by Joe Kernen
Santelli is not the quietest guy in the room at the calmest of times, but this morning I thought his head might explode. As he turned away from the camera to ask the floor traders which of them wanted to pay for their neighbor’s mortgage, I told him, “They’re putty in your hands.” I was being sarcastic, but Rick evidently regarded it as a challenge and replied, “We’re thinking of having a Chicago Tea Party in July.”
The most distinctively American protest movement of the last century had been born. And by “distinctively American” I mean “distinct from Europe.”
Now, don’t start assuming that the Kernens are a bunch of unsophisticated rubes who, if they travel outside the United States at all, behave obnoxiously, speak English loudly and slowly to the locals, and in general behave like the prototypical “ugly Americans.”22 We love Europe. We had a great family vacation in 2008 in Portugal. We’ll be going to Europe again and again as Blake and Scott get older.
But it’s one thing to enjoy Paris or Lisbon or Rome as a vacation spot and a whole different thing to want to import European ideas into the American economy. It’s easy to make fun of the Tea Party activists when they accuse the current administration of wanting to turn the United States into France, but it seems to me that they’re on to something: A big part of the Democratic Party’s agenda seems awfully comfortable with the European way of doing things and awfully uncomfortable defending the American way.
“Blake, have you ever heard the phrase “ ‘the American way’ ”?
“I think so.”
“In school.”
“Not really so much.”
Blake’s teachers are uncomfortable even describing the American way, much less defending it. I’m guessing this is because there’s so much negativity in the air about the subject, whether it’s about exporting American ideals to other countries or even the idea that the American way of doing things might actually be superior. After members of the news media spent eight years criticizing George W. Bush for ignoring European leaders, they fell all over themselves to praise Barack Obama for cozying up with them. Europe, we are constantly told—or we were, before the Eurozone started having to spend hundreds of billions to support its weakest members—has figured out how to have a prosperous society that has practically vanquished inequality and where health care and education are not only better but cheaper. To a lot of these people, Ronald Reagan’s belief in America as a “shining city on a hill” has become a punch line.
Not, however, in the Kernen household. I’m not so sure that the world is divided into America and Everyone Else, but I do believe that there are two different ways of seeing the economic world, and one of them is definitely more popular in the United States.
Actually, this idea is pretty widely held, both by people (like the Kernens) who think the American way is superior and by the trainloads of Progressives, liberals, and—of course—Europeans who think the American way is barbaric. Any time I find myself in agreement with so many people, it’s a good idea to check my assumptions. Are America and Europe really all that different?
While I was checking those assumptions a few months ago, I came across a book by Peter Baldwin, a historian at UCLA, entitled The Narcissism of Minor Differences: How America and Europe Are Alike. As he points out, the measurable differences between modern Europe and present-day America are actually pretty small, smaller, in fact, than the differences between Spain and Germany or Iowa and California. A few of his observations:• U.S. taxes are at least as progressive as European ones.
• Germans are even more litigious than Americans.
• Italians watch just as much TV (and just as much really bad TV) as Americans.
• The Swiss, Germans, French, and even Italians own more passenger cars per capita than Americans.
• The richest 1 percent of Americans owned about 21 percent of all wealth in 2000—exactly the same as in Sweden (and much less than Switzerland’s 35 percent).
• Sweden, Belgium, and the Netherlands all have a higher percentage of poor citizens than the United States (poor defined as 60 percent or less of median income).
Some of these points are just handy to have around when some Frenchman or Swede looks down his nose at our unsophisticated ways, such as when they sneer about our dependence on cars for transportation as opposed to the better-for-the-environment-andmorally-superior high-speed trains used to travel across Europe. (It turns out that America transports ten times the amount of freight by rail that Europe does, which means that French families may get to the supermarket by train, but the stuff they buy there was transported all the way across country by trucks).
A lot of these similarities, though—and the better-known differences, such as the European “advantage” in education and health care—hide something pretty dramatic: The European economies have spent the last five decades benefiting from a giant free ride paid for by American taxpayers and consumers.
Start with defense. The U.S. Department of Defense spends three times as much as all of Europe, and what we’re buying with all that money—$630 billion a year—doesn’t just defend America. Ever since World War II, the United States has been responsible for the peace and freedom of Europe as well, and when three hundred million Americans are paying for the security of four hundred million Europeans, it frees up a huge amount of money for Europe to spend in other places: like welfare, or “free” health care.
Europe gets a free (or at least discounted) ride on health care as well. It’s true that the United States spends more on health care than a typical European country without getting much better results—this was one of the arguments made on behalf of Obamacare. But one of the biggest reasons that health care is so expensive in the United States is the cost of drugs, which is a direct consequence of the fact that the United States is the only large economy where patent drugs are priced by the free market; in Europe and everywhere else, prices are controlled, or profits, or both. Thus, while the average American family actually takes fewer prescription drugs—only about three-quarters of the number taken in Europe—it spends nearly 40 percent more for the privilege. The United States is, literally, subsidizing the consumption of drugs all over the world—drugs that would never exist without a U.S. market that is willing and able to pay the roughly $800 million it takes to research and design a new drug.
