Hard on the heels of my criticism of US economic triumphalism comes the news that the US unemployment rate has risen from 5.7 per cent to 6 per cent, and that the Treasury Secretary (O’Neill) and economics advisor (Lindsey) have resigned. Digging a little further, it becomes apparent that in the core sector for productivity growth, manufacturing, things are grim indeed, with employment down by around 15 per cent over the last couple of years, and output also down sharply

Productivity growth in US manufacturing has been impressive, but, at least in part, it has been of the kind made famous by Margaret Thatcher. A lot of less-efficient plants have closed down and that automatically raises the average.

It would be easy to spin this into a declinist story. Playing the Zinsmeister extrapolation game, I could predict that the US will have double-digit unemployment in five years time and lose most of its manufacturing sector in ten.
Easy but silly. As I observed two years ago

nothing is more fickle than international economic fashion. It wasn’t that long ago that New Zealand was being hailed as a miracle economy. Some time in the next few years, no doubt, Japan will be booming while the US struggles to escape from recession. Japan’s problems will be forgotten while the malaise of American governance will be the focus of attention…. Yet when all the fuss has died down, the United States will still have the world’s richest economy, and most Americans will still enjoy high material living standards. America will still be the world’s dominant technological, economic and military, power.

Japan isn’t booming yet -it’s still paying the price for bad decisions made during the era of Japanese triumphalism. But it’s clear that the US economy has structural problems every bit as intractable as those that are evident in Europe.

Nathan Bierma writes

One of my biggest pet peeves about blogs is how amnesiac they are; they place such a primacy on the latest post–indeed, in the case of the majority of blogs who fixate on political headlines or personal minutiae, the only value in what they post is how up-to-the-minute they are–that once a post slides down the screen and into the archives, it’s effectively flushed out of existence.

Nathan has started a ‘Recycle Bin’ feature, where he reposts old (in blog terms, a few months old is ancient) posts. I’ve been thinking of doing something similar, especially as, with growing visitor numbers, a lot of current readers have never seen the old posts.

In an email response to my piece on declinism and triumphalism, Steven Den Beste writes

It is true that if you do your analysis with a narrow shutter, you can get that kind of changed impression on a regular basis. It’s also the case that many of those who have trumpeted the decline of American, when short-term opportunity arose, have an agenda and criticize us for other reasons when our economy is good.

But it’s possible to look at underlying problems and see trends which are more critical, and not illusionary. The demographic inversion that Europe faces is not transitory.

I also don’t think that the decline of Europe is inevitable; I think it may well be possible for them to turn things around. Part of why I’ve been writing what I have is a forlorn hope that my small voice may contribute to a process of waking up the people of Europe to make the changes which are necessary to save themselves, before it’s too late.

One thing we do now know: For all its ideological appeal, socialism doesn’t actually work, and the more closely any nation embraces the socialist redistributionist ideal, the less will overall its economy will function.

In this case, it is extremely disturbing that Germany essentially sat out the last economic boom cycle. It’s not merely that it didn’t perform as well during that interval as we did, it’s that their economy was in what amounted to recession the entire interval. (It’s just that it wasn’t quite as bad a recession as what’s happening there now.)

I guess what I’m trying to say is that just because other people have made these kinds of arguments wrongly before doesn’t mean that I and the rest who are making them about Europe now must also be wrong. A stopped clock and all that..

There are a lot of points here, but I just want to observe that the tendency to focus on Germany as the archetypal EU nation while understandable (it’s the biggest) can be quite misleading. The most important reason is the fact that this is the first economic cycle since reunification. Reunification was a big economic shock in itself, made more so by the decision (politically justifiable but economically unfortunate) to merge the two currencies at parity. Not only were there real economic shocks, but all the economic statistics were distorted by this. For example, Zinsmeister quotes high German unemployment rates, but ignores the fact that the rate for the former West Germany is not that much different from the US (8 per cent as opposed to 6) and that even this rate is boosted somewhat by Easterners seeking work in the West. Taking all this into account, it’s not that surprising that the Germans have missed an expansion cycle.

The move to the euro raises somewhat similar issues. In a globalising world, the removal of the barrier to mobility created by exchange rates will have long-run benefits, but a single currency complicates short-term macroeconomic management, and Germany has suffered from this. Somewhat paradoxically, the Germans who lobbied hard to ensure that they would not be subject to the inflationary bias of the Italians and others, are now suffering from the deflationary effects of a tight monetary policy.

I’ve been waiting for someone to make the obvious point about John Howard’s defence of unilateral pre-emptive strikes on terrorists based overseas, but as far as I can see, no-one has. Howard could easily silence his critics in the region by announcing that they are welcome to mount attacks on individuals and groups operating in Australia that they regard as presenting a danger of terrorist attacks.

