Most American economists, and even some European economists, are reluctant to acknowledge Europe’s dramatic economic strides. Michael Mussa, former chief economist at the International Monetary Fund responsible for putting together the agency’s world-growth forecasts, now with the Institute for International Economics in Washington, D.C., predicts that the U.S. growth rate in 2004 will be around 4.5 percent while that of Western Europe will be only 2 percent. Western Europe is expected to fare slightly better in 2005 at 2.25 percent while America’s growth rate is expected to drop to 3.5 percent. Europe’s less robust growth rate compared to the U.S. is cited as proof that the EU is falling further behind in the race to be the world’s most competitive economy.
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The reason for Europe’s poor performance, argue American economists, lies with the governments’ inflexible labor policies, anti-entrepreneurial biases, overtaxation, and burdensome welfare programs—so-called “Euroschlerosis.” What they conveniently ignore is that America’s recent economic growth has not come without a steep price tag in the form of record consumer and government debt. The cost of stimulating the economy has been steep. The United States had to take on $1.5 trillion of additional debt between 2000 and 2004 and increase its annual government deficit to $500 billion in 2004 alone, while American families saw their savings rate hover at 2 percent. In a sense, America is paying for its improved short-term economic performance, at least in part, by borrowing against the future.
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Admittedly, many European companies rival their American counterparts, and the EU economy is nearly as competitive as our own, but doesn’t America continue to produce more millionaires? Not so. According to a report compiled by Cap Gemini Ernst & Young along with Merrill Lynch, Europe boasts 2.6 million millionaires—individuals whose financial assets are at least $1 million (U.S. dollars), excluding home real estate—while North America has only 2.2 million millionaires. More telling, Europe added 100,000 millionaires to its roles in 2000, while North America dropped by 88,000 millionaires in the same year.
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Surprisingly, of the 7.2 million millionaires in the world today, the greatest percentage—32 percent—live in Europe, and their numbers are growing faster than those of any other region.
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Although the EU economy is running almost head-to-head with the U.S. economy, the numbers don’t tell the whole story. That’s because the comparisons between the EU and the U.S. are being made by looking at their respective GDPs. The problem with this approach is that GDP gives a false sense of real economic well-being. For this reason, it has come under increasing criticism in recent years by economic reformers, and even policymakers inside some of the world’s leading global economic institutions.
The GDP was created by the U.S. Commerce Department at the height of the Depression in the 1930s and was used first as a gauge for measuring the nation’s economic recovery and then to monitor wartime production capacity during World War II. The fault with the GDP is that it doesn’t discriminate between economic activity that really improves the standard of living of people and economic activity that does not.
In a scathing critique of GDP in
The Atlantic
magazine several years back, policy analysts Clifford Cobb, Ted Halstead, and Jonathan Rowe likened the tool to “a calculating machine that adds but cannot subtract.”
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In an era where “production”—any kind of production—was considered a sine qua non for measuring well-being, GDP became the standard reference for economists, business leaders, and politicians. GDP counts every economic activity as good. So if crime rises because of unemployment and poverty, requiring an increase in police protection and enforcement, court costs, prison costs, and a beefing up of private surveillance and protection, the economic activity it engenders finds its way into the GDP. If a toxic-waste dump needs to be cleaned up, an oil spill contained, or contaminated groundwater purified, again the economic activity adds to the total GDP. If the use of fossil fuels increases, it is added to the GDP, even though it means a depletion of existing stocks of nonrenewable energy. And if the health of millions of Americans deteriorates because of an increase in obesity, cigarette smoking, alcohol consumption, and drug use, the increased costs of health care are, likewise, added to the GDP. Same with the increased costs associated with protecting the nation against terrorism. The purchase of more missiles, airplanes, tanks, and bombs are all added to the GDP. One would be hard-pressed to say that any of these activities actually result in a net improvement in our quality of life. Here lies the rub. So much of our GDP—and an increasing percentage of it each year—is made up of economic activity that clearly does not improve our well-being.
