Is There an European Economic Model?

by Henry on January 15, 2010

There’s been a fair amount of debate around Jim Manzi’s recent piece on the differences between Europe and the US. I contributed a bit myself in the Bloggingheads with Dan Drezner linked above (with discussion of Iceland, Stephen Cohen and Brad DeLong’s recent book, and other stuff too). In this wrap-up reply to his critics, Manzi maintains that some of the criticisms that have been made by e.g. Paul Krugman are flat out wrong (Paul seems to have misattributed the data series that he was using), while saying that he was not in fact setting out to prove empirically that European style welfare redistribution systems limit innovation and growth (if I understand him correctly, he still believes this to be true, but doesn’t claim that the figures he adduces show it). As he notes, he is actively advocating that the US turn to redistribution – but is also claiming that there are trade-offs involved. I should also note that I’ve met him a few times, and always found him to be a straightforward, decent and, fwiw, mildly Europhilic guy (with whom I disagree, obviously, on multitudes of things). But as per my original Bloggingheads, I am dissatisfied with one of the most basic claims of the argument – that there is a distinct “European model,” followed by all states within Europe, which can readily be distinguished from the American approach. This is a claim that you sometimes see on both left and right – but it is one that I think is very wrong indeed.

The nub of Manzi’s defense is as follows:

Critics argue that since we all know the social welfare state is only present in Western Europe, it is disingenuous to bundle together Western and Eastern Europe.

In the article, I explicitly defined the “European model” as I used the term by methodically listing out each element of it:

Seen together, these initiatives — shifting government spending away from defense and public safety toward social programs; deeper direct involvement of the government in the operation of large corporations across a substantial portion of the economy; energy rationing in the name of managing climate change; more direct government control of health-care provision; and higher tax rates that probably include a VAT — point in a clear direction. The end result would be an America much closer to the European model of a social-welfare state, which prioritizes cohesion over innovation.

It turns out that Europe as whole is systematically different from the U.S. on each of the listed dimensions. As a further and more severe statement, it is also true that Eastern Europe as a region (defined as Russia and other west-of-Urals components of the old Soviet Union and countries of the old Soviet bloc) and Western Europe as a region (defined as all other countries in Europe from Iceland to Greece) are also each systematically different from the U.S. on each of the listed dimensions.

Manzi then goes through a point-by-point defence of each of these claims.

However, it seems to me inarguable that some of these dimensions are more important to the ‘America is converging on an European-style welfare state’ argument than others. It may be that action against global warming is alleviating economic inequality within European states – but I would like to see the argument spelled out. Similarly I imagine that the effects of heavier product market regulation on cohesion and inequality is at best moderate and indirect. VAT is actually a regressive tax that hits ordinary consumers and workers much harder than the rich (the story of why the US has no VAT and, say, France does is a historically complicated and interesting one). And while Manzi is correct that taxes’ percentage of GDP is lower in the US than all European members of the OECD, it isn’t by much, only edging Switzerland by a nose. I would be very hesitant about making claims about profoundly different models given evidence like this.

All the more so, because usually, when we talk about ‘welfare states,’ we are talking about various forms of direct social protection. And here, I think Manzi’s evidence is weak:

shifting government spending away from defense and public safety toward social programs

The governments of both Eastern and Western Europe have a much higher weighting of social spending than does the government of the U.S. According to the OECD’s common governmental-expenditure classification system, in 2006 the ratio of (a) government spending on the sum of Housing and Community Amenities, Health, Recreation, Culture and Religion, Education, and Social Protection to (b) government spending on the sum of Defense plus Public Order and Safety was about twice as high or higher in every country for which the OECD reports in Eastern Europe (Czech Republic, Estonia, Hungary, Poland, Russia [using transaction code P3CG], Slovak Republic, and Slovenia), and every country for which the OECD reports in Western Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, and the U.K.), as it was in the U.S.

The problem here is that the defense and public safety/social programs binary is an artificial one. There is no necessary reason (at least none that is obvious to me), why less spending on the military is more likely to lead to higher spending on social welfare than cuts, say, in road building, or subventions to business, or any other item in the budget. The argument that the US is not able to afford a strong welfare state, in contrast to Europe, because of its heavy military spending seems to me to be rather post hoc – or, to put it another way, I am aware of no evidence that heavy military spending directly lowered spending on welfare in the US (what evidence I am aware of mostly points in the other direction).

