Friday, November 07, 2008

The Coming Europeanization of the U.S. Economy?

Good News: In the last 15 years from 1994 to 2008, the U.S. jobless rate has never exceeded 7% and has averaged 5.1%. In contrast, other developed economies in Europe like Germany have never had a jobless rate less than 7% during that period, and German unemployment has averaged 8.7% (see chart above).

Bad News: The U.S. jobless rate is now approaching Germany's, and is within 1% of Germany's unemployment rate for the first time in at least 15 years (see chart above). Could this be signalling the "The Europeanization of America" (more protectionism, higher taxes, more regulation, more government spending, and increased strength of labor unions)?


At 11/07/2008 10:52 AM, Anonymous Anonymous said...

We are now following the economic policies of Europe. So, why shouldn't we expect the same result. One key difference, though, is that our employment is still "at will", as opposed to countries like France where it's almost impossible to fire employees. Another key difference is that European countries have much more union participation that the United States. Both unions and the inability to lay off employees contributes to structural unemployment.

If the United States adopts these two aspects of the European model (which is what this congress and president want), then our unemployment will be higher.

I notice that Germany's unemployment tanked recently. I know they were liberalizing the economy and cutting back on social spending recently. Could this account for the drop in unemployment?

At 11/07/2008 12:15 PM, Blogger Arman said...

Insured unemployment give you the only real hard numbers, and frankly, they don't look that bad at all.

Other figures are educated guesses at what some people think that the rates probably are.

"I notice that Germany's unemployment tanked recently. I know they were liberalizing the economy and cutting back on social spending recently."
They have been pushing right wing market policies for years. This has proven disastrous. I hear that they are vacating right wing nonsense. It isn't surprising to me that the economy would respond positively, just as the US did under FDR.

At 11/07/2008 12:29 PM, Blogger bobble said...

"The U.S. jobless rate is now approaching Germany's . . . Could this be signaling the "The Europeanization of America" (more protectionism, higher taxes, more regulation, more government spending, and increased strength of labor unions)?"

WHOAAA! you're getting way ahead of yourself. the U.S. unemployment rate is spiking up but it has *nothing to do with "Euorpeanization"*

right now and for the last 8 years we have had lower taxes, less protectionism, and decreased labor union strength.

so why is our CURRENT unemployment rate spiking up?

At 11/07/2008 12:49 PM, Anonymous Anonymous said...

They have been pushing right wing market policies for years. This has proven disastrous.

OOOH! Vagaries and aggressive assertion. Very convincing.

You've never been invited to be on a debate team, have you Arman?

At 11/07/2008 3:03 PM, Blogger Arman said...

>so why is our CURRENT unemployment rate spiking up?<
Because right wing policies do not work. Of course not too long from now it will be all blamed on Obama, just as 29-32 is all blamed on FDR.

At 11/07/2008 3:07 PM, Blogger Arman said...

Very convincing.
Just telling you how I see it. You'd have to look up the facts for yourself for any convincing to be done... something I'm sure your nowhere near compelled to do.

You've never been invited to be on a debate team,
Why, are you inviting?

At 11/07/2008 6:46 PM, Blogger the buggy professor said...

1) The chart, as you present it Mark, is interesting but misleading: in 1992, to be specific, Germany unemployment was under 8.0%, and the US unemployment rate was just starting to decline after the brief recession from 7.8%.

--- What would be accurate is to show or say that Germany's unemployment did rise noticeably afterwards, whereas the US, in the Clinton era, created 20 million new net jobs . . . vs. less than 6 million new net jobs in the Bush era after the 2001 recession.

 * Part of the problem with German unemployment after the initial two years of unsustainable booms following reunification was and remains the higher levels of jobless people in East Germany --- always about 50% higher than in the western sectors (which have about 75-80% of the total population).

 * More important, though, the high levels of unemployment in Germany in the 1990s and into the first two or three years of this decade reflected all sorts of labor market rigidities, insufficient investment in growth industries, a lack of entrepreneurial small business start-ups, and product-market rigidities that hindered the ability of established firms to higher more jobless working-age people --- as well, it has to be stressed, the ability of small start-ups to get bank loans and break through the regulatory barriers . . . including very restrictive business hours of operation in retail sectors.

