Entrepreneurial Culture

Wall Street Opinion Journal Edmund S. Phelps February 12, 2007

Why European economies lag behind the U.S.

The nations of Continental Western Europe, in the reforms they make to try to raise their economic performance, may prove to be a testing ground for the view that culture matters for a society’s economic results.

As is increasingly admitted, the economic performance in nearly every Continental country is generally poor compared to the U.S. and a few other countries that share the U.S.’s characteristics. Productivity in the Continental Big Three–Germany, France and Italy–stopped gaining ground on the U.S. in the early 1990s, then lost ground as a result of recent slowdowns and the U.S. speed-up. Unemployment rates are generally far higher than those in the U.S., U.K., Canada and Ireland. And labor force participation rates have been lower for decades. Relatedly, the employee engagement and job satisfaction reported in surveys are mostly lower, too.

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In my thesis, the Continental economies’ root problem is a dearth of economic dynamism–loosely, the rate of commercially successful innovation. A country’s dynamism, being slow to change, is not measured by the growth rate over any short- or medium-length span. The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.

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Further, I argue that the cause of that dearth of dynamism lies in the sort of “economic model” found in most, if not all, of the Continental countries. A country’s economic model determines its economic dynamism. The dynamism that the economic model possesses is in turn a crucial determinant of the country’s economic performance: Where there is more entrepreneurial activity–and thus more innovation, as well as all the financial and managerial activity it leads to– there are more jobs to fill, and those added jobs are relatively engaging and fulfilling. Participation rises accordingly and productivity climbs to a higher path. Thus I see the sort of economic model operating in the Continental countries to be a major cause– perhaps the largest cause–of their lackluster performance characteristics.

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Comments

  1. Dean Scourtes says:

    The high cost of health insurance for small business and the self employed presents a formidable impediment to new business creation in the United States.

    A person currently sellf employed in the United States must either have a spouse with health insurance or be prepared to pay over $800 per person a month for coverage. If they have a pre-existing medical condition they can forget about getting health insurance at all.

    Jean Fraser, he CEO of the San Francisco Health Plan, a not-for-profit HMO writes:

    My husband employs three people, all of whom have worked for him for years. He is deeply committed to giving his employees health insurance. But he just doesn’t know what to do.

    He is paying $3,400 each month for insurance just for his three employees. (He gets his own health insurance through me.) This costs him $41,000 per year, about what he would pay to hire another person. Even at this rate, his employees still have co-pays for all doctor’s services, and must shoulder 10 to 30 percent of the cost of medical procedures and hospitalizations. The insurance companies give no reason for the increase.

    My husband’s choices are to keep the same plan and somehow swallow a 15 percent increase to $48,000 per year, or decrease the business’s cost by shifting more of the cost to his employees, one of whom has a wife with multiple sclerosis. “Isn’t there something else I can do?” he asks. “At this rate, I might have to let go of one employee just to keep health insurance for the other two.”

    On Rethinking Health Care in California, True choice — universal health care

    San Francisco Chronicle, January 31, 2007

    It is curious that economic conservatives who whine about the minimum wage depressing job creation have nothing to say on this issue.

    Ms. Frase concludes:

    As the CEO of a health management organization, I know that our health insurance system — the one you and I depend on every day — is on the verge of collapse because too many employers just can’t afford it anymore. If you ask me, we should have Medicare for everyone, and employers (who would be relieved of their insurance costs) and individuals should share responsibility for the cost just as we do for Medicare. This is the ultimate “free choice” solution, allowing each of us to choose our own doctors and hospitals, and even enroll in a health plan, if we so choose. Such a model eliminates most of the wasteful administrative costs in our system. It would also be relatively easy to implement by using our Social Security numbers.