The late senator Robert Kennedy best summed up the shortcomings of using Gross National Product to define the economic well-being of the country. He wrote,
The Gross National Product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and missiles and nuclear warheads . . . it does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials . . . it measures everything, in short, except that which makes life worthwhile.
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Even the man who invented the GDP, Simon Kuznets—he later went on to win the Nobel Prize in 1971 for his accomplishment—warned in his first report to the U.S. Congress back in 1934 that “the welfare of a nation” can “scarcely be inferred from a measure of national income.”
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Thirty years later, Kuznets weighed in again on the subject, after having witnessed politicians and economists abusing the tool he invented for more than three decades. He wrote: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and the long run. Goals for ‘more’ growth should specify more growth of what and for what.”
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A number of attempts have been made over the years to come up with a suitable alternative to GDP. The Index of Sustainable Economic Welfare (ISEW), the Genuine Progress Indicator (GPI), the Fordham Index of Social Health (FISH), the UN’s Human Development Index (HDI), and the Index of Economic Well-Being (IEWB) are among the more popular indicators. They each attempt to determine “real” economic improvement in human welfare.
The earliest effort at establishing an alternative index was the ISEW, created by then World Bank economist Herman Daly and theologian John Cobb in 1989. Their index begins with personal consumption spending and then adds unpaid domestic labor. Then they subtract activity that is primarily designed to mitigate losses, like money spent on crime, pollution, and accidents. The ISEW also adjusts for income disparity and depletion of natural resources.
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The GPI includes many of the same criteria but adds the value of voluntary work in the community and subtracts the loss of leisure time.
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The FISH measures sixteen social-economic indicators, including infant mortality, child abuse, childhood poverty, teen suicide, drug abuse, high school dropout rates, average weekly earnings, unemployment, health insurance coverage, poverty among the elderly, homicides, housing, and income inequality.
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The IEWB takes into account such things as the family savings rate and the accumulation of tangible capital such as housing stocks, which measure one’s sense of future security.
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The question of how accurate the GDP is in measuring and monitoring real improvement or deterioration in our quality of life has come home for me over the course of the past twenty years. Beginning in the mid-1980s, I spent upwards of one-third of my time in Europe. I have visited virtually every part of the continent and stayed in small towns, rural communities, and large metropolitan areas. Because I was commuting, sometimes twice a month, back and forth, I was continually bombarded by the differences between America and Europe. The little things often caught my eye. For example, when I walk into men’s rooms in Europe, the lights go on automatically and then shut off nine or ten minutes later whether I am done or not. Or when I enter most hotel rooms, I have to insert my card key into a slot for the lights to turn on. When I leave, I retrieve my card key from the slot and the lights automatically turn off. Similarly, when I’m at an airport or approaching an escalator, a light signals my presence and the escalator begins to move. All of these little devices are designed to save energy.
On the streets, I see very few homeless or mentally ill people. Although they certainly exist and their numbers are on the rise, they are not as visible a presence as they are on the streets of New York City, Washington, Chicago, and Los Angeles. People in Europe walk on the streets at night, even in the poor neighborhoods. Women often walk unaccompanied in the parks after dusk. While police are around, they seem fewer and less tense than the ones I’m familiar with on city streets in America.
When I’m in Europe, I rarely come across multitudes of fat and obese people. Sometimes, I can walk an entire day without encountering a single overweight person. In America, by contrast, it seems everyone is grossly overweight and, even more shocking, unaware or unconcerned about their appearance.
In Europe, I see men and women lingering for hours over food and drink in the eateries and outdoor cafés. Although not unusual in itself, what’s strange is that I see them at these establishments at all hours, not just at lunch or at the end of the day, as would be the case in America. The first thought that crosses my mind is, Are these people all unemployed or just slow to get back to their desks and their assignments?