(In the late 1990s, a very good Anglo-American comparative study showed that 1 out of 11 American working adults created a new business every year. In Britain and Italy, which came in second, it was about 1 out of 33. In Germany and Finland, about 1 out of 50 --- which means hardly any German even knows someone who has started a business and succeeded.


2) A great deal has changed in this decade.

 * In particular, since 2002 or so, Germany has --- like France and Holland and Scandinavia --- carried out major reforms of its labor markets. In both Germany and France, a laid-off worker who doesn’t find a job on his or her own in 1 year will have their unemployment benefits stopped; he or she must then take a minimum-wage job funded by the government. (In France, it’s supposed to be the same, but frankly getting the data here isn’t easy.)

 * Nor is that all. Germany’s coalition government has increased the age of social security retirement from 65 to 67 . . . a necessary change, with more changes to come --- what with the rapidly aging population of the country (as well as all over West Europe), with the declining active-worker/retiree ratio worsening in the decades to come, starting very soon. Much sooner than here, by the way.

 * And finally, to its great credit, German export-oriented industry --- exports about 37% of total German GDP production --- has revamped, modernized, kept wages back, and manages to remain, rightly or wrongly, the major engine of economic growth in the country. The net trade-surplus is about $400 billion, a strong contributor each year to German economic growth through its multiplier effects on investment and its links to large numbers of middle-size and small-size business firms. (The major problems in economic growth remain on the domestic side of GDP, including self-imposed inhibitions on consumption and, to repeat, remaining rigidities in product-markets . . . including huge tangles of bureaucratic red-tape.)


3) Granted all this, the growth of the German economy --- like all other West European economies (and in the eastern parts of the EU) --- has been slowing down throughout the year, and is entering recession. And, contrary to the original and expected jingoist Schadenfreude that greeted the bad news about the US financial meltdown in September of this year (2008), neither Germany nor the rest of Europe has been able to escape the same sort of credit-crunch that afflicts the US economy. If anything, almost all the EU banks are far more highly leveraged by noticeable margins of 3:1 or up to 10:1 than their American banks, and they have, it seems, about the same number of troubled or non-performing or just plain toxic assets.

 * So it’s likely that even if, in 2009, US unemployment grows to 8% (the Bush-Sr recession of 1990-91) or 10.8% (the Reagan 1981 recession) ---- the latter, by the way, the highest since the days of the Great Depression) --- unemployment in Germany is likely to be higher by two or three percent.


4) Note, though, that if you want to single out the welfare state as the culprit in causing higher unemployment levels in Germany or France (or Italy or Belgium), the levels have been lower for three or four years in Scandinavia (except Sweden), Holland, and Austria than here.

 * In September of this year, for instance, unemployment in both Holland and Denmark was under 3.0% --- thanks in part to active labor market policies and freeing up certain labor-market rigidities . . . including the ability of firms to let go excess labor. Everywhere in the Eurozone, 15 members (three new ones in East Europe), it was 7.4% as of August 2008 --- the level reach in August a year earlier. With the economies declining in growth rates or entering recession, that unemployment level had climbed to 7.5% . . . down from a peak of 9.1% in 2005, and 1.0% higher right now than our own at 6.5%.

 * More generally, unlike in 25 years or so between the late 1970s and the start of this decade, West Europe has created about as many new jobs as a percentage of the total population --- about 380 million or so people --- as we have. (For that matter, 5 of the top 10 economies ranked in overall competitiveness (the US no. 1) by the World Economic Forum recently --- a ranking linked to by Mark --- were ranked between 11 and 27 by the Heritage Foundation in economic freedom. Germany --- ranked no. 7 by the WEF --- was ranked 23rd from the top in economic freedom. Sweden, no. 4 in economic competitiveness, turned out to be 27th in economic freedom.) If you want, you can find a prof bug chart comparing the top 10 countries in the WEF rankings against economic freedom here:


5) None of this is to deny that there aren’t problems still that afflict West Europe’s labor markets. The main ones are three-fold:

 * There are special burdens of young people entering the job market for the first time. Married women who want to enter the job market also have certain special problems finding work.

