It Feels Different
Morgan Stanley’s Stephen Roach has got the “feelin”:-
“It feels different in Europe. The pain of stagnation has evoked a powerful backlash that is finally driving meaningful structural reforms. Europe has nowhere to go but up, and that long and arduous journey now appears to be under way. America, by contrast, is at the top of its game -- coming off eight fat years the likes of which most leading economies have rarely seen. But now burdened with an unprecedented shortfall of national saving, a record current-account deficit, and a massive overhang of debt, it will be exceedingly difficult for the US to keep the magic alive. At work over the next several years could well be the beginning of a stunning productivity convergence between the US and Europe -- a shift that could have profound implications for the global economy, financial markets, and currencies.”
Essentially this is a just regression to the mean argument – US productivity growth was above mean for the last decade, European was below so statistically we’d expect them to converge in the future. Unfortunately Stephen over looks a couple of points – based on hourly figures, Europe has already converged to US productivity levels, or in the case of some countries such as France, exceeded them.
The real problem is the Europeans work less than Americans and so have lower GDP per capita. The reason? As
Ed Prescott has argued, it is higher European taxes, not productivity, that lowers the European labor supply. For convergence in GDP per capita to occur, its labor supply that needs to increase and taxes would therefore have to fall. But an increase in the labor input would, by conventional economic theory, lower not raise European productivity levels. So Methinks Morgan Stanly has some stock it wants to unload.
Posted by wardx107 at October 19, 2004 02:27 PM