The same thing is true of America’s colleges and universities, where the basic research on so many of those drugs—and a lot of everything else needed by a technological society—originates. The professors I worked under at the MIT Center for Cancer Research in the late 1970s were the beneficiaries of a U.S. system that—precisely because it is partially private—spends nearly three times as much per capita on postsecondary education as any country in Europe and creates research and knowledge from which the whole world benefits.
“Blake, do you know what welfare is?”
“That’s when you can’t work.”
“Right. Do you know who pays people who can’t work?”
“I don’t know; the government? Generous people?”
Somewhere along the way, it became standard editorial-page “truth” that America was a harsh place—one that might be wealthy but was stingy when it came to taking care of the poor. But the idea that the United States is less generous on social welfare turns out to be, well, ungenerous. Though Sweden (to pick what looks like a really generous European welfare system) spends 37 percent of its annual GDP on welfare, while the United States kicks in only a tightfisted 17 percent, these numbers are based on gross payments. Since the United States, unlike Sweden, typically collects no—or very little—tax on its payments, a calculation of net payments reduces the Swedish percentage of GDP to 29 percent, while the U.S. number rises to 19 percent. And it doesn’t stop there: Since the United States is a whole lot more productive than Sweden, the right way to compare the numbers isn’t as a percentage of the total economy but as a percentage of the population. After that little calculation, the differences almost disa
ppear: Sweden spends $6,300 a year per capita (in 1990 U.S. dollars) while the United States spends $5,400—more, for example, than France, Germany, or Denmark.
And let’s not forget the American private sector, not that I ever would: With net private social-welfare numbers added in, the United States takes over the lead, with $7,800 annually, 16 percent more than Sweden. Yes, Sweden. And here’s the really impressive part: Even after absorbing the cost of providing the entire world with security, scientific knowledge, and miracle drugs, the American economy still blows everyone else out of the water. It’s been doing so for quite a while, and it’s still doing so today.
In the twenty-five years from 1980 to 2005, the per capita GDP in the United States grew at a rate 55 percent faster than it did in Germany and 48 percent faster than in France. Even after spending fifty years catching up after the Second World War, Germany’s per capita GDP was barely 74 percent of the United States’s and France’s 72 percent. The reasons aren’t very hard to see, since per capita GDP is nothing but the percentage of people with jobs, the annual hours those people worked, and the productivity of those hours: how much output per hour worked.
Which means that the average American worker, during the worst recession in seventy years, put in more than 35 percent more hours yearly than the average German worker—and produced 30 percent more per hour in actual value.
The American economy is different, all right. But if the difference were just due to the free ride that Europe (and the whole world) has been taking on America’s investments in stealth bombers and lifesaving drugs, then the difference would be only about sixty years old or so, because up until the end of the Second World War, European and American economic attitudes were pretty similar.
Which is what I thought when this project started. They’re not. What I learned is that an even bigger reason that the social-welfare state is so much more entrenched in Europe than in the United States is simply that it had such a big head start: Fifty years before the New Deal, Germany was offering national health insurance—and by 1889, state-funded pensions. The situation faced by the German chancellor Otto von Bismarck even resembled the one that greeted Franklin Roosevelt when he took office in 1933. Like the 1930s, the 1870s were a time of worldwide economic depression, and one of the few growth industries during depressions is political socialism. The aristocratic Bismarck had little love for free-market capitalists but even less for socialists, and his first response was to outlaw socialist parties. But it was his second response that was the real success: in German, Staatssozialismus, which translates into English as “nanny state” (okay, really it’s “state socialism,” but it amounts to the same thing).23
The result was predictable. When you build a nanny state, you turn a decent-sized chunk of the populace into the sort of people who depend on nannies: infants. Or at least into the ten-year-olds who make the best Progressives and liberals. The whole German—and, soon enough, European—experiment in social welfare was based on the cultivation of people who believed their lives were determined by forces they couldn’t control. The governments of Europe (and eventually the Labour governments of Great Britain) were, from the end of the nineteenth century on, committed to fostering a culture of dependency.
They didn’t do it out of benevolence, either. The most important reason for building these European nanny states was to keep the locals from turning into revolutionaries, but Bismarck and his followers had another objective, too. All of those goodies given to Germans, in particular, were also designed to counter the dramatic emigration of Germans to the United States. Bismarck’s government even made a point of publicizing the fact that, while wages (and opportunities) may have been greater in the United States, the value of those “indirect wages” (i.e., social insurance) should persuade many to stay home.
