The Continental Divide

THERE ARE SOME THINGS EVERYONE KNOWS. One of them is that while modern Europe has social democracy—with generous benefits, long vacations, and short working hours—this comes at a terrible price: high and chronic unemployment, technological stagnation, and social torpor. Another is that America has a weak welfare state, with low wages for the unskilled but plenty of jobs. As everyone says, we are unequal but dynamic, entrepreneurial, and socially fluid.

Left and right agree that these are facts. They disagree only on what to do about them. American progressives (among them Jeremy Rifkin, whose new book is called The European Dream) want us to become more European: to work less, play more, take time out for a drink. Meanwhile in Europe, conservatives want to become more American. The solution to Europe's problems, they say, is to cut wages, lower taxes, increase working hours, and cut unemployment benefits, welfare, and pensions; a top German business economist has called for cutting low-skilled pay rates in Germany by one-third.

It turns out, however, that the supposed facts are not facts at all. They are myths. It's one of those rare, wonderful topics on which everything that just about everyone thinks happens to be wrong.

To begin with, wages in Europe aren't more equal than in the United States. It only seems that way because of an optical illusion. When economists compare, they typically put the U.S. up against some individual European country. Denmark—a country with Wisconsin's population, almost exactly—is certainly more income-egalitarian than the United States. So are Norway, Sweden, Germany—even France. (Spain and Italy are not so clear.)

But what if we look at Europe as a whole? It's true that Europe is a collection of countries—with different tax systems and welfare policies. But American states have such differences, too. And economic boundaries inside Europe have been erased: The Continent has free trade, free capital flow, and legally free internal migration. In these ways, Europe is a single economy from North Cape to Gibraltar, like the United States. And looked at that way, it's a terribly unequal place. Average wages in Spain are
between 30 and 40 percent lower than in Germany. Factor that in, and pay for work in Europe is more unequal than here. Add in the newly admitted East Europeans, and it just got much more unequal still.

Inside Europe, both inequality and joblessness vary a lot. And guess what? As a rule the countries that are more equal have less unemployment; those that are less equal have more unemployment. The well-run social-democratic places (Denmark, Norway) today enjoy jobless rates slightly lower than our own 5 percent. But unemployment is around 10 percent in Spain and Greece, and almost 18 percent in Poland—for an overall European average of 8.7 percent in mid-2005. So there's actually no evidence, either within Europe or between Europe and America, that big pay inequalities are good for employment.

And when you look at European welfare states, it turns out that Europe does not transfer more wealth to the poor than the U.S. does. Yes, European governments are big. But because Europe's pensions are almost wholly public—including the pensions of upper-end workers—much more of those transfers in Europe go to, say, the top 20 percent. Earn more, get more—that is the principle behind any pension plan.

In the U.S., about one-third of retirees have, and largely rely on, private pensions or other income, including 401(k)s. Social Security is largely the mainstay of the middle class and below. Public spending on health care alone is almost as great in the U.S. as in Europe. Our problem is that these programs don't cover everyone. Instead, Medicaid supports only the poor and Medicare helps the elderly—many of whom would be poor without it. Here again, European workers are paying mostly for their own care, while the U.S. system takes from those who work to care for those who don't. (This may help explain why Americans tend to resent their system and Europeans do not.)