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  • It Isn’t Voodoo Economics

    Posted by James R. Rummel on May 17th, 2007 (All posts by )

    An economist named John Schmitt is quoted extensively in this Reuters news article. It seems that he is rather upset with the way we do things here in the United States. You see, we are “the only advanced economy in the world that does not guarantee its workers paid vacation days and paid holidays.” Mr. Schmitt says that it is a “national embarrassment.”

    The article then goes on to point out that French workers are guaranteed 30 days of paid leave per annum, but only one paid holiday. Most of the other European countries force employers to provide a mere 20 days of paid leave, but the workers also are allowed 15 paid holidays.

    That sounds nice on the surface, but I seem to recall that Europe is seriously lagging behind the United States so far as GDP is concerned. In fact, didn’t Europe just manage to reach the level of prosperity that the US attained a full generation ago?

    It seems to me that there might just be a connection between government mandated vacation time and slow economic growth, a connection that Mr. Schmitt seems to have missed when talking about our “national embarrassment.”

    But economists probably suffer more from embarrassment than I do. If I was Mr. Schmitt, for example, my face would certainly be red after that Reuters article came out.

     

    23 Responses to “It Isn’t Voodoo Economics”

    1. Don Says:

      “More than half of workers simply don’t use all of their vacation time, according to a report from Hudson, a worldwide recruitment service. The study, which is based on a national poll of 2,082 U.S. workers, showed that 56% do not use all of their allotted paid time off. The report released Wednesday shows a full 30% said they take less than half of their days off. Plus, one in five workers reported that they only plan on getting away for long weekends this year without taking a full vacation.”
      http://www.informationweek.com/research/showArticle.jhtml?articleID=199101283

      Not counting those on vacation still attached to their offices by BlackBerrys, the net, and cell phones.

    2. John Jay Says:

      In my company the UK employees sometimes complain that their salaries are not as high as the US employees. Our repsonse is that we’ll talk about equalizing the salaries when they give up half of their vacation days and start showing up to work in August (all of the EU is notorious for shutting down in August, and in the US we have to scramble to make sure that deadlines are hit in July if EU personnel are involved).

      I have a German colleague (working in the US office – self selecting sample) who still complains about an incident a few years back where the German office went on vacation in August, leaving the US office to handle some serious queries from the German government that had come in the last week of July. None of his US direct reports would do that, so he says.

    3. Jonathan Says:

      This is typical make-news. Schmitt works for a left-leaning think tank and has just published a report that needs to be promoted. The quotes in the Reuters article are taken from the accompanying press release. The rest of the information in the article is taken directly from the report (pdf). The Reuters article does not present any information or even opinions from other sources.

      I probably disagree with the economist’s agenda here but I don’t blame him for successfully using the press in his promotional efforts. Reuters, meanwhile, by allowing itself to be used in this way, confirms itself as being institutionally lazy and/or agenda-driven (probably both) and not to be trusted.

    4. Methinks Says:

      If government force worked so well, Soviet Russia would have been an economic miracle. So would the more moderate socialist Europe.

      Teachers in this country get almost 3 months of vacation. See how well that’s working out for us?

    5. gs Says:

      It seems to me that there might just be a connection between government mandated vacation time and slow economic growth, a connection that Mr. Schmitt seems to have missed when talking about our “national embarrassment.”

      I tend to agree, but the decline of the dollar vs. the euro perplexes me: a true national embarrassment afaic. The drop has been about 30% under the current administration. Whoever is buying the euro is not buying the story of a hidebound declining Europe outpaced by a vigorous entrepreneurial America.

      My understanding is that some financial models interpret currency movements in terms of interest rates. Do those models explain the decline of the dollar? If not, what have the currency markets seen about Europe that they found lacking in America?

    6. Remi Says:

      Why are you embarrassed by the drop in the $.
      The dollar was long due for a strong correction. Most of the so call American miracle comes from the facts that we have the ability to print money and never pay it back (as long as our partner keep it in their safe). We spend money like a drunk sailor.
      Ask the German or French what use to happen to their currencies when they had deficits.

    7. Mace Says:

      Yeah, employers provide “paid” holidays just like they provide “free” healthcare.

