Scott Sumner  

Is Europe becoming more like the US?

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America Takes Over the World--... Separation and Dr. Pangloss...

A new article in the Financial Times got me thinking about the US and Europe:

Portugal is the EU country hit hardest by a Europe-wide demographic problem as falling fertility rates and ageing populations threaten economic growth and the provision of pension, public health and elderly care services.

The looming crisis, described in one newspaper editorial as "a perfect demographic storm", results from a combination of Portugal's plummeting birth rate, a deep recession and a wave of emigration that is fast turning the country into a society of one-child families. . . .

Portugal's fertility rate -- the average number of children in the population for every woman of child-bearing age -- has been falling, from three in 1970 to 1.21 in 2013. This is the lowest level in Europe, with only South Korea having a lower rate among the 34 mostly wealthy nations in the OECD. . . .

"The high rate of youth employment and a precarious job market are critical factors in deterring young couples from having children," says Maria Filomena Mendes, a sociology professor and president of the Portuguese Demographic Association. "At the same time, many young people are emigrating at an age when they might otherwise have been starting families in Portugal."

Between 2010 and 2014, Portugal lost 198,000 inhabitants, close to 2 per cent of its population, as the number of deaths exceeded births, emigration rose to levels unseen since the 1960s and immigration slowed to a trickle. As the OECD put it in a recent report, "a further fertility dip is evident in Portugal since the onset of the financial crisis".

If nothing changes, the worst-case projection by the National Statistics Institute (INE) sees the population of Portugal dropping from 10.5m to 6.3m by 2060, while the number of over-65s for every 100 under-15s -- the so-called ageing index -- would soar from 131 to 464, the highest in Europe.


There's a lot of discussion about the differences between the US and Europe, and how those differences explain the failure of the euro. I partly agree, but think there's much more that could be said about the subject. Here are a few scattered thoughts:

1. The US has traditionally been more ethnically diverse than Europe, and that is still true today.

2. Europe has traditionally been more egalitarian than the US, and some attribute the difference to the greater diversity in the US. The most pointed accusations suggest that in the US, whites fear that welfare spending would go to African Americans and other minorities.

3. In the EU there seems to be very strong resistance to fiscal union, with "the North" especially fearful that southern Europe would require frequent bailouts. In my view this supports the claim that the greater egalitarianism in Europe was at least partly due to greater homogeneity within individual countries.

4. It's possible that the modern welfare state simply doesn't work in some cultures. Perhaps as the weaknesses become apparent, people flee the resulting austerity. Then places like Portugal and Puerto Rico go into a sort of fiscal death spiral, which can only end with either mass emigration and default, or fiscal union.

5. The EU is becoming much more diverse. This claim is rather vague, as there's still not all that much racial diversity. Rather I'm making a (subjective) claim that the ethnic or cultural gap between Germany and countries like Greece, Portugal, Bulgaria and Romania is much wider than between Germany and Austria, Denmark and the Netherlands. As the EU expands, the new members show greater cultural diversity. In that sense the EU is becoming more like the US, although it remains significantly less diverse. If Serbia and Bosnia and Macedonia and Montenegro and Kosovo and Moldova and Belarus and Ukraine and Georgia and Armenia and Turkey later join, it will become still more diverse.

6. As the EU expands, and becomes more ethnically diverse, it also becomes less equal. There are enormous gaps in living standards between places like Bulgaria and Portugal as compared with Sweden and the Netherlands. If we were to use an American analogy, an average European country like Spain is about as rich as an ethnic group like African Americans. European groups like the Roma are so poor that there is no American equivalent, except perhaps on some of the poorest Indian reservations.

7. If blacks, Hispanics, Asians, Native Americans and other minorities formed self-governing enclaves within the US, then the US economy would look more like the EU. But don't be too hasty in assuming you know what that would look like. Black America is not just "Detroit"; it includes lots of middle class suburbs of cities like Washington and Atlanta. As I just indicated with the comparison with Spain, black (and Hispanic) America is not poor in an absolute sense; the average incomes are comparable to an average European country. (Of course many minority areas face other societal problems that don't show up in crude (PPP) income comparisons.) Nonetheless, I believe that some of these minority enclaves would struggle in a fiscal sense, for much the same reason that southern Europe struggles, despite being in an absolute sense much richer than Bulgaria, or indeed most of the world. It's quite possible that the European welfare state model only works in northwestern Europe, Japan, Canada, Australia and New Zealand. Not in the US, not in Brazil, and indeed not in 95% of the world.

