With the war in Ukraine grinding on and the French election heating up, for #3 in the three part exchange between the Chartbook and the FT’s Unhedged newsletters, our minds turned to Europe.
I think that a large part of the difference is cultural. As a general rule, Europeans are poorer and more frugal. The Germans are culturally predisposed to be savers. France has traditionally been less industrial than Germany, and an agricultural economy is generally regarded as being cash poor. Public ownership of business corporations lags behind the United States. In Europe, corporations are generally family businesses passed on from generation to generation, the corporation operating as a carapace, and without any meaningful existence of its own apart from the controlling family. Europe is typically more class-bound, and whatever inroads the working class makes it into the middle class are most frequently done as state enterprises, i.e., transportation systems, social insurance systems, postal savings systems, telecommunications, and the like. American-style go-for-broke capitalism is looked upon with fear and suspicion. European investments tend to be much more conservative than their American counterparts, and consequentially, they are less scalable.
The charts and graphs do not differentiate between productive investments and frivolities. American investors will bet on anything that looks like it might make some money, at least in the short run; and in America, the short run seems to be the predominant horizon. America does not have the 2000 year history of Europe, and Americans build for resale. Consequently, money moves through the American economy at a higher velocity and cyclic rate than it does in Europe. Americans are attracted to every bright shiny object that comes along, as Europeans look on with envy. Americans go broke more often, but the motto of American businesses is and has always been, 'Fortune favors the bold'.
The upshot is, and has always been, that bankruptcy has never had the stigma in America that has in Europe, where insolvency has traditionally taken on much more of a stigma of moral failure. America had the lure of an open continent to settle and develop, where land and resources were cheap, or any group of men who could cobble together enough money could set up a business that could survive the ups and downs of the business cycle. In this regard, Europe has been less forgiving of economic failure. No doubt, Americans waste more money than Europeans, but even wasted money cycles through an economy with the same velocity that well spent money does; and the more money that is spent, and invested for others to spend, the more likely it will be that, mirabile dictu, things that were unimaginable suddenly become the objects of investment and greater wealth. The American economy is more diverse; the taste makers are fewer and less influential. That diversity of taste and variety of experience is the stuff of life itself, with some succeeding, some surviving, and others failing. But the American economy is not bound by tradition, or a top-down hierarchy of what a suitable investment should look like. American entrepreneurs are known for being outrageously bold, gauche, and having a knack for making money, lots of it, which they then proceed to lose on other ventures that were equally as unlikely to succeed as those that actually made money.
How is Europe more class bound if social mobility is higher in much of Europe than in the US? Also: France is not an agricultural economy. Also: how is the American economy more diverse than that of the entire EU?
When you say 'much of Europe', you need to be more specific. Northwest Europe and Scandinavia is not the same as Eastern Europe, the Balkans, and Southern Europe. Social mobility correlates directly with access to capital, education, and perceived social class. Climate and topography make a difference; all one needs to do is to go somewhere and look around. If visitors come to Paris and think that France's all libraries, coffee shops, theaters, and museums, they would be sadly mistaken. Social aspirations differ between countries. France and Germany are as different from one another as Iowa and the Northeastern Seaboard in the United States are as different from one another. In the United States, is used to be, at least until recent years, that social mobility was more fluid because people moved around a lot more. That's changed for reasons having a lot to do with economic opportunity, or the lack of it; job availability for skilled and semiskilled labor. State professional licensing requirements have grown in number and complexity, further inhibiting internal mobility. Nonetheless, everyone is presumed to be able to read and write American English. That commonality of language is both a social lubricant and the foundation of commerce. Europe, however, is characterized by linguistic differences. Couple that with those language differences within Europe, and it is easy to see how intra-European migration patterns might be less robust than in the United States. It's only been within my adult lifetime that internal trade and travel barriers have been eliminated. During the year I spent working in Germany, large numbers of men from Spain, Croatia, Italy, and elsewhere in the European hinterland came to work in Germany as 'guestworkers'. They lived in boarding houses and headed back to where they came from when summertime arrived. The point is that they never put down roots where they came to work. My friend Carlos Martin Torres went home to Madrid, where he was a university student. I went home to California. My current workers do not build an economy that they can participate in. They work for substandard wages; and they view their lives and aspirations as being elsewhere. The work they do may be a step up from village life, but it is a very small step, and with absolutely no potential for advancement. Their lives is similar to the migrant California agricultural workers living in makeshift camps during the growing season. Eventually, many of them put down roots, and bring their families north from Mexico, or Central America. But the changes are incremental and generational. One could work, but life remains at a subsistence level, and people do not prosper unless they settled in for the long haul. For the whole of their lives they are sojourners, simply people passing through, and never becoming a part of the community. Here in California, American National policy restricting immigration had the effect of forcing people to settle in, and build our lives here, meaning that willingly or not, they became part of the communities in which they originally came to work, and then to move on. A shortsighted and bigoted national immigration policy had the effect of integrating large numbers of former agricultural workers into the modern California economy. Approximately 30 percent of California's population are of Hispanic cultural heritage. Many of these people retain their ties to the agricultural society and work that they and their forebears formerly did, but a great many more have found their homes in urban society, where they naturally acquire the means to survive and prosper there. That means education and developing business acumen, the keys to wealth generation and retention. I can go to any city and town in the San Joaquin and Central Valleys of California, and I will see an entire integrated society of people, predominantly Hispanic, who are as American as I am.
