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.
sure we die. You'll, too. But we'll die in style.
If it's our innovations it's hardly a freeride. And you pay for that with a currency that is hardly worth the paper.
Seems to me that they are totally blind!
It is toooo late with the "new" immigrant policy!!
The muzzie's birth rate vs. the traditional present European birth rate will extinct them all totally in 50 years. The muzzies are very patient in their goal of conquering world domination by producing lots of children, including the U.S. where the pace is little slower!!!
"letting those foolish Americans take the bullet for the rest of the world."
Admittedly off the topic, I read that and realized I finally understood all those REFORGER exercises the US Army did with NATO.
Another item. Raising a child should be recognized as contributing toward Social Security!
Coming from the Economist, this is really bad news for Europe. It is also not a surprise to anyone paying attention.
No, it is predictable. Didn't Ayn Rand kinda' write a novel or two about this sort of thing?
Wait a minute! Do you support child penalty tax? Why children should be taxed at higher rate? They should be exempted the same way as other human beings. As it is now, it is parents and children who pay more than their share.
Also don't you see that raising a child is a more important contribution toward Social Security and viability of private retirement funds than paying money into it? Without future generation you savings will be a worthless piece of paper.
Classic Liberals/Libertarians are like dinosaurs - they die out. Ayn Rand did.
How many children Ayn Rand raised? What would be the survival chance of a society made from Ayn Rand clones?
Yup. I wish the meltdown didn't take so long though...
The demographic future of the United States is to be a Hispanic Catholic country.
White American fertility rates are lower than the white fertility rates in parts of Europe (Ireland is higher, and France about matches the Americans).
Black American fertility rates are slightly higher than whites, but still below replacement level.
The only segmnent of the American population that is well above the replacement fertility rate are Hispanics, and they are the ones who pull the national total up to just shy of replacement rate.
This doesn't mean America is "doomed", unless one considers America becoming a Spanish-speaking Catholic part of Latin America is "doom".
It does mean that similar demographic patters are happening in the US as in Europe. In a sense, it IS because of the social welfare state, but only partly. Mostly, it's religious philosophy.
One of the most devout large groups in America are Latino Catholics, and their religion prohibits birth control and abortion. Unsurprisingly, they're the only major sector of the American population that is well above replacement rate.
Same thing in Europe, where religious minorities (of the Muslim and devout Catholic varieties) are the ones having the kids.
To ensure that we don't have to bother setting up a real army on our own ?
In Germany's case, absolutely. The last three times the Germans were allowed to do that, millions suffered as a direct consequence.
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