USA vs. Europe

I find myself in a bit of a conundrum.  Having just gotten back from a trip to Europe, my seventh in about a dozen years, I continue to be amazed by the visible and tangible evidence that Europe is kicking our butts in a number of economic areas.  Sure, I’m aware of the things we like to focus on when we poopoo Europe’s economic performance:  structural unemployment, highly socialized economies, bloated governments, frightening demography, etc.   Nevertheless, their stuff is just better than our stuff.  Just about everything that is manmade is of a higher quality, better maintained, and more functional in Europe than in the US.  And yet, I have always thought that big-government Europe could never compete with the US with its emphasis on individual liberty and limited government.  How can these bloated bureaucracies be kicking our butts when it comes to making and maintaining high quality stuff?   Apparently I need to rethink my premises.

First, some observations from my most recent trip.  The eye popping differences began with the flights.  As it happened, we flew Lufthansa over and United back.  No surprise: Lufthansa won hands down.  The Lufthansa Airbus A340-600 was new, staff was courteous (and gorgeous), food good, even in coach the silverware was metal, and alcohol, including good wine, was available without additional charge.  The United return was an aging Boeing 767 in bad need of an overhaul (as was the staff), alcohol was extra, and halfway through the flight the bathroom was out of toilet paper and remained so the rest of the flight. 

We flew into Munich where the escalators all worked, the luggage carousels purred, and the rental cars were all BMWs, Mercedes, Audis, and VWs in excellent condition.  When we landed back in Newark, somewhat depressed by the return flight experience, the first escalator we encountered was, appropriately, not working. 

Of course, tourists usually see the best of what a locale has to offer.  But the same can be said of where I live in the US.  I spend nearly all my time in areas that cater to tourists and are analogous to the areas I’ve visited in Europe.  ( I know, pinch me!)  That said, I am blown away by the level of construction and the quality of the properties in Europe.  You cannot even compare high-end construction in the US with the same level in Europe.  What we call the finest door or window in the US wouldn’t even qualify for a shed in prosperous parts of Europe.  The same can be said for just about every detail in high-end construction.  Europeans build for the long run.  In the US, most of what we build is disposable and reflects that. 

Infrastructure in Europe also wins hands-down over the US.  Trains throughout Europe are superior, even in the indebted countries like Italy and Spain.  They run on schedule, go fast, and can take you (and your bike and dog) just about anywhere.  Roads, funiculars, cog railways, and even hiking trails have been built and are maintained to an amazing degree in the most inhospitable of places.  Autobahns are plenty smooth at even 100mph.  You can hike for hours up just about any mountain in the Alps, and chance upon ancient Inns that are only accessible by foot (or now helicopter), and get a beer, a delicious meal, a hot cappuccino, and often a room. 

On the technology front, again a mismatch.  I’m proud that much technology originated in the US, but Europe has adopted it as well as anywhere.  Smart phones, computers, and broadband internet are ubiquitous.  Some things however haven’t made it the other way across the pond.  Anyone who’s stayed in a European hotel knows that the key card must be inserted before the power goes on.  How many coal fired plants could we do without if we adopted this simple idea?  European waitstaff enter orders digitally and remotely, accept credit cards remotely, and hence can serve more tables more efficiently than we can with our centralized and more manual systems.  I believe this is a consequence of the European custom where the waitstaff works for the restaurant and is paid a salary, versus the US custom where the waitstaff largely works for the diner via tips (a system I prefer as a diner, btw).  Seems to me better efficiency would benefit restaurants and diners, but this technology has not been adopted in the US. 

Back when I first visited Europe in 1974, the rap on the old world was that you couldn’t find decent toilet paper and the commode would likely be a hole in the floor.  No more.  On this trip I encountered a public bathroom halfway up a mountain, in Italy no less, that practically wiped your bum for you.  Electronic toilets, electric doors, faucets that both washed and dried your hands, and door handles that changed color to indicate occupancy.  It was a level of technology and excellent design in a public restroom I’ve never seen anywhere in the US. 

So, how is Europe able to have bigger government, more redistribution, more regulation, hence less economic freedom, and at the same time produce tangible things that are superior to ours?  The answer is that they do not necessarily have less economic freedom.  Despite the best intentions of our founders, in many ways Europeans today are the economically freer people! 

