“Political history in the advanced industrial world has indeed ended, argues this pioneering study, but the winner has been social democracy…”
So runs the opening blurb on Sheri Berman’s The Primary of Politics: Social Democracy and the Making of Europe’s Twentieth Century. Most of the book is a well-researched account of the history and subtlety of social democratic thought, but I wish to consider the broader framing of the argument. In the last chapter the author returns to her apparent view that social democracy is fundamentally a solution to the problem of politics and it will remain relevant, indeed dominant, throughout the twenty-first century.
Much as I have enjoyed living in, working in, and visiting Western Europe, I have my doubts.
The Western European economies, which I take as the living embodiments of social democracy, face a dual crunch: low rates of economic growth and unfavorable demographics.
The importance of economic growth is obvious, but rarely are the long-range implications of lower growth taken seriously.
If a country grows at two percent per annum, rather than one percent, the difference in wealth or welfare in a single year is relatively small. Over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990.
Growth laggards fall behind. If we compare a one percentage point differential in the growth rate, and start at real income parity, we need a time horizon of 110.4 years to establish a 3:1 ratio of superiority of per capita income. If we are comparing a two percentage point boost in the growth rate we need a time horizon of only 55.5 years to establish a 3:1 superiority in per capita national income.
Nobel Laureate economist Robert E. Lucas put it succinctly: “…the consequences for human welfare involved in questions like these are staggering: once one starts to think about [exponential growth], it is hard to think about anything else.”
For all its virtues, social democracy stands in danger unless Europe can boost its rates of economic growth. Even if some of the more radical social democrats may feel that “people already have enough,” it is hard to imagine Europe persisting and flourishing if it ends up as the “poor man out” and in a state of relative impoverishment. If nothing else, the most talented Europeans would migrate elsewhere. There are already 400,000 EU researchers working in the United States, and it is not clear when they plan on returning.
Most of Western Europe experienced a long postwar boom, lasting at least through the late 1970s (the timing is later for Spain). This was sustained by rebuilding, an enormous growth in world trade, and by lower levels of government intervention than we see today. But welfare payments rose, taxes rose, labor markets became less flexible, interventions favored insiders to a greater degree, regulations were cartelized, and the entrepreneurial spirit ebbed.
Western European per capita income is now about 30 percent below that of the United States and I see the gap widening rather than closing. It is common for the United States rate of productivity growth to be twice as high as that of the core European nations (NB: don’t be fooled by statistics of high average labor productivity levels in some countries, such as France. In part they result from limits on the creation of low-wage jobs and they do not predict good future performance.) The relatively free Ireland continues to boom, but France, Germany, Italy and others have performed poorly. Even the Dutch economic miracle appears to have ended.
Germany may experience a current blip in growth rates, coming close to three percent over the next year. But this will not sidestep the broader and persistent problem of shrinking populations. Most European birthrates are under the 1.5 mark and it is quite possible that many national populations will be cut in half by 2050. Along the way there will be too many retirees per worker and current European tax rates – already among the highest in the world – will have to rise. Since older populations also tend to be less productive, it is hard to see how Western Europe might reassume world economic leadership or even hold its current relative ground. Nor has the EU, for all its benefits, proven itself a good mechanism for making economic policy; farm subsidies are over 45 percent of the EU budget.
Part of the demographic problem, of course, is that the real standard of living in Western Europe is remarkably high. Western European women have learned how much fun they can have, living in Europe and traveling abroad, when they are not tied down with four children. The extreme secularism of Western Europe – a philosophy which I share and indeed cherish – also promotes small families. Religious exhortations to have more children, combined with a child-friendly church culture, do in fact raise birth rates. In both economic and cultural terms, Western Europe is not investing enough in its future.
It seems that for Western Europe to regain its dynamism, it has to move to a freer market economy, higher rates of childbirth, higher immigration, and greater religiosity. It has to stop being the Europe which we (or at least I) love, and become more like the United States.
The defender of the European way can attempt four arguments:
- The proper rate of social time discount is high. Yes, America will be much wealthier in the future but that simply doesn’t matter much.
- America’s growth advantage is illusory. Cowboy capitalism is self-destructive, and in the long run the European economies are better bets.
- Europe will return to traditional morality and high rates of child-bearing, but in the meantime we should keep this wonderful experiment going for as long as possible.
- Islamic immigrants, plus Chinese and Indian tourists, will save the European way of life.
I hear #2 from many Europeans, and from some American leftists, but it is mostly fantasy. If American does self-destruct it will more likely be from foreign policy than anything else. A look at the comparative microeconomics of information technology, research and development, or American universities, confirms that America’s growth edge is rooted in fundamentals.
I will not, in this forum, debate the ethics behind #1, which I have argued against elsewhere. Furthermore #1 is not an easy fit with the pro-education, pro-future, anti-global warming sentiments found on the Left.
#3 and #4 are plausible. We do not know for sure they are true, but they violate neither the available data nor a first-cut application of economic reasoning.
These hypotheses, however, are damaging to European pride and damaging to the idea of social democracy as a universal model. #3 implies that the current arrangements, however noble, are doomed. #4 implies that the model can be sustained only with the assistance of foreigners, and poorer foreigners at that. In that scenario Europe survives as an Asian and American theme park, with the manual labor done by Muslims. The French and German lifestyle will continue, but with smaller numbers and as a kind of museum piece.
The bottom line: European social democracy will go down in history as a glorious moment in the sun. But its deep structural problems, most of all for delivering ongoing economic growth, mean that 21st century Europe will have to take a very different course. For better or worse, history will continue. The one component missing from Social Democratic Theory – and from this otherwise excellent book – is realistic economics.