That answers your third question, how it is that the American economy is more diverse than that of Europe. Read the above answer, and the question answers itself.
In America, 'der Mittelstand' is gradually being pulled apart, sometimes not so gradually. It used to be that working families could earn enough through higher wages and low taxation to be able to partake of a middle-class lifestyle. That is increasingly less likely to happen today. What began in manufacturing with increasing automation, is steadily eroding the service industries as well. There are increasingly few jobs at decent pay that can actually support a small family, i.e. two to three children. The golden age for the middle class with the 1950s and 1960s where the residue of the 20-year Democratic ascendancy was still paying dividends. Inflation was low, and the United States enjoyed it enormous trade surplus from a still-recovering Europe, and Third World countries were still getting by exporting natural resources. The postwar world was generous to former veterans of the Armed Forces, providing generous grants for college educations and homeownership. An entirely new generation of college graduates, almost all of the men, were able to acquire high quality professional education, and jump right into the American economy which was then booming. That trend continued throughout the 1960s, as the children of those early beneficiaries of governmental investment in human capital and material infrastructure came to see a college education is something of a birthright but without any compelling obligation to give back to the society which raise their living standards as high as they became.
In politics and foreign relations, the Cold War took an enormous toll that was not readily evident. As American foreign trade expanded, political leaders found it necessary to seek alliances with a wide variety of Third World countries whose influence at the United Nations could be counted on to oppose the Soviet Union. Cultivating that pro-America outlook cause the American government and private NGOs to loosen the purse strings to provide unprecedented (truly so) foreign assistance for manufacturing and trade. It was during that era that large segments of American manufacturing were exported overseas. Within 10 years of America's victory over Imperial Japan, Japanese manufacturers acquired much of the American consumer electronics industry, and photographic equipment. That was followed by automobiles, and other forms of specialized manufacturing. The semi conductor was invented in California's Silicon Valley, but its chief applications were developed in Taiwan with the birth of the personal computer industry. While it was true that a great deal of the design and engineering work continued to be done here in the United States, again, Silicon Valley, but also in the Route 128 Beltway around suburban Boston, large-scale manufacturing found its way to Taiwan, and basically stayed there, until mainland China to develop its manufacturing capabilities to the extent that the technical quality and capabilities of their products equaled or exceeded anything that the best companies in the United States could offer. Germany recovered her industrial capabilities beginning in 1948 and continuing on into the present day. I mentioned elsewhere that I had been a 'Gastarbeiter' in Germany in 1963, taking what was then supposed to be a summer job job with a British company, Dunlop, in Hanau, a medium-sized industrial city on the Main River approximately 20 km from Frankfurt am Main. I remained with the company approximately seven and one half months, before leaving to tour Europe. Europe and Asia were catching up, and America was mired down in the conflicts over civil rights. The opponents of expanded civil rights for racial minorities were perfectly happy to shut down public investment in infrastructure and human capital on the perception that they did not benefit from those public expenditures. It was a foolhardy and shortsighted attitude, but one that is on full display with Donald Trump, and the Republican Party of today. They would rather starve than earn more money if they had to share those additional earnings with people who did not look like them, and who had different perspectives on life.
It was the ascendancy of the financial services industry that killed the golden goose in America. I'll save the details for a later time, but the ascendancy of private equity proved to be the deathknell of what was then the American middle class.
Labor's share of GDP hasn't decreased at the same rate in Europe as it has in the US. (Which is the flip side of more of US GDP going to corporate profits that boost share prices.) Neither have European-listed companies received the same 2017 cut in the corporate tax rate that US-listed companies have.
