The Left vs Right Economic Model (aka Europe vs United States model)

My good friend Jon asked an important question: why not prefer the European economic model vs the United States economic model? I didn’t want to bog down his comments section with a long response, so I thought I’d post my longer response here.

Basically, there are two paradigms, two “visions” of an economy. The first, is generally considered left (or European): an economy with a large safety net, strong unions, and generally high taxes. The second, and my preferred, is considered right (or USA model): an economy with a large percentage of immigration, weak unions, weak safety net, and generally low taxes. The leftist economy tends to grow slowly. The rightwing economy tends to grow in a boom and bust way, with higher average growth than the leftist economy.So which one is better? Well that depends on personal preferences. The answer will be different for each person, depending on their personality (It would be like asking someone if they should join a union – it depends). If you are ambitious, entrepreneur minded, and generally a high achiever, you would prefer the United States model economy, where it’s easier to strike it rich (and, similarly, you would tend to oppose union membership). If you are someone who, for example, prefers small gains over large risks, and doesn’t have any ambitions to be CEO one day, you just want a steady pay with little growth – then the leftist economy is better for you (and, similarly, you would probably tend to favor union membership).

It’s kinda like asking someone should you invest their money in stocks or bonds? There is no right answer…it depends on the personality. Stocks give you better long term gains, but they are a lot riskier and volatile. Bonds are safer, but you sacrifice long term growth. It depends on the person (and age group – which is why the young around the world tend to prefer the USA, while the older Canada, see here).

Here is the important thing you have to notice about these two economies: they are mutually exclusive (please, click on the link and read the blog, it’s very pertinent to this discussion ). You can’t have a large safety net, for example, and a large immigration class. And you don’t need high taxes if you don’t have a large safety net. And you don’t get high growth with high taxes. etc. It’s all a domino.

So for example, in the United States, you have a dynamic corporate sector with one company rising to prominence in one decade, and going bankrupt in the next decade. Whereas in Europe, it’s usually the same companies, decade after decade (see here and here). Again, the United States model gives you boom and bust, with more growth, while the European model gives you steady growth, with less long term growth.

Or take immigration. Germany, for example, is not very friendly to the immigrant Turks (only recently, beginning to change, see here). And Germany – like the Scandinavian countries – is generally homogeneous (White).

More importantly,  these dynamics feed off of each other. Because safety nets are indeed zero sum – your welfare gain really is my loss – large safety nets foster an ant-immigrant culture (it’s the same reason that during a recession, anti-immigration sentiment increases – the people feel that in a time of scarce jobs, immigrants are “stealing” their job).

Matthew Yglesias, who lived in Europe, writes on the cultural difference between Europe and the United States:

There’s often a kind of conventional idea on the left that the United States is an unusually racist society. And I think there’s also often a kind of image of Europe as a place where more of the progressive agenda has been achieved than in the USA. But I think that you’ll find if you look at Europe through the eyes of the liberal agenda that while the German left has certainly been more successful than the American left at securing universal health care, it’s been much less successful at promoting a tolerant, integrated, multicultural society. And allowing for the errors implicit in making any kind of sweeping generalization, I’d say that’s pretty generally the case across Europe. …

In the US, in other words, racial problems have been more salient for a long time since we’ve been a racially diverse society for a long time. But by the same token, for all the problems we have with us today, we’ve made enormous progress over the years. Racial and ethnic tensions are a common problem in the world, and the United States manages diversity pretty well in comparison with other places (not just in Europe) even if we fall short in some absolute terms. Just look at Barack Obama. I think we’ll be waiting a while yet before someone of non-European ancestry is elected head of government in a European country. Denmark has some great public policy ideas, but it’s also kind of made itself into the gated community of nations in a way I don’t find particularly appealing.

Just look at this youtube video on Black soccer players to see how different race relations are in Europe compared to the United States.

The United States is much more tolerant of immigrants not because we are inherently different than Europeans, but precisely because of our smaller safety nets. Because immigrants that come here are largely excluded from our safety nets, we don’t feel that they come to steal our piece of the pie – instead they are viewed as coming here to enlarge the pie for everyone (unless of course, you are a poor Black person – in that case you do feel threatened from immigration, and rightly so – which helps explain the high anti-immigration sentiment in the poor Black communities) .

That is not to say that the European economic model is bad for everyone. I agree that some people probably are better off under the European model. If you are a White, not very ambitious member of the middle to lower upper class (think liberal arts university professors, or White union members), the European model probably is better for you than the United States model.

