Europe vs. America: the grudge match

Tyler Cowen adds to the always-popular “Europe vs. America” debate. At stake is whether western European countries are going broke and should scale back their social spending (for example, here in Paris they have free public preschool starting at 3 years old, and it’s better than the private version we were paying for in New York), or whether, conversely, the U.S. should ramp up spending on public goods, as Galbraith suggested back in the 1950s when he wrote The Affluent Society.

Much of the debate turns on statistics, oddly enough. I’m afraid I don’t know enough about the topic to offer any statistical contributions to the discussion, but I wanted to bring up one thing which I remember people used to talk about but hasn’t seem to have come up in the current discussion (unless I’ve missed something, which is quite possible).

Here’s my question. Shouldn’t we be impressed by the performance of the U.S. economy, given that we’ve spent several zillion dollars more on the military than all the European countries combined, but our economy has continued to grow at roughly the same rate as Europe’s? (Cowen does briefly mention “military spending” but only in a parenthetical, and I’m not sure what he was referring to.) From the other direction, I guess you could argue that in the U.S., military spending is a form of social spending–it’s just that, instead of providing health care etc. for everyone, it’s provided just for military families, and instead of the government supporting some modern-day equivalent of a buggy-whip factory, it’s supporting some company that builds airplanes or submarines. Anyway, this just seemed somewhat relevant to the discussion.

P.S. OK, there’s one place where I can offer a (very small) bit of statistical expertise.

Cowen asks:

It would be an interesting exercise to construct an “imaginary Europe,” so instead of the current gdp of Italy you would sub in the output of a comparable number of Italian-Americans, and so on. The Swedish-Americans in Minnesota get subbed in for the Swedes in Sweden, and so on. I’ve never seen that done but I would like to know the answer, both with respect to per capita income and social indicators.

I’ve never seen this done either, and I’m not quite sure it makes so much sense. For one thing, there’s been a lot of intermarriage, for another, the ancestors of Italian-Americans weren’t a random sample of Italians (my recollection from the movies is that most of them were involved in the olive-oil-import business, or something like that); for another, it’s my impression that the-area-that-is-the-U.S. was richer per-capita-white-people than Europe, even in colonial times, so the implicit comparison seems to be missing something important.

Setting this aside, I just wanted to point out that this approach of putting together a composite comparison group has been done. See Section 3.2 of this article by Don Rubin, Liz Stuart, and Elaine Zanutto and this article by Alberto Abadie and Javier Gardeazabal. So if anybody does want to do Cowen’s suggested study, that’s a place to start.

7 thoughts on “Europe vs. America: the grudge match

  1. That paragraph of Tyler's made me wonder whether he's heard of synthetic control methods. If not, it's funny that he'd describe it almost exactly. In any case, the method used in Abadie & Gardeazabal (2003) has been made available as an R package, Synth:

    So creating a "synthetic Europe" should be possible in principle. Still, the notion that you could match Europe on nearly enough covariates to make the comparison meaningful seems less and less plausible the more you think about it. Even if you could, neither part in the debate really makes clear what the "treatment" of Europe is, which you'd need in order to identify an effect on the indicators Tyler refers to.

    None of this is to knock the synthetic control method. If anything, it forces the user to take seriously the huge amount of assumptions implicitly made in country-level comparisons. If people thought harder about how many assumptions are really involved, we probably wouldn't have this tired "Europe vs. America" debate so often.

  2. All of the debate on comparing GDP growth rates ignores a critical variable : debt. Most economists seem to agree that debt , public or private , that grows faster than the rate of the underlying economy has the effect of shifting demand forward , thus inflating current GDP growth at the expense of future GDP growth.

    Chest-beating re: U.S. economic performance over the last three decades is thus misguided , as are any inter-country comparisons that don't correct for the distorting effects of increases in debt/GDP ratios ( combined public plus private debt ).

  3. The technique Cowan describes was employed to compare levels of trust:

    Uslaner, E. M. (2008). Where you stand depends upon where your grandparents sat: the inheritability of generliazed trust. Public Opinoin Quarterly, 72(4):725 – 740.

  4. This issue reflects something about America: we choose to spend money on the military rather than society. We will spend over $7 Trillion over the next 10 years on military / security, given current spending levels and inflation. If we take out social security and medicare/medicaid, we spend 1/3 of our national budget on military / security.

    Europe choose to spend otherwise.

    It seems the issue of which society does better in terms of growth is a wash. The US population increased more so GDP increased more and yet even without that a number of countries in Europe performed as well as we did. Or better, if you look at Germany, for example, which became the world's largest exporter though having an economy 1/4 ours.

    In blunt words, there is nothing much to indicate that our system really generates better growth results. But there is much evidence that it generates worse results when you look past growth. The US has increased income inequality, with much of that in the top .1%. Despite "Tea Party" ignorant claims, the US is not more economically mobile and a number of measures – such as intergenerational – show the US is worse, meaning less mobile, meaning the poor stay poor. People in the middle have as much a chance of getting poorer as richer. I'm not going to do more than mention the lack of national health insurance.

    It seems the conservatives have tied much of their theology to the concept that our system generates higher levels of growth. If it does – and that is debatable – then the differences are marginal. So the question might be: accepting marginally small difference, are the worse social outcomes worth that small difference?

    My reaction is that this is not really the question conservatives want to answer because they actually feel that we as a society should not be giving things, like health insurance, to the undeserving. I believe racial and class overtones dominate and that talk about economic growth is what consultants might describe as the "espoused" reason.

  5. It is the military spending. Taxes in the US are surprisingly high compared to taxes in Europe when you include state and local taxes (most of the comparisons you see in the media omit non-national taxes for the US but include them for the European totals).

    The conservative rejoinder here is that Europe is getting a "free ride" on US military spending, because we are defending them. This was sort of a valid point twenty-five years ago. European military budgets are quite large, but they don't spend more on the military than the rest of the world combined, so they look small compared to the US. There is also the question of why the US is paying for Europe's defense, if that is what is happening, twenty-five years after the collapse of the Soviet Union.

    The point about the US economy generating high growth rates even with the the high military spending is a good one, and indicates that there are some policy areas where the US takes a better approach than Europe. But the comment above about the debt was a good one.

    The social spending question is really a red herring, something relevant in the 1980s but not so much today. For example, there is alot to criticize about the US healthcare system, which has nothing to do with whether or how poor people receive medical coverage. But the discussion tends to be framed solely around that one issue.

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