European industries seem to have higher entry costs, and with them lower turnover rates: 50% of new pharmaceutical products in America come from firms less than ten years old, against only 10% in Europe; 12% of the biggest US firms by market cap at the end of the 1990s were less than 20 years old, against 4% of the biggest European firms.
Here is more. Here is a more general piece on the latest growth news out of Europe.
“50% of new pharmaceutical products in America come from firms less than ten years old, against only 10% in Europe.”
Strong IP in America makes patent-protected corporations more motivated to protect patent and less motivated to innovate?
“12% of the biggest US firms by market cap at the end of the 1990s were less than 20 years old, against 4% of the biggest European firms.”
Dot.com bubble?
Barkley,
I disagree with the majority of posters here, but “Grover Norquist fan club” is a bit cruel.
At a guess growth is measured in PPP GDP and we are to extrapolate a continuing discrepancy in that figure but not to do the same for trends in the value of the dollar and assume no significant distortion in the PPP figures. We are also to ignore that most of that growth is extremely concentrated and assume instead that it translates at something like face value to welfare and therefore signals great things for the US and bad things for Europe.
To explain this prognosis we are then to infer from the size of various Nasdaq stocks in 1999 that there are high barriers to entry in Europe and then to attribute these to micro factors and not, say, the existence of barriers to moving from one of Europe’s 25 markets to another and the direction of change thereof.
Why does discussion of the relative virtue of of the American economy always focus on micro factors and ignore the elephant in the room which is the difference in scale? Are these issues also the cogent ones in discussions of the success of the Chinese economy?
If this picture is true and the US economy is so strong, why have US dollars, bonds and equities been such miserable investments over the last year or three or five?
If this picture is true and the US economy is so strong, why have US dollars, bonds and equities been such miserable investments over the last year or three or five?
Equities? Year or three? The US S&P 500 Index is up 16.18% in the last year and 12.30% per year in the last three years. Perfectly fine by any historical measure. Of course, when exchange rates are taken into account, it’s been a poor investment for Europeans and investing in Europe has been a good return for Americans. (Asia, OTOH, has been no better and in some ways worse an investment for Americans.) So I suppose that’s your perspective.
Now five years, absolutely the S&P 500 Index has been a poor investment any way you look at it. That’s because five years still hits right before the bubble ended.
Jack, when you take out the ex communist states (look for “EU 15 at Eurostat or the OECD), Europe does worse, not better. Europe has free movement between states, free trade in goods, a mostly common currency . . . it’s no less an economic entity than, say, America ca 1880.
Jane, it’s a difference and there are transfers between them. The question is are the differences in the structure of the states going to develop in Europe’s favour or the US’s? Compare 20 years ago to now. Are you really suggesting that it is as easy to expand a business from Slovakia to Norway as it is from Arkansas to Oregon?
How does the development of the ex-communist states compare with Mexico’s?
My real point is that the assumption that the action is in micro differences is a big one.
The point is that Europe is now aggregating its economic statistics, and given the degree of economic integration of the continent, it is no longer appropriate simply to make comparisons between American and, say, the German economies; America has its own monetary policy and trade rules, while Germany does not. The monetary union will, IMHO, require that the integration gets deeper and deeper (and will probably eventually have the effect of pushing non-euro countries out out of the centre). The EU 15 has a single labour market, most of them have a single currency, their trade policies are negotiated together, their regulations are converging . . . their tax and labor market policies are different, but that is also trueof New York and Alabama. You’re underestimating the depth of the divide between US states (expanding into another state is actually quite a big job with all sorts of legal, tax, and labour implications) and overestimating the differences between EU states. The question about Slovakia isn’t relevant (although even so I might not answer it the way you’d like) because no one is talking about the demographic problems of Slovakia (which are large, but thankfully, due to convergence their g is expected to grow much faster than r, which will allay the problems). The question is whether it is more appropriate to compare the US to Sweden or to Europe. Given the depth of the integration, and the problems inherent in comparing a small, centralised and homogenous country to a large, federalised, and heterogenous country, I’d say the latter. And there is no composition of countries which yields a higher growth rate for developed Europe than for America, unless you can find a way to justify throwing out everything except Ireland and Scandinavia. The majority of the population of Europe lives in countries which are headed for a clash between their welfare states and their demographics. Transfers from Ireland are not going to save them.