But liberals often speak as if all that mattered were White union members (another example of this is in the minimum wage debate), but immigrants and minorities count as well and so do the non union members (White or not) and the very poor and even the very rich. And so the question is: are they better off under the European economic model?  And on that I would say no. In addition to the exceptions mentioned above, the unemployment rate is significantly higher in European than in the United States (and especially higher if you have the bad luck of being a minority in Europe). And strong welfare nets notwithstanding, having a job counts for a lot (Highly recommended article here). It’s a source of self respect, pride and happiness. Furthermore, the unhappiness associated with being unemployed swamps out any happiness gains from the slightly higher job security gains of others.

And don’t say that ‘a couple percentage points of unemployment is worth it’, since even a couple points of unemployment could have a drastic affect on happiness levels. An economist explains: ‘Think about how hard it was to find a job back in January 2009 when our unemployment rate was 7.2%. The plight of the job-seeker wasn’t 30% worse than it was in May, 2008,  when the unemployment rate was 5.5%.  It was probably more like two or three times worse. Now imagine turning 7.2% unemployment into a way of  life.  It’s pretty awful to imagine, isn’t it?  Well, you don’t just  have to imagine it, because in France and Germany, 7.2% is normal.  The horror!”

So to summarize: the European economic model is better for low ambition White union prone citizens. It’s worse for immigrants and minorities of all  stripes. White non-union members. The United States model is better for those at the bottom and top of the economic ladder, and those who prefer risk and growth over stability.

37 Responses to “The Left vs Right Economic Model (aka Europe vs United States model)”

  • While I generally agree that less welfare and more immigration freedom is desirable (Brian Caplan has been discussing this lately), I don’t think it is entirely helpful to say that there are these “two” models, European and American. Lin Ostram has discussed how Sweden, even though it outwardly could appear to have something of a socialist appearance has a number of voluntary social institutions that have evolved outside of government that promote the welfare of their citizens. Swiss Cantons allow for a health care system that is much more robust than many others (while still far from perfect). It’s not that I disagree with anything you’re saying, I just don’t think that European and American style are descriptive enough.

  • Very true – and other parts of Europe are more capitalist, or “American”, than people realize. These are, admittedly, broad strokes.

  • The Europe Economic model has failed in an age of declining birth rates. If you look at any debt clock, the internal and external debt of Europe as a whole is several times greater than their GDP. They have failed to balance their books, and will never do so because Social Programs are not investments, but liabilities. The United States would be much better off to never copy their economic model. We may have the highest debt in the world, but compared to our GDP, its not unrepairable. Its like a rich man (USA) taking out a large loan vs a middle class (Europe) taking out the same loan? Assuming both keep their jobs, who has the better chance of paying it back?

    Also Unions were a big topic. I live in Georgia, and in the past 5 years the South is slowly growing into automobile manufacturing. The unions in the North have screwed themselves out of jobs. Volkswagen is making a new plant in Chattanooga just 10 miles from where I live and West Point Georgia has the newest KIA plant. The pay is on par with the Cost of Living in the South. There will be no Unions (state agreements with the companies). In fact most individuals in the South frown down on Unions based on their actions up North (yes we can read). So, in the case of Unions, no union is better and its actually helping boost the general economies in the South because of the fact that companies like that mentality and are moving to Georgia and Alabama and Tennessee and South Carolina for production.

  • J,

    Great point. This is precisely what union supported liberal Democrats have in mind when they raise the minimum wage – its an attempt to steal the South’s competitive pricing advantage.

    I blogged about that here. Here is a related quote:

    To think of this another way, it is important to note that the minimum wage was first passed at the national level in 1938, around the time of the second wave of the great depression. If you were to look at the voting record of that legislation, one of the things you would discover is that the northern senators voted almost unanimously in favor of the minimum wage and the southern senators voted almost unanimously against the minimum wage. The reason for that is that wages were alot lower in the south, the south being the part of the country with the most ex-slaves. So the minimum wage was basically set at a level above southern wages but below northern wages. The minimum wage was set by the northerners as a way to keep jobs in the north by preventing businesses from moving to the south to take advantage of the lower wages. Who paid for this minimum wage? Unemployment during that time was almost all poor southern workers, primarily black southern workers, who were basically priced out of the labor market (the minimum wage was also used to price women out of the labor market, see here ).

  • That is exactly true. Along the lines of minimum wage, employers want to pay as low as possible. On an individual level though, people are willing to take a certain amount: high or low. I, being a white college student with loans, would be willing to to take a job that pays lower than minimum wage and have done so before. It’s called extra cash for entertainment spending. The savings that a business gets from that can make it so much easier to higher another employee, or to eventually raise wage based on performance. But if the wages a business offers are too low, the business WILL NOT get any employees because who would want to waste their time working for too little. This is how an unregulated wage market, in which individuals can work out their worth with companies, works. Many companies after a while may even feel that your value is more than current minimum wage laws because your good performance has equaled higher profits.

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