 * Lots of the jobs --- getting the data isn't easy --- are part-time, and though many workers are happy with part-time, most employed workers with those jobs would probably want full-time work.

 * The big job creation in the EU, not much lower as a percentage growth rate compared to the US in this decade, has emulated the 1980s and early 1990 US pattern: it has so far come at the expense overall of productivity growth


6) The latter, negative West European trade-off deserves a brief clarification. As it happens, it brings us to the core problem bedeviling economic dynamism in West Europe --- remember, about 380 million people in the EU’s 15 member-states there, plus tiny Norway (4 million) and Switzerland (6 million).

 * To wit? The failure of West European countries --- even the impressive export-oriented firms in Scandinavia, Holland, Germany, and elsewhere --- to reap the big benefits in productivity-growth created by the computer-chip, the pc, ICT technologies (information and communications), and the Internet as the symbol of all this. The big exception are the advanced welfare states of West Europe in Scandinavia, where fairly homogeneous, small, generally well-educated populations have experienced a noticeable growth in productivity-rates this decade, though much of it (presumably) is due to reallocating surplus labor away from declining industries to new, more dynamic ones working with foreign multinationals.

 * The point can be taken a stage further. In particular, remember what was just said about the EU’s job-creation in this decade? --- namely, unlike in the 1980s and 1990s here, where that job-creation lagged badly, it has risen about the same percentage of the eligible EU work force.

Unfortunately, as with the US in the 1980s and until the latter four years or so of the 1990s, there has been a negative trade-off in most of West Europe between increases in productivity and that job-creation.

-- At some point, obviously, this trade-off has to stop if the West European countries are to maintain their competitive abilities to grow their economies --- with their populations aging rapidly --- as standardized manufacturing and certain service industries (outsourcing) is increasingly monopolized by China, India, the rest of dynamic Pacific Asia, and the disciplined, lower-wage East European countries. The same observation, I suspect, applies to the future of Japan as well.


7) To finish now with a reference to Mark’s well articulated fears about the likely “socialist” future --- a term he has used in other posts referring to an Obama-presidency --- of the US.

Let’s ignore the loose rhetoric about socialism.

I’ve discussed this airy use of it as a boo-word at length in several buggy-site articles, showing why --- for a variety of economic, social, political, and cultural reasons --- we have no noticeable socialist traditions in this country . . . no, not even Labour Parties as in Britain, Australia, or New Zealand (or briefly in the 1920s in Canada). You can find a summary of those lengthy, data-filled articles that I posted recently in two segments at Mark Thoma’s Economist’s View . . . Thoma, a centrist economist linked to by Mark Perry’s libertarian Ph.D. superviser, Tyler Cowen at his web site, the Marginal Revolution. Go here (copy and paste in your browser address bar) if you’re interested: (Mark’s own postings don’t, apparently, allow for an http in href HTML tags to be registered properly.)


That said, let’s cut to the chase.

Start with the big big worries about tax rises by socialist Obama, assuming Congress passes the legislation, to the Clinton era.

Everybody remember the 8 years of Bill Clinton’s “high-tax policies” --- which Obama threatens to reapply to Americans earning over $250,000 per person? Those bygone socialist years, remember further, saw the creation of 20 million new net jobs. In the 8 years or so of the Bush-Jr era of “low-taxes”, we will --- by the time Obama is installed in office next January --- have experienced the creation of around 4.5 million . . . and possibly fewer still, what with the pace of growing unemployment captured in Mark’s diagram for 2008.

-- It’s odd, no? At the end of the 1990s Clinton go-go “socialist” years --- tax, tax, tax! --- GDP had advanced 31% (vs. 19% for Bush’s 7 years since the recession ended October 1991 --- with a decline likely by the end of 2008’s GDP); job-creation was 20 million; and for the first time in decades, the federal deficit reversed itself, and we had three years of growing surpluses. (Bush’s $3 trillion dollars worth of federal deficits did, only fair to add, coincide with a defense increase --- roughly $800 of that $3 trillion).