You still have a problem in that market capitalization is generally
a very poor measure to use when comparing companies.
Because the market tends to give young, rapidly growing firms a much
higher valuation it creates significant distortions when you try to
use that measure to compare the economic importance of firms –
it will almost always make young firms appear to be more important.
During the bubble we had little dot.com firms with a dozen employees
and no sales with larger market capitlization than older well established
firms with thousands of employees and million in sales. Many of those
dot.com high flyers no longer exist and now have zero market capitalization.
I’m willling to bet that if you used sales or employees, or some other
metric that the comparisons would be very different.
Jane,
So Europe can go Nordic or go West (as you already pointed out, the Ireland option is not an option, since not every country can rely on massive subsidizies from EU). Is there any doubt which direction they will go?
Jane, is the discussion about microfoundations or about demographics? I wish you would answer the question about expanding from Slovakia to Sweden versus from Arkansas to Oregon, I’m sure I would cope. Do you really think the European move would be easier?
I’m all for considering the EU as a whole but if you want to look at microfoundations you have to accept that there is vastly greater variety in Europe than in the US and, my main point, that these are far from the only significant differences between the EU and the US.
My point is that if I wanted to build a company with a 10% EU market share, the things that would slow me down are cross border trade barriers, language issues, differing tax regimes and other non-uniformities in the market, not social security levels or state provided health services.
Why is there no discussion of PPP calculations? Are they really so accurate that a 0.2% GDP growth difference is significant?
Jane Galt,
I must apologize for being so obnoxious
(blame it on my cough medicine), but
statements like “Europe does worse” cry
out for precision. Apparently you mean
the EU-15, not 25, not Euroland 12, not
CEE-6, not future EU-27, not NATO Europe,
not “Western Europe,” and certainly not
“all of Europe” (which gets really messy,
given that 48% of the land area of Europe
is in Russia, but it also extends way
across Asia). Furthermore, there is
“worse at what”? Apparently to Jack you
meant GDP growth, but then that just pushes
the question to “when”? Not true for the
last two quarters and not true for 1945-73,
although true for some cherry-picked time
periods besides those.
Of course the issues first raised by
Tyler had to do with patents and by what
firms, new or old, with the presumption that
patents by new firms show “better” somehow,
not clearly defined. I realize that you might
want to state that A is A and that means
laissez-faire is the best, by golly. But,
as noted in Tyler’s post on university research
productivity, the US federal government plays
a huge role in all this, NSF, DARPA, etc.
And, returning to the question of whether
or not one should look at Europe as some
aggregate on this, R&D and antitrust policy
is heavily at the federal level in the US,
although there is some variation in regs about
starting up corporations and taxes across
states in the US (ah, so many companies HQed
in Delaware, obviously they do “better”!).
But certainly R%D policies are much more at
the national level in the EU, and there remain
much greater variations in rules about forming
companies and so forth, despite some convergence.
So, one really does need to look at individual
countries or blocks of similar countries, even
if one wants to compare with the US on this
entry/patents issue.
Anyway, I’ll go take some more cough medicine
and shut up…
Obviously, Ireland and Luxembourg are exceptions; but Luxembourg is a special case, and Ireland got where it is precisely by adopting US-style reforms.
It is worth pointing out to Social Europe types who wish that ireland’s success can be laid at the feet of EU transfers that Portugal had basically the same transfers during the same period but didn’t boom. The bulk of Ireland’s success was its low and falling corporate tax rate. It is hard to grow GDP (a.k.a. wealth) when the government insists on pilfering the wealth creators.