And it matters that it is artificial. I would lay good money that defense spending that is doing most of the work in Manzi’s weighting. While I haven’t been able to find a dataset covering social protection programs in all European countries as well as the US, I am pretty sure that the US is not an outlier from all European states (which is what Manzi is interested in) on social welfare spending alone. Eyeballing OECD data on social protection, together with data on EU member states (which covers some poorer E. European countries that aren’t covered in the OECD data), it is clear that (a) the OECD data is biased in favor of richer European states, and (b) that the poorer European states not counted in the OECD data have considerably lower levels of social protection as percentage of GDP than do the richer ones.

While the data sets are clearly not comparable (presumably they focus on different measures of social protection), the Eurostat data shows that poorer East European states such as Romania, Bulgaria and the Baltics have very low spending on social protection – they spend roughly half what rich social democratic states such as Sweden and the Netherlands do as a percentage of GDP (and much much less, obviously, in terms of per capita expenditure). While the Eurostat figures don’t include the US, I would again lay money that US spending on social protection as a percentage of GDP is higher than these countries – i.e. that if the US was included, it would be a bigger spender than some of the countries included in Manzi’s definition of the European model.

None of this is to say that there aren’t important differences between, say, Sweden and the US. But it is to say that these differences are probably rather less marked than the intra-European differences between, say, Sweden and Albania. And this is all the more true when we start looking at the detail of institutions, rather than crude comparisons of spending levels. On welfare states – the US has more in common with European states such as the UK and Ireland than Bulgaria has in common with Norway (readers interested in the different forms that welfare states take should start with Gosta Esping-Andersen and read out from there). So too for tax policy – or perhaps even more so – are countries such as Lithuania and Latvia, which have implemented flat taxes that American conservatives can only dream of, really exemplars of a European welfare state model? There is a good discussion to be had about differences between approaches to inequality in the US, and in various European states, but this discussion needs to start from an explicit recognition of the variety of European approaches.

{ 35 comments }

1

Tim Worstall 01.15.10 at 9:15 pm

“I am dissatisfied with one of the most basic claims of the argument – that there is a distinct “European model,” followed by all states within Europe,”

Quite. At minimum we can distinguish between Mediterranean, Nordic, Anglo Saxon and Rhenish (and that ain’t all folks!). They all have different strengths and weaknesses and can be, according to your Bayesian priors, be ranked in order of desirability.

The Med systems for example seems to have high labour protections for those in the formal economy. The Nordic (and Anglo) near none. The Nordic system also has high unemployment pay as a portion of previous pay and lots of retraining. Which the Med and Anglo systems do not.

The Med system attempts high capital and corporate taxation: the Nordic low.

Rhenish seems to depend more upon accomodating (ie, not class war based, do what’s right for the larger picture as with Nordic) unions than Anglo or Med.

“One European system”? It is to laugh.

2

politicalfootball 01.15.10 at 9:55 pm

All you Europeans look alike to me.

3

Alex 01.15.10 at 11:06 pm

if I understand him correctly, he still believes this to be true, but doesn’t claim that the figures he adduces show it

It is, indeed, to laugh.

Meanwhile, Timmeh, if you believe this to be true, when can we expect a list of posts you’re retracting?

4

elm 01.16.10 at 12:41 am

…while saying that he was not in fact setting out to prove empirically that European style welfare redistribution systems limit innovation and growth (if I understand him correctly, he still believes this to be true, but doesn’t claim that the figures he adduces show it)

I believe you’re right, and his defense is technically not-untrue but it misses the mark. He doesn’t claim to show that &emdash; he simply asserts it without justification or evidence:

From the original article:

“…we must have continuous, rapid technological and business-model innovation to grow our economy fast enough to avoid losing power to those who do not share America’s values and this innovation requires increasingly deregulated markets and fewer restrictions on behavior…”

“…government policies to reduce inequality or ensure access to jobs, education, ­housing, or health care that can in turn undercut growth and prosperity…”

“…a ballooning welfare state that threatens future growth…”

Other examples abound.

5

mollymooly 01.16.10 at 12:47 am

Is “an European” deliberate? I don’t get it.

6

James Conran 01.16.10 at 12:55 am

“an European”? Don’t sound right to me.

7

elm 01.16.10 at 1:21 am

@5, @6: One would assume it’s proper grammar in the original European.

8

Willem van Oranje 01.16.10 at 1:58 am

Maybe you could fit in social and economical mobility into the debate? There have been a couple of studies that showed that social and economical mobility is greater in a couple of West-European countries as compared to the US.

