Equity and prosperity, part 2

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Like me, Jonathan Chait also liked parts of Jim Manzi’s epic right-leaning prescription for combining competitiveness with social equity. But Chait also identifies a major problem with a pillar of Manzi’s argument—that the U.S. has dramatically outperformed Western Europe economically since the dawn of the Reagan era:

[S]ince 1980, the original 15 members of the European Union saw their real per capita income grow by 58%. Real per capita GDP in the United States grew by… 63%. And that measure actually overstates the difference. The European Union does not include Switzerland, Norway or Iceland — three countries that clearly qualify as European social democracies. Those three countries had 71% growth in per capita GDP since 1980 — thanks to Isha Vij of the Center for American Progress for pointing this out to me — which, if added to the EU 15, would bring the growth record of the United States and the social democracies even closer to parity.

When you add in the fact that income inequality increased more in the U.S. than in Western Europe over that period, and that Western Europeans work fewer hours per week and take more vacations, it starts looking like the past three decades have been better for them than for us. Manzi is certainly right that there’s been more economic dynamism in the U.S. than in Europe over that period—we’ve got Intel and Microsoft and Apple and Google and Facebook and Twitter and they’ve got a bunch of big companies that have been around for 100 years and, well, SAP and Vodafone. But that dynamism has not delivered faster growth in living standards. Which is a bit of a puzzle. It’s an article of faith in Silicon Valley and at the Kauffman Foundation and among most journalists who write about business that entrepreneurialism and creative destruction bring growth. But there’s no law that says that growth is going to stay within the country’s borders or be equitably distributed.

Which is where governments come in. By investing in infrastructure (both physical and intellectual) they can keep more of the benefits of growth at home and by redistributing some of the wealth generated by growth they can spread the benefits more equitably. I’m not saying most governments do this well, although the Scandinavians have come pretty close in recent years. But none of Manzi’s four big reform ideas (unwind the government’s holdings in private companies; go for simple financial reforms that separate risky and essential activities, not lots of new regulations; give more freedom to public schools to design their own teaching approaches and compete with each other; and think of immigration as recruiting) are necessarily incompatible with Western European- (or Canadian- or Australian-) style social democracy.

Update: Manzi links to his response to Chait in the comments. His key point would seem to be this:

If we do consider per capita GDP, as noted in the piece, “economic output per person is now 20 to 25% higher in the U.S. than in Japan and the major European economies”. As Reihan Salam notes in his blog post on this, as of 1980 the consensus was that the U.S. and Europe should be converging on a reasonably common level of economic output per person. The roughly comparable growth rates in output per person over the past quarter century represent the unexpected maintenance of a U.S. lead.

Yeah, but I’d be interested in knowing if we maintained that lead in output per hour, since Western Europeans have chosen less work (and more vacation) over more pay, while Americans have done the opposite. And I know, I could probably figure out the answer by spending some time here. But I’m going to choose less work instead.

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