Senate Europe - riding on the American tide

So about a month or two ago, I was watching Fareed Zakaria on CNN, who was comparing Europe and the United States. In typical Michael Moore fashion, he was comparing the standards of living under the European style welfare states to the US. The amount and standards of state-provided services and so forth, compared to the US, and the different tax levels. You know the drill. From what I've heard, Canada is also very similar to European countries, at least as far as their health care system is concerned?

Anyway, he also examined the flipside of that coin, which is rarely given attention. The economies of European countries were significantly less diversified than the US, relying primarily on few key sectors to sustain their growth, which is risky. This was especially true of the Nordic countries (who happen to have the biggest public sectors and the most government services). But more important than that was that the foreseeable trend was a continuation of this. The number of new businesses starting annually, and the numbers of new patents registered annually, even when adjusting for population sizes, is lower in European countries compared to the US. This was an indication that the environment is not business friendly (high taxes and regulations, probably), consequently entrepreneurs don't take risks as much as in the US, there is less innovation and, in short, their economies are more fragile than the US. Most crucial of all, their output isn't enough to sustain global economic growth in the first place. They're reliant on the US and the emerging economies (China, particularly) to sustain growth. The gist of his argument was that the European economies are riding on American innovation and economic growth (in conjunction with 3rd world cheap labor).

Now, I might interject that Americans need a market with purchasing power to buy your products in the first place. Your iPhones and laptops and whatnot have to be sold somewhere, and the 3rd world largely doesn't have that purchasing power yet, so there's a symbiotic relationship there, I would think. You make it, we buy it. But I'm not an economist, so my point might be moot, I don't know.

So, to summarize, Zakaria was making the point that Europe is the moocher of the world. We have big governments that make us comfortably lazy and risk averse avant-garde cinema watchers, while the US is the economic powerhouse that makes our lifestyle possible because of its smaller government and less public services (with the help of third world cheap labor). In short, the 3rd world does the lifting, the US does the thinking, and Europe sits comfortably in a rocking chair on the porch, watching you sweat.

Since I'm not an economist and have absolutely no way of verifying his claims, although they seem convincing to me, my first question is: to what extent is this true? And more importantly, second: I like this arrangement very much. If it's true, how can we make sure this continues? My guess would be to just fund your Republicans with an annual percentage of our collective national budgets, but I'm open to other suggestions as well.

Third: how can we keep the 3rd world poor so they keep making our stuff cheap, and is there an alternative to that? Is it possible for all nations to have large middle classes simultaneously, or must some countries always remain the sweatshops of others? If it's the latter, how can we best facilitate that?

 

I know some things about the global macroeconomy, but not enough to answer you confidently. But what you and Fareed Zakara just described is definitely the American stereotype of the rest of the world. I know enought to know it's not entirely that simple, though.

The world will never stay the same for more, and developing nations of the East already have a growing Middle Class, now it's shifting to Africa, then it will be equal.

As for the really cheap labor... robots.

 

I think a huge part of it is also that when the default isn't just "send this to a poor country to be done" it means that people have to find more efficient ways of doing things. It's of a similar vein to how I've heard a huge part of why large-scale farming hasn't become more efficient is the combination of subsidies and a workforce they can pay below the legal limits, and so the technology is out there to become more efficient, but because there's an initial investment, no one will do it because of those artificial things giving them a benefit.

I'm also reminded of (and I'm not sure to what extent it's true, partially because it's been absorbed into a highly political debate now) how I have read several times that one of the reasons the costs of pharmaceuticals in the US is so high is because the companies are trying to cover their R&D costs and in most of their markets, their prices are artificially capped, which means that while they might be recouping the costs of the drug, they don't have the funds to be trying to develop new drugs, and so it's those in the US that are paying the R&D costs that would otherwise be more spread out around the world. That said, I do remain fairly skeptical of that since there's enough questionable practices from the large pharmaceutical companies that I'm not sure how easy it is to reasonably untangle their finances, and I think for some of them, advertising costs are larger still and that makes me doubtful they're that hurting for funds. But the suggestion is fairly similar in theme.

 

I'm not serious about the morally reprehensible parts of the third question where I ask how we can make sure poor people stay poor. That was a parody of certain JC posters who will not be named. About the part where I ask how we can make sure Americans continue to reject more and broader social programs, that was asked jokingly as well, although ultimately that's up to Americans themselves to decide, so how we feel about it is irrelevant anyway. Ideally, that is. But if Americans at the time were willing to oust Allende in favor of Pinochet for their own benefit, then who's to say European politicians wouldn't sabotage American politicians with leftist goals if they were able to? Principled men are sadly a rarity in the world of politics, as we all know. As it happens, though, Americans on average don't seem to have any desire for a broader public sector on their own accord, either. So, if the paradigm presented by Zakaria is correct, that works out great for us.

 

But it leaves Europe very vulnerable to recessions and chronically high unemployment, and it makes Europeans become less and less relevant to the global marketplace.

I highly doubt the Europeans are trying to influence our politics like that.

And the way the world works now won't stay the same, it's always changing. Companies are already leaving the developed Chinese coastal areas for Africa because of rising labor costs in China (and the rest of East/Southeast/South Asia). Eventually, sometime in the 21st century, if current trends continue, everyone will eventually be on a level playing field when it comes to development and labor costs. And with technology allowing more productivity/efficiency with fewer workers, true economic power will rest with the innovators, the entrepeneurs, the creative, the critical thinkers, etc. In other words, unless things change, it will be America and India.