9

Kieran Healy 01.16.10 at 2:02 am

One would assume it’s proper grammar in the original European.

From the deep archives, evidence of the persistence of Yerp.

10

Barry 01.16.10 at 4:08 am

Henry: “I should also note that I’ve met him a few times, and always found him to be a straightforward, decent and, fwiw, mildly Europhilic guy (with whom I disagree, obviously, on multitudes of things).”

This reminds me of a boss of mine, back at Ford. He had taken two one-week business trips to the London area. No rain in either trip. He joked with the British engineers that he didn’t think that it rained that much in England. In other words, he *found* England to be rather dry. In the same vein, I spent a week in Boston in October, 2008. It tried to rain once during the day, not enough to matter. I joked with my friend living there that one day had been ‘a typical Boston October day, 70 degrees and sunny’.

It’s amazing what a very short acquaintance with something will lead one to think.

Now, I haven’t keep up on the later steps in this controversy, but from my initial reading, Manzi wrote an article bashing European social democracy, and got a new *sshole ripped by Krugman, Chait and The Economist. His reply was that one of the criticisms was not true, and that he didn’t mean what he said.

So in this case, we do actually know about Manzi; he’s a dishonest person.

I’m a bit harsh on this (but nothing that he doesn’t deserve), because IMHO the two biggest lies in the world are (1) ‘He’s my colleague, and an honest person – ignore what he’s just been caught doing’, and (2) ‘I’ve met him, and he’s a nice guy’.

11

John Quiggin 01.16.10 at 4:15 am

Comparing the US to the whole of Europe, there are few respects in which it is really exceptional. What is striking is that, in a lot of respects (working hours, life expectancy, state size/capacity) the US looks more like a poor European country than a rich one, while in other respects it is richer than the richest (but, not so much so as to really stand out).

12

Shmoe 01.16.10 at 5:21 am

I rather enjoyed the way Dan and Henry bounced off each other in this Diavlog(?). No fireworks, just two wonks trying to be catholic as they see it respectively; which is more enlightening than it might sound. I was quite amazed to see how much they managed to cram into a half an hour, I’d really like to see what they do with a full sixty minutes next time. There will be a next time, right Henry?

13

Tim Worstall 01.16.10 at 9:39 am

“Meanwhile, Timmeh, if you believe this to be true, when can we expect a list of posts you’re retracting?”

What would I need to retract? Posts that, say, point out that Sweden has a tax system that taxes capital and corporate earnings lightly, incomes more and consumption even more (compared to many other countries)? Or ones that point out that if you want to have large amounts of redistribution, a large state, you can’t do this just by taxing the rich? You have to do what the Nordic social democracies do and have a high tax burden on everyone? Ones that point to the liquid labour markets of those Nordic social democracies? And the illiquid ones of the Med style economies?

14

Barry 01.16.10 at 3:31 pm

John Quiggin 01.16.10 at 4:15 am

” Comparing the US to the whole of Europe, there are few respects in which it is really exceptional. What is striking is that, in a lot of respects (working hours, life expectancy, state size/capacity) the US looks more like a poor European country than a rich one, while in other respects it is richer than the richest (but, not so much so as to really stand out).”

Somebody once said that it was better to be poor in Europe, and better to be rich in the USA. The big question was where the flip-over line is – if it’s at the 25th percentile, that’s one thing; if it’s at the 75th percentile, that’s another.

15

hix 01.16.10 at 3:56 pm

Ah yes the Social Democracies are just sucesfull because they are actually market fundamentalists which is proofen by their low taxes on the capital side story. At least decide for one story :-) .

I have to admit a huge amounth of Schadenfreude when i look at recent Irish gnp numbers, considering they started the dumping game which was pretty hard to avoid especially for small open economies without much enthusiasm for authoritarian solution.

Admit it, you know very well why the Nordics really have low capital side taxes, and that its a bug not a feature of the system.

16

Tim Wilkinson 01.16.10 at 7:49 pm

Defense+public order/safety seems an odd category to me. Is it standard to lump those together? I suppose it might make some vague sort of sense if “defence” were to be taken literally, but it looks a bit as if public safety is just in there to make it less obvious that the phenomenon is basically the US’s massive proportion of military spending. Could this be a case of cherrypicking methods of analysis?