    8. fred lapides Says:

      Let me first note that I am way out of my depth on economic matters. But that said, it seems to me that the total package and not merely one or two parts of it need to be compared. Thus, retirement benefits, health coverage, overtime, unemployment benefits, vacaion, etc etc–all must be considered if one is to compare the effectiveness of various economies. What, for example, does it matter if I make , say X number of dollars more than a worker in another country but I have to pay all my health costs and he pays none or little? etc etc

    9. Methinks Says:

      Fred,

      You always pay for all of the health costs yourself. Your employer factors the cost of providing health coverage into your salary and deducts that amount from it. So, if it costs your employer $10,000 annually to provide you with health coverage, you will be offered a salary that is $10,000 less than it would be if you paid for it yourself.

      In socialist economies, healthcare coverage is a transfer payment from the wealthier and more productive to the poorer and less productive workers. The more they make, the larger the transfer to others. However, this provides a disincentive to become more productive. That’s one of the reasons that the average European’s income is less (in real terms – factoring in all the taxes, transfer payments, etc. that you mention) than what we consider “poverty” in the United States.

    10. Shannon Love Says:

      I think that historical degrees of class mobility may explain a lot about differing attitudes towards benefits like vacations between Europeans and Americans.

      Historically, Europe has had relatively little class mobility. No matter how hard a person worked or how skilled they became, social conventions frustrated their ability to climb up the class hierarchy. Even if they did rise economically, they could find themselves socially isolated. Any given individual found it hard to conceive of themselves as altering their own economic conditions by dent of their own effort. Redistribution seems like the only realistic means of improving their lives.Culturally, Europeans began to think of improvements in the lives solely in terms of getting more reward for doing the same job.

      America by contrast has historically had very high degrees of social mobility. Indeed, one could argue that America has the greatest degree of social mobility ever. More importantly, Americans attach no stigma to the “self-made man”. Indeed, we admire no one more. Americans brag constantly about their humble origins. Any individual American can easily conceive of themselves as significantly improving their lot (or even making it big) by their own efforts. Culturally, Americans think of improvements in their individual lives in terms of changing jobs and moving up the economic and social hierarchy.

      Tellingly, I think, Americans from he deep south, with its historically relatively static class structure, reflect more European sensibilities.

    11. Angie Schultz Says:

      No matter how hard a person worked or how skilled they became, social conventions frustrated their ability to climb up the class hierarchy.

      This is not entirely gone even today. I have a friend working in France, and she says that they still care about who your father was, what he did for a living, etc. I believe she said they’d ask you that right out in an interview.

    12. John Jay Says:

      Shannon – having lived both Europe in Japan, I would say that Old Family Deep Southerners more closely resemble them than the current EU.

      That being said, there is very little power left to those societal matrons and patrons down there, unless you are intent on social climbing with the KY horse-set, or the Charleston SC or Atlanta GA socialites. TX alone destroys the sterotype of the fixed Southern aristocracy, and in the rest of the South, they’ve been on the decline since the Recent Unpleasantness Between the States.

    13. Methinks Says:

      “…Recent Unpleasantness Between the States.”

      I laughed out loud reading that. I lived in the South for 20 years, I know what you mean.

      Now, however, I live in NYC and I find an aristocracy no less rigid than the one I find in Europe (or the fixed Southern aristocracy). They don’t love the “new money” on the Upper East Side! So much so, in fact, that they go to great lengths to keep that sort of riff-raff out of their co-ops.

      In general, having observed them myself, I agree with Shannon’s assessment of the cultural differences between the US and Europe. However, I don’t agree that redistribution actually betters the life of Europeans. It certainly doesn’t make them more socially equal either. It simply levels the income of rich to some degree by making them more poor but at the cost of massive disincentive for economic expansion and a huge incentive for rent seeking. As a result, the overall standard of living is much lower in most of Europe than in the United States. They have fewer amenities (like air conditioning and microwave ovens), smaller dwellings, medical wait lists, and smaller incomes and less personal freedom. In Europe, 35,000 people died in a heat wave a few years ago. Unheard of in the United States.

      Within the EU, the more economically liberal countries (with the exception of countries that have very special circumstances) have a higher standard of living and a higher average income. The less redistribution the better.

