European Policies = European Stagnation

By Dan Mitchell on August 29, 2024

I've written many times about how Americans are much richer than Europeans.

And I've also written many times that the U.S. economy has been growing faster (which shouldn't happen according to convergence theory).

There's a simple reason for America's superior performance. The U.S. is burdened by a medium-sized welfare state and a bad tax system while European countries are saddled with large-sized welfare states and crippling tax systems (other policies also matter, but fiscal policy is the main difference).

Today, let's look at more evidence. Here's a chart from Marc Andressen showing that the U.S. economy has dramatically out-performed over the past 15 years when compared to eurozone nations.

By the way, the U.S. has not enjoyed strong growth the past 15 years. The reason for the ever-growing gap is that Europe's economies are mostly stagnant.

Which raises the question of whether we should copy Europe?

I've answered that question several times, but I want to revisit the topic because Nicholas Kristoff has a column in the New York Times that asks whether America should become more like Europe. Here are some excerpts.

For liberals like me, Europe has often seemed a charmed place with sound lessons for America. Europe softened the harshest edges of capitalism, provided safety nets...universal health care, free or subsidized child care...University education is often free...six weeks of paid vacation, a year's maternity leave... Yet it's also only fair to point out that Europe is struggling today. The U.S. economy last year grew six times as fast as in the European Union, 2.5 percent to 0.4 percent. ...there isn't a single European company on one recent list of the world's top 10 tech companies by market capitalization. ...France offers...an enviable way of life. But if it were a state, it would be one of the poorest per capita, on par with Arkansas. ...Once the engine of the region, Germany is now sometimes dismissed as the sick man of Europe. ...if economies continue to grow at the current pace, by 2035 the average American and the average European will be as far apart economically as the average European and Indian are today... I fear that unless it sheds pointless but costly regulations, embraces innovation..., it may become less a model for the world's liberals than a warning.

Kudos to Mr. Kristoff for recognizing that Europe has major problems.

Though it seems that he puts most of the blame on red tape, when the real problem is fiscal policy.

That being said, my two cents is that America obviously should not be more like Europe. But I also don't think Europe should be like the United States.

Instead, both Europe and the United States should go back to the policies that made them rich in the first place.

P.S. Keep in mind that not all European countries are the same. There are some very statist countries and some relatively pro-market countries. Europe even includes the very sensible country of Switzerland, which wisely has not joined the European Union and the eurozone.