The choice: dynamic capitalism vs. the welfare state

US workers have less job security than their European counterparts. In theory, they should benefit from stronger economic growth and a more stable economy. But do they?

By MSN Money Partner Apr 25, 2012 12:13PM

By Mark ThomaThe Fiscal Times

Those who favor a free market approach to managing the economy often compare the U.S. to Europe. Europe, it is argued, is much less flexible and dynamic than the U.S. because of its heavier reliance on social insurance, worker protections, and the high tax rates needed to support these programs.

 

Nobel Prize winning economist Edmund Phelps has argued, for example, that "the free enterprise system is structured in such a way that it facilitates and stimulates dynamism while the Continental system impedes and discourages it." According to Phelps and others, the greater reliance on the free market system in the U.S. results in faster and more robust economic growth.

There is an implied tradeoff here. In the U.S. system, workers have less protection and hence more insecurity than in countries where protection is more prevalent. In return for giving up security, there are two promised benefits. First, it is argued, economic growth will be higher. With less government interference, lower taxes, and unions all but absent, the economy will be free to reach its growth potential.

Second, the economy will be more stable. If a big shock hits the economy, the U.S. will be able to reestablish full employment in new, productive, high-paying jobs much faster than countries with greater social protections and the flexibility inhibiting institutions that come with them.

If these two benefits are large, then trading security for dynamism, flexibility, and higher growth will be more than worth it. So has the economy lived up to these promises?

Gains went to the top

Turning to growth first, there is reason to question whether it’s true that, before the Great Recession, the U.S. outperformed Europe. If it did, and there’s some evidence pointing in this direction, the difference is relatively small and has been diminishing over the last decade. But even if growth was a bit higher in the U.S., the benefits did not go to the households experiencing the greatest increase in insecurity, those at the lower end of the income distribution. Instead, the gains went mostly to those at the top.

What about the other promised benefit of a general free market approach to managing the economy, a better ability to withstand and respond to shocks? Has the U.S. fared better than European countries during the Great Recession?

The U.S. did better than some European countries during the crisis, but worse than others. For example, harmonized unemployment rates from either the Bureau of Labor Statistics or from Eurostat show that the U.S. unemployment rate increased more than most European rates at the onset of the crisis, and that right now the U.S. unemployment rate is higher than in Germany, the Netherlands, Austria, Belgium, Denmark, Finland, and Sweden. But at the same time, the U.S. unemployment rate is quite a bit lower than in Greece, Spain, Ireland, and Portugal, a bit lower than in Italy, and very similar to the U.K.

With such a mixed outcome, it’s difficult to support the claim that the free market approach that began in the 1970s has lived up to the promise of a more dynamic, flexible, faster growing economy. And the case is even harder to make when the fact that the deregulation of the economy that helped to produce the housing bubble is factored in.

But is the social insurance model favored in Europe the answer? Isn’t the fact that Europe is having so much trouble evidence against the idea that the European version of social insurance works?

Not if the evidence is interpreted correctly. As the summary of this paper from the Institute for the Study of Labor documents, there is very little connection between the size of the welfare state and subsequent sovereign debt troubles. In fact, there is quite a bit of heterogeneity across Europe, and the countries with the largest social welfare states, such as Denmark, Sweden, and Germany fared the best during the recession, while those with the smallest, such as Greece and Italy, are in the most trouble.

A larger welfare state did not lead to a sovereign debt crisis, but it did lead to substantial protection during the recession and much better performance than in the U.S.

I am not arguing that we should mimic the institutions in Europe. Some have worked, some have not, and what works in Europe may not be directly applicable here. But there are lessons to be learned if we look in the right places, e.g., at Danish-type flexicurity and German style job-sharing, and then alter the policies as needed to make them work here. We certainly have room to improve.

Unfortunately, budget pressures will make it difficult to maintain the social insurance programs we have now, let alone improve them, especially since it will mean higher taxes. Nevertheless, political realities aside, it’s very clear that we need more, not less, social protection for households.

Insecurity was much too high during the recession, and it remains too high today. Somehow, we must find a way to do better.

More from The Fiscal Times:

Mark Thoma is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.



30Comments
Apr 25, 2012 3:35PM
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"Somehow..." eh.  The answer is as easy to see as the nose on Uncle Sam's face.  It's not "where we have to go"  it's "what we need to return to".  The radical Republican voodoo economic theories are no way to run a country - we just need to undo what has been done since 2000.

 

1. Regulate the hell out of the banking and financial industry.  The Masters of the Universe caused a global financial meltdown and facilitated the "free marketing" of US jobs to anywhere but the US.  Make banking boring again and put criminal bankers in jail.