    14. John Jay Says:

      Methinks – careful, now. I am a Southerner, ‘though not a Deep one, and my family took part on both sides of the Recent Unpleasantness (including one who was a member of the only Federal unit fielded from VA). ;-)

      My first comment was poorly worded – what’s left the Soutern aristocracy has more in common with Japanese that EU society. I think that my Southern roots and sense of decorum helped me fit into Japan better than some Yankee ex-pats I saw who just would not adjust to a more rigid social code.

    15. Tatyana Says:

      John Jay: interesting, your last sentence. One of the bloggers I read regularly, a 10yrs-American resident from Moscow, is making a head-spinning career at IBM as a marketing coordinator in Japan.
      Despite her being a woman. Despite her being young (relatively…she’s the youngest among equals in this position).

      She said her secret is life in Moscow with its business hierarchies, understanding how social psychology influences business decisions. She speaks their language.

    16. outraged Says:

      Methinks says-
      “That’s one of the reasons that the average European’s income is less (in real terms – factoring in all the taxes, transfer payments, etc. that you mention) than what we consider “poverty” in the United States.”

      Where did you get this factoid, methinks? Are you suggesting that the average European’s income is less than $9,310 a year (HHS defined poverty level for a one person household in the US in 2004)? That is hard to live on, even with free health care. Given that the per capita GDP in Western European countries is three times that, I am suspicious of this statement. Anyway, it makes more sense, of course, to talk about median income instead of average income, given the skewed distribution of income. I googled around a bit and a semi-random look at documents showed that median disposible income (that is, after taxes) for the 50+ working population ranges from 11,000 Euros in Italy ($14,300) to 39,000 in Denmark ($50,700).
      http://www.nek.uu.se/Pdf/wp2006_14.pdf

      I’m curious where you got your data to the contrary. I’m also fascinated about why contributors to this site are so resentful about Europe and its perfectly acceptable standards of living coupled with decidedly more humane social policies than ours.

    17. Don Says:

      The Specter of Poverty in America
      Tuesday, September 21, 2004
      By Robert Rector

      …”For most Americans, the word “poverty” suggests destitution: an inability to provide a family with nutritious food, clothing and reasonable shelter. But only a small number of the million persons classified as “poor” by the Census Bureau fit that description. Real material hardship certainly does occur, but it’s limited in scope and severity. Most of America’s “poor” live in material conditions that would be judged as comfortable or well-off just a few generations ago.
      The following are facts about persons defined as “poor” by the Census Bureau, taken from various government reports:
      — Forty-six percent of all poor households own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and porch or patio.
      — Seventy-six percent of poor households have air conditioning. By contrast, 30 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning.
      — Only 6 percent of poor households are overcrowded. More than two-thirds have more than two rooms per person.
      — The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens and other European cities. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)
      — Nearly three-quarters of poor households own a car; 30 percent own two or more cars.
      — Ninety-seven percent of poor households have a color television. Over half own two or more color televisions.
      — Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
      — Seventy-three percent own a microwave oven, more than half have a stereo, and a third have an automatic dishwasher.
      Overall, the typical American defined as poor by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family isn’t hungry, and he had sufficient funds in the past year to meet his family’s essential needs. While this individual’s life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, activists and politicians.
      …”

    18. Methinks Says:

      Well, outraged (nice name, btw), the link you provided doesn’t do much to contradict my point. A dollar in the US does not buy a dollar of goods in Europe. The stats you have are PPP adjusted to other European countries, not the US. European reported income data includes transfer payments. US income data does not include transfer payments. Adjust your data for parity with the US and include transfer payments in US income data and see what you get.

      “I’m also fascinated about why contributors to this site are so resentful about Europe and its perfectly acceptable standards of living coupled with decidedly more humane social policies than ours.”

      I can only speak for myself but I prefer the US to Europe precisely because their social policies are far less humane. How do I know that? I’m American by choice. I lived in both Western and Eastern Europe and was a victim of the “humane” programs there (mostly medical care). I high-tailed it to the US. So, that’s my preference.

      In Europe, government regulates every inch of your life. Regulations are costly and have even costlier unintended consequences but overwhelmingly do not have the intended outcome. There is little economic and personal freedom – although, there is civil freedom. There are waiting lists to get onto waiting lists to obtain medical care and people die on these waiting lists. The cancer survival rate in European countries is a fraction of ours. Medical care in general is rationed across Euroepe. The generous welfare programs allow people to be allergic to stuff like electricity to receive generous long term disability. I don’t think it’s fair to expect other people to toil so that you can goof off – that’s not humane in my book.

