Truck and Barter: Euro-Excuserosis

June 27, 2005

Euro-Excuserosis

By Tino

By all relevant measures the Western European economies are not doing well compared to America. GDP per capita is some 40% higher in the US than among the EU 15. Unemployment for many of the welfare states is stuck in double digits, and even higher using comprehensive measures.

The relative poverty is reflected in many areas, such as lower private consumption, and lower quality of public services despite higher taxes. One would expect a vivid debate in Europe of their economic problems, especially given how resentful many Europeans are of America’s superior wealth and power. But Europe has chosen a much more painless approach: Denial.

“Who says the Europeans economy is doing badly? Our enlightened system is burying the McAmericans! Haven’t you heard of “Balanced Growth”?

There seems to be an entire industry devoted to making up more or less fanciful arguments why Europe is really doing better than the US. I want to exemplify and debunk some of those myths. In the process I also hope to convince you that Americans work less and have more free time than Swedes.

1. The Productivity per worker trick

I am sure many of you have heard it. “Sure, Europe may be doing slightly worse in GDP, but in productivity per worker or per hour worked we are keeping up with the US”

The problem with the argument is simple. The European Welfare systems have artificially changes the incentives to work though high minimum wages and high taxes.

These distortions have pushed a large part of their adult population out of the labor force. I showed last post that 30% of Sweden’s adult population neither works nor studies. Clearly this group is likely to be the least productive. But when they do not work their labor productivity goes down to zero, the increase only comes from taking them out of the data. Calculating productivity “per worker” is thus likely to be very misleading.

Another “productivity miracle” comes from the policies that make sure it doesn’t pay to work too many hours per day. In France and other nations they have even passed laws making sure people don’t work “too much”.

The last hour worked in a day is likely to be less productive than the first one, so your productivity per hour might look better, but you would still have done much less work and earned less.

If people could actually choice without high taxes or strict regulations they would probably make a reasonable tradeoff between work and income themselves. The state forcing them to make another choice is not “welfare”. And since we don’t consume per hour or per worker only total productivity matter. So beware of Frenchmen bearing productivity per hour figures.

2. GDP Data mining

This was exemplified quite nicely by Sweden’s Government, who claimed Sweden had the same per capita growth rate as the US.

The only problem is the base year they just “happened” to choice: 1994. Sweden’s was in it’s the worst economic depression since the 1930s. Better yet, this was the last year of the depression, just before the recovery. We also managed to finish the comparison when the US still hadn’t recovered from the 9/11 depression.

Between the selective chosen years 1994-2001 Sweden had the same Growth rate as the US. But what happens if we take more representative years? Indeed, between 1990-2002 the US has some 12% faster growths per capita than Sweden. For every year since the US outperformed Sweden.

Year - - - - US- - - Sweden

2003 - - - 3.0% - - - -1.5%
2004 - - - 4.4% - - - -3.5%
2005 - - - 3.5% - - - - 2.1%

3. Confusing more specialization with working more

It may surprise you to hear, but Americans actually work less than Swedes and earn more.

To be sure, Americans spend more time on market in the market. But only part of the work people do is in the market. Much of it is unpaid work in the household, especially for women. Cleaning, washing dishes, cutting the grass etc take time. In the US this represents some 35% of the hours worked.

In Sweden wholly 47% of hours spend working go towards work in the household. One important reason is tax wedges on work. With very high taxes on labor it does not pay to hire someone to help you clean, paint the house, or even cut your kids hair. Even though many unskilled workers are unemployed this would be too expensive due to taxes.

Both the Swedish statistical agency and the US department of Labor spend a lot of effort gathering detailed information how people spend their time.

The average Americans man reports 35.1 hour per week in work or study, compared to 30.9 for the average Swedish man.

As suspected, Americans men average spend 4.3 hours per week more on productive market activity (including, work, studying, travels to work and studying) than Sweden. But Swedish men spend 8.1 hours more per week working in the household, 3 hours of which are maintenance!

In total, American men spend 4 hours more per week on Leisure and Personal Care than their Swedish counterpart. For woman the corresponding figure is 3.5 hours.

Maintenance is classic category where taxes wedges of 600-900% force people away from the marketplace. A simple real life is my business professor who painted his own apartment. He didn’t enjoy it, wasn’t very good at it and would have been more productive giving lecture.

Lets say the Painter waned to get 10 $ after tax to make it worth his wile. He pays 50% taxes, so he would need to bill for 20$. The sales tax is 25%, so the professor had to pay 25$ per hour. Now the professor pays 70% marginal taxes, so due to taxes would have to earn 83$ so that the painter could consume for 10$

People thus substitute hours worked in the market to unproductive (but untaxed) work in the household, not because they want to but because the system forces them to. This is not seen when you look only at hours worked per year.

4. Making up new categories

Some organization or magazine gets attention by make up arbitrary categories with fluffy criteria. When Sweden ranks high our media and the Government use it as an argument than things are great, no reform needed. The “Most competitive economy” is the most oft repeated ranking.

I will keep it simple: No consultant can determine what creates economic success. Only the test of reality can. If you have a survey where Germany is more competitive than Luxembourg they should outperform Luxembourg.

--------------------------------------------------------------------

Just imagine half the creativity and energy is put into pretending we don’t have economic problems was used for actual reform.

Tino.sananda.@gmail.com

Posted at June 27, 2005 01:49 AM

Comments

Excellent post! I had never thought of looking at "hours worked outside of work" but it makes perfect sense.

Here's a thought on productivity per hour: perhaps it is genuinely somewhat lower in the US since we have a lower min wage and thus companies can afford to employ some workers that aren't as productive. (I've done no research on this; it's just a hunch.)

Comment by Scott Lawton

at June 30, 2005 03:14 PM | Permalink

Yes, you are right, but as you say productivity would be lower *per hour worked*, not per American. It is the latter that matters, but the former they like to present.

(actually productivity in the US is still higher than Europe by about 10% despite this, but let's separate the two issues).

If we tomorrow pass a low that no one without a PhD productivity per hour will skyrocket. The economy as a whole will of course plummet. Everyone is made poorer of, since those whose productivity is now zero have to share what the few who still work produce.

This is the extreme of what Europe has done, the high taxes and labor market policies make it very hard for the lowest 20-30% to work. The rest are taxed very high to support those outside the labor force.

Comment by Tino at June 30, 2005 03:29 PM | Permalink

Productivity says nothing about efficiency and effectiveness. Q.e.d.

Comment by Axel at July 5, 2005 09:42 AM | Permalink