On the 4th of July, thinking about what the US and Europe can learn from each other

A holiday re-run: There are surprisingly few tradeoffs between each continent's biggest successes

There’s been a sort of rolling dispute ever since the bombing campaign against Iran wrapped up as to how successful the US/Israeli effort really was in crippling the Iranian nuclear program.

I’m not sure what to think about this.

On the one hand, exaggerating his achievements is clearly something Donald Trump would do. So is ignoring or suppressing contrary intelligence findings. And that’s bad. It’s bad to suppress intelligence for political reasons, and it’s bad to lie to the public. So I have some inclination to play up credible reports that the attacks were much less successful than advertised. On the other hand, a huge part of the problem with the “bomb Iran” move is precisely that it runs the risk that it doesn’t work and then we get sucked into a logic of escalation and regime change. One could imagine a world in which a drumbeat of “Iran’s program isn’t really destroyed” becomes a rationale for intensifying the war, much as Iraq hawks became convinced that no amount of bombing and sanctions and inspections was satisfactory.

The best outcome here has always been that Trump makes a diplomatic deal and then, because he’s a blowhard, exaggerates how different the deal is from Obama’s deal. And then, because the Republican Party is a cult, they swallow it, and annoyed Democrats need to go along with it too. So lying about the success of the air strikes might be part of a constructive process. But I also think Trump’s brand of systematic dishonesty is really toxic. At any rate, it’s hard to write articles when you aren’t sure what you want to say, so I’m keeping this short.

As usual, we’re un-paywalling an older article for the federal holiday. This one is about the United States versus Europe, the many successes of our country, and the extent to which I believe we could learn from Europe in some key areas, without compromising on the stuff we are much better at. If you enjoy it, I hope you’ll consider upgrading to paid to receive all of our articles in full.

---

The United States of America is a lot richer, on average, than even the wealthier countries of Europe.

This reflects, among other things, the fact that Americans work considerably more hours per year than Europeans. In fact, if you go back 15 years or so, the difference in hours worked accounted for essentially the entire gap in GDP per capita between the US and places like Denmark or the Netherlands (though not Italy or Spain).

Whatever you make of that difference, it’s clearly a tradeoff: It’s nice to have more time off, but it’s also nice to have more money. Reasonable people can disagree about which is nicer, and even those with a considered preference for one model can acknowledge the genuine upside to the other.

Similarly, when I went to Denmark with progressive writers in 2009, many of them were scandalized by how expensive random low-end consumer goods were, thanks to the 25 percent VAT Denmark uses to finance its generous welfare state. As a visitor, you pay the high tax on your random purchases, but you don’t get the upside of free health care. As a resident, you would face a tradeoff — Danish people consume fewer heavily taxed goods, but get access to more subsidized goods.

But over the past 15 years, America and Europe have further diverged.

The United States, which started out richer, has seen faster productivity growth and opened up a GDP per capita gap with even the top Northern European countries that isn’t just explained by hours worked.

At the same time, a lot of things are better in Europe. Notably, Americans are dying at much higher rates than Europeans, and if offered the chance, I feel confident most of us would be willing to spend a lot of money in order to not die.

And what I think is interesting and important about this is that unlike money versus leisure, there doesn’t seem to be a tradeoff.

If you look at the reasons why the United States is richer than Germany, and at the reasons why Americans die younger than Germans, there’s no real overlap. Europeans could dramatically improve their economic situation without compromising their public health outcomes. And Americans could greatly improve public health without compromising our economic strength.

How America got so rich

The key to this, again, is that while Americans do work longer hours, our economic advantage is increasingly not confined to that. As Mario Draghi showed in his recent report on EU “competitiveness” (a concept I hate, but that’s a story for another time), Europe nearly caught us on output per hour in the late 90s, but has lost ground more recently.

The leisure tradeoff is real, but it explains less than 30 percent of the total gap in GDP per capita. The bulk of it is productivity.

This is important, because when Americans argue about European economic policy, we normally talk about their higher taxes and more generous welfare state. This has some nice features, but also some downsides. It makes some stuff cheaper and other stuff more expensive. It also very likely reduces hours worked, because both higher taxes and more generous benefits alter the cost/benefit calculus around retiring early or engaging in overtime work.

But the biggest drivers of the productivity gap don’t have anything to do with that.

One big factor is energy. European countries mostly banned fracking just when it was taking off in the United States, and Germany and other European countries have also moved to aggressively denuclearize their electrical grids. Superior European energy efficiency on the consumer side seemed like a big advantage back when the US was so heavily reliant on imported fossil fuels. But today, the US energy sector is an important driver of economic growth, while Europe has made itself energy poor and dangerously dependent on Russia.

The more notable driver, though, is the technology sector. Twenty years ago, the United States was already the clear leader in computer and software companies. Today, this sector just looms much larger in the economy than it used to. Eight of the ten biggest companies in the world are American, and of those, six are computer-and-software companies. The seventh, Tesla, emerged from the “tech” ecosystem, even though it’s a car company.