For twenty years now The Heritage Foundation has published a ranking of countries based on economic freedom.  At current standing the US is #12.  Switzerland is #4.  Overall, four European countries beat the US:  Switzerland, Ireland, Denmark, and Estonia.  Of the top twenty, ten are European.  And yet, I believe Heritage understates Europe’s economic freedom and overstates ours. 

Wherever you go in Europe you see things you would never see in the US.  Swimming pools have diving boards, hotels have trampolines, and in the Alps, parapenters (hang gliders) and squirrel suit flyers are everywhere.  Sometimes people die or are injured doing these things, but Europeans are free to take these risks, and businesses are free to offer these experiences.  A tort system that supports litigious actions effectively limits our freedom in the US without specific laws banning behavior.  I once tried to rent a mountain bike in NJ but was told insurance rates due to litigation made that impossible.  The result is a loss of freedom and economic freedom.  Heritage does not account for the effects of our tort system and our lawsuit culture on economic freedom. 

Also, remember how we were supposed to be the country specifically designed to have limited government and unprecedented liberty?  Remember how that was the thing that made us “exceptional”?  Well, according to my calculations, six European countries have more limited government than we do, and some of them are prosperity powerhouses:  Switzerland, Slovakia, Estonia, Poland, Ireland, and Norway (which is tied with the US).   Moreover, three more are within the margin of error:  Luxembourg, Czech Republic, and the industrial powerhouse of Europe, Germany. 

(*This is a larger list than the one Heritage arrives at.  See note at the end for a full explanation of the method I use versus the one Heritage uses.)

Sure, not everything in Europe is awesome.  There are slums in Europe just as there are in the US.  Having fast trains, nice buildings, great cars, and amazing infrastructure doesn’t create a classless society.  To do that you have to go full Socialist, or full Communist, and then you end up with none of the above, except of course the slums and a few grand palaces. 

Here’s the upshot: 

Europe is highly decentralized, being made-up of sovereign nations, often with semi-autonomous regions within those nations.  The US is now highly centralized with states that have fewer rights than ever in our history.  Decentralized systems are inherently more resilient.  Europe is a place where you can find limited government, reasonable regulation, democracy, human rights, personal accountability, prosperity, freedom, rule-of-law, etc. all in one place, though certainly not everywhere.  The US is a place where you cannot find all those things to that degree in a single place thanks to centralization.  Advantage Europe. 

Europe now does its redistribution in the right place thanks to the Euro - away from the political entity that prints most currency (The ECB).  The US redistributes at the federal level where it also prints it’s currency setting up a fatal conflict of interests.  National debt per capita is currently $30,504 in the Euro countries.  It is $55,228 in the US.  Advantage Europe. 

Europe is a place where citizens can drive as fast as they please, but they are accountable.  The US is a place where the federal government dictates driving speeds.  Europe is a place where public swimming pools have diving boards, hotels have trampolines, and citizens are accountable to use them responsibly.  The US is a place where its citizens are denied many freedoms due to a litigious tort system and centralized federal power.  Advantage Europe.

The US has the highest corporate tax rate in the industrialized world along with a tax system that seeks to tax foreign earnings as well as domestic.  European countries only tax earnings in their own country, hence many US companies are doing"inversions" where they merge with smaller European companies and move their headquarters there.  Advantage Europe.

Europe produces better stuff, and in many ways, a better standard of living.  They just do.  Much of this is cultural, but the result is undeniable.  Advantage Europe.

I used to maintain that the US was a place with unmatched adherence to the rule of law, a constitution that protected our rights, limited government, economic freedom, and a future second to none.  Now I admire Europe. (With a caveat for demography, although ours isn’t looking too good either!)

(Update - Certainly one reason Europe produces better stuff is due to history; Europe, and especially Germany, have a highly evolved Guild System in place, which has been churning out the world's best tradesmen and craftsmen since before Columbus sailed to the New World!  But that does not diminish the role of economic freedom in determining the quality of goods in a nation.  All one need do is look at the examples of East and West Germany, or North and South Korea where similar cultures resulted in radically different outcomes due to freedom, both political and economic.

Also, whenever discussing economic history, particularly when comparing the US and Europe, the role of WWII must be acknowledged.  A major reason for US economic power in the post WWII world was due to the fact that we emerged the largest intact industrialized nation by far.  Europe and Japan were smoldering ruins, and China was still in loincloths.  Those days are long gone, yet we are still enjoying the fruits of that post WWII world with our dollar being the world's reserve currency.  Imagine how our $18 trillion debt will look if the dollar loses that status?)     