8. It seems to me that Europe stepped right up to the edge of moving on a track to becoming the United States of Europe, didn't like what it saw, and lurched back for essentially nationalistic reasons. Call it the impossible trinity: Big welfare states, fiscal union, and cultural diversity--you can only have two. The EU realized it would have to get rid of one of the three. America progressives were outraged that they stepped back from fiscal union, and didn't write Greece a big check. But the alternatives were a polite version of ethnic cleansing and/or getting rid of the welfare state---I doubt American progressives would have approved of those choices either. Didn't the German finance minister want Greece out of the euro? That's the "clean" solution.

9. Indeed I don't think American progressives who love Bernie Sanders and want us to become a big diverse version of Sweden have any idea of what they are up against. Their project will fail. If they don't want it to fail in a Donald Trump direction, then I'd suggest they rethink their views on the applicability of the Swedish welfare state model to America.

There's one weakness in the preceding argument---elsewhere I've argued that the euro is the key problem, not the impossible trinity. I still think the euro is "a" key problem, but the FT article on Portugal made me wonder if the problems aren't even deeper.

This post is speculative; I'm not at all confident that it is correct.


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COMMENTS (12 to date)
Jean writes:

Ha! I've lived in both Germany and Bulgaria - hard to believe the differences in the two cultures; night and day. You're on the right track, Scott, but the one issue you're missing is that the 'European' identity is essentially negative - "we aren't Americans!" The US is a contractual society - anyone can become an American (I have) by fealty to the Declaration of Independence, the US Constitution, the Federalist Papers and what these stand for. A charter which constrains (theoretically anyway) the government. Negative rights.
The EU constitution is an abomination which outlines many, many positive rights, and in no way at all constrains government. I doubt you could find anyone in the EU who would be willing to fight and die for the blue flag with the yellow stars.
Tribalism - it's what's for dinner.

ThomasH writes:

I do not see the link to the big welfare state, fiscal crises, and falling birthrates.

How much of the problems with the European welfare state lies in financing it with wage taxes rather than taxes on consumption with the proceeds invested prudently and benefits paid in accordance tax and interest income?

I do not know about "progressives" but my anger at the Troika's management of the Greek economy over the last 5 years has been that none of the programs have included instruments to shift resources from producing for government consumption to exports so as to maintain full employment. The Troika's management of Greece is worse that Chavez/Maduro of Venezuela.

Jean writes:

ThomasH - you can't see the connection between the big welfare state and falling birthrates? Is it safe to assume you haven't had children?

Expressed preferences for most women are they would like two children - revealed preferences are (in Southern Europe) one child. Think maybe their very high tax rate has something to do with that?

Capt. J Parker writes:

Re:Dr.Sumners thought #9: My belief is that nearly all American Progressives, not just those who love Bernie Sanders, think that America should and can become a big diverse version of Sweden. They probably don't have any idea what they are up against but they think they do. What they think they are up against is one thing: bigotry - and they would not hesitate to make the claim that in the EU bigotry assumes the euphemistic title of nationalism. So, telling progressives to rethink their views on the applicability of the Swedish model to the US is, in their minds, telling them they must accept bigotry.
Maybe a better reason to tell progressives to rethink the US can be a big diverse Sweden is because "Sweden has been very aggressive in privatizing, deregulating, and having a very open policy for international trade and investment. Every single Swedish child is eligible to use vouchers to go to any school they wish." from: http://www.themoneyillusion.com/?p=16824

Scott Sumner writes:

Thomas, You said:

"financing it with wage taxes rather than taxes on consumption"

A wage tax is essentially identical to a consumption tax.

As far as Greece and Venezuela, I'd say you underestimate how bad things got under Chavez. In any case, Greece's problems are of its own making, it borrowed way too much.