 

2. Return to Reagan era taxation levels in the US.  Hell, return to Clinton era taxation, that was even lower than Reagan.  But whatever we do, we need to recognize that there is nothing "American" about Bank of America paying ZERO TAX in 2009.

 

3. Shareholder revolts.  Nobody who runs a company into the ground deserves a bonus, let alone a parachute.  There isn't a human being on the planet that deserves $100 million a year for managing a publically traded company for its shareholders.  No Masters of the Universe to be found there either.

 

We start fixing our future problems by going backwards.  See - easy.

Apr 26, 2012 12:23AM
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Nordic Europe, especially since the disaster of the Naziis during WWII, seems to be working better than the U.S.  A good part of that is their work ethic, which seems to be working better there than here; but, they are more disposed to cooperative sociality, as opposed to our staunchly competitve ethos.  They seem to view taxes and good government as useful tools, not impediments as we do.  And, their governments do not seem to be excessively bloated, like our military steroidialism.  They do participate, if not proportionally (except for the Danes) in our campaign against terrorism in Afghanistan.

They also do not have large pools of homeless and mentally disturbed individuals roaming the streets.  Could we possibly learn something from Norway, Sweden, Denmark, and even, dare I say it, Germany? Is it just chance that there's more to having a high quality of life than runaway capitalism with excess power in the hands of a few very wealthy individuals.  Is it strange that their countries are populated mostly by small and mid-sized businesses--and a strong middle class?  It seems to me that the latter was the case here not too many decades ago.

It is true that our capital investments in Germany helped mightily to restore that country after WWII, but it is what they did with that capital that should be instructive to us, particularly as they re-integrated the eastern sector without help from us, and are now the economically strongest member of "old Europe".

Apr 26, 2012 2:17AM
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This article has some interesting ideas. But, it doesn't tell the whole story. For example, it says nothing about the effect the welfare state has on the psyche of the individual. It says nothing about the quality of the work people do -- or don't do -- when they have a guarenteed paycheck. What happens to people who live in a government supported cradle-grave life, There are more kinds of bankruptcy than economic.
Apr 26, 2012 2:37PM
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There is so much left wing gibberish on this page I don't know where to begin.  Europe has lagged behind the US in productivity and GDP for one primary simple reason, US workers work more hours than their European counterparts.  Most US workers do not get 8 weeks of vacation each year nor do they retire at age 60.  There is no free lunch, someone else has to pay for it.  The best path to prosperity has always been free market Capitalism.  I'll agree that not everyone will become a millionaire but everyone has the opportunity to do so.  You cannot engineer outcomes with a state controlled economy.   It failed in the USSR, it failed in Cuba and it's failing miserably in Venezuela.  In fact, it fails everywhere it's tried and it's falling apart right now in Europe.  Statists are all about control and a loss of freedom.  Remember, you will never be hired by a poor man (or woman), it's time to stop demonizing the wealthy.  Governments do not create jobs, they simply confiscate money from those who produce and redistribute it to those who do not.  This works to a point (ie social safety net) but carried to it's natural consclusion, the productive soon see the futility of hard work and join the collective.  That's when we're on the road to becoming the USSA (United Socialist States of......)
Apr 28, 2012 6:14AM
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The USA and Europe both have their ups and downs. I have lived in both.  Before the major bash starts, a few rules might help:

1) If you haven't lived in the USA, try living there before you heavily bash it.

2) If you haven't lived in Europe, try living there before you heavily bash it.

The American dream today is dead and Europe is no cake walk either...

Europe has as many if not more notable inventions as the USA. Wait, even in the old eastern world, we would be no where without the Mathematics created in the far east.  Let's not do a comparison of what's best.  Did you as individual create electricity? Nope but you are American and an American created it, so that makes you the best, right? Well if it wasn't for 1000's of years of study throughout the beginning of human civilization, none of the countries on top would be where they would today. 