I came here to say precisely this, Bruno. In the US, the labour share of productivity began shrinking in the late 70s , and when labour gets paid less, capital keeps more, eh?
And that's before investigating to what extent US markets "enjoy" the additional "advantages" of rampant share buybacks and other share price manipulation schemes vis a vis the European regimes.
I would like to see you break out the role of military contribution to the gap between European countries and the US, as it is so intertwined with technology. There’s a huge economic payout for US market dominance that comes from being the dominant military power. If you’re taking out technology to make the comparison more fair, that’s taking out a lot of the military industry too. But, when you set those aside, I wonder how much you might be postulating a reality that ignores the significance of US military preeminence since WW2 and the Marshall Plan and it’s contribution to economic market superiority. I can’t analyze this myself, but would love to see you look at the military-technological complex and it’s role in establishing US market and financial dominance. The Russian invasion of Ukraine has been a boost for US M-Tech. But there are seismic changes taking place (or at least significant solidifying of alignments) Russia, China, India, etc. This is a big change that is the elephant in the room of US economic dominance. This political challenge has profound significance. It’s no accident that the challenge to US/NATO has been manifest in military aggression and it’s no accident that Biden admin has responded by increasing military aid to Ukraine, a gesture boosts military profits and signals the administrations reaffirmation of the role of military-tech in the strength of US economy in relationship to European economies. I’m not disagreeing with your article—just thinking about the uncoupling of technology from the comparison, which seems (in a way) to set aside the most fundamental driver of US economic dominance. The fact that Russia so brazenly (and unwisely) chose to challenge the US and NATO militarily seems to speak to the weakened military status of the US in the wake of a series of less than spectacular wars in the Middle East. I think it was a miscalculation, but it was right In recognizing that the US is in a weakened military role, not because it lacks the weaponry but because it has become so brazen in its motives to wage wars for corporate profits (much of it supporting the fossil fuel industry). So I’d like to read your analysis of that in terms of its importance and specific contribution to US economic preeminence historically. I’m new to your newsletter, so maybe you have already addressed that. Just questions that came to mind in reading how you setup the comparisons.
The US response to the war in Ukraine was essentially the continuation of "self-licking ice-cream" that prolonged the war in Afghanistan so much - with the added benefit that no US troops are in harm's way, and that the hardware sold is of much higher value (and therefore will bring in better profits). Billions worth of arms are pumped into Ukraine - some useful for their defense and some clearly just "pork" congress members bring to MIC contractors located in their districts (e.g. patrol boats when Ukraine lost most of their coastline and the rest is under Russian Black Sea Fleet blockade). The real profit boost kicks in when depots in former Warsaw pact members are cleared of old big hardware items (tanks, APCs, anti-aircraft systems etc.) to be sent over to Ukraine and need to be replenished by new US-made ones, and then serviced for next few decades.
In today’s column I read this line: “Less austere budgets have a redistributive effect that could help rebalance Europe toward consumption.” While the thought that consumption makes sense within an economic mindset, the idea of continued consumption is an anathema to staving off a climate catastrophe. Consumption as a prop to helping economies is so short sighted.
Is there a chart comparing revenue growth for STOXX and S&P 500 less FAANG? That would show how much of the earnings growth is due to margin growth. There's a lot of politics that influence margins, e.g., strength of labor unions, minimum wages, and taxes. I know the political environment for margins in the US has been terrific–––I think they're at or near an all time high––– but I don't know about Europe.
I understand Europe's poor performance since the global financial crisis is substantially because the European Central Bank tightened prematurely, while the Federal Reserve undertook quantitative easing. So the disparity may (at least substantially) be due to macroeconomic policies, not microeconomic policies.
Also, I am never sure whether total factor productivity is based on hours worked, or worker numbers (regardless of how long workers work). On this, the economist Paul Krugman has argued (as I recall it) that European productivity is as good (even better?) than American productivity once we adjust for the number of holidays (and the unemployed) that European workers have relative to Americans.
Finally, there has been a lot of studies indicating that market power is a big factor in the US economy, and so perhaps the difference in equity returns also reflects that US firms tend to have greater market power than EU firms. So perhaps it's something to be celebrated (vs regretted) that EU equity returns are less than US equity returns.
Save nuclear weapons defense is ultimately at the discretion of others- who have yet to be motivated enough to commit mass suicide in solidarity with others. Yet. They might stumble into it yet, have no fear.
Energy transition will require a surge of brown to go green as well as vast extractions of green minerals from the Africans. The Chinese will be happy to handle the unsightly matter of course.