      There are countries that either have special circumstances (like oil in Norway coupled with a miniscule populations) or ones that have adopted more free-market, low tax reforms (Estonia, Poland and Ireland) That do fine. But only because they adopted an economic system much closer to the American model than the European.

      But the leading countries of the EU – France, for example – are up the proverbial creek. Unemployment is as high as 40% among minorities, over 20% among the 25-34 age group and around 10% overall. France’s GDP growth is well below that of the Euro-Zone and the country has experienced a huge brain drain in recent years as a result. Sarkozy had to make a campaign stop in what he called “one of the great French cities”, London, because 300,000 French took up residence their to escape high taxation and economic stagnation. I live in NYC and I was shocked by the number of beggars on the streets of Paris when I was there last month.

      In Germany, people dependent on the welfare state grew 400%, while people who paid into the welfare state grew by only 4% over the same 30-year time period, ending in 2000. And those numbers were adjusted for the effects of reunification.

      Did I mention that 35,000 people died in a heat wave in recent years?

      Check out Eurostat.

      If you think that all this is “humane” and “acceptable”, then I can’t help you. Pack your bags and go on over there. You’re free to have a personal opinion – as long as you don’t try to impose it one others.

      BTW, I don’t think anyone “resents” Europe hwew. Why would anyone feel bitter about a failed system when we live in a better system? I think it’s more appropriate to say that we deride Europe’s socialism as a failed system.

    19. James A Pacella Says:

      I’m coming out of exile for this one.

      Full text here

      http://www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf

      Its from 2004
      2.1 The USA is richer than Europe
      Today there is a relatively big difference in economic prosperity between the countries of
      Europe and the USA. Per capita GDP is appreciably higher in the USA.
      As can be seen, the USA is far and away ahead of all the European countries. Next
      comes Switzerland, a relatively extreme and, for Europe, misleading example, owing to
      the heavy flows of foreign capital it receives. Even so, the difference in per capita GDP
      between the USA and Switzerland is 17 per cent

      2.2 The odds are, Europe will be a long time catching up
      with the USA
      The true magnitude of the gaps is amply illustrated by Diagrams 2:2 and 2:3. The gaps
      already existing today are so great that, even if the European countries were to suddenly
      being growing much faster, it would still take them a long time to catch up with the USA.

      This kind of gap is not susceptible to short-term cyclic processes. Catching up would take
      the European countries far longer

      One very interesting observation is that one country alone catches up with the USA in
      2005, assuming the American economy to be at a complete standstill, and that country is
      Ireland. Five years’ growth in the other European countries will still not suffice to catch
      up with a wholly stagnant American economy.

      As we saw earlier, Ireland is the first country to catch up with the USA, in 2005.
      Otherwise Switzerland and the UK are the only countries to catch up with the stagnant
      American economy before 2010. Seven European countries take until 2015 or longer to
      catch up with the USA. Sweden, for example, does not come up to the American level
      until 2022. Once again, the differences between the American and the European economies
      are very great, so great that most of the European countries will need 15 years of
      normal growth to catch up on the American economy as it now stands.

      I dont want to get in trouble, so I just put the rest of the table of contents and encourage you to read the report or watch the lecture the author of the report did at heritage

      multimedia.heritage.org/content/Lehrman-021506c.ram

      2.3 Many European countries have lower per capita GDP than the majority
      of states in the USA 12
      2.4 High incomes coupled with low taxes mean high private consumption
      in the USA 14
      2.5 Retail consumption is higher in the USA 15
      3. GDP AND ECONOMIC PROSPERITY – ANY CONNECTION? 17
      3.1 Good economic development helps to improve wages 17
      3.2 High wages mean high household incomes 19
      3.3 Good economic development leads to fewer low-income households 20
      3.4 It is better being poor in a rich country than in a poor one 21
      4. WHY EUROPE LAGS BEHIND – A QUALIFIED GUESS 24
      4.1 High taxes are not without their problems 24
      4.2 High tax wedges give the wrong incentives 27
      4.3 Equalisation policy and a large public sector also have their problems 28
      4.4 The Americans work on the job, while the Europeans work at their leisure 28

    20. ajr Says:

      Even if we take it as a given (which it’s not!) that the average European worker seems “better off” with such a system, there is no doubt that the overall costs of the European labor system drive away the best workers. There have been many articles about Europe’s brain drain to the US, with top scientists, researchers, and professors heading here. Germans routinely complain that the highly egalitarian system in universities helps the mediocre academic and harms the stars — who, unsurprisingly, choose to decamp for MIT or Caltech or Stanford or Princeton or even a top state university here where work is interesting, there is plenty of money for labs and postdocs and equipment. Generous leave time and limited competition harm mobility and dynamism in the workplace and turn off the most innovative thinkers. The mediocre, union-protected teacher however, stays happily in Bonn or Paris or Madrid.