The article has it's points and seems quite fare. Stop getting over emotional.
Apr 25, 2012 4:40PM
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dynamic capitalism.lol.a fancy way of saying i exported your job now ive gone from hugely rich to ridiculously rich. Think ill buy congress and keep it that way.oh by the way since you no longer have a job im going to look down my nose at you.hold the gate open for my illegal alien gardeners please.ps dont even think about asking for enough to eat i went to alot of trouble to hord everything for myself.be a good fellow and crawl off and die

Apr 30, 2012 10:39AM
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SmileHi, it is not my employers or the government responsibility to take care of me in my old age, I am an adult and need to save money for my own retirement , that way I know for sure I will be taken care of , and not a burden to society !
Apr 30, 2012 10:00AM
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If you are the CEO or other top executive of a large corporation, you're better off in the U.S. (much higher pay and far lower taxes).  If you are a regular worker, you're better off in Europe (5-6 weeks vacation, better retirement, better health care).  The only real question is sustainability. The continuing debt crisis in Spain, Italy, Portugal, and Greece shows that all is not well.  If it spreads to France, then the rest of Europe could be in deep sh*t.
Apr 25, 2012 7:00PM
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The rich are dynamically getting richer because of their  dynamic power to make lots money and are having their own dynamic strata of economy on high end luxury items. Once the money moved up to them it tends to circulate dynamically within that level and those money dynamically increases even more like snowballs. Well some get the message apparently but some are just out of touch  to   understand  this basic simple concept or are just plain selfish and on extreme denial. The whole economy just isn't going to work too good at the current economic environment..

May 1, 2012 1:51PM
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you tell me that everyone has an opportunity to become a millionaire which proves

outright that you have no knowledge of poverty...........i can tell you for sure that the child born in the ghetto has as much chance of being a millionaire as one born in central africa.....zero chance

 

despite the brutal poverty in america we have ceo's making 18 million

we would definitely be better off as a whole with less poverty and no ceo's raping society

May 2, 2012 6:50AM
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Having lived  and worked in Europe for the past twenty years, I am often astonished at how ignorant and prejudiced the business establishment in the US is about how Europe actually functions.The model that seems accepted by most Americans is that Europe teeters on the edge of some mythical socialist/communist takeover, that free Americans alone are resisting. Europeans, in fact, do quite well, thank you, and without the hysteria Americans show either at the threat of socialism or at the realization that their government is both unwilling and unable to provide security for its broader population. Only fiscally conservative Americans seem to benefit from their own propaganda and from the great sacrifices made by the 99%.
May 2, 2012 4:19AM
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They certainly do not.  After having reduced wages over the past 30 years, Republicans are now chopping away at pensions, health benefits, colas and anything else they can get away with.

Rents rise ten to fifteen times and income for workers and retired workers is slashed. 

The value of homes soars and owners still pay meager taxes in California, for the services they get.  The GOP is not for me. 

May 2, 2012 3:28PM
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a few rich guys and a huge number of people struggling at their expense?

                                         OR

a huge number of people doing well ?

Apr 26, 2012 5:39PM
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Europe is so great that it has given us the things that have changed the world forever. Thanks to Europe we discovered electricity...oh, that was an American. Well thanks to Europe we have light bulbs...oh, that was American. Well at least they gave us flight, the telephone, television, and Internet...shoot all American.

 

The wealth of oil in the ground discovered in Texas around the turn of the 20th century saved us from killing off whales for the whale oil.

Mark, and other nanny-staters, need to consider a few things regarding the distribution of wealth. One, even the poor people can use their money to make decisions. If they choose to consume rather than invest, then that's on them. Also, the more they are taxed by government or inflation, the less they have to invest and consume.

 

Second, wealth becomes concentrated with age. There is a reason why a certain percentage of the population has more wealth than others, and that's because it took a lifetime of work. There is a reason why a 30-year old doesn't have the wealth of a 60-year old. Wealth is just as much a function of time as it is an economic system.

 

Stop scrathing your beards and pick up a shovel. The shovel creates wealth, not the pontification of asset inequality.

Apr 29, 2012 3:21PM
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Europe is so great that it has given us the things that have changed the world forever. Thanks to Europe we discovered electricity...oh, that was an American. Well thanks to Europe we have light bulbs...oh, that was American. Well at least they gave us flight, the telephone, television, and Internet...shoot all American.

 

ok, maybe a little research would help you?  I will address a couple of your statements here

 

1809 - Humphry Davy, an English chemist, invented the first electric light. Davy connected two wires to a battery and attached a charcoal strip between the other ends of the wires. The charged carbon glowed making the first arc lamp.

1820 - Warren De la Rue enclosed a platinum coil in an evacuated tube and passed an electric current through it. His lamp design was worked but the cost of the precious metal platinum made this an impossible invention for wide-spread use.

1835 - James Bowman Lindsay demonstrated constant electric lighting system using a prototype light bulb.

1850 - Edward Shepard invented an electrical incandescent arc lamp using a charcoal filament. Joseph Wilson Swan started working with carbonized paper filaments the same year.