And no one seems to be rushing. No one. People still stroll in Europe. The older people often walk with their hands behind their backs, with one hand clasping the opposite wrist. I can’t remember the last time I saw large numbers of people stroll on America’s big-city streets. And while there is run-down housing and there are very poor neighborhoods all over Europe, they don’t, for the most part, compare to the burned-out neighborhoods in the South Side of Chicago where I grew up or the Bushwick/ Brownsville section of Brooklyn where I lived and worked as a VISTA volunteer after finishing my graduate studies at the university.
While graffiti on buildings has become epidemic in some parts of Europe—Milan comes readily to mind—I rarely experience the kind of urban blight that characterizes most American towns and cities. There appears to be more symmetry to the way everything is laid out in Europe. Living environments are more in scale. Adjoining neighborhoods, schools, and retail stores are usually within walking distance of one another or just a few minutes away by tram. And, here’s a statistic sure to elicit envy: nearly six out of ten Europeans take less than twenty minutes to get to work.
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When I visit homes in Europe, people seem to have fewer things and be surrounded by less high-tech gadgetry. But what they do have is generally of very high quality and well taken care of. The same can be said about personal appearance. European men and women I know—mostly in the middle and upper middle class—don’t have the extensive wardrobes some of my friends in the States enjoy. But what they do have is very high quality, and so when they go out, they appear to be put together better. The difference, I suspect, is that most mercurial and immeasurable of things called “style.” In Europe, it’s less about how much one has and more about how to enjoy one’s life. Most Europeans are quite clear in this regard.
The point is, there is a very real and demonstrable difference in “the quality of life” one experiences in much of Europe compared with that in most parts of the United States. I have talked to countless Americans and Europeans, from every walk of life, who share similar thoughts on the matter. But, curiously, in my meetings with business leaders, economists, government policy wonks, and elected officials—especially in America—I hear only of how much better off America is, and, in case proof is needed, the GDP is invariably trotted out as a testimonial to the superiority of the American way of life.
But what if we were to really take seriously the criticisms waged against the GDP as a measure of well-being and began to fully take into account alternative criteria for assessing the quality of our lives? I believe it would become clear to any objective observer that, in many ways, the “United States” of Europe—while still in its infancy—has already eclipsed the United States of America and become a new kind of superpower.
Recall that the EU GDP is now approximately $10.5 trillion, while the U.S. GDP weighs in at $10.4 trillion. The $100 billion difference widens, however, if the GDPs are adjusted to reflect the negative activity that does not contribute to the improvement of people’s everyday quality of life. Let’s begin with the wide disparity in military expenditures. The twenty-five EU nations together devoted $155 billion in 2002 to defense-related spending. The U.S. defense expenditures for this same year totaled $399 billion, or $244 billion more than the total defense outlay for all of the European countries combined.
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If the $244 billion were to be subtracted from the U.S. GDP, it would bring the U.S. GDP down to $10.16 trillion, broadening the gap between the EU and the U.S. to $344 billion.
Some might argue that subtracting the U.S. military expenditures is a bit unfair since the United States has had to take on the burden of defending Europe since the end of World War II. Were it not for America’s superior military machine, and the U.S.’s willingness to act as Europe’s protector through the North Atlantic Treaty Organization (NATO), Europe would have long ago had to beef up its own military machine to defend its regional and global interests. Fair enough. On the other hand, many Europeans argue that the U.S. military is far bigger than warranted in a post-Cold War world, and they remind the U.S. that the so-called “peace dividend”—the expected reduction in military expenditures that was supposed to result from the fall of the Berlin Wall and the end of the Cold War—has yet to materialize. While the threat of global terrorism poses new security issues that were not anticipated a decade ago, Europeans argue that these problems are best handled with a combination of police actions, soft diplomacy, and more sophisticated and generous development aid. In any event, say European analysts, if the $155 billion currently spent by all twenty-five European countries for defense was properly reorganized at a European level to establish a single streamlined rapid-reaction force for the continent—that effort is already partially under way—it would more than suffice to meet any potential military contingency.