To return to defense the vehicles and armies will run on petrol, so thats a contradiction.
So is also a contradiction in Europe actually not buying Russian gas.
Even if they have to pay in Rubles. They are, they will.
The end of history may indeed be a reboot of the 19th century, Putin may have dibs.
The simple reason for this huge growth differential is a bureaucratic, slow moving Eurocrats elite in combination with left wing single country policies. A French style paternalism which is not interested in market oriented economics. It is interesting to read that Adam believes more money printing and debt will spur economic growth. It is just the opposite. A devastating moral highground which brings in Mio. of uneducated migrants from the Middle East which are mostly all resting in an oversized social security system. The EU Recovery fund in Italy and Spain is currently spent on distributing all kinds of subsidies, in fact handing out money to be elected again. Why would somebody invest money in a region where 50 % and more of your income goes to the state? Adam is painting a support picture of left wing policies believing that fiscal transfers will create sustainable growth. The energy transition, e.g. in Germany is a complete failure. This energy transition needed cheap fossil energy from Russia. Otherwise many thousands companies and Mio. households would have been already insolvent. After about 20 years and 25 bn. Euros a year in subsidies the new energies are by far not able to be a reliable energy source.The German way is no example for success and is not followed by any other European country. So as long as socialist policies and printed money hand outs in large quantities to support an election base, which get by the day poorer, is the main political idea in the EU, the US advantage will even get bigger.
Great article professor! It touches on a few points and lines of reasoning that I have been arriving at via other avenues. Here is a brief summary of my position as a political agnostic and global macro trader who is in the business of making money and not in the business of being right.
Fact = The broader West has been in persistent below trend real GDP growth since at least the GFC. This deflationary backdrop is riding on the back of unproductive debt and poor demographics (**Please refer to the mountains of empirical evidence from Dr. Lacy Hunt to Reinhart/Roghoff and Central Bank researchers should you feel the need to challenge this empirical fact**)
Speculation on a fundamentally unknowable future = For the broader West to "break the back of DEFLATION" we need a major productivity boom and/or a demographic boom. The productivity boom is easier to engineer and arguably more desirable, more sustainable and definitely "greener". This possible productivity boom requires a greater degree of energy and supply chain infrastructure interconnectivity WITHIN the West. (the West = EU, England, USA, Canada, Japan, Australia, New Zealand, Taiwan, South Korea, Singapore)
My hope for this unknowable future = The Russian and Covid crisis will ignite a wave of diversification among the West as defined above. Diversification of geopolitical risk/supply chain risk/energy dependency risk. This diversification will increase energy and supply chain interconnectivity among the West and thus lead to the necessary investment in the real economy which will ignite the needed productivity boom (nuclear, hydrogen, renewables, rare Earth metals NOT coming from China).
Reconstruction in Ukraine could be a huge opportunity for European industry, surely, once Putins forces have been sent packing. Plus huge new defence budgets. Plus energy transition away from Russian oil. This could be the political economic “shift” that is one of Tooze’s 3 requirements for a bull market to take off.
There will be no huge reconstruction of Ukraine - yes, billions of euros will be tossed over but will disappear in the black hole of corruption, but the main reason is that it would upset the EU apple-cart too much: sucking dry the yearly billions given to EU peripheral states. Watch the turmoil from Estonia down to Croatia and Bulgaria if those billions are redirected. Given that those countries have the votes in Bruxelles, while Ukraine doesn't means it won't happen. Much more profitable option - which helps the aging workforce - is to keep millions of Ukrainians as cheap labor (certainly easier to integrate and more productive that Syrians, Iraqis, Afghans, Pakistanis).
Transitioning away from cheap and reliable Russian gas and oil will add input cost to anything produced in EU, taking away from profitability and ability to compete with far eastern economies. Sorry, no amount of sun or wind will power any car or process industry any time soon. Only nuclear or importing expensive LNG can do that. To compensate the high energy input with lower labor cost, lots of industry will move from core (Germany) to peripheral countries (Poland, Hungary, Romania etc.). It remains to be seen once Germany doesn't generate so much surplus how EU is going to be financed. Squeezed over a decade, at some point German voters will just pull the plug on EU and the whole thing will collapse.
Looking at some of the latest polls, French voters are close to toss both EU and NATO overboard. I don't actually think it will happen (everything will be mobilized for Macron to be re-elected), but things are not looking great for EU from the perspective of internal politics of key member states.