[Since it’s come up-
“an European”? Don’t sound right to me.
Maybe an artefact of spell/grammar checking – the machine looking for vowel/consonant based on spelling rather than sound? If only ‘Yerp’ were used, no such problem – I expect that one is covered.
(Doesn’t explain what those who use “An historical” – even though they wouldn’t use “an” before (most) other words starting with H – think they are doing though. IIRC, when spoken it tends to make them drop an H.)]

17

Kieran Healy 01.16.10 at 10:50 pm

Doesn’t explain what those who use “An historical”

I see this as a survival (by imitation) of a certain kind of British upper-class accent.

18

Kieran Healy 01.16.10 at 10:50 pm

I should have said “contemptible survival”, by the way.

19

john c. halasz 01.16.10 at 11:57 pm

20

Henry 01.17.10 at 12:50 am

The “an European” is the product of hurried typing – I usually spot a few grammatical errors within 30 mins of posting and amend, but didn’t spot this one.

21

MDHinton 01.17.10 at 12:52 am

‘An European’ is ugly and wrong. ‘An historical’ is both beautiful and correct.

22

Ted 01.17.10 at 3:39 am

Nordic exceptionalism reflects three socio-historical contingencies:

1. No devastating war costs for over 100 years: the 1905 dissolution of the union with Sweden was peaceful; neutrality during both world wars; the occupation by Nazi Germany happened very early in WWII (1940), and so there was very little costly infrastructure and civic damage to repair once the Nazis left.

2. The discovery of massive oil and gas resources at precisely the same time the rest of the industrialized world entered stagflation, and the United States’ own store of natural resources – particularly oil – was in decline.

3. THE main source of its social democratic strength and success, which the US can never compete with is that Norway is the most monocultural nation on earth. This social capital is a necessary precondition for social democratic success. It can never work in highly multicultural societies.

23

john c. halasz 01.17.10 at 4:20 am

Oow! Envy!

24

Henri Vieuxtemps 01.17.10 at 12:53 pm

…the European model of a social-welfare state, which prioritizes cohesion over innovation.

How do you prioritize innovation? Innovations evolve, and they evolve in the direction dictated by the environment. Something as simple as coin deposit lock in shopping carts is an innovation that so far hasn’t happened in the US, with its relatively cheap/flexible labor environment; same is the case with many other labor-saving innovations. So, “prioritizes cohesion over innovation” seems like an odd claim.

25

Tim Wilkinson 01.17.10 at 2:01 pm

Barry @10 IMHO the two biggest lies in the world are (1) ‘He’s my colleague, and an honest person – ignore what he’s just been caught doing’, and (2) ‘I’ve met him, and he’s a nice guy’.

Seconded (as a general observation)

26

Tim Wilkinson 01.17.10 at 2:07 pm

HV @24 “prioritizes cohesion over innovation” seems like an odd claim

And BTW a weaselly one – the existence of an actual tradeoff is only conversationally and not strictly implied. So it can be wriggled out of and/or its ‘misreading’ provide an an avenue of diversionary counterattack if convenient.

27

hix 01.17.10 at 2:20 pm

To bad that egalitarian culture enables more diversity when it comes to decission makeing. Harvard graduates with different skin colours create no diversity.

28

elm 01.17.10 at 3:19 pm

Henri Vieuxtemps: How do you prioritize innovation?

It depends on the type of innovation you have in mind.

If you’re thinking of the computer, the cellphone, the Internet, the transistor, or the airplane, you do so by subsidizing research and higher education. I don’t think that’s the type of innovation that the market liberalizers have in mind.

Manzi: “After all, we must have continuous, rapid technological and business-model innovation to grow our economy […] and this innovation requires increasingly deregulated markets and fewer restrictions on behavior.”

The innovations that require deregulation and deregulated markets are of a different sort: Enron’s special purpose vehicles, the negative-amortization mortgage, the credit default swap, leverage ratios of over 30:1, mortgage-backed securities, and the 80/20 mortgage.

29

Henri Vieuxtemps 01.17.10 at 3:51 pm

the computer, the cellphone, the Internet, the transistor, or the airplane

Right, but that’s technology; it’s not the same as innovation; it’s, perhaps, necessary but not sufficient. You could, for example, have all the components necessary for a high-speed train invented and developed, but as long as gasoline prices are low there is no incentive to build it; innovation is not happening.