-- Oh, and under Clinton, the stock market happened to rise in those socialist high-tax years 226%. Under the tax-cutting Bush-Jr years --- ending in a corporatist-state salvation-effort to stave off a disastrous financial meltdown --- the stock market has fallen over 19% as of this first week in November. Nothing unusual here. The stock market always does better under Democratic than Republican presidents: since 1900, since 1929, or since 1933. Since 1933, to be exact, $10,000 invested in the market would have risen to around $350,000 under Democratic presidents, and about $50,000 in the Republican years. (Go back to 1929, and the $50,000 drops to $11,000.)


The result?

Not surprisingly, Americans in general --- the rich, the affluent, the middle class, the poor --- were overwhelmingly satisfied at the end of the Clinton-socialist economy: only 6% said in surveys at the start of 2001 that they were unhappy with the economy. Last time we heard, 90% of Americans said we were in a very bad or bad Bush-led economy, and by January 22nd of 2008, who knows? That figure may rise to 95%.


Michael Gordon, AKA, the buggy professor

At 11/07/2008 8:32 PM, Anonymous Anonymous said...


I was enjoying your post until you "ignored empty rhetoric about socialism" and went whole hog partisan. That put your whole post into question for me. I don't like Bush, so I hate it when I'm forced to defend him.

Reagan's 1981 recession was the result of squeezing out inflation. Inflation he did not cause.

Clinton did not become president right after the tech bubble burst, did not have to deal with 9/11 and two wars. I won't argue the necessity of the second, but I think there's nobody is debating the first. So, comparing the Bush years to the Clinton years is apples to oranges. In fact, one could make the argument that Clinton was riding Reagan's. Or that Bush ended up in the pickle he was in because Clinton cut military spending and didn't kill Osama when he had the chance. Of course maybe Reagan's wave then crashed on Bush. Or was it Clinton who created the dot com bubble and it crashed his last year in office. Oh, it's just so confusing when you really get into the partisan dance. It's just chaos.

While you're busy sarcastically implying that taxes don't create distortions as evidenced by Clinton's tax hikes and - ha ha! - nobody died, you fail to mention that he increased those tax rates when the economy was steaming ahead. You're clearly trying to imply that if Obama increases taxes on the very people who have the most options (the skilled high earners) and are the investors we rely upon to create jobs as we spiral into a recession, there will be no effect on economic growth. Really want to go there? Come on! You can't even say if there would have been more economic growth under Clinton had he eliminated the deficit with spending cuts instead of tax rate increases. Which brings me to another point about good 'ole Clinton..

Clinton did reform welfare and cut spending in a few other places too. Or was that the Republican congress? Huh.

Bush (God Bless his rotten little soul) did try to create jobs and economic growth. He pressed Greenspan to lower the Fed funds rate to ridiculous levels and promoted more home "ownership" and all the other good stuff that both Dems and Republicans love to do to centrally plan economies. It's just too hard to avoid a recession after one bubble crashes without inflating another one and have that one crash in your last year of presidency. Or was that all Bush seeing as other countries around the world had the same credit and housing bubble?

So did Democrat Clinton create all that economic growth in the 90's or was it the Republican congress?

If you down your partisan kool-aid for a minute and engaged in a little honesty for a change, you would have to admit that...

-Presidents are not dictators and cannot act without congress, so attributing anything purely to the president (good or bad) is...well, stupid.

-Policies have effects long after presidents leave and congress changes hands. Thus, it is difficult to attribute effects observed during one presidency to that particular presidency. For example: Did Reagan benefit from the deregulation that Carter started? Did Clinton inherit a fundamentally stronger economy resulting from Reagan's policies (including tax cuts - approved by a democrat congress, mind)? Etc.

- Finally, and most importantly, a 13 trillion dollar economy with hundreds of millions of individual actors and hundreds of millions of different individual ends and means is characterized by too many variables for you to be able to attribute all that happens to one person - the president - who has so little real power.

In fact, even in command economies like the Soviet economy, the government found that it had a lot less power than it thought it.

At 11/21/2008 2:26 PM, Anonymous Anonymous said...

The unemployment rate comparison would be much more accurate if you used the U6 rate, which is closer in definition to what Germany uses, than the U3 rate which you used.


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