It succeeded—not only in reducing the rate of emigration but also in selecting the most docile people in Germany to stay and encouraging the least docile to go.
By then, European immigration to the New World was entering its fifth century; America was a nation of immigrants long before Americans decided that the “course of human events” forced them to wave good-bye to Mother England. And we’ve always been a little ambivalent about it. Immigration is such a thorny issue these days, particularly among conservatives, that I get a little twitchy just thinking about it. When I hear someone arguing that we shouldn’t penalize the millions of immigrants who followed the rules about moving to the United States (and the millions more who are waiting at the borders for their paperwork to be reviewed) by granting amnesty to those who are here illegally, I find myself agreeing. And when I hear someone else saying that we can’t expel eleven million people who are here illegally, I find myself agreeing with that. When one senator says we should reconsider the principle that everyone born in the United States is automatically a citizen, even if their parents came here illegally, I nod my head. When another one points out that we shouldn’t amend the Fourteenth Amendment over this, I agree with that, too.
I’m an agreeable guy.
But there’s one aspect of the whole mess I’m sure about. If you want to raise a population rich in the attitudes that start them off believing they are in control of their lives, rather than victims, then you want to encourage immigration. Legal immigration, of course, but immigration—and lots of it.
Wherever you find them, immigrants are the most incomemobile segment of society, partly because they start out at the bottom. But they don’t stay there, at least not in the United States. After a typical immigrant household has been living here for one decade, its income is typically a third less than that of a native household. But after two decades, they’re only earning about a fifth less—and after three decades only about 6 percent less. If they’ve become naturalized citizens in the intervening years, there’s essentially no difference in income.
Immigrants are income mobile, but Americans are just plain mobile, at least compared to Europeans. In Germany, for example, barely 1.4 percent of the population moves from one “state” to another annually. In the United States, the number is nearly twice as high—and the real difference in mobility is much greater than that when you remember that Germany’s sixteen states cover fewer square miles than California.
You see the same phenomenon when you look at the difference in the relative ease with which small businesses are formed in America versus Europe. The one-time costs of setting up a new business in the United States run a typical entrepreneur a little less than 2 percent of annual per capita income: approximately $1,000. In France that number is more than ten times greater: more than 35 percent of per capita income. As a result, not only does Europe produce a whole lot fewer entrepreneurial businesses—Germany produces 36 percent fewer start-ups as a percentage of existing businesses than the United States—but existing businesses hang on a lot longer: For every hundred businesses that vanish in the United States, only sixty-three go out of business in Germany. To a typical Progressive, this is a good thing, but it really just reflects far less of the creative destruction that is utterly necessary for free markets.
I’m not sure whether European statism produces economic stasis or if it’s the other way around, but I’m absolutely certain that they go together. So if you’re scared that team Obama is a little too eager to turn America into a European-style social democracy, you should be.
Every year, the Heritage Foundation publishes an index to economic freedom around the world. The index compares ten different aspects of each nation’s economy—including tax rates, government spending, the ease with which new businesses can be started, the freedom to hire and fire workers, how well property rights are enforced, and levels of corruption—on a scale of one to one hundred and averages them to come up with a total score. Okay, it’s more than a little wonky, but it’s also useful.
It turns out that not all of the components measured are really strong indicators of economic success. The top scores in “fiscal freedom” (the taxes paid by individua
ls and businesses) include countries like Oman, the Maldives, and the Kyrgyz Republic; two of the “best” countries in the category of government spending are Burma and Turkmenistan. However, the top performers in other categories, such as trade freedom and property rights, are also the most free and most productive economies in the world: Western European countries such as France and Germany; English-speaking countries (Canada, Australia, New Zealand, and the United States), Japan, Hong Kong, and Singapore.24
One result is that on most of the measures of economic freedom that matter, the world’s rich countries are hard to tell apart: Germany, Japan, and the United States all enforce property rights, are generally free of corruption, and permit the free flow of capital.
However, there is one measure on which they are wildly different—and it’s the one that not only explains the differences in economic performance but also is a clue to its source. It’s the category called labor freedom.
Labor freedom is the result of an equation that includes six different values: the ratio of the minimum wage to the average value added per worker, legal hindrances to hiring new workers, the flexibility in the number of hours an employer can ask an employee to work, the difficulty of firing employees, and how much notice and severance are required to do so (I told you it was wonky). The world’s top three countries in labor freedom are Singapore, Australia, and the United States, all scoring at least ninety-four out of one hundred. In the same category, France scores a 54.7 and Germany less than 40. (A different study, performed by the Organisation for Economic Co-operation and Development—OECD—in 1999, found that the countries with the strongest employment protections were Italy, Greece, Turkey, and Portugal. The weakest were the United States, the UK, New Zealand, and Canada.)