30

Tim Wilkinson 01.17.10 at 5:29 pm

that’s technology; it’s not the same as innovation

IIRC there was broad consensus on one of the ‘Trickle-Down’ threads that invention isn’t – even in current US practice – dependent on or even best achieved by ‘market forces’. Which leaves ‘innovation’ – i.e., basically, actual production of useful inventions. But the idea that that’s dependent on ‘markets’ is achieved by running together the ability to pick winners with the ability to get hold of capital in a market setting. Generally such assumptions are further obscured by being bundled up in some superficially appealing but practically meaningless (or else not-so-appealing-after-all) phrase like Manzi’s fewer restrictions on behavior.

31

bianca steele 01.17.10 at 6:23 pm

The question about labor force flexibility suggests Jim Manzi might have something else in mind. In high tech industries, there is a huge amount of churn, both in the creation and destruction of firms, and in the hiring and letting go of workers. Manzi IIRC relies on the venture-capital financing that generates and relies on this churn. There is also a process in which startups that don’t fail are collected into larger firms (the term for this escapes me at the moment), sometimes creating new large firms (e.g. Cisco), but often folding new industries into old firms (Hewlett-Packard). This is very hard on people. Innovation does occur at the large firms without the intervention of smaller ones, so someone who thinks large firms are better managed and better places to work might wish to change the model.

There is another model, especially for software companies, often seen in my experience in low-profit but economically necessary areas that require certain kinds of expertise. These are small firms that in the US tend to be located in college towns (perhaps with little other industry around), or in Europe. They often give their product away for free at least at the entry level, so it seems a fair guess that they are actually subsidized either by government or by their university-employed workers’ and managers’ salaries for their “day jobs.” They do not produce end user products (or even, in many cases, products of a quality that would permit them to be used industrially or commercially without heavy modification), so in a sense they do not compete with industry. But the open source movement may be changing this.

32

Tim Worstall 01.18.10 at 12:35 pm

“IIRC there was broad consensus on one of the ‘Trickle-Down’ threads that invention isn’t – even in current US practice – dependent on or even best achieved by ‘market forces’. Which leaves ‘innovation’ – i.e., basically, actual production of useful inventions.”

Part of that was me outlining Baumol’s theories on the subject. Correct, “invention” in his view is not dependent upon either capitalism or markets. “Innovation” however is (again in his view). However, do note that he defines innovation slightly differently. His definition is that innovation is the spread of the use of an invention across the society. It’s the use, not the production. Mobile phones are an invention. The use of mobile phones across a society is innovation. That latter better achieved by having multiple suppliers of both physical equipment and of the service that makes them useful. And it does seem to be true that countries with multiple suppliers of mobile phone services have a greater penetration of mobile phone usage.

And just for the avoidance of doubt, the definitions of “capitalism” and “markets” here are well wide enough to include the Scandanavian social democracies.

33

Tim Wilkinson 01.18.10 at 5:04 pm

Tim W’l @32:

It’s the use, not the production
But a successful innovation (or production of an invention, i.e. in a market setting, bringing it to market) doesn’t mean that lots of people will actually want to buy it. That’s what the ‘advertising’ industry is for. In fact, I think I went wrong myself in specifying only ‘useful’ inventions.

countries with multiple suppliers of mobile phone services have a greater penetration of mobile phone usage

Or, countries with a greater penetration of mobile phone usage attract multiple suppliers of mobile phone services?

Pretty much all the rich countries come out capitalist on your -definition- stipulation, and governments tend to work, e.g. via competition laws, to prevent (not government-funded or already heavily vested) private monopolies once a market is established – oligopoly is fine of course – so counterexamples might be hard to come by for entirely extraneous reasons.

Anyway, I’ll see your cherry-picked anecdote and raise you a pair of web links showing conclusively that competition (and its associated duplication of infrastructure) is a bar to greater take-up of mobile telephony.

34

James Conran 01.19.10 at 9:44 pm

@ Ted #22

“[Social democracy] can never work in highly multicultural societies”

This isn’t the only measure of “multiculturalism” and it’s a relatively recent development, but as far as I know Sweden has a higher proportion of foreign-born residents than the US.

35

piglet 01.21.10 at 1:21 am

“Something as simple as coin deposit lock in shopping carts is an innovation that so far hasn’t happened in the US”

I second that.

On the main thread, it should really be too obvious to need stating that there is no “European model” period. However I’m sure that if you pick some meaningful metrics and run a PCA over it, OECD countries will appear grouped in clusters and the US will tend to appear as an outlier. I’m making an unsubstantiated claim here but one that is is verifiable and I’m surprised I never see that kind of analysis done. It wouldn’t take more than a curious grad student with some background in statistics and economics.

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