GLOBALIZE THIS!

Friday, June 03, 2005

WHY I DON'T LIKE DAVID BROOKS: #1

This morning I decided to start a new, regular feature on Globalize This!: Why I Don't Like David Brooks. Yesterday, Brooks opted to rail against the wildly successful European welfare state...those stubborn old world Europeans just won't face the facts of living in a globalized economy. For Brooks, who will henceforth be known as Bobo, social welfare systems are about as passe as Prussian monocles. And Bobo knows what's best:

"...it is not the absolute standard of living that determines a people's morale, but the momentum. It is happier to live in a poor country that is moving forward - where expectations are high - than it is to live in an affluent country that is looking back."

And Bobo knows because Bobo has lived in so many poor countries--Bobo knows what poor people think, what makes them happy. So by Bobo's logic, workers living in China, which is on the rise, should be happier than workers living in the United Kingdom, which has been on the descent since roughly the 1940s. Hmmmm...

What Bobo doesn't know, apparently, is that he lives in perhaps the largest social welfare state in the world. As it happens, though, the American welfare state is of a different breed known as a "market-reinforcing welfare state." The market-reinforcing welfare state is designed to provide welfare for people like Bobo who are already socioeconomic winners. In order to qualify for benefits in this welfare state, one already has to have substantial income and wealth. This type of welfare state is markedly different from the more egalitarian social welfare benefits provided by European governments, the Canadian government, and many other governments.

Bobo receives government subsidies for health care. Bobo never sees the subsidy, the government does not provide it directly to him or directly to Bobo's caregivers, but instead provides it in the form of tax credits to Bobo's employer for giving Bobo health insurance. Bobo also receives government subsidies for housing and pensions in the form of income tax deductions he takes for interest payments on his mortgage and contributions to tax sheltered retirement savings plans (401Ks, IRAs, and more complex investment instruments that most regular folk haven't heard of). The value of benefits Bobo gets from this type of welfare statism undeniably dwarfs to, say, a single mother who moved from welfare to work and is receiving food stamps, Medicaid, child care subsidies, and is living in public housing. So it's not that Bobo is against welfare statism, he is only against a more equitably distributed welfare state.

Bobo pretends (or ignorantly believes) that Europe's welfare statism is the reason for Europe's economic malaise (or what some call Eurosclerosis), as opposed to, say, the contractionary bias of the European Central Bank's inflation-targeting policy or the fiscal policy straight-jacket embedded in the stability pact that underlied creation of the Euro currency. Thus, Bobo concludes, Europe's welfare statism is to blame for the fact that European incomes are comparable to those of Arkansans.

But wait...Bobo's point is egregiously misleading for at least two (and a half) reasons. First, the half reason, a technical point. I'm not sure how Bobo is comparing the Arkansan and European per capita incomes. My guess is he is using purchasing power parity exchange rates (PPP), which is to say the implied exchange rate based on relative consumer prices in the two countries. Punditocrats like Bobo love to use the PPP rates because it makes them appear to know about technical economic issues about which they know very little or nothing. With the way the Euro-Dollar exchange rate has been going for the past 3 years or so, it's fair to say that this approach understates European incomes relative to American incomes.

But for the moment accepting Bobo's numbers, the first full reason Bobo's point misleads is that Europeans incomes are lower because, on average, they work 250 hours less than Americans every year. If you believe in utility theory where rational households choose to allocate their time between working and leisure in order to maximize their happiness (utility), then Europeans are happier (and better off) taking an additional 6+ weeks of vacation (relative to American vacation time) than they would be if they were to work the same amount as Americans and have commensurately higher incomes. This model of the world, though perhaps oversimplified to a fault, is what underpins almost all economic theory. But Bobo doesn't need to bother with economic theory, because Bobo knows what makes people happy (see above quote).

The second reason is that European incomes can be lower because many of the important things they consume, such as health care and public transit, are paid for by the welfare state and not out of household incomes.

I hope you've enjoyed this installment of "Why I don't like David Brooks." Stay tuned for many more of my Bobo counter-rants.

¶ 6/03/2005 11:27:00 AM

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