During my visits in England and Spain — admittedly two of the winners — I was wondering if we haven’t underestimated European growth rates. It is well known that when new commodities are entering the market, measured growth rates can significantly understate the real increase in well-being. (Imagine that the price of an iPod fell from infinity in 1995 to $200 or so today; measuring this gain in terms of "more bundles of $200 in value" is missing some of the very high gains from those people who love iPods but were previously "at a corner" of no purchases, due to unavailability.)
So how does this apply to Europe? I’m not mainly talking about iPods. Rather migration is rampant. When a Pole moves to London he can buy many more goods and services. It’s a big move up in real income plus lots of new goods are introduced to the consumption basket. So when there is lots of voluntary movement from poorer to richer regions, changes in measured income will understate some of the true gains.
Frequently I stressed to Spanish reporters just how big a success their country and economy has been; they almost didn’t believe me. When I said things like: "Spain is in a much better competitive position than China, which still doesn’t have half the per capita income of Mexico" they were truly shocked.
But migration is tricky. Migration into much of Western Europe is easier today than 30-40 years ago. So some of the gains may just be transfers from native born to immigrants and not net welfare gains, especially in places like Scandinavia, where restrictions definitely helped produce rents for the population. There may still be a net gain, but it’s hard to net it out properly. The large movement of skilled workers out of Europe to North America (e.g. Germany and the UK) is evidence that the upper middle class does not see Europe’s future positively. Moreover, this group is traditionally the one least likely to move because they are beneficiaries of the elite meritocracy. So just on migration, you have small but wealthy and educated elites moving out and larger numbers of mostly less skilled/poorer workers moving in. You don’t see the same proportional outmigration of skilled Americans, especially not from long-established families (not just second generation returning to Mexico or Asia).
“When a Pole moves to London he can buy many more goods and services. It’s a big move up in real income plus lots of new goods are introduced to the consumption basket.”
London may be a particularly bad example given the very high cost of living there. Change it to Manchester and the sentence is fine.
We should all be glad to know that we’re doing our part to help our poor European cousins: The EADS’ air tanker contract win on Friday ensures that our USAF will soon be flying French Airbus. That’s a $35-100 Billion deal and a loss of ~9000 American jobs. (Don’t try to say the EADS front, Northrup Grumman will get equal American jobs to Boeing). What are we thinking? Why not Aeroflot? Or better yet – the Chinese — we might have gotten Boeing planes made with cheap Chinese labor and helped reduce their unemployment!
I think the braindrain is more a product of more attractive jobs in USA because the economy is bigger and tax rates are still higher in western europe than in US.
One of my favorite argument is when people extrapolate China’s growth to the point where their per capita income equals the United State’s. “And won’t we be screwed then!” For whatever reason (and there could be plenty). The problem is that getting to this per capita income is pretty hard. The only reason why China’s growth is newsworthy is b/c of how big China is. But if they could achieve this kind of per capita income with that kind of government, it would be historically unique.
Even with a high cost of living, a Pole moving to London experiences a quite large increase in their real income. Trust me on this one. I don’t think folks realize how big the gap is (roughly similar to Mexico vs. US as a matter of fact).
Spain is one of the Western European economies that are doing best. Their growth rate has been above the rest of the continent’s for decades. There is no underestimation. England has not been as spectacular, but also above EU average growth since Thatcher.
Go to neighbours France or Portugal (which did very well until it got stuck in 1% growth a decade ago) and you’ll get a gloomier picture.
jorod: “As tax rates fall in Europe, growth will increase.”
Could happen, but it would be contrary to several decades of empirical experience.
http://trueconservative.typepad.com/trueconservative/2008/02/small-governmen.html
and
http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-2.html
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