Ross Douthat has just published an excellent column on America at the end of the 2000s, and he cites an essay by our friend and National Review contributing editor Jim Manzi that appears in the latest issue of National Affairs.
Social democracy has its benefits, but global competitiveness isn’t one of them. As Jim Manzi points out, in an essay on “Keeping America’s Edge” in the latest issue of National Affairs, “from 1980 through today, America’s share of global output has been constant at about 21 percent. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40 percent of global production in the 1970s to about 25 percent today.”
A friend objected to this passage, arguing that U.S. population growth over that period accounts for the difference. Population growth does account for some of the difference, but it doesn’t eliminate the growth gap. This is despite the fact that the U.S. economy should have performed less well on this front according to the Solow-Swan model of convergence. For the most advanced and productive economy, further productivity gains are necessarily more “expensive” because they reflect the cost of experimentation designed to push beyond existing best practices. Many of those experiments will fail. This is the essence of entrepreneurship. Other economies can “follow-the-leader” by learning from its mistakes and apply domestic savings to the practices and technologies that emerge from the Darwinian competition that defines a competitive, entrepreneurial economy.
That is, European productivity growth should have been much higher than U.S. levels, according to the logic of conditional convergence. It was not, however. The real mystery is why Europe has been underperforming. One assumes that labor market rigidities are part of the problem, but there’s room for disagreement. As for the higher productivity per worker hour in France, it is to some extent an artifact of lower rates of labor force participation — if we excluded more young workers, low-skill immigrants, and part-timers from the workforce, we’d presumably have much higher productivity per worker hour. The post-1981 increase in work effort in the U.S. has, as economist Edward Prescott has noted, came primarily from high earners in response to lower marginal tax rates at the top. Before then, Europeans tended to work longer hours than Americans. As Casey Mulligan always says, incentives matter. One thing that saddens me is that this kind of nuanced picture is hard to get across on, say, radio or television. I was just on an excellent public radio program, and one of my fellow guests said that “we tried tax cuts and deregulation and they didn’t work!” How exactly does one respond to this? From my perspective, some tax cuts are good — like tax cuts that aim to increase work effort — and others are bad — like tax cuts that aren’t paid for by spending cuts. And as for deregulation, again: some kinds of deregulation are good, like when it leads to increased competition and lower prices, and others are bad, like “deregulation” that centralizes power in the hands of politically-connected elites. Liberals often accuse conservatives of peddling “bumper sticker” solutions — simple nostrums like tax cuts as the cure for all that ails us, etc. My sense is that many (not all) liberals have a “bumper sticker” solution as well: “Trust Us.” My sense is that it’s not tax cuts and deregulation that failed in the 2000s. Rather, it was the doctrine of trusting Washington. But this is all very abstract.
