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The Productivity Gap

European governments are worried because their workers aren't as efficient as Americans.

7:00 AM, Apr 15, 2003 • By IRWIN M. STELZER
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THEY KNOW THE WORDS, but they don't quite have the tune.

The Europeans are worried about the productivity gap. Their studies show that America leaves them in the dust when it comes to producing goods and services efficiently. Since the only way a nation can increase the welfare of its citizens is to have each worker produce more, this productivity gap is worrisome. After all, what good European wants to contemplate a future in which the gap between U.S. and E.U. living standards progressively widens?

So in this one regard they want to become more like the otherwise despised United States. One answer the Europeans have concocted is to meet--year after year--and promise a variety of "reforms" to make it easier for new firms to set up shop, and existing firms to hire. So far, no luck. Unemployment in Germany is over 10 percent, and in France is approaching double digits--and rising. Only Britain is doing moderately well, and even there rising taxes and continental-style regulations are starting to take their toll.

The Europeans understand that without rapid economic growth, the funds for the cherished expansion of their welfare states just won't be available. So they try to talk like Americans. In the words of Europe's most savvy finance minister, Chancellor Gordon Brown of the UK, they are promising they "will learn from American competition and enterprise. . . ."

But in looking to America for guidance, Europe seems to have learned too much from Franklin Roosevelt and too little from Jack Kennedy and Ronald Reagan. FDR followed the advice of an adviser who promised "We shall tax and tax, and spend and spend, and elect and elect." The result was a prolonged depression that ended only when America entered WWII. Kennedy and Reagan took the road less traveled, cut taxes, and set in train periods of extended and rapid growth.

Not Europe's politicians. Brown has raised taxes steadily since taking office. Jacques Chirac was elected on a promise to cut taxes by 30 percent over five years, but after an initial reduction of 5 percent, gave a Gallic shrug and reversed course. Gerhard Schröder's economic recovery plan seems to change daily.

Meanwhile, deficits in all of these countries continue to rise, and now exceed the 3 percent of GDP that the European Central Bank considers prudent. Such deficits are probably appropriate in a period of slowing growth, and the Europeans like to point out that they are merely following the lead of President Bush in spilling some red ink. But there is a difference. Europe's deficits are the result of massive overspending by the public sector America's deficit, on the other hand, will result from a tax cut that puts more money into the hands of consumers to spend in the private sector. Not for E.U. politicians the teaching of leading experts such as Princeton's William Baumol and his colleagues: "Restraining public expenditures," they conclude, "can make private investment easier and more rewarding financially."

There is worse. Europe's leaders see a productivity gap and feel called upon to develop government programs to eliminate it. Not for them Ronald Reagan's wise "Don't just do something, stand there." Not enough entrepreneurship? Let's have more tax credits. Entrepreneurs are unwilling to locate business in the regions in which the politicians want them to locate? Still more tax credits and some regional planning. Not enough research and development? Set up an international bureaucracy to encourage it. All of these programs, of course, favor those who can best navigate the sea of paper created by the tax code and the massive regulatory web spun by the eurocrats, while the heavy tax burden on the successful reduces their incentive to work and take risks, and encourages capital flight.

That's just not what American-style entrepreneurship is all about. It's about free spirits deciding what sort of business will meet consumers' needs. It's about businessmen, large and small, deciding where to locate their offices and factories, without the aid of a regional planning council. It's about getting rich, with "social justice" flowing from private philanthropy of the sort that all-invasive governments in Europe have virtually eliminated.

Most of all, it's about individual freedom. It is not possible to breed a nation of men and women who look to the state to fund their trips to the spa (as in Germany) or who are told that they are too ill-informed to choose their own doctors (as in Britain)--and then expect those same men and women to become risk-taking, innovating entrepreneurs.