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Europe is not so backward after all Samuel Brittan: Financial Times: 30/07/04 For many decades Europe has had an inferiority complex about its economic performance relative to the US. This is partially justified, but its implications are far from clear. New light is shed in a paper by Robert Gordon, an American economist*. The most basic index of performance is real gross domestic product per hour worked ("productivity"). The gap here appeared early in the 19th century and continued to widen until about 1950. For most of the subsequent period Europe has been catching up. There is nothing startling about the list of US advantages detailed by Professor Gordon. Often overlooked is the high ratio of land to labour that the US began with and never quite lost. This contrasted with "Europe's historical legacy of small fields carved up by ancient rules and even old walls", some of which are still visible to an airline traveller. Cheap land and scarce labour in the US provided a strong motive to buy, install and invent labour-saving machinery and mass production. Prof Gordon mentions frequently overlooked social factors such as a common language and the motivation of self-selected immigrants. Thus the US could exploit much more quickly the great inventions of the early 20th century. A novel aspect is Prof Gordon's emphasis on political unity, which allowed the US to exploit its raw material advantages, while in Europe liberalising trade was a slow and uncertain process. As late as 1863 the Netherlands levied high tolls on traffic on the river Scheldt to protect Rotterdam from Antwerp. There were always limits to European free trade while there was a possibility of war between individual countries. Prof Gordon finds more revealing the postwar acceleration in European productivity. Much of this was of course catch-up with the US. He assigns a crucial role to postwar trade liberalisation and the establishment of the European Economic Community. It happened long before there was any talk of a single currency or of extreme policy harmonisation. But since 1995 US productivity may have started to pull away from Europe again. He attributes this not only to the US lead in information technology but also to a productivity spurt in areas such as retailing that Europe cannot match because of its greater shortage of land and hence more restrictive planning requirements. But the most interesting aspect of his paper is his discussion of how much the gap really matters. European output per hour is now 93 per cent of that in the US while output per capita is a much lower 77 per cent. The difference between the two measures is attributable to longer hours in the US, to lower unemployment there and to higher labour force participation. If the differences merely reflected a European preference for leisure or early retirement by individual citizens, there would be nothing to complain about. Prof Gordon's guess is that a third of the difference reflects voluntarily chosen leisure and the remaining two-thirds reflects laws and practices that have priced European workers out of the labour market. When Prof Gordon turns from crude GDP to welfare, he is not so sure. He suggests that not all the higher US GDP is welfare-enhancing. Some of it involves fighting the environment: for instance, heating and air conditioning to combat a more extreme climate. Some of it, too, goes on a higher level of home and business security to protect against crime or to maintain 2m people in prison. He speculates that the Europe/US economic gap might well be reversed by a broader welfare measure. At Prof Gordon's level of aggregation, the difference between, for instance, the eurozone and the other European countries disappears. A superficial glance at the indices suggests that the UK has the worst of both worlds. It has roughly the same output per capita as Germany and France but this is achieved, despite lower productivity, with longer hours, longer working lives and less leisure, on American lines. The history of successive British governments' attempts to close the productivity gap should make one cautious about any rush to emulate some fashionable model, whether that of Germany in the 1970s, Japan in the 1980s or the US today. It should also make the British government cautious about lecturing other EU countries about its supposedly superior economic performance. My own assessment is that the US and at least north-west Europe have now reached a stage of development where there is little to choose between them in economic performance and where growth is no longer the most sensible policy objective. If the "European social model" is to be criticised, it is because it restricts freedom of choice. * Two Centuries of Economic Growth, CEPR discussion paper 4415
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