More Reactions to Keeping America’s Edge

Ross Douthat very generously devoted the bulk of his New York Times column to the article and its key themes. He adds two items to the agenda that I proposed: entitlement reform and tax reform. I agree with both of these concepts, and expect to go into much more detail on both in the book, likely with some preliminary ideas hashed out here on these blogs. Michael Barone was also very generous, and also proposed adding pro-family tax reform to the agenda.

Chrystia Freeland devoted her New Year’s Day column in the Financial Times to some of they key themes in the article, and emphasized some of its sociological aspects. In the article I said of the old Wasp ascendancy that they “developed a social matrix that offered broadly shared prosperity to generations of Americans.” Ms Freeland’s wording of this idea makes me wish she were there for the rewrites:

The genius of that elite was its ability to bring the American dream within reach of nearly everyone. If it hopes to emulate the longevity of America’s Wasps, and, more importantly, the political system they created, today’s global plutocracy must figure out how to do the same.

Jonathan Chait at TNR wrote that the piece does “have some interesting observations and decent proposals”, which is gratifying, as I saw a lot of the agenda I was proposing as being capable of gathering broad support. He also criticized the presentation of some of the data. Here are the relevant sentences from my article:

From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world.

Mr. Chait has two basic criticisms of these sentences, as I see it. He asserts that:

1. While technically accurate, the statements present the data in a misleading way because (i) I am comparing a period starting in the 1970s with one starting in 1980, and (ii) I quote a GDP figure for all of Europe, and then proceed to describe Europe “opting for social democracy”, which implies that this should have referred only to Western Europe.

2. I discuss total GDP, rather than GDP per capita, which is a better measure of prosperity.

Let me take these one at a time.

1. I used the word Europe as per its dictionary definition. I apologize for any confusion the wording might have created; as always, such confusion is the fault of the author, not the reader. I don’t think, however, the statement is misleading. The basic conclusion that Europe has ceded enormous global GDP share, while the U.S. has retained close to constant GDP share, holds for any reasonable geographic definition of Europe, for any time periods beginning in the 1970s or 1980, and when using any data source that I investigated for comparing currencies.

I’ll start with the change in U.S and European shares of global GDP, using Mr. Chait’s preferred (and entirely reasonable) definitions: a common start date of 1980, and the EU15 as a proxy for Western Europe. According to the US Economic Research Service Macroeconomic Dataset; GDP Shares by Country and Region Data Table; 11/4/09 update, the U.S. share of global GDP was 26.2% in 1980, and grew very slightly to 26.7% in 2009. This is a net share change of +2% (1 – 26.7/26.2) for the U.S. over this period. Germany, as another example, had a global share of 8.2% in 1980, which declined to 5.85% in 2009. This is a net share change of -29% for Germany over this period.

According to this data source, the net share changes from 1980 to 2009 are:

U.S. +2%

EU15 -22%
Of which,
Germany -29%
France -20%
Italy -32%

Now I’ll show almost the same analysis with a different data source – the OECD Publication The World Economy: Historical Statistics – that only has data through 2006. (In general, these calculations show slightly worse performance for both the U.S. and Europe as compared to the rest of the world, but almost identical U.S. vs. Europe performance). This table will show the change in share of global GDP between 1980 and 2006 for a core group of 12 European economies identified by the publication, plus each of the “big three” continental social democracies individually, plus the U.S.

Net share changes from 1980 to 2006 are:

U.S. -7%

Euro 12 -29%
Of which,
Germany -37%
France -28%
Italy -34%

However you slice it, the same observation holds true: European countries as a whole, and especially the major “social market” economies of Germany, France and Italy, have lost 20% – 30% of their share of global GDP versus the U.S.

2. Exactly as Mr. Chait indicates, GDP per capita would be a far better measure of prosperity – which is why I used that metric when discussing relative prosperity earlier in the piece. I used total GDP in the paragraph in question for the reasons I stated in the article. This was a description of the loss of European economic power to Asia. Ultimately, absolute size of an economy matters, because economic clout represents the latent capacity for military and cultural power. Not all large, successful economies become military powers, but many do. And per capita wealth will not protect a society from a large, aggressive military power. As an extreme illustration, annual GDP per capita is more than $40,000 in Hong Kong and more than $30,000 in Taiwan, but this did not allow Hong Kong to remain independent of PRC China, which has annual GDP per capita of about $6,000, and would not allow Taiwan to do so without the presence of the U.S Navy.

This is why the sentence that immediately follows the ones quoted by Mr. Chait is this:

The economic rise of the Asian heartland is the central geopolitical fact of our era, and it is safe to assume that economic and strategic competition will only increase further over the next several decades.

And it is why this is almost immediately followed by the following paragraph:

Yet the strategy of giving up and opting out of this international economic competition in order to focus on quality of life is simply not feasible for the United States. Europeans can get away with it only because they benefit from the external military protection America provides; we, however, have no similar guardian to turn to. We do not live in a Kantian world of perpetual commercial peace. Were America to retreat from global competition, sooner or later those who oppose our values would become strong enough to take away our wealth and freedom.

If we do consider per capita GDP, as noted in the piece, “economic output per person is now 20 to 25% higher in the U.S. than in Japan and the major European economies”. As Reihan Salam notes in his blog post on this, as of 1980 the consensus was that the U.S. and Europe should be converging on a reasonably common level of economic output per person. The roughly comparable growth rates in output per person over the past quarter century represent the unexpected maintenance of a U.S. lead.