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)

Subprime Nation

(This graph is a modified version of one I posted earlier.  I think it is worth revisiting as I get back to actively blogging after a hiatus.)

Since the financial crisis in 2008, we have known that one of the key reasons for the collapse was that the new breed of subprime mortgages and their derivatives were completely misunderstood and assumed to be as safe as mortgages had historically been.  (There's an old joke about what happens when you assume...)  Rather than treat these new subprime beasts as risky and different, the prevailing assumption was that they would behave just like the old 30 year fixed rate mortgages had, when borrowers had real income, real assets, real down payments, and real equity.  Big mistake.

We may be living a repeat of this kind of error, only this time it has to do with government spending.  Since 2008, Ben Bernanke's Fed and Barack Obama's government have presided over an historical explosion in government spending as a percent of the private sector.  Like subprime mortgages and derivatives back in 2007, we have no historical basis for understanding this kind of explosion in peacetime spending.  Even during the Great Depression nothing like this happened.

Two other times in history reveal large bursts in government spending - WWI and WWII.  The difference is, after both those wars the US enjoyed an unchallenged perch atop the world economy - Europe lay in ruin as did Japan after WWII. China was yet to be a world economic power.  That's not the case now.

Another issue:  What has been achieved by all the spending?  In WWs I and II,  we achieved something of lasting value - survival, peace, victory.  Today we are spending at world war levels and achieving little more than an illusion of prosperity.  The politics make sense if not the economics.  By delaying the effects of runaway spending, politicians are shielded from ever being associated with the borrowing and money creation catastrophes they've created.    

What all this means is that we are in uncharted waters.  Just like subprime mortgages in 2007, the conventional assumption is that there is nothing dangerous about peacetime spending at this level and we will be able to taper or unwind without incident.  I was a skeptic back in 2007 during the subprime boom.  I'm a skeptic now too.

(Note on the graph:  Quantitative Easing is included as government spending in the years it occurred, 2008 - 2013.  That's because it is government spending!)          






         

The Scariest Graph You'll Ever See

Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax ... If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income... 

--Milton Friedman - from a speech in 1980 titled "Money & Inflation"  (herein referred to as "The True Tax")

So why is this graph so scary?  Unlike the spikes during WWI and WWII, Obama and Bernanke's spike occurred during relative peacetime.   We are not fighting an all-out global war like WWI and II.  We are just spending our kids money on ourselves.   The Great Depression itself shows no equivalent spike in government spending.  

 

Notice the three most prominent recessions in our history (Recessions appear as spikes in the blue state and local part of the graph):  two are during the Great Depression and the other is now.    Is it a coincidence that those historic recessions coincide with the ascendency of the two presidents most known for wealth redistribution, Franklin Roosevelt and Barack Obama?

Roosevelt stuck with his redistribution, which contributed to the second recession four or five years later.  Barack Obama is similarly sticking to his redistribution.  

People don't need graphs to sense something is wrong.  They are already doing the rational thing and dropping out of the work force.

The Federal Reserve has indicated it will continue spending $85 billion a month on its bond buying spree.  ObamaCare is shaping-up to be a budget busting, job killing, economic drain.  Could we be repeating history, only this time with a $17 or $18 trillion debt?  How long can a nation discourage its workers and maintain government spending near 70% of the private sector?

Another recession may be the least of our problems.

  

Notes on the graph:  

The above graph shows total government spending from 1900 to present as a percent of the private sector.  According to Milton Friedman's explanation above, this is the true tax rate.  The red represents US federal spending as a percent of total private sector income.  The blue represents state and local spending as a percent of total private sector income.  The cumulative shows the true tax rates for the country as a whole.

Quantitative Easing I, II, and III are included in  federal spending for the years 2008 through 2013.   Quantitative Easing is not included in traditional government spending figures nor has it shown up in the money supply as of yet, because the Fed is paying the banks to sit on it.   This money, amounting to $3.2 trillion currently, is nevertheless money spent by the federal government and therefore has been included here.      

I have labeled the years 2008 - 2013 as "Bernanke /Obama" and not as "Financial Crisis" or "Subprime Mess".   The recession officially ended June of 2009, before President Obama's policies had any effect.  Yet the TARP spending, Quantatitive Easing,  Stimulus, and regulatory blowout continued unabated, and in fact continues to this day.

(For a full explanation of the "True Tax" read  "The True Tax Rate is 70%!") 

Updated 2/18/14 to better reflect the precise timing of QEI - QEIII.