I think that a large part of the difference is cultural. As a general rule, Europeans are poorer and more frugal. The Germans are culturally predisposed to be savers. France has traditionally been less industrial than Germany, and an agricultural economy is generally regarded as being cash poor. Public ownership of business corporations lags behind the United States. In Europe, corporations are generally family businesses passed on from generation to generation, the corporation operating as a carapace, and without any meaningful existence of its own apart from the controlling family. Europe is typically more class-bound, and whatever inroads the working class makes it into the middle class are most frequently done as state enterprises, i.e., transportation systems, social insurance systems, postal savings systems, telecommunications, and the like. American-style go-for-broke capitalism is looked upon with fear and suspicion. European investments tend to be much more conservative than their American counterparts, and consequentially, they are less scalable.
The charts and graphs do not differentiate between productive investments and frivolities. American investors will bet on anything that looks like it might make some money, at least in the short run; and in America, the short run seems to be the predominant horizon. America does not have the 2000 year history of Europe, and Americans build for resale. Consequently, money moves through the American economy at a higher velocity and cyclic rate than it does in Europe. Americans are attracted to every bright shiny object that comes along, as Europeans look on with envy. Americans go broke more often, but the motto of American businesses is and has always been, 'Fortune favors the bold'.
The upshot is, and has always been, that bankruptcy has never had the stigma in America that has in Europe, where insolvency has traditionally taken on much more of a stigma of moral failure. America had the lure of an open continent to settle and develop, where land and resources were cheap, or any group of men who could cobble together enough money could set up a business that could survive the ups and downs of the business cycle. In this regard, Europe has been less forgiving of economic failure. No doubt, Americans waste more money than Europeans, but even wasted money cycles through an economy with the same velocity that well spent money does; and the more money that is spent, and invested for others to spend, the more likely it will be that, mirabile dictu, things that were unimaginable suddenly become the objects of investment and greater wealth. The American economy is more diverse; the taste makers are fewer and less influential. That diversity of taste and variety of experience is the stuff of life itself, with some succeeding, some surviving, and others failing. But the American economy is not bound by tradition, or a top-down hierarchy of what a suitable investment should look like. American entrepreneurs are known for being outrageously bold, gauche, and having a knack for making money, lots of it, which they then proceed to lose on other ventures that were equally as unlikely to succeed as those that actually made money.
How is Europe more class bound if social mobility is higher in much of Europe than in the US? Also: France is not an agricultural economy. Also: how is the American economy more diverse than that of the entire EU?
See my reply.
When you say 'much of Europe', you need to be more specific. Northwest Europe and Scandinavia is not the same as Eastern Europe, the Balkans, and Southern Europe. Social mobility correlates directly with access to capital, education, and perceived social class. Climate and topography make a difference; all one needs to do is to go somewhere and look around. If visitors come to Paris and think that France's all libraries, coffee shops, theaters, and museums, they would be sadly mistaken. Social aspirations differ between countries. France and Germany are as different from one another as Iowa and the Northeastern Seaboard in the United States are as different from one another. In the United States, is used to be, at least until recent years, that social mobility was more fluid because people moved around a lot more. That's changed for reasons having a lot to do with economic opportunity, or the lack of it; job availability for skilled and semiskilled labor. State professional licensing requirements have grown in number and complexity, further inhibiting internal mobility. Nonetheless, everyone is presumed to be able to read and write American English. That commonality of language is both a social lubricant and the foundation of commerce. Europe, however, is characterized by linguistic differences. Couple that with those language differences within Europe, and it is easy to see how intra-European migration patterns might be less robust than in the United States. It's only been within my adult lifetime that internal trade and travel barriers have been eliminated. During the year I spent working in Germany, large numbers of men from Spain, Croatia, Italy, and elsewhere in the European hinterland came to work in Germany as 'guestworkers'. They lived in boarding houses and headed back to where they came from when summertime arrived. The point is that they never put down roots where they came to work. My friend Carlos Martin Torres went home to Madrid, where he was a university student. I went home to California. My current workers do not build an economy that they can participate in. They work for substandard wages; and they view their lives and aspirations as being elsewhere. The work they do may be a step up from village life, but it is a very small step, and with absolutely no potential for advancement. Their lives is similar to the migrant California agricultural workers living in makeshift camps during the growing season. Eventually, many of them put down roots, and bring their families north from Mexico, or Central America. But the changes are incremental and generational. One could work, but life remains at a subsistence level, and people do not prosper unless they settled in for the long haul. For the whole of their lives they are sojourners, simply people passing through, and never becoming a part of the community. Here in California, American National policy restricting immigration had the effect of forcing people to settle in, and build our lives here, meaning that willingly or not, they became part of the communities in which they originally came to work, and then to move on. A shortsighted and bigoted national immigration policy had the effect of integrating large numbers of former agricultural workers into the modern California economy. Approximately 30 percent of California's population are of Hispanic cultural heritage. Many of these people retain their ties to the agricultural society and work that they and their forebears formerly did, but a great many more have found their homes in urban society, where they naturally acquire the means to survive and prosper there. That means education and developing business acumen, the keys to wealth generation and retention. I can go to any city and town in the San Joaquin and Central Valleys of California, and I will see an entire integrated society of people, predominantly Hispanic, who are as American as I am.
