Higher taxes responsible for Europe's lower productivity

In 2004, the year he won the Nobel Prize, Edward Prescott, an economist at the Federal Reserve Bank of Minneapolis, published a paper titled "Why Do Americans Work So Much More than Europeans?" The data were stunning, says James K. Glassman, former undersecretary of state for public diplomacy and public affairs and the current executive director of the George W. Bush Institute in Dallas.

Prescott found that the average output per adult between 1993 and 1996 in the United States was 75 per cent greater than in Italy, 49 per cent greater than in the United Kingdom, and 35 per cent greater than in France and Germany. "Most of the differences in output," he wrote, were "accounted for by differences in hours worked per person and not by differences in productivity."

In other words, Americans don't work any more efficiently than Germans; Americans just work a lot more. Not only do Americans work longer hours each week and take fewer vacations; Americans also work more years of their lives, and a higher proportion of their adults are working:

In 2007, for example, American men, on average, retired at age 64.6, while Frenchmen retired at just 58.7 and Austrians at 58.9.

That same year, 72 per cent of Americans, aged 15 to 64, were in the workforce, compared with 59 per cent of Italians and 64 per cent of French.

The result is that Americans produce and earn considerably more than Europeans:

In the United States Americans make $47,000, compared with $36,000 in Germany and the United Kingdom, and $34,000 in France.

In fact, as the Michigan State economist Mark Perry points out on his blog, Carpe Diem, citizens of America's poorest state, Mississippi, have a higher GDP per capita than Italians, and Alabamans surpass Germans, French and Belgians.

Prescott fingered the culprit: high taxes. Taxation rates on the next euro of income became so high that people were discouraged from working – especially with the enticements of early retirement.

But why are taxes so high in Europe? Certainly not to maintain a strong defence but rather to pour money into a welfare state that provides lavish support to retirees, perennial students, and others who aren't working. In other words, Europeans have chosen to have workers support non-workers in their leisure, explains Glassman.

Source: James K. Glassman, Higher Taxes Responsible For Europe's Lower Productivity, Commentary Magazine, July/August 2010.

For text: http://www.commentarymagazine.com/viewarticle.cfm/notes-on-europe-s-economic-decadence-15465

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 27 July 2010