 

The European status quo leaves Europe vulnerable or the American status quo does? If you mean the latter, then according to Zakaria and right-wingers, it's exactly the American status quo, in contrast to the European welfare model, that has kept the US economy, and indeed the whole world economy, afloat and growing. If you mean the European status quo, then that can and must be improved, independent of what Americans decide to do domestically. The gist of Zakaria's argument is that your rightism benefits us, and that you're essentially carrying us afloat. This is true independent of whether we move more to the right ourselves or stay where we are. We can move more to the right and become more competitive as well, but your existence will act as an extra bonus on top of that.

I doubt that as well, although I wouldn't discount Berlusconi from considering such schemes if he had thought of it (and was able to carry it out).

 

The global status quo, since it's truly a global economy now. It leaves Europe very vulnerable and dependent.

I don't know, maybe it's my Americanism showing, but "[America is] essentially carrying [Europe] afloat" is terrible dependency and a huge negative for Europeans, a thing that should be viewed as absolutely awful and terrible from the European point of view, not a good thing that should be maintained at all. And I doubt we're going to be able to carry Europe afloat forever... if that's true then it's definitely not sustainable.

 

For the time being, however, it seems to work out great for us. I don't see how it wouldn't be sustainable, though. From what I can tell, the mere fact of your existence offsets our non-competitiveness and non-innovativeness. It's not that we can't pay the bills domestically, at least that's not the case in northern Europe. The budgets add up internally. The individual countries have enough economic growth to support themselves in theory. It's just that we don't contribute enough to the global economic growth, relative to our population size, and the theory is that it's because we're too comfortable. We also don't invent enough new things. But in contrast, you are productive enough that you've been able to offset our relative growth deficit until now (except during the recession, when China's growth was really keeping the entire world afloat, according to Zakaria). From what I can tell, as long as you keep churning out as many Fortune 500 companies as you do, we're home free. The danger starts when your growth starts to slow down, which presumably it never will as long as you continue your current policies and never steer left. The only 'wrench in the gears', so to speak, would be if you hit another housing bubble or something similar that would cause another recession like the recent one. As China's, and eventually India's, middle classes grow, their astronomical growth levels, made possible by their low incomes, will flatten out and they won't be able to save us from future recessions. At that point, not just us, but the whole world is screwed.

It also seems like Europe will continue to be increasingly dependent on foreign workers to do the jobs our domestic populations won't want to do.

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Edit: I have to make the disclaimer that this is all assuming that I've understood this economics business correctly, which I'm absolute not confident enough about to guarantee that I have.

 

Did you used to post on phatooine?

 

No.

 

I wonder how "innovation" is being defined here. I live in a community where I see a lot of divorced women opening cupcake bakeries and consignment stores that all go out of business within months.

In Austria, I have a pharmacist friend who managed to become rich by opening a pharmacy, and then a few more in select areas. On the one hand he has zero chances of growing this into a massive pharmacy chain. On the other hand, it's still somewhat possible for Austrians to do very well as small business-owning pharmacists, for decades a virtual impossibility in the U.S.

The U.S. and Europe are both being carried economically by foreign oil. Europe's in a worse position in some ways, because it doesn't have the current natural gas and oil boomlet going on in the U.S. Europe is stagnating now in part because North Sea oil went into decline and as an energy importing region it's trapped by China and India pricing the rest of the world out of the market for energy imports. The U.S. has put off the inevitable by a few years, but we'll be following Europe into a long period of stagnation.

Another modest advantage we have over Europe is a relatively younger population. We do not have to as great an extent the problematic inverted population pyramid of western Europe. But relatively higher population growth will come back to haunt us eventually.

 

Well, this might be somewhat unrelated, but it turns out that reserves of the kind of minerals that go into computer chips and LCD screens have been discovered on Greenland (which is a Danish colony). The trouble is that there is also uranium in the same bedrock, so mining for one thing will inevitably blow up uranium dust as well, sparking worries from the local population nearby. When I say local population, I mean a little village nearby, populated by 1600 people, but this is Greenland we're talking about, after all.

Global warming has paid off for these people. Why? Well, reserves of deep sea oil have also been discovered off the Greenland coast, mainly on the western side. It was discovered by a Chinese firm, and the melting ice caps of the north pole have opened up a quicker sea route from Greenland to the Pacific Ocean, making these reserves very lucrative for China. American, Russian and Norwegian corporations, among others, are also exploring the Arctic ocean floor and scrambling for drilling rights. In Greenland's case, the Chinese firm that discovered the reserves is waiting for drilling rights from the Greenland autonomous government. By the way, Greenland only received semi-autonomy from Denmark in 2009, and you should have seen how butthurt Danish MP's were over Greenland not having any intention of including Denmark in the decision making process or profits. That's gotta hurt! Greenland will, of course, be paying back the debt it owes Denmark for the administration of the island. The island's military defense, as well as the administration of its court and police are still Danish responsibility, but Greenland aims to achieve full autonomy once it develops a self-sustaining economy. There's a good chance they'll get it too, as ethnic Danes on the island seem to want it as much as the indigenous people (understandably), which makes it harder for the Danes to take a patronizing "we made your country, you owe us something" stance.

Edit: by the time I finished this write-up I realized it had very little relevance to the topic... But now that I've already posted, I can answer the question you asked above, so the post is not a total waste:

Zakaria defined it by the number of new companies registered annually, adjusted for population size, as well as the annual number of patents registered.

 

Is there a text version of what Zakaria said?

 

No, but you can download podcasts of the episodes for free from iTunes. Unfortunately, I don't remember exactly when it was aired.