*Note on government spending:  My ranking of government spending differs from Heritage’s in two ways:  I compare government spending (all federal, state, and local) to just the private sector portion of GDP for all countries.  Heritage uses both the public and private part of GDP in the denominator, which is problematic especially in measuring the US, which has been on a money printing, borrowing, and stimulus binge.  To correct for this, I consider only the private portion of GDP (GDP less Government Spending) for all countries.   The Heritage formula is, Total Government Spending divided by GDP, and mine is Total Government Spending divided by (GDP less Government Spending). 

Also, Quantitative Easing is not specifically accounted for in Heritage’s government spending numbers.  I do include it because it is government spending. 

For a full explanation of my method see “The True Tax Rate is 70%!” 

All numbers come from the OECD (Organization for Economic Co-operation and Development) data.  (not all European countries participate in the OECD)

The Immaculate Recession

Two days ago, on June 25^th 2014, the third update to GDP numbers was released for the first quarter of the year, and the latest numbers show a GDP change of -2.9%.  This is pretty amazing since the consensus opinion going into the quarter was for +2.5%, the advanced estimate in April was for +0.1%, the first revision in May was for -1%, and now the second revision in June is a whopping -2.9%!

Even in a business like economic forecasting and reporting, which is known for being particularly dodgy, this discrepancy is unusual.  But there may be a simple, though not comforting, explanation for this wild swing. 

Consider that the official definition of a recession is two consecutive quarters of negative GDP growth.  Therefore, the lower the first quarter, the easier it will be to avoid the “R” word when the second quarter is reported.  For example:  if the first quarter had actually been -1.5% and the second quarter comes in again at -1.5%, that would ring the recession bell and the overall 2014 GDP would be -1.5%.  But if the GDP really is -1.5% after two quarters, and the first quarter is reported as -2.9%, then the second quarter can be reported as +1.4%, and no recession will have officially occurred!  Call it the immaculate recession. 

Now you might be saying, “that’s ridiculous , the Bureau of Economic Analysis (BEA) is a highly respected non-partisan government agency which would never manipulate official numbers to benefit incumbents during an election year!”  Yeah, tell that to the victims of the IRS, FDA, FBI, INS, DOJ, NLRB, NTSB, Fish and Wildlife, etc, etc, etc. 

Update: Oh, and remember this?  Census "faked" election 2012 jobs report.

Obamaball

In light of the recent celebration surrounding the drop to 8.3% unemployment, I am reposting "Obamaball" which first appeared 12/21/11.   

Have you seen the movie “Moneyball” or read the Michael Lewis book by the same name?  To make a long story short, it is a true story about winning baseball games without superstars by taking a deeper look at the statistics and analyzing them in a better way.  Baseball and economics share a fondness for statistics so the question arises, could economic statistics reveal a similarly undiscovered strategy for the economy like what Oakland General Manager Billy Beane did in “Moneyball”?  Moreover, could the President's economic plan, “Obamaball”, be that strategy?  

Baseball stats and economic stats are not all that comparable.  In baseball there have always been nine members on a team, ninety feet has always been the distance between bases, sixty feet six inches has always been the distance from the mound to the plate, the bat is always wood, there are three outs, three strikes, four balls, nine innings, and so forth.  Therefore, an ERA has always been an ERA, an AVG has always been an AVG, and R, H, and E have always been R, H, and E.   

If only things were as simple in economic statistics, especially since the big ones all come from the government.  Unlike baseball, the government is always changing how they measure and what they measure.  Sometimes the statistics change because of an unintended consequence from a change in a law.   Sometimes it is for practical reasons.  And sometimes it just seems political.   After all, government economic stats come from the very government they sit in judgment of!

Here are four key statistics which form the basis for much of the economic rhetoric heard today.  In all four cases these statistics fail the baseball test.   

•       Inflation (CPI)– Not only has the Bureau of Labor Statistics changed the way it measures inflation over the years, notably in 1980 and 1990, but they cannot avoid relying on prices for manufactured imported goods which tell us more about foreign labor markets and regulations than they do about our own currency.  When these changes are backed-out, the actual inflation rate is about 2.5% higher than what is reported.  What makes inflation so problematic is that all other measures of economic performance are “inflation adjusted” and thus dependent on an accurate inflation number to start with.  Even corporate earnings must be weighed against an accurate inflation measure.