      High GDP also allows the US govt to have more funds for research so that our research budgets dwarf the budgets of Europe, despite our lower tax rates. Furthermore, Europe has no equivalent to the privately endowed mega universities which means another source of funds that Europeans can’t match. This has implications for long run productivity and future GDP growth. Fortunately for the rest of the world, it can partially free ride off the US innovations. But that doesn’t change the fact that this sort of European “pro-worker” legislation has a huge opportunity cost borne by everyone.

    21. John Jay Says:

      Tatyana – a Russian Sociology course teacher I had in grad school used to say that Japan was the only true Communist state in existence. I don’t totally agree, but after living in both the USSR and Japan, I do see some similarities.

    22. ss13 Says:

      Well, GDP here is misleading. AFAIK, American GDP is big because of 1% or so of population who has owns VERY much and earns very much. Contrary to that 30 millions of Americans work 18 hours a day and barely earn enough to pay for a home and a living. (From “Working poor”). De-facto they are state slaves. USSR also grew fast under Stalin (up to 30% GDP per annum) because of prisoner labor. Likewise, only a few percent of Americans ever comer in debt because of their health care, but most are in fear of it. You just don’t count those dying in USA because of their lack of insurance.

    23. Methinks Says:

      “De-facto they are state slaves.”

      Nice Marxist distortion. Wage rate does not determine slavery. These are free people and that makes them not slaves but low skilled workers. Still, if you travel at all, you will know that they live a life many times richer than the life similarly skilled workers live in most of the world. If they didn’t, they wouldn’t be risking life and limb to come here.

      “Well, GDP here is misleading.”

      You’re welcome to come up with an alternative metric for comparison. Incidentally, you are sort of correct that GDP is misleading for the average. GDP measures production and the top 10% is far more productive than the rest. The good news is that, unlike European countries, this country has not regulated itself to the point that this 10% of the population has no hope of becoming more productive. I speak as one who has achieved such mobility under my own steam. I couldn’t have done that in Europe.

      “30 millions of Americans work 18 hours a day and barely earn enough to pay for a home and a living”

      This problem is easily solved. Don’t let in low-skilled immigrants from impoverished countries. Low-skilled, impoverished immigrants import their poverty with them. You wouldn’t believe the difficulty a low-skilled individual has immigrating to a European country. The real question is why a person who hasn’t bothered to take advantage of the vast resources available in this country to develop his skills beyond those of a worker in Mumbai believes he is entitled to live better than the worker in Mumbai.

      “USSR also grew fast under Stalin (up to 30% GDP per annum) because of prisoner labor.”

      Well, nice non sequitur. Prison labour was a small component of the larger abomination which occurred in Russia. GDP grew so fast mainly because of useless production for which there was no demand – so that the Russians could point to all the “growth communism produced”. We were producing junk just to produce it. That’s how we ended up with warehouses of useless junk and shortages of just about every imaginable necessity. Despite the rivers of blood and utter inhumanity of socialism, you leftists seem to still love it. Maybe you can explain your adoration to me one day – using real outcomes instead of the normative bull I usually get.

      “only a few percent of Americans ever comer in debt because of their health care, but most are in fear of it”

      I fear a lot of things. In France, people fear not getting into the Polytechnic so they can become government functionaries and have a chance at an almost decent life. They also fear not getting new cancer drugs for over a year after they become available while the regulatory body haggles over price. I’d say that’s a worse fear.

      “You just don’t count those dying in USA because of their lack of insurance.”

      sure we do. And still, our healthcare numbers are better than Europe’s. You have to count the people who pay for their insurance via taxes and then have to get on waiting lists for non-elective procedures. Often, just to see a doctor in the first place.