1854 - Henricg Globel, a German watchmaker, invented the first true light bulb. He used a carbonized bamboo filament placed inside a glass bulb.
Mathew Evans patented a light bulb.

1878 - Sir Joseph Wilson Swan (1828-1914), an English physicist, was the first person to invent a practical and longer-lasting electric light bulb (13.5 hours). Swan (pictured at right) used a carbon fiber filament derived from cotton.

1879 - Thomas Alva Edison invented a carbon filament that burned for forty hours. Edison placed his filament in an oxygenless bulb. (Edison evolved his designs for the light bulb based on the 1875 patent he purchased from inventors, Henry Woodward and Matthew Evans.)

1880 - Edison continued to improved his light bulb until it could last for over 1200 hours using a bamboo-derived filament.

 

on January 26, 1926 at his laboratory in London, Baird gave what is widely recognized as being the world's first demonstration of a working television system to members of the  Royal Institution  and a newspaper reporter

 

maybe you better research the other items that you claimed Americans 'invented' or 'discovered', before you insist that a steam engine and a train that ran on tracks were also American?

 

BTW   --  Alexander Graham Bell was a Scotsman....  (I will concede that he perfected the first practical telephone while living in the USA)

May 1, 2012 7:57PM
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The revolution will not be televised. Instead, it will be tweeted. Our fascination with electronic gadgets have dulled our minds and made us apathetic. We get what we deserve collectively.
May 2, 2012 4:06PM
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Can ya believe countries thousands of years older than the good old USA may have figured some things out. There's a lesson here somewhere.
May 9, 2012 1:30PM
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All the Germans I know get oodles of vacation time, sick leave, and a year's leave for BOTH parents, one at a time, when a baby is born.  Everybody gets the medical care they need, everybody has a chance at an excellent education based on aptitude and work, not depth of daddy's pockets; and all but the most remote areas have access to public transportation.  Do these things come cheap?  Of course not.  But there is a belief that the whole is stronger when the parts are better cared-for.  Unlike here, where so many think they can go it alone and to hell with everybody else.  What used to be applauded as that independent American spirit has devolved to "I got mine, so f*** you."
May 9, 2012 5:17PM
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 From 1975 to 1991, the average salary of the top 20% increased from $50,077 to $54,431.  The average salary of the bottom 20% increased from $1,263 to $29,008.  According to the data, from 1996 to 2005, the mean income of all Americans grew from $70,420 to $97,206--a 38% increase.  The mean income of the top 0.1-1% grew by 22.4%, the income of the top 0.01-0.1% grew by 10.4%, and the income of the top 0.01% shrunk by 17.8%.  The median income for these groups actually shrunk, while it grew by 24% for most Americans.  Less than half (40 percent or 43 percent by different measures) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of individuals in the top 0.01 percent in 1996 remained in the top 0.01 percent in 2005.   

 

“The first measure of mobility considers how the incomes of taxpayers in each income group in 1996 changed relative to the incomes of all taxpayers in the filing population in 2005. The income thresholds in 1996 and 2005 for the income quintile groups in this measure are based on all taxpayers age 25 and over in the population of all tax return filers in these two years. The table shows a high degree of income mobility over this period. Nearly 58 percent of households in the lowest income quintile in 1996 had moved to a higher quintile by 2005. While 29 percent moved up to the second quintile, the same percentage moved up at least two quintiles, and about 5 percent moved all the way to the top quintile.”

 

Clearly, the rich have gotten richer--but the poor have also gotten richer, at a much faster rate than the rich. 

  

For the record, the government receives 20 times more revenue today than it did in the fifties, when taxes for the rich were much higher; it receives three times more revenue when adjusted for inflation and population growth.  Nobody's "starving" the government of revenue, and the totalitarians in Congress are not oppressed.  The US had to undergo a severe economic downturn for the first couple years of Reagan's Presidency, when he sharply cut spending and dramatically reduced inflation, but in the end more jobs were created under Reagan than under any President in the past thirty years.  The Kennedy tax cuts likewise spurred vast economic growth.  If you define a “high taxes period” as any period where the federal government took substantially and persistently more than 18% of GDP; then, in the United States since 1950, average growth during high tax periods was 1.08%, average growth during normal times was 2.45%. Every high tax period was a long period of economic stagnation, malaise, or decline or else contained a long period of decline. Such events were rare during normal tax periods. “Voodoo economics” works in the sense that tax cuts are apt to produce a substantial rise in government revenues after a little while.

 

May 9, 2012 1:01PM
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Our government is a democracy -- of the people, for the people and by the people; not capitalism for the rich and the greedy.

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