. Unless it again puts income growth ahead of income security and redistribution, the Continent will continue to decline as an economic power.

Labels: , , , ,

5 Comments:

Anonymous Anonymous said...

The point of this article (from the penultimate paragraph) seems to be that the right balance is needed between social security (or social safety nets) and economic freedom, not that social safety nets are bad in themselves. This is something that most liberals I know would agree with (despite the caricatures of liberals that come from people like you).

Those who should really take a lesson from this are the Republicans who are currently trying to eliminate anything that remotely resembles a social security program.

2:11 PM  
Blogger John McAdams said...

Anonymous,

The problem with what you said is that the report clearly says that the welfare state has been overextended in Europe, and that economic freedom has served America well.

Do you seriously deny that the current European welfare state is unsustainable? Hell . . . the U.S. welfare state is unsustainable.

As for Republicans wanting to eliminate Social Security, that's an absurd fantasy of yours.

You need to deal with what Republicans like Paul Ryan are actually saying, and not throw up straw men.

7:11 PM  
Anonymous Anonymous said...

"The problem with what you said is that the report clearly says that the welfare state has been overextended in Europe, and that economic freedom has served America well."

Sorry but that isn't a problem for what I said since what I said is consistent with this. I agree that the author makes the claim that the welfare state has been overextended. But he clearly states in the penultimate paragraph that the lesson is a balance is needed, not that social programs are bad in themselves. If you can't see that he says this, then it's hard to know how we can have a rational discussion.

I also agree that the extent of the social programs in Europe is probably unsustainable, and that so long as we are unwilling to raise revenue in this country, social programs are unsustainable here too. This is a place where conservatives seem clearly more concerned with "economic freedom" at any cost than with striking a balance.

"As for Republicans wanting to eliminate Social Security, that's an absurd fantasy of yours."

Is this really such an absurd fantasy, given that the Republicans tried to do exactly this six years ago under the banner of privatization?? Thank God they were unsuccessful, given what happened to the markets shortly thereafter.

But in a way that is beside the point since I was using the term "social security" in the way the author was, namely as meaning social programs or safety net programs. That's why I didn't capitalize it and put "social safety net" in parentheses. So your straw man accusation misses the mark.

You have to admit, though, that if Ryan COULD get away with eliminating social security (even if under the guise of privatization), he certainly would. And if he personally wouldn't, the libertarian/tea party folks like Bachmann certainly would. Right?

9:25 PM  
Blogger John McAdams said...

Anonymous,

Glad you admit the welfare state has been over-extended. That's way more than most liberals will concede.

As for "eliminating" social security, privatizing something is not the same as eliminating it. It would be way better if people had control of their own retirement accounts. In fact, most people do have control of a "defined contribution" account, and that's way better than the Ponzi scheme that is Social Security.

4:13 PM  
Anonymous Anonymous said...

What I admit is that social programs cannot be sustained if we are unwilling to raise revenue.

As for privatizing vs. eliminating, this is just semantics. In my book, privatization of a social program changes the nature of program and thus counts as elimination. But you're free to disagree about the definition; I don't really care.

But can you tell me what you think would have happened if six years ago Republicans had been successful and the market crashed as it did two years later? It is hard not to think that the people who lost their retirements would also have lost their "social security."

And by the way, the Ponzi scheme rhetoric is pretty tired. If you want to complain about "schemes", you should spend more time talking about the schemes that financial institutions, unfettered by oversight or regulation, concocted which led to the big Republican recession of 2008. It was those schemes (which were allowed to flourish in the name of economic freedom) that led to financial collapse in the US, not pressure exerted by an overextended system of entitlements.

7:17 PM  

Post a Comment

Links to this post:

Create a Link

<< Home