Day By Day

Thursday, January 21, 2010

The Costs of Social Democracy

During my many years in academia I have had occasional arguments with Europhile colleagues who assert that the European political and economic models are superior to America's. This has become an article of faith among left-wing academics despite the fact that statistics show just the opposite. Paul Krugman, Nobel laureate in economics, makes the academic argument once again in the New York Times writing that European-style social democracy, with its extremely high tax rates, has been an outstanding economic success and that Europeans are not paying a heavy economic price for their government-subsidized lifestyles. In support of this assertion he argues that while it is true that Europe has experienced much slower growth rates than the United States and that Europe's unemployment rates are consistently much higher than American, much of that disparity can be explained through demographics and work habits. America's population is growing while Europe's is not, and Americans tend to work longer than Europeans. He argues that on a per-capita basis Europeans are nearly as productive as Americans.

Not so, says Greg Mankiw, Professor of economics at Harvard who cites statistics that show European per-capita productivity to be much lower than American [here]. Mark Perry expands on Mankiw's point, noting that according to official statistics nearly all European countries are poorer per-capita than nearly all American states. Only little Luxembourg ranks near the top.

He writes:
Professor Krugman claims that “Europe’s economic success should be obvious even without statistics.” Unfortunately, the economic statistics presented here tell a much different and bleaker story about Europe’s economic performance than Krugman portrays. Most European countries have lower per-capita GDP than even many of the poorest U.S. states, suggesting that Europe has a lot more to learn about economic growth, dynamism, and success from the U.S. than vice-versa.
Read the whole thing here.

I only have two observations to make. First, none of these economists attempts to take into account the "underground economy" of illegal transactions. By all accounts these off the books deals are rampant in Europe where many people work a limited number of hours at their official jobs [the earnings from which are taxed heavily], then supplement their earnings with off the books work that is tax free. So we should not rely too heavily on official data which are incomplete. Secondly, Perry's data point out a disturbing feature of the American economy in the Twenty First Century. They show that the District of Columbia is more than twice as wealthy per capita as the richest State [Delaware].

RELATED: Whatever Krugman's skills as an economist, they certainly do not bleed over into his political analysis. Last week he argued that Obama is not placing enough blame on President Bush for his current troubles. Warner Houston replies here.