Silicon Valley (and to an extent Seattle) is the goose that laid the golden egg of the American economy. Europe really only has one big tech company, Spotify, and it’s just not that big — less than half the market cap of Adobe, to say nothing of the true tech giants. Poor countries become middle income countries by developing more advanced industries. Middle income countries become rich countries by developing even more advanced industries. Europe is quite rich and it has some major companies at the cutting edge of difficult industries, like pharmaceutical development and jetliner manufacture. But the most cutting edge industry cluster of all, the computer-and-software stuff that we call “tech,” barely exists in Europe, and it’s holding them back.

Why no European tech?

It’s important to understand that while there are certainly good aspects of the European social model, none of them strike me as reasons for Europe’s weak tech sector.

For starters, some of this is dumb luck. As Paul Krugman writes, it’s notable that from an economic geography standpoint, it’s not as if huge tech companies are sprouting up across the United States. They are very specifically located between San Francisco and San Jose in a pretty narrow strip of land. It just happens to be a strip that is located in the United States. California is, by all accounts, an incredibly annoying place to do business, and tech executives are constantly complaining about this. Nonetheless, they almost all stay there, being annoyed, because the agglomeration benefits of being in or near Silicon Valley appear to be very large — it’s why the most talented tech people from all around the world come there. Stripe was founded by Irish guys, but the company is in South San Francisco.

This is an important economic geography perspective, and just one of the reasons I’m excited to have Krugman on Substack.

Still, it’s not just whatever happenstance led to Silicon Valley. According to Dealbook, there’s more venture capital in Denver than in Paris, and more in New York than in the top two European cities combined. You might think this is a tax story. Leftists love to complain about billionaires, many of whom made their money as successful startup founders, so maybe the issue is that European leftists have killed startups with punishing levels of capital taxation. Except not really — the US has higher capital taxation than Germany or Italy or Spain, and the one European country with a successful tech startup is Sweden, which has some of the highest taxes.

So why don’t we see more investment and successful startups in Germany? Germany has lower capital taxation than the United States. It has a strong engineering culture. And it also has what seem to be a lot of rules and regulations that are fundamentally hostile to founding and scaling nimble companies.

Some of it is just wildly dumb stuff like the example in this tweet. And a lot of it is that Europe tends to have more and stricter labor market regulation. It’s more expensive and time consuming to fire workers in most European countries, which means it’s risky and difficult to rapidly hire a lot of workers. Oftentimes, smaller companies are exempt from the more onerous regulations, which is great for fostering an ecosystem of highly specialized family manufacturing companies, but terrible for birthing large-scale startups.

The upshot is that while I don’t think Europe could ever replicate the success of Silicon Valley, they could be doing a lot better. Greater Boston, which focuses on the sort of biomedical technology that Europe has a lot of strength in, attracts more VC funding than London. Munich, Europe’s number three startup funding city, has less than half the startup funding of San Diego. And critically, while doing better would require wrenching changes to European regulatory sclerosis, it would not require ditching the main aspects of the social model than American liberals find admirable: the universal health care and generous support for parents and young kids.

America could learn a lot, too

Conversely, if you look at where the United States is falling short, it has nothing to do with our success in technology and very little to do with our success in energy.

America has dramatically higher rates of homicide, drug overdoses, and car accidents than Europe and moderately higher suicide rates, as well. Americans are also a lot fatter.

To an extent, obesity is downstream of the United States being so rich. But broadly speaking — and unlike the leisure tradeoff — these problems are orthogonal to America’s success stories. Changing European business regulations to be friendlier to high-growth startups would not require European countries to flood their streets with concealed handguns. And the policy steps that would give America safer roads and fewer fentanyl overdoses would not require us to embrace European energy scarcity or labor market regulation.

And I would say that this is broadly true of positive aspects of European quality of life. If we followed Europe in allowing mid-rise apartment buildings with just one staircase, we could have more efficient floor plans and more courtyard apartments and small-scale infill. If New York built subways at the costs seen in Stockholm or Copenhagen, it could afford massive expansion of the mass transit system without increasing spending. The kind of high-speed rail planning that we see in France or Italy could make it much faster to travel around the Northeast, while releasing valuable New York airport landing slots for more planes from further away. It turns out that even though these issues related to transportation and building codes are near and dear to my heart, they are not as economically important as the ones that have given us the lead in technology and energy. Madrid is probably the world’s biggest subway construction success story, although this doesn’t, by itself, create high-wage industries in Spain. But it is nice to have. And critically, America’s key economic strengths would actually be greatly enhanced if we could cheaply expand mass transit in the Bay Area and the Northeast Corridor.

What’s more, high levels of violence in the United States aren’t just a life expectancy issue. Making cities like Chicago, Baltimore, and Philadelphia safer would unlock large amounts of affordable housing and improve economic dynamism.

Now, of course, even if you had the best of both worlds on both sides of the Atlantic, things would still be different. Europeans would have higher taxes and a more generous welfare state, working fewer hours and living in smaller homes with fewer consumer durable goods. America would have more wide open spaces and more really big metro areas but fewer dense mid- and small-sized cities. America would still lead the world in high-tech because the quintessential cluster is here. Even if our roads were safer on a per-mile basis, we’d be driving more and dying more on them.

But the broad point holds and I think is sobering: Americans could be enjoying much better health and longevity, with better housing and transportation options, without eroding our advantage in material prosperity, and Europeans could be dramatically richer without eroding the core achievements of their social model.