Myths about the U.S. Economic Model

The Great Recession is allowing some widely held beliefs about the U.S. economy — which were the source of much evangelism over the last few decades — to run up against a reality check.  This is to be expected, since the United States has been the epicenter of the storm of policy blunders that caused the world recession.  This month my CEPR colleagues John Schmitt and Nathan Lane showed that the United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials.  If we look at what percentage of our overall labor force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses — well, the U.S. ranks at or near the bottom among high-income countries.

As economist Paul Krugman noted after reading the study, “one more American myth bites the dust.”  Indeed it has.  And as both the authors of the paper and Krugman note, there is a plausible explanation for the United States’ low score in the small business contest: our lack of national health insurance.  There are enough risks associated with choosing to start a business over being an employee, but the Europeans don’t have to worry that they will go bankrupt for lack of health insurance.

A number of other alleged advantages of America’s “economic dynamism” are also mythical.  Most people think that there is more economic mobility in America than in Europe.  Guess again: we’re also near the bottom of rich countries in this category, for example as measured by the percentage of low-income households that escape from this status each year.  The idea that the United States is more “internationally competitive” has been without economic foundation for decades, as measured by the most obvious indicator: our trade deficit, which peaked at 6 percent of GDP in 2006.  (It has fallen sharply from its peak during this recession but will rebound strongly when the economy recovers).  And of course the idea that our less regulated, more “market-friendly,” financial system was more innovative and efficient — widely held by our leading experts and policy-makers such as Alan Greenspan, until recently — collapsed along with our $8 trillion housing bubble.

On the other hand, most Americans pay a high price for the institutional arrangements that bring us these mythical successes.  We have the dubious honor of being the only “no-vacation nation,” i.e. no legally required paid time off and of course some weeks fewer actual days off per year than our European counterparts enjoy.  We have a broken health care system that costs about twice as much per capita as that of our peer nations and delivers worse outcomes, as measured by life expectancy or infant mortality.  We are near the top in terms of inequality among high-income countries; and at the bottom for parental leave policies and paid sick days.  The list is a long one.

Yet it was just two years ago that Nicholas Sarkozy successfully won the presidency of France by arguing that the French could not afford their welfare state and had to adopt a series of reforms that would make the French economy more “dynamic” like that of the United States.  These included tax cuts for the rich and labor law changes that would make it easier for employers to fire people.  Many French are now sorry they voted for this guy and very glad that they have more protection than most Americans have from the ravages of the recession.  Of course they could also use a larger economic stimulus, but the fact that they don’t have one is due to the neoliberal policies of their own government and those of the European Union, especially the European Central Bank.

There is another area where the comparison between the American and European model has serious implications for the future of the planet: that is climate change.  “Old Europe” uses about half as much energy per capita as the United States does.  A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.

We estimated that the U.S. would consume about 20 percent less energy if it had the work hours of the EU-15.  This would have a significant impact on world carbon emissions.  Furthermore, when the world economy recovers, there are a number of middle-income countries that will approach high-income status in the not-too-distant future (South Korea and Taiwan are already there).  Whether they choose the American or the European model will have an even bigger impact on global climate change.

The major media in both Europe and the United States have played an important role, for decades, in helping politicians capitalize on economic mythology to push policy in economic and socially destructive directions on both sides of the Atlantic.  It remains to be seen how much the Great Recession will influence the thinking and reporting of these influential institutions.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C.  He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy.  He is also president of Just Foreign Policy.  This column was first published by the Guardian on 13 August 2009 and republished on the CEPR Web site under a Creative Commons license.