True, Ireland had some other advantages, notably that its workforce consists of a huge number of former expatriates who learned the languages, customs and foibles of their former host countries. This gives employers in Ireland an edge in developing products for each country and selling them. Social Europe ought to steal this idea and hire lots of noncitizens to do likewise for their countries. Somehow I expect they won’t though since they labor under the illusion that the number of jobs are fixed and thus foreigners are dirty job stealers.
Countries like Germany,France,etc. spend a large amount of time on tea and dinner.
Why are these countries still have such high output,in particular,Germany, when they move so slow? Will them be taken over by Asian countries, like China and India, who are very hard working?
Probably not.
One good side about the Germans is that the products can last long periods, that is, the depreciation rate is low!
For instance, in Germany, a typical factory building built 200 years ago can still work in perfect condition today!
Jane Galt,
I agree that since 1990 generally, EU-15 have had
slower aggregate GDP growth than the US. With their
higher benefits and slower population growth, they
also face more serious fiscal problems than does
the US in the pensions area (the US does not have
a social security crisis). OTOH, they have much
lower costs in the medical area, so the US has
more of a problem there.
The gap is much less if one looks at per capita
GDPS. This could turn into a replay of the
Quiggen vs Cowen argument on productivity, so I
shall not go on about it, but one can also argue
about whether immigrants come to the US because of
growth or their arrival causes (or at least stimulates)
growth, as endogenous growth models argue. Some of
both, I figure, and of course the US-Mexican border
is the sharpest per capita income discontinuity in
the world and easily penetrated.
Ireland has US style policies in some areas, and
certainly has very low corporate taxes, but it is
also more European in other areas, e.g. having
Nordic style corporatist wage bargaining.
Focusing on the pharmaceutical industry that is
mentioned in the original post brings up some
peculiar issues. Thus, much of this in the US
is concentrated on the I-270 corridor coming
out of Washington and NIH in particular, the
main source of federal funding of biotech research.
The main center of C cubed high tech is in Northern
VA, coming out of the federal funding spouts of
the Pentagon, the NRO HQ, and the “George Bush
Center for Intelligence.” There is no comparable
locus in Europe.
Focus on pharmaceuticals also focuses the comparison
on the US with Germany, with Germany clearly exhibiting
many of the worst characteristics in the entry barriers
and regs areas. Of course the other big player in
pharms in Europe is one not in “Europe” by your
definition, Switzerland.
Regarding aggregate growth, the US has
done better than EU-15 in most of the
recent decades. It does have a broadly
more flexible microeconomy with strong
entrepreneurship and ability to move
R&D into practice.
However, before pronouncing inevitable
doom on the EU-15 I note two advantages
they have over the US that could become
very important in the near term future:
1) energy efficiency. They have slowed
their own growth down by having very high
taxes on gasoline and oil products more
generally. Upshot is that they are already
pretty well adjusted to a really serious
and permanent increase in oil prices that
might happen at some point. I am not
forecasting when that will happen, but my
bet would be that it will be when al Ghawar
in Saudi finally tanks. That pool produces
about 5% of world oil production, and its
peak will be the world peak.
2) massive and rising foreign indebtedness
of the US. There will have to be an adjustment
at some point in some way to stop this massive
accumulation, now in excess of $3 trillion, and
few scenarios look pleasant for the US, with
some looking plain awful. EU-15 do not have
this problem at all. Their slower growth has
meant that they have not been importing stuff
from abroad and borrowing to do so. They might
get dragged down if we collapse (along with
pretty much everybody else), but they will not
have to make a huge internal adjustment. In
short, both environmentally (and I have not
even brought up adjusting to global warming)
and internationally macroeconomically, the
EU-15 have been on a much more sustainable
growth path than has been the US.
So, wake up a decade or two from now, and
the shoe may well be on the other foot.
They do not look so doomed at all.
happyjuggler0,
Apart from the problem of financing retirment benefits, do you see value in growing population? This is a real question. I am confused as to what its upsides are, except of course, that a bigger working pool makes it easier to support non-workers.
jult52,
If the deep recession slows capital investment.
Barkley – Ok but a lot of “ifs” there.
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