That answers your third question, how it is that the American economy is more diverse than that of Europe. Read the above answer, and the question answers itself.
A middling bit of that Mittelstand would not be a bad thing for Americans.
In America, 'der Mittelstand' is gradually being pulled apart, sometimes not so gradually. It used to be that working families could earn enough through higher wages and low taxation to be able to partake of a middle-class lifestyle. That is increasingly less likely to happen today. What began in manufacturing with increasing automation, is steadily eroding the service industries as well. There are increasingly few jobs at decent pay that can actually support a small family, i.e. two to three children. The golden age for the middle class with the 1950s and 1960s where the residue of the 20-year Democratic ascendancy was still paying dividends. Inflation was low, and the United States enjoyed it enormous trade surplus from a still-recovering Europe, and Third World countries were still getting by exporting natural resources. The postwar world was generous to former veterans of the Armed Forces, providing generous grants for college educations and homeownership. An entirely new generation of college graduates, almost all of the men, were able to acquire high quality professional education, and jump right into the American economy which was then booming. That trend continued throughout the 1960s, as the children of those early beneficiaries of governmental investment in human capital and material infrastructure came to see a college education is something of a birthright but without any compelling obligation to give back to the society which raise their living standards as high as they became.
In politics and foreign relations, the Cold War took an enormous toll that was not readily evident. As American foreign trade expanded, political leaders found it necessary to seek alliances with a wide variety of Third World countries whose influence at the United Nations could be counted on to oppose the Soviet Union. Cultivating that pro-America outlook cause the American government and private NGOs to loosen the purse strings to provide unprecedented (truly so) foreign assistance for manufacturing and trade. It was during that era that large segments of American manufacturing were exported overseas. Within 10 years of America's victory over Imperial Japan, Japanese manufacturers acquired much of the American consumer electronics industry, and photographic equipment. That was followed by automobiles, and other forms of specialized manufacturing. The semi conductor was invented in California's Silicon Valley, but its chief applications were developed in Taiwan with the birth of the personal computer industry. While it was true that a great deal of the design and engineering work continued to be done here in the United States, again, Silicon Valley, but also in the Route 128 Beltway around suburban Boston, large-scale manufacturing found its way to Taiwan, and basically stayed there, until mainland China to develop its manufacturing capabilities to the extent that the technical quality and capabilities of their products equaled or exceeded anything that the best companies in the United States could offer. Germany recovered her industrial capabilities beginning in 1948 and continuing on into the present day. I mentioned elsewhere that I had been a 'Gastarbeiter' in Germany in 1963, taking what was then supposed to be a summer job job with a British company, Dunlop, in Hanau, a medium-sized industrial city on the Main River approximately 20 km from Frankfurt am Main. I remained with the company approximately seven and one half months, before leaving to tour Europe. Europe and Asia were catching up, and America was mired down in the conflicts over civil rights. The opponents of expanded civil rights for racial minorities were perfectly happy to shut down public investment in infrastructure and human capital on the perception that they did not benefit from those public expenditures. It was a foolhardy and shortsighted attitude, but one that is on full display with Donald Trump, and the Republican Party of today. They would rather starve than earn more money if they had to share those additional earnings with people who did not look like them, and who had different perspectives on life.
It was the ascendancy of the financial services industry that killed the golden goose in America. I'll save the details for a later time, but the ascendancy of private equity proved to be the deathknell of what was then the American middle class.
Labor's share of GDP hasn't decreased at the same rate in Europe as it has in the US. (Which is the flip side of more of US GDP going to corporate profits that boost share prices.) Neither have European-listed companies received the same 2017 cut in the corporate tax rate that US-listed companies have.
I came here to say precisely this, Bruno. In the US, the labour share of productivity began shrinking in the late 70s , and when labour gets paid less, capital keeps more, eh?
https://www.epi.org/productivity-pay-gap/
And that's before investigating to what extent US markets "enjoy" the additional "advantages" of rampant share buybacks and other share price manipulation schemes vis a vis the European regimes.