This need not be a merely hypothetical offer. There have been numerous instances of groups in Australia undertaking various forms of military training in preparation for terrorist/national liberation activities overseas (under the Howard doctrine, it’s the foreign government that gets to choose which is which). And, as Ken Parish pointed out recently, the High Court has granted refugee status to people who could reasonably be regarded as supporters of terrorism. More generally, potential terrorists have legal rights here that they might not have in their home, or target, countries.

To be serious, if Howard set out his doctrine by specifying circumstances under which our neighbours would be justified in intervening in Australian affairs, the list of qualifications would be so long as to make it obvious that there is no serious prospect of the doctrine being applied to any country with a functioning, and not actively hostile, government. Which raises again the question of why he is making these statements at all.

The same points apply to the ‘Bush doctrine’ insofar as it is presented as a general principle – imagine the reaction if some foreign country decided to apply Bush’s reasoning to US-based groups they regarded as presenting a terrorist threat. But in practice, everyone understands that the Bush doctrine is premised on the notion that the US, as the source of international law and order, is itself above the law. It would be better if this were stated clearly rather than being implied – then people like Howard would not suppose that the Bush doctrine applied to Australia.

Update For those who are still ignoring my admonitions to read the comments threads (the best part of the blog, honestly!) I’ll mention that Gummo Trotsky missed beating to this punch, even though he’d been given the tip by his reader (not the only one, he claims to have another), Ross M, who emailed

I’m old enough (that makes me one of those reviled boomers)…to remember shock horror stories and pictures of secret Ustashi training camps here in Oz…of course that was also before it was perfectly understandable that Yugoslavia could come in and take them out, and punish us for not exerting due diligence in rooting them out ourselves.

The BlogGeist strikes again!

Quite a few commentators on my recent posts regarding Zinsmeister have seen them as essentially quibbles about statistics which are irrelevant since ‘everyone knows’ Europe is in terminal decline. This is an example of one of the favorite themes of ‘pop’ economics: ‘declinism’, and its opposite, triumphalism. The basic idea is to select statistics on which a given country is performing badly (or well) and extrapolate them to predict disaster (or triumph).

Typically triumphalism is displayed by supporters of the party in office, while declinists claim that otherwise inevitable disaster can be averted only if they are put in charge and their policies implemented.

I first tackled this kind of thing fifteen years ago, at which time it was regularly predicted that Australians would end up as the ‘poor white trash of Asia’ (the phrase is attributed to Lee Kuan Yew, but was used by many others. My comments in a paper I published in the Current Affairs Bulletin, entitled, ‘White trash of Asia?’, [1987, 64(2), 18–25.] could be repeated with marginal changes today

Indeed, by appropriate selection of time periods and criteria, any nation can be made to look good or bad. For example, it is currently fashionable to compare the “dynamic” US economy with the hidebound and over-regulated economies of Western Europe. Yet, only a few years ago the US was being compared unfavourably to these very countries. All that has happened in the interim is that the US has moved from a trough to a peak on the business cycle. Over the post-1973 period as a whole, the US has done slightly worse than most European economies.
It is quite straightforward even to make a country like Japan look bad. For example, Norton and Macdonald (1981) compare a number of countries on the basis of changes in rates of unemployment, inflation and growth since 1973. Their purpose is to compare Australia’s performance with that of other countries, but when their criterion is applied to changes in growth rates, Japan is the worst performer in the OECD.

Pessimism about the US came back into vogue after the stockmarket crash and the Bush I recession, before being replaced by even more vigorous tiumphalism from the early 1990s onwards. And of course it’s not necessary to massage the stats to make Japan look bad nowadays.

In the time I’ve been observing the debate a string of countries have been touted as ‘miracle economies’ and then lost their glow – New Zealand, Norway, Japan, Austria, the Netherlands, Britain, Sweden, Germany and the ‘Asian tigers’, to name but a few. And of course, the US comes into fashion with every boom and goes out of fashion with every recession. I’ve written a lot of articles in both newspapers and economic journalism making this point, but without making the slightest impact on the popularity of declinism and triumphalism. A few examples are here, here and here.

My basic point is that differences in economic performance between developed countries over the past thirty years have mostly been transitory. Sometimes one country looks good on one criterion, sometimes another. The more durable differences are in the way income is distributed in which productive capacity is allocated between public consumption, private consumption, leisure, household production and so on. There is for example a real social choice to be made between high levels of income security and opportunities to become very wealthy. Europe goes for more of the former and America for more of the latter. Similarly, Europeans have always preferred more leisure and this difference has grown in recent years.

