Tuesday, May 10, 2005

How Is Europe a Model?

We often hear people talk about "The European Model," meaning the generous welfare net, worker protections, generous vacations, short work weeks, "free" education, and "free," universal healthcare. Generally, when they call it a "Model," it's with a sense of admiration. The Wall Street Journal's Brian M. Carney has http://www.blogger.com/img/gl.link.gifa different idea (subscription link only):
WSJ.com - Europe Hasn't Outgrown 'That '70s Show': "Given that Europe's streak of economic underperformance can now be measured in decades, perhaps a better question to ask is: Why does anyone think that a system of generous welfare benefits, high taxes and harsh restrictions on hiring and firing would ever produce anything like a dynamic, growing economy? Why does anyone assume that there is such a thing as a 'European model,' rather than just a collection of ill-conceived policies having a predictably depressing effect on the economy and job creation?"
Indeed, the old-line Continental, European countries have been stuck with anemic growth and massive unemployment ever since Jimmy Carter brought the same to the US. The problem is all those benefits cost beaucoup d'argent, which means high taxes to pay for it. The massive spending/tax burden on business and labor and the generous incentives for not working produce (surprise!) lots more people out of work. That leads to higher spending, and around and around the drain we go...
"In 1965, government spending as a percentage of GDP averaged 28% in Western Europe, just slightly above the U.S. level of 25%. In 2002, U.S. taxes ate 26% of the economy, but in Europe spending had climbed to 42%, a 50% increase. Over the same period of time, unemployment in Western Europe has risen from less than 3% to 8% today, and to nearly 9% for the 12 countries in the euro zone. These two phenomena are related; in a country with generous welfare benefits, rising unemployment increases government spending rapidly.

But here a third element enters the picture, creating a feedback loop that explains why the Continent will never regain the halcyon days of postwar growth. As spending goes up, higher taxes must follow to pay for those benefits. But those taxes, usually payroll taxes, must be collected from a shrinking number of workers as jobs are cut. This in turn increases the cost of labor and decreases the benefit of working rather than collecting unemployment or welfare checks. As Martin Baily, a former head of Bill Clinton's Council of Economic Advisers, has described, this can lead to a spiral of rising taxes and falling employment, especially when welfare payments are high, as they are in most of Western Europe.

The result is predictable -- more jobs are lost, the tax base shrinks, and taxes must go up further to pay for yet more welfare benefits, making work less attractive and not working more attractive."
Laws that make it almost impossible to fire a worker, mean that businesses are very reluctant to hire anyone at all. The work hours a French or German employer gets out of a worker in a year is massively lower than American and Japanese employers get from their workers. It's hard to see how the European chemical industry is going to survive the massive costs of regulations already on the books that will require extensive testing of every chemical in commerce.

The European system is a "model" like the idea that every woman can have a high-powered career as a go-go corporate executive, while also being the perfect stay-at-home-mom for six children is a "model." More like a pipe dream, really...

UPDATE: The full version of the article is now available on the free, OpinionJournal.com site.

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