I would like to see you break out the role of military contribution to the gap between European countries and the US, as it is so intertwined with technology. There’s a huge economic payout for US market dominance that comes from being the dominant military power. If you’re taking out technology to make the comparison more fair, that’s taking out a lot of the military industry too. But, when you set those aside, I wonder how much you might be postulating a reality that ignores the significance of US military preeminence since WW2 and the Marshall Plan and it’s contribution to economic market superiority. I can’t analyze this myself, but would love to see you look at the military-technological complex and it’s role in establishing US market and financial dominance. The Russian invasion of Ukraine has been a boost for US M-Tech. But there are seismic changes taking place (or at least significant solidifying of alignments) Russia, China, India, etc. This is a big change that is the elephant in the room of US economic dominance. This political challenge has profound significance. It’s no accident that the challenge to US/NATO has been manifest in military aggression and it’s no accident that Biden admin has responded by increasing military aid to Ukraine, a gesture boosts military profits and signals the administrations reaffirmation of the role of military-tech in the strength of US economy in relationship to European economies. I’m not disagreeing with your article—just thinking about the uncoupling of technology from the comparison, which seems (in a way) to set aside the most fundamental driver of US economic dominance. The fact that Russia so brazenly (and unwisely) chose to challenge the US and NATO militarily seems to speak to the weakened military status of the US in the wake of a series of less than spectacular wars in the Middle East. I think it was a miscalculation, but it was right In recognizing that the US is in a weakened military role, not because it lacks the weaponry but because it has become so brazen in its motives to wage wars for corporate profits (much of it supporting the fossil fuel industry). So I’d like to read your analysis of that in terms of its importance and specific contribution to US economic preeminence historically. I’m new to your newsletter, so maybe you have already addressed that. Just questions that came to mind in reading how you setup the comparisons.
The US response to the war in Ukraine was essentially the continuation of "self-licking ice-cream" that prolonged the war in Afghanistan so much - with the added benefit that no US troops are in harm's way, and that the hardware sold is of much higher value (and therefore will bring in better profits). Billions worth of arms are pumped into Ukraine - some useful for their defense and some clearly just "pork" congress members bring to MIC contractors located in their districts (e.g. patrol boats when Ukraine lost most of their coastline and the rest is under Russian Black Sea Fleet blockade). The real profit boost kicks in when depots in former Warsaw pact members are cleared of old big hardware items (tanks, APCs, anti-aircraft systems etc.) to be sent over to Ukraine and need to be replenished by new US-made ones, and then serviced for next few decades.
In today’s column I read this line: “Less austere budgets have a redistributive effect that could help rebalance Europe toward consumption.” While the thought that consumption makes sense within an economic mindset, the idea of continued consumption is an anathema to staving off a climate catastrophe. Consumption as a prop to helping economies is so short sighted.
Most basically, even naively, I have to ask if p/e ratios are worth much if debt finances share buy-backs (etc.)?
Is there a chart comparing revenue growth for STOXX and S&P 500 less FAANG? That would show how much of the earnings growth is due to margin growth. There's a lot of politics that influence margins, e.g., strength of labor unions, minimum wages, and taxes. I know the political environment for margins in the US has been terrific–––I think they're at or near an all time high––– but I don't know about Europe.
I understand Europe's poor performance since the global financial crisis is substantially because the European Central Bank tightened prematurely, while the Federal Reserve undertook quantitative easing. So the disparity may (at least substantially) be due to macroeconomic policies, not microeconomic policies.
Also, I am never sure whether total factor productivity is based on hours worked, or worker numbers (regardless of how long workers work). On this, the economist Paul Krugman has argued (as I recall it) that European productivity is as good (even better?) than American productivity once we adjust for the number of holidays (and the unemployed) that European workers have relative to Americans.
Finally, there has been a lot of studies indicating that market power is a big factor in the US economy, and so perhaps the difference in equity returns also reflects that US firms tend to have greater market power than EU firms. So perhaps it's something to be celebrated (vs regretted) that EU equity returns are less than US equity returns.
Just some thoughts for what they are worth!
Save nuclear weapons defense is ultimately at the discretion of others- who have yet to be motivated enough to commit mass suicide in solidarity with others. Yet. They might stumble into it yet, have no fear.
Energy transition will require a surge of brown to go green as well as vast extractions of green minerals from the Africans. The Chinese will be happy to handle the unsightly matter of course.
To return to defense the vehicles and armies will run on petrol, so thats a contradiction.
