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.

Apr 26, 2012 5:39PM

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 26, 2012 2:37PM
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 26, 2012 10:35AM

If we allow capitalism and democracy to work the wealthy will soon  receive over 90 percent of wealth creation and the rest of Americans will be living below the poverty line.  When this happens in a society there are riots and eventual overthrow of the crooked and greedy government and business leaders.  After the overhtrow we can begin the process of rebuilding America and maybe this time the new leaders will focus on true equality for all of us so we can focus on quality of life and not on greed for more money.


Apr 26, 2012 2:17AM
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 12:23AM
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 25, 2012 10:10PM
I'd like to see this article wrapped around a 2x4 and used to bang some sense into most Republicans, but even that wouldn't work.  It is sad that one of the most important of our institutions, capable of moving the USA forward, The House of Representatives is obsessed with giving the wealthiest among us even more financial advantage. 

Anyone who thinks that Greed is Good knows nothing about the Great Depression--and may not have the intelligence or motivation to learn about it, in their obsessional desire to undermine any attempt to improve the country.  They would much rather drag us back to ages past, and create a theocracy here.
Apr 25, 2012 7:00PM

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..

Apr 25, 2012 4:40PM

dynamic 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 dont even think about asking for enough to eat i went to alot of trouble to hord everything for a good fellow and crawl off and die

Apr 25, 2012 3:49PM
OK... Now I expect right wing anti government people to just bash these conclusions and the author who wrote this article as a liberal Nobama propagandist again...
Apr 25, 2012 3:35PM

"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.

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