Is America on the road to economic backwardness?
We're on top now, but not doing what it would take to stay there
Here's something that may surprise you: If the United Kingdom were a U.S. state, it would be the second-poorest one.
It's all the more surprising given its economic history — the U.K. was the first nation to industrialize, and was for nearly a century the undisputed economic heavyweight of the world. It had a huge head start, but has since fallen behind.
So which countries have the most productive economies? Leaving aside countries with resource booms (Norway, Qatar), and ones with inflated economic statistics due to serving as a giant tax shelter (Ireland, Luxembourg), the six leaders in order are these: Belgium, Denmark, the United States, the Netherlands, France, and Germany.
But there are reasons to think the United States is poised to suffer the same fate as the U.K. — to be passed up by better-governed countries.
The above ranking comes from looking at GDP per hour worked in the OECD statistics. As Thomas Piketty explains, this is the best way of calculating overall productivity, as it gets past differences caused by working more hours (which is why U.S. per capita GDP is still much higher).
So what happened? In fact, the U.K. being passed up may not be as strange as it first appears. As Eric Hobsbawm writes in his history of the Industrial Revolution, England was not an educational or technological powerhouse when its economy exploded in the late 18th century. Instead it basically stumbled into the complex of political and economic institutions, plus raw materials in the form of cotton, that allowed it to develop fast economic growth before anyone else.
The first generation of textile manufacturing only required rudimentary science and engineering, and so at first the U.K. rocketed ahead of better-educated countries. But as manufacturing techniques progressed, they became more complex and sophisticated, and thus did require better and better-trained workers, engineers, and scientists, and better public policies. As a result, the U.K. began to lose some of its lead to continental European countries. It was eventually passed up by America, which had only a slightly later start, and had far superior education and science, plus a huge population and a whole continent stuffed full of resources.
What's more, industrializing countries often end up with increasing wages, and so there is often pressure to core out the manufacturing base and ship it to cheaper countries. Built-up companies also present a ripe target for financial parasites, who would devour genuinely productive enterprises for a quick buck.
These diseases of capitalism afflicted both the U.K. and the U.S., but the latter dealt with it better. After the wretched Gilded Age and the worst-ever depression caused by financial excess, the New Deal set up a basic framework of regulation, industrial policy, and open markets that enabled by far the fastest growth in American history — and protected the nation from outsourcing and Wall Street bloodsuckers. (It was also barely harmed by the two world wars, compared to the devastation in Europe.)
As a result, by the end of World War II, the United States was far and away the most productive country, outstripping most European countries by a factor of two or more. But the top European countries caught up quite quickly in the postwar generation, reaching parity around 1980. What's more, they took advantage of that warp-speed growth to implement extremely generous welfare states that not only shared the fruits of that growth widely and vastly increased leisure time, but also helped people find jobs and keep the economy cranking. Generous paid leave and child care benefits help mothers and fathers stay in their jobs, and active labor market policies (retraining, job placement, employment subsidies, and so on) help connect unemployed people with work.
The American welfare state, by contrast, has always been a threadbare and janky mess compared to that of Germany, France, and especially the Nordic states. Denmark has 55 weeks of paid parental leave, and spends 2.2 percent of GDP on active labor market policies (or the equivalent of over $400 billion in the U.S.), compared to 0 weeks and 0.1 percent here. As a direct result, its prime-age employment rate is over five points higher than America's — and over eight points higher among women. But not only that, it has more triadic patents per resident, more venture capital as a share of GDP, and more researchers as a fraction of employees.
And remember, its economy is actually slightly more productive than America's. It's all the more remarkable when you consider its chilly climate and proximity to the smoking economic crater that is the eurozone.
But instead of closing the welfare gap with Denmark since 1980, we've mostly made it wider. We have an order of magnitude greater poverty, and all services are generally wretched for poor people. The signature American welfare policy is viciously coercive measures to force poor people into work, without the slightest effort to make sure the jobs are actually there to be had, or that people have the right skills to get them, which goes on to fail disastrously. The American government barely cares about making sure productive workers aren't wasted, or that mothers don't drop out of the workforce. Our health-care system routinely lets productive people fall ill and even die for no reason (though ObamaCare was a modest step in the right direction).
Additionally, we've let Wall Street vampires off the chain since 1980 — not just bleeding companies dry and outsourcing others, but also rolling up whole sectors into huge, stagnant oligopolies that actively strangle innovation and kill jobs. American telecommunications service, for instance, is now far behind that in Europe, despite the fact that the technology was developed here.
And that is just what happened with the U.K. and textiles. The United States has been coasting on past successes for decades now. Without wise policy we will soon be an economic laggard.