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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chair of Rockefeller International. His new book is ‘What Went Wrong With Capitalism’
A widening transatlantic gap is inspiring glee in the US and angst in Europe. Though their per capita income levels were similar a couple of decades ago, growth (in constant dollars) has been twice as fast since 2010 in the US than in the UK and the EU’s Big 4 economies — Germany, France, Italy and Spain.
Why is Europe falling behind? Look at the role of government. While over time governments have extended their control over most capitalist economies, they have expanded most markedly in Europe. Until the 1980s, government spending was lower on average in the UK and the EU Big 4 than in the US. Now Europe spends far more. The burdens of an oversized state have crushed productivity growth, which is the key to rising prosperity. From 1960s postwar peaks, I calculate that productivity growth has collapsed from almost 7 per cent to less than zero in the EU Big 4. It has fallen in the US too but less drastically, dropping from 2.5 per cent to around 1 per cent, possibly due to superior tech prowess.
Records for the UK begin earlier than most. Going back to the 1690s, the UK never ran a peacetime deficit until the 1970s. It then ran a deficit in all but five of the next 50 years. The Reagan-Thatcher “revolution” of the 1980s changed only the way the state funds its expansion, by borrowing not taxing. Public debts have risen threefold in the UK and the EU Big 4 to around 100 per cent of GDP on average.
More government spending left less room for private competition and initiative, particularly as central banks joined governments in a campaign to eliminate business cycles. Central bank purchases of bonds and other assets exploded from near zero in the downturns of the early 2000s to record heights in 2020, reaching 16 per cent of GDP in the US and 22 per cent in the EU Big 4.
As the “cleansing effect” of recessions faded, incumbents thrived. Corporate profits rose in part on oligopoly pricing power. Since 2000, sales in most industries have been concentrating in the largest firms — though on this front less rapidly in Europe than the US.
Markets increasingly distorted by easy money and state bailouts also spawned “zombies” — firms that don’t earn enough to cover even interest payments on their debt. Rare before the 1980s, the latest data show zombies account for at least 10 per cent of public companies in developed markets — up to 20 per cent in the US and 22 per cent in the UK.
In part because it lacks spending authority, the “Eurocracy” channelled its energies into what has been described as a “global regulatory hegemon”. Any company with ambitions in Europe must meet standards set by the most powerful states, Germany and France, on everything from carbon emissions to milk production.
Facing both continental and national bureaucracies, it’s no surprise Europeans are more likely than Americans to cite regulation as a major obstacle to starting or expanding businesses. Many medium-sized German companies say they are considering shutting down, citing “too much red tape and higher taxes”. Many French firms dare not grow, lest they face costly rules that apply to firms with more than 50 employees.
Heavy regulation creates a business environment that is friendly to mega firms with the most money and lawyers. Until the pandemic hit, start-ups were shrinking as a share of all companies in many industrial countries, including the UK, Spain and Italy.
By favouring giant companies, governments boost the wealth of corporate founders, including entrenched billionaires. Since the super-rich own the lion’s share of financial assets, they gain most when the state rushes in to stop even minor market tremors. In recent decades billionaire wealth grew faster as a share of GDP in the UK and the EU Big 4 than the US. France now has both an unusually bloated government, with spending equal to 58 per cent of GDP, and an unusually dominant billionaire class whose total wealth is equal to 22 per cent of GDP, ahead of even the US.
That helps to illuminate the transatlantic gap. Add up productivity losses from oligopolies, zombies, bureaucracy, inequality and other market distortions fuelled by big government, and together they could explain the productivity slowdown. The burdens of big government are outweighing the boost from new technologies, particularly in Europe and the UK.
The twist is that US President Joe Biden has turbocharged the long expansion in American spending, debt and regulation. The country’s deficit, typical for a western nation until recently, is expected to average upwards of 6 per cent of GDP — much higher than the UK and the EU Big 4 — in coming years. Once again, the US is on track to replace Europe as the land of even bigger government — and slower growth.