Captain, You said:

"So, telling progressives to rethink their views on the applicability of the Swedish model to the US is, in their minds, telling them they must accept bigotry."

I guess I'm asking whether it's realistic to assume that America is able to do something that Europe has been unable to do. Previously progressives thought it was just a matter of us doing what the Europeans already did. I'm saying that now it appears they tried and failed to do what the progressives want in America.

R Richard Schweitzer writes:

Scott says:

2. Europe has traditionally been more egalitarian than the US,

From personal experiences over many years; that can only be taken as true if egalitarian means "making people more equal" (via one or more forms of socialism) rather than treating people equally.

Think about the relative conditions of social (and economic) mobility over the years among the various class groupings, by countries, ethnic, groups and overall.

If egalitarian, it is the wrong kind to be compared to equality in the U S.

Capt. J Parker writes:

Dr. Sumner, You said "Previously progressives thought it was just a matter of us doing what the Europeans already did. I'm saying that now it appears they tried and failed to do what the progressives want in America."

I agree but, here is what I think the counter-argument looks like:

Europeans succeeded at the nation-state level but failed at the Federal level because there was not a Federal fiscal union. We don't have this problem in the US. We already have a Federal fiscal union in spite of our diversity so, for progressives, there is no reason the Swedish model can't be applied to the US except for racially motivated resistance to expansion of government welfare programs and the taxes to pay for them.

I'll say again that European "nationalism" is in many respects synonymous with bigotry to American progressives so, to them, the failure to erect the impossible trinity of big welfare, diversity and fiscal union in the European Federation has the same root cause as in the US: bigotry, simple as that. If you accept the argument I'm making for progressives then your question becomes: Is it realistic to think we can overcome bigotries that the Europeans have failed to overcome. I'm sure every progressive would answer yes.

TravisV writes:

In the future U.S., perhaps government employment will decline, but the safety net will remain. Denmark Flexicurity?

In the future, as the U.S. becomes more diverse, will the voters oppose universal health insurance? Really? Will the voters want to make Social Security and the EITC much less generous? Really?

It's also not clear to me whether or not the tax code will be more progressive in the future.

Northern Europe (and the Nordic countries) is certainly more egalitarian than the US, but not the whole of Europe is. Maybe in a Gini Coefficient sense, but not in "different social classes get treated the same" sense. In my experience, Americans don't even really get the concept of social class, and think it's a fancy word for wealth or income. But in Europe, it's perfectly coherent to say that someone is "upper-class, but poor", in fact, a lot of British literature is about these people. Even Sweden, though, has the highest wealth disparities in Europe and a large fraction of of its political class is noble (as in, actual bona fides nobility).

In general, though, countries of Germanic culture are pretty egalitarian, though (if you're white).

*

Fiscal union might come, but there is as much push back against from Greece as from Germany, if not more.

Sure, the Greeks want a bigger check (don't we all?). And even after getting it, they'll ask for more yet (http://hugo-dixon.com/2015/08/15/greece-just-got-e55bn-debt-relief/), but they don't want a true fiscal union with shared governance.

Protesting against the Troika is protesting against fiscal union.

Noah Carl writes:

Good post, Scott. A European federal state is unlikely to be feasible in the near future: http://www.openpop.org/?p=1185

Mike Sax writes:

Speaking of Bernie Sanders he has his own race problems. More black Democrats choose staying home and not voting to voting for him.

http://polling.reuters.com/#!response/TR131/type/oneshot/filters/SC_RACE:2,PARTY_ID_:1/dates/20150718-20150818/collapsed/false

Scott Sumner writes:

Captain, You might be right, but I very much doubt it. I think we will continue to spend much less than Europe on welfare (except health (Medicaid) and education, which are seen as "deserved.".

Travis, Maybe, but your comment almost makes it sound like the US already has a European-style welfare state. I'm saying it's going to be hard to get Americans to accept government spending of 50% of GDP.

I hope you are right about flexicurity, but right now we aren't moving in that direction, just the opposite.

R. Richard and Luis, Good points.

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