His name doesn’t have the ring of ‘Nelson Mandela’, but Thomas Friedman is right to say that the struggle over the fate of this Iranian “Islamic Protestant” is the most important trial going on in the world today.

Virginia Postrel stresses the public good nature of knowledge in an NYT piece headed When Knowledge Was Spread Around, So Was Prosperity. She doesn’t draw any implications regarding the desirable extent of ‘intellectual property’, but I assume she’s written on this topic. Can any readers point me to a good link on this.

Following the dispute with Zinsmeister, I thought I’d go back to a piece in the Economist (subscription only) I bookmarked a while ago. After pointing out a range of issues with productivity measures, the article says

Julian Callow at CSFB calculates that in the five years to 2001 productivity, measured by NDP per hour, rose by 1.8% a year in America and by 1.4% in the euro area-a much narrower gap [than on the most commonly-cited measures]

Whichever figures one uses, though, labour-productivity growth has risen over the past decade in America, but fallen in Europe (see chart). One reason is that American firms invested more heavily in IT equipment than European firms in the 1990s, boosting the capital stock per worker. This is why many economists prefer to focus on multifactor productivity, the increase in the efficiency with which firms use both capital and labour. But that is even harder to compare sensibly across countries.
On the flip-side

One explanation for why productivity growth in Europe has slowed is that reforms to make labour markets more flexible have deliberately made GDP growth more job-intensive. More flexible workplace arrangements, such as part-time jobs and fixed-term contracts, have allowed firms to get around job-protection laws and so encouraged more hiring; cuts in social-security contributions for the low-paid have priced some of the jobless back into the labour market. The flip-side is lower average productivity growth, as more unskilled and inexperienced workers enter the workforce.

Labour-market reforms in the euro area have been more successful than is often appreciated. Participation rates have risen, and unemployment has fallen. As a share of the population of working age, employment has risen from 59% in 1996 to 63% last year. Over the past five years, employment has increased at an annual rate of 1.4%, even faster than America’s 0.8% rate of expansion and a huge improvement over the previous five years, when jobs declined by 0.1% a year.

For completeness, it’s worth amplifying the Economist’s point that strong growth in employment and hours worked is often associated with weak growth in output per hour. The converse was observed in the early 90s, when Europe had lousy (in fact, negative) employment growth, but outperformed the US in terms of growth in output per hour worked (2.1 per cent vs 1.6 per cent by my reading of the Economist’s graph).

For readers who may not be familiar with it, The Economist is an English weekly, founded in the 19th century, which takes a broadly free-market line and is critical of many aspects of the EU.

Don Arthur has announced that he has ceased publication of his blog A Hail of Dead Cats until now one of the brightest stars in Australian blogdom. Looking at the length and erudition of his posts, I can imagine they must be taking a lot of time away from his PhD thesis. He will be sorely missed.

Karl Zinsmeister has written back to me as follows:

Eric Raymond kindly forwarded me your critique of my essay “Old and In The Way” (http://taemag.com/taedec02a.pdf).

You are too clever by half. The figures you multiply in your response to my essay cannot be so crudely treated. For one thing, you have considered only persons working, and ignored hours worked per person. Nor can overall labor productivity be treated so simply. Overall productivity figures capture a mix of factors: output per labor input (representing about a third of America’s present productivity advantage over the EU), as well as higher labor inputs and other factors.

Incidentally, I used a European source for these particular figures, precisely to insulate myself from sniping of the sort you have attempted in your blog. The data you refer to were first presented by the Dutch Secretary of State for Social Affairs and Employment, Hans Hoogervorst, in a Feb 1, 2002 speech at the Hague. His paper is reproduced in “Europe’s Welfare Burden,” published in 2002 by the Institute for the Study of Civil Society in London (link).

I would appreciate your posting this as a response on your blog.

I can only respond that Zinsmeister does not appear to have read the post carefully or to have thought too much about the response. Hours worked per person are a crucial part of the calculation and are, of course, included. And whether multiplying his figures is a ‘crude’ procedure or not, it’s the appropriate way to deal with a mathematical identity.

Output per person in population = Proportion of employed people in population*Hours worked per employed person*Output per hour worked.

As with Glenn Reynolds and the debate over Sweden a while back, Zinsmeister suggests that quoting a European critic of Europe’s performance ‘insulates’ him from any suggestion of error. I don’t suppose that either Reynolds or Zinsmeister would be impressed if I attacked the performance of the US and then said I must be right because I relied on, say, Noam Chomsky, or even Al Gore. Unfortunately, I can’t check the source as the link is to an a precis of a book with no relevant info. But what kind of procedure is it to rely on obscure secondary sources for data that is readily available from agencies like the OECD and BLS?