•       Economic Growth and Recession  (GDP) – GDP numbers are all adjusted for inflation too and thus suffer the effect of any inflation inaccuracies.  That is why a 2.0% annual growth rate based on a “GDP Deflator” which is under-measured by 2.5% feels exactly like, well, a -.5% growth rate.  That is how GDP can be reportedly rising by 2% yet polls can show most people believe we are still in recession.  The people are probably right.

•       Unemployment (U3) – You’d think that “unemployment” would be a cut-and-dried statistic:  “The number of people not employed as a percent of the labor force”.  But that’s not how the government does it.  In fact, if every single person in the US was collecting unemployment, disability, welfare, food stamps, or some other form of assistance but not actively seeking a job, the official unemployment rate in the US would be…0%!  The way we measure, we could have no one working and still have zero unemployment.  If we corrected for just this issue and undid the error back to Barack Obama’s inauguration, the real unemployment rate would be 11%.  If all the nonsense is removed, the actual number is close to 23%.    

•       Income Inequality (1% vs. 99%) – Much of the recent rhetoric about the 1% vs. the 99% is based on a CBO report from October of this year, which has numerous issues.  In order to measure income inequality, the CBO used a government measure based on income tax returns from 1979 to 2007.  Not 2010, which should have been available, but 2007, right before the financial meltdown in the midst of a bubble!  Second, many returns in the top brackets include corporate pass-through income, which is a recent phenomenon and makes income tax returns meaningless for measuring changes in personal wealth.  Moreover, tax rates changed constantly from 1979 to 2007 making any trends difficult to discern.  These are just a few of the problems making this CBO report useless for analyzing trends.

And then there’s the economic analysis.  Here are four big economic issues and the current administrations analysis along with some questions.    

•       Arguably the biggest economic issue of our time is the financial crisis of 2008 and its aftermath.  According to President Obama’s analysis, greedy fat-cat bankers largely caused the whole thing.   Isn’t that like blaming a plane crash on gravity?  Aren’t gravity and greed constants?  Are bankers today greedier than they were, say, in the 1950s?  Were there any sub-prime loans back then?  Where did sub-prime loans come from?  Wasn’t the President part of the chorus demanding sub-prime mortgages in the 90’s and didn’t he then protect and subsidize the dangerous practice through his support of Fannie Mae and Freddie Mac as a US Senator?

•       Once the analysis points to greedy bankers, it’s a short leap to blaming the continued malaise on the same class, which the President has made the theme of his re-election campaign.  So what has prevented Obama from stopping the greedy and the rich from continuing the malaise?  Didn’t he have two solid years of filibuster-proof control of the entire federal government?  Didn’t they pass Dodd-Frank?  How then can he explain MF Global and Jon Corzine (D-NJ), the newest example of greedy fat-cat banking failure?  Why did Obama and the Democrats keep the Bush tax cuts “for the rich” back in 2010 when they were set to expire?  How does this all add-up?  

•       If greedy bankers caused a financial crisis, what better way to fix it than to go on a 5 Trillion dollar spending and borrowing binge, right?   Who will pay for the extra 5 trillion in borrowing? Does that even matter as long as the inevitable collapse is timed to occur after the Obama reign?  Can “the rich” possibly make-up the difference if the top 10% of the country earn 40% of the income and pay 70% of the income taxes already?

•       If the financial crisis was due to greedy rich bankers, then the healthcare crisis must also be caused by greedy rich insurance companies and greedy rich doctors, right?   What better way to fix it all then to put the federal government in-charge of the whole thing?  Aren’t Medicare and Medicaid both disasters from a sustainability standpoint?  How can putting the same government in-charge of the entire industry be a good thing?  How can Obama claim the “free market” has failed in healthcare when it hasn’t been involved in healthcare since WWII when employers got to deduct premiums but individuals did not?      

So this is it in a nutshell:  President Obama, the General Manager of our team, has looked at the statistics, done his analysis, and believes he has saved us from a Great Depression, free markets don’t work, greedy rich people caused all the problems in the first place, the government’s job is to re-distribute wealth, and borrowing 5 trillion is OK as long as it blows-up on someone else’s watch.  

Welcome to “Obamaball” where all the stats are rigged and all the analysis is wrong.