  2. J R Dittbrenner says:

    Dear Mr. Sourtes,
    A good deal of what Mr. Phelps fathoms is very true.
    The killing off of of several generations of their citizens in two World Wars-the invasions and the population movement-and the loss of almost everything in the 20th. century can give one a different mind set than one would have in the US. We haven’t been invaded and occupied in the last 200 years. Check out the deep South for an approxament mind set.
    The creation of the EU has caused vast transfers of money-tens of billions-to the poorer states to equalize financial and trading pressures. For Germany, the money transfere from West Germany to East Germany has run into the billions of Marks and Euros. This does not count the very large population movement from East to West. They wern’t going to another job but going just in the hope of one. To a very great many a job-albeit with no future-and a society that at least functions legally with some social net is a consumation to be lived for. The institutional organization-commerical and state-has had tobe restrictive for control of all this movement of funds and people. It should be relaxed and redirected for a more free entrepreneurial mind set.
    Just before, during and after the World Cup I found Germans proud tobe Germans and want Germany to move. Their welcome was very real. 15 years ago it seemed that most people here had doubts about themselves, their country and who was responsible for their place in this universe. The present Chancellor is hampered by a divided government but she is making progress step by step. She is a physicist and looks before she moves and lived under communism so she understands freedom. Her father was a minister.
    Europen debt, by state and the EU as a whole is is held to the GNP and is not that great. If you comapre the national debt of the US to China and Japan you are in the trillion + area. If they were to call in all those Treasury Notes-guess what; and there are lots more Treasury Notes in the rest of the world. America, don’t blink, you all ready spent a trillion+ during the Bush administration. You also used Clinton’s trillon.
    As to insurance, it is simple: from a a corporate point of view-Insurance Companies- the patient is only a profit center and investos are paramont. Cut it anyway you want, profit is the only motive to the setting of unregulated premium cost or copayments or deductables. It is the bottom line-look at New Orleans’ insurance recovery per person. It is bleek.
    Sincerely yours, J R Dittbrenner

  3. Dean Scourtes says:

    Certainly there are aspects of the US-model that make the United States more competitive and dynamic is some ways, and there are aspects of the European model that make Europe more competitive and dynamic in other ways. The challenge is to find the right mix.

    New business creation faces fewer legal hurdles in the United States, but must overcome the formidable cost of health insurance, and expense that does not burden business firms operating in Europe.

    More flexible labor arrangements, low tarrifs and outsourcing provide American business with more ability to manage costs than their Euorpean counterparts. The increasing economic insecurity of US workers, on the other hand poses a threat to future American economic prosperity and political support for free trade and open markets.

    While American businesses are frequently more profitable in Europe, often the priority of American firms is to produce immediate profits and short-term gains to satisfy shareholders rather than invest in R&D for long-term market development and expansion. By targeting new developing technologies and markets, European firms on the other hand, have built an advantage in several important markets such as wireless phones.

  4. Dean Scourtes says:

    Martin Wolf of the Financial Times writes that the US will have to embrace some aspects of the European Welfare State, or else risk a protectionist backlash.

    Is globalisation a leading cause of rising inequality in high-income countries? The outcome of the debate on this question may determine whether the US will remain open to trade. If policymakers do not craft an imaginative response, protection against imports may be the outcome, regardless of its (non-existent) merits….

    ..What, if anything, should be done? At first glance, the trend towards greater inequality should not worry a person with Mr Bernanke’s principles. But that response would be quite wrong… rising inequality causes declining equality of opportunity… makes losing a job costlier, more objectionable and so more resisted…. In a country in which much social insurance has historically been supplied by employers, the loss of jobs and the closure of businesses is particularly traumatic. Protectionism then emerges as the politically correct form of resistance to the market….

    There are two possible responses. One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide. The other is to create a system of support that does not destroy incentives… greater funding of education for the disadvantaged (ideally, with private supply) and universal health insurance. The left will also want higher minimum wages and generous subsidisation of low earnings.

    I am not suggesting that the US should embrace Europe’s interventionist follies. But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not.

    http://delong.typepad.com/sdj/2007/02/martin_wolf_see.html

    Therein lies the internal contradiction in current conservative economic thinking. Winner-take-all policies create such sharp inequities that they threaten support for capitalism itself.