So is also a contradiction in Europe actually not buying Russian gas.
Even if they have to pay in Rubles. They are, they will.
The end of history may indeed be a reboot of the 19th century, Putin may have dibs.
The simple reason for this huge growth differential is a bureaucratic, slow moving Eurocrats elite in combination with left wing single country policies. A French style paternalism which is not interested in market oriented economics. It is interesting to read that Adam believes more money printing and debt will spur economic growth. It is just the opposite. A devastating moral highground which brings in Mio. of uneducated migrants from the Middle East which are mostly all resting in an oversized social security system. The EU Recovery fund in Italy and Spain is currently spent on distributing all kinds of subsidies, in fact handing out money to be elected again. Why would somebody invest money in a region where 50 % and more of your income goes to the state? Adam is painting a support picture of left wing policies believing that fiscal transfers will create sustainable growth. The energy transition, e.g. in Germany is a complete failure. This energy transition needed cheap fossil energy from Russia. Otherwise many thousands companies and Mio. households would have been already insolvent. After about 20 years and 25 bn. Euros a year in subsidies the new energies are by far not able to be a reliable energy source.The German way is no example for success and is not followed by any other European country. So as long as socialist policies and printed money hand outs in large quantities to support an election base, which get by the day poorer, is the main political idea in the EU, the US advantage will even get bigger.
Great article professor! It touches on a few points and lines of reasoning that I have been arriving at via other avenues. Here is a brief summary of my position as a political agnostic and global macro trader who is in the business of making money and not in the business of being right.
Fact = The broader West has been in persistent below trend real GDP growth since at least the GFC. This deflationary backdrop is riding on the back of unproductive debt and poor demographics (**Please refer to the mountains of empirical evidence from Dr. Lacy Hunt to Reinhart/Roghoff and Central Bank researchers should you feel the need to challenge this empirical fact**)
Speculation on a fundamentally unknowable future = For the broader West to "break the back of DEFLATION" we need a major productivity boom and/or a demographic boom. The productivity boom is easier to engineer and arguably more desirable, more sustainable and definitely "greener". This possible productivity boom requires a greater degree of energy and supply chain infrastructure interconnectivity WITHIN the West. (the West = EU, England, USA, Canada, Japan, Australia, New Zealand, Taiwan, South Korea, Singapore)
My hope for this unknowable future = The Russian and Covid crisis will ignite a wave of diversification among the West as defined above. Diversification of geopolitical risk/supply chain risk/energy dependency risk. This diversification will increase energy and supply chain interconnectivity among the West and thus lead to the necessary investment in the real economy which will ignite the needed productivity boom (nuclear, hydrogen, renewables, rare Earth metals NOT coming from China).
Happy speculating my friends!
And who will benefit from the demand unleashed by the rebuild of Ukraine?
Reconstruction in Ukraine could be a huge opportunity for European industry, surely, once Putins forces have been sent packing. Plus huge new defence budgets. Plus energy transition away from Russian oil. This could be the political economic “shift” that is one of Tooze’s 3 requirements for a bull market to take off.
There will be huge reconstruction of Ukraine - Yeah, just like the huge reconstruction of Afghanistan and Iraq!
There will be no huge reconstruction of Ukraine - yes, billions of euros will be tossed over but will disappear in the black hole of corruption, but the main reason is that it would upset the EU apple-cart too much: sucking dry the yearly billions given to EU peripheral states. Watch the turmoil from Estonia down to Croatia and Bulgaria if those billions are redirected. Given that those countries have the votes in Bruxelles, while Ukraine doesn't means it won't happen. Much more profitable option - which helps the aging workforce - is to keep millions of Ukrainians as cheap labor (certainly easier to integrate and more productive that Syrians, Iraqis, Afghans, Pakistanis).
Transitioning away from cheap and reliable Russian gas and oil will add input cost to anything produced in EU, taking away from profitability and ability to compete with far eastern economies. Sorry, no amount of sun or wind will power any car or process industry any time soon. Only nuclear or importing expensive LNG can do that. To compensate the high energy input with lower labor cost, lots of industry will move from core (Germany) to peripheral countries (Poland, Hungary, Romania etc.). It remains to be seen once Germany doesn't generate so much surplus how EU is going to be financed. Squeezed over a decade, at some point German voters will just pull the plug on EU and the whole thing will collapse.
Looking at some of the latest polls, French voters are close to toss both EU and NATO overboard. I don't actually think it will happen (everything will be mobilized for Macron to be re-elected), but things are not looking great for EU from the perspective of internal politics of key member states.