I put a lot of focus on “convergence” and “divergence” because economic theory says rich countries should not grow faster than poor countries.
So when there are examples of divergence, especially when looking at decades of data, we can learn very important lessons about economic policy.
Those lessons, in every single case, teach us that free markets and limited government are a recipe for faster long-run growth and higher living standards.
Today, let’s consider another example. And we’ll start with this chart from Sam Bowman, which shows that Americans are getting richer faster than Europeans are getting richer.
The chart comes from an article he wrote for Reason on the prosperity gap between the United States and Europe.
Here are some excerpts, starting with some comparative statistics.
Europe may be beautiful, but it has become a byword for economic malaise… Most of us in Europe don’t own ice makers. …air conditioning is still a luxury across the continent. …Like most Europeans, I don’t own a dryer. The average American could stop working in the first week of October and still will have earned more than the average Frenchman working until the end of the year. In Western Europe, GDP per capita—the average economic output per person—is about $63,000 per year, adjusted for the cost of living. In the United States, it is $86,000. …
For roughly two decades, Western Europe, home to the continent’s largest economies, has stagnated. In 1995, its labor productivity—the value of goods and services produced per hour worked—was 95 percent of what it was in the United States, having risen from just 22 percent in 1945. By 2023, it was down to 80 percent. …the median American household has a disposable income that is 16 percent higher than the median German household, adjusted for purchasing power.
He then looks at potential reasons for Europe’s lagging performance.
He touches on several areas. I especially liked his discussion of labor market red tape.
What explains this gap between Europe and the U.S.? There are many factors, from rigid labor markets to energy restrictions to trade barriers to burdensome regulations on tech companies. The connecting thread is that Europe is poor because of specific policy choices. Europe is poor because it chose to be poor. …what really separates European companies from American ones is Europe’s high cost of business failure, rooted in its inflexible labor laws. …In markets where companies have to take risks, mass layoffs can be unavoidable. But in the United States, layoffs are usually quick and relatively low-cost; in the E.U., they can take months or even years.
Regular readers presumably won’t be surprised. So called employment-protection legislation discourages employers from creating jobs.
You can and should read the entire article for analysis of how other policies are undermining European prosperity.
I’ll close by pointing out that the growing gap between Europe and the United States is not just a story about divergence.
It also gives me a good excuse to recycle my never-answered question.
Supporters of free markets have dozens and dozens of examples of how economic liberty leads to more national prosperity.
I keep asking my leftist friends to show me any example, at any point in history, of big government leading to more prosperity.
They can’t answer, because global economic history shows there is only one economic system that generates mass prosperity.
P.S. The article also includes a section on “mutual recognition,” which is vastly underappreciated as a cornerstone of good cross-border economic policy.
Rather than trying to harmonize regulations with a single rule book written in Brussels, trust that rules that are good enough for Swedish consumers are acceptable for Spanish ones too. If something is legal in one European country, you should be able to trade it and use it in all the others, provided it is clear where it comes from. “Mutual recognition” of this kind was supposed to be the basis of the single market. Restoring it would be one of the biggest trade liberalizations in world history.
Our friends on the left don’t like this approach, however, since it means jurisdictional competition. They prefer harmonization, which effectively means cartels for the benefit of governments.
P.P.S. The three previous editions in this series can be read here, here, and here
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