Arnold Kling

What's Wrong with Europe?

Arnold Kling, Great Questions of Economics
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Europe lagged the United States in productivity growth in the 1990's, by 18 percent per year, according to Alberto Alesina and Francesco Giavazzi. They have analyzed the causes for this gap, and they find that the biggest difference is that United States businesses are better managed and more entrepreneurial.

Rigid labor markets and a corporate governance culture that protects incumbent managers, make it hard to reap the benefits of new technologies...goods market regulations favor incumbent firms and discourage new entrants: while firm profits in Europe are high, investment is not, at least when compared to the US.

This exposes the second weakness: the ability to innovate. As in the case of capital, what Europe lacks is not scientific competence, but the ability to translate scientific achievements into business innovations.

As an aside, I would point out that European opposition to genetically-altered food ought to be viewed in this light--as a resistance by incumbents to innovation. Even Paul Krugman pointed out in one of his early New York Times columns that organically-grown food is much riskier than genetically modified food--political correctness has it completely backwards.

Brad DeLong is more optimistic about Europe.

Much of western Europe is in the same situation as the US in the early 1990s, simply waiting for the next turn of the business cycle and the continued diffusion of technology to achieve the necessary critical mass. The computer and communications revolution is already transforming the economies of Finland, Sweden, Ireland, Australia. My money is on western Europe's revolution being relatively close behind.

Discussion Question. Throughout the 1990's, the financial press reported the "cruel" layoffs that were taking place among large U.S. companies. Why might an economist argue that rapid economic growth requires contraction in some sectors?

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