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Will U.S. Move Toward European Capitalism?

Stock traders converse at a stock exchange in Frankfurt. As a result of the financial crisis, analysts say the U.S. may be going through an economic transformation to become more like Europe.
Thomas Lohnes
AFP/Getty Images
Stock traders converse at a stock exchange in Frankfurt. As a result of the financial crisis, analysts say the U.S. may be going through an economic transformation to become more like Europe.
Daniel Yergin, chairman of Cambridge Energy Research Associates, delivers a speech in 2007. He has chronicled the global expansion of capitalism in a book and TV series called <em>The Commanding Heights</em>.
Mauricio Lima
AFP/Getty Images
Daniel Yergin, chairman of Cambridge Energy Research Associates, delivers a speech in 2007. He has chronicled the global expansion of capitalism in a book and TV series called The Commanding Heights.

The global financial storm has swept away millions of jobs and destroyed trillions of dollars in wealth, spawning calls for economic reform. The crisis originated in the United States — the result of careless lending, exotic financial products and lax regulation.

Daniel Yergin chronicled the global expansion of capitalism in a book and TV series titled The Commanding Heights. He says confidence in the capitalist system has been shaken by the financial crisis.

"We have not seen this kind of debate about the future of capitalism and market economies since the collapse of communism at the beginning of the 1990s," Yergin says.

While the U.S. style of lightly regulated, dynamic capitalism has been ascendant since then, Yergin says the pendulum is swinging back toward a less volatile (slower growing, more stable) European model, with more government involvement in the economy. Just look at President Obama's agenda, he says, and you see government being very assertive.

"You know, Washington, D.C., is not only the political capital of the United States, it's the financial capital, it's the auto capital, it's the energy capital, it's the health capital of the United States," he says. "So I think people recognized that the game is here — here in Washington."

What Role For Government?

Obama has said: "I don't want to run auto companies. I don't want to run banks."

He has made it clear that he sees much of the recent government involvement in the economy as temporary: "I refuse to let these companies become permanent wards of the state, kept afloat on an endless supply of taxpayer money."

Princeton professor and former Federal Reserve vice chairman Alan Blinder takes the president at his word. He believes Obama really doesn't want the government to run companies like GM or Citigroup.

"It's in some real sense un-American; it's not the way we do things in the United States," he says. "You know, this really isn't France — as you can tell by sampling the food — so I'm not so worried about that. It's definitionally true: We now have in America a bigger socialist sector, if you want to call it that, than we've had in a very long time — maybe ever. But the government definitely wants to get out of these businesses."

In the end, Blinder thinks it's doubtful that the U.S. will move very far in the direction of the European economic model.

Barry Eichengreen of the University of California, Berkeley agrees. But he thinks the current financial crisis suggests the U.S. needs to be more open to other ideas.

"The United States has no monopoly on how best to organize a market economy," he says.

Eichengreen, who recently published a book on European economies, says Europeans obviously do things differently, with a larger role for government, more regulation and a more generous social safety net that provides workers greater security.

"And yet they have been able to grow in terms of living standards as successfully as we have for the last 15 or 20 years," he says.

What Does The European Model Offer?

So what would it mean for Americans if the U.S. economy became more like Europe's — especially with a bigger social safety net?

Well, Allegra Milan has experienced the difference. She grew up in New York but fell in love with a German student. Milan followed her boyfriend, Florian Dussler, back to Germany. They settled in Dusseldorf, where Milan got a job teaching at an international school. And they had a baby, Adrian, five months ago.

Milan found having a baby in Germany quite different from what she'd observed in the U.S. First of all, her public health plan paid virtually all the cost. That included the cost of a midwife, who helped her prepare for Adrian's birth and then visited her at home for seven weeks afterward.

"And when she'd come, she'd check on my healing from the delivery, and she'd check on Adrian's weight and how he was growing and just talk with me," Milan says. "So, I felt very, very supported as a new mother here, whereas I don't think I would have had the same kind of support in the U.S."

Dussler, who works for a software company, says there's something else the government provides that Americans might find even more surprising.

"We get a so-called payment for Adrian called Kindergeld, which is child money, literally translated," he says. "It's 164 euros per month." That's about $232. And on top of that, Allegra gets paid about two-thirds of her annual teacher's salary for a full year after Adrian's birth while she stays home to care for him.

There's A Downside, Too

Of course, the price for these social supports and other benefits — such as a free college education and generous unemployment payments — is steep.

"Almost half of my salary goes to my combined taxes, including the contribution I make to my health care," Milan says.

And even with taxes at that level, the generous benefits are becoming unsustainable. As the German population ages, there aren't enough workers to pay taxes into the system. That's partly why Germany is subsidizing child birth: The country needs more babies like Adrian who will grow up to be workers.

While Milan and Dussler appreciate the security and support provided by the European model and think it's worth the taxes they pay, they also think it has some problems. Dussler says he wishes it were more dynamic.

"It needs to be easier to found your company," he says. "It needs to be easier to employ people. Many companies don't exist in Germany because you have such harsh employment rule[s]."

Converging U.S., European Models?

Kevin Hassett, an economist at the American Enterprise Institute, a conservative Washington think tank, agrees. And he says that, actually, many European governments have been loosening their grip on their economies during the past couple of decades.

"They've moved much more towards having an economy that looks like an American, or a traditionally American economy," he says.

Hassett believes that will continue. But as a result of the financial crisis, he also sees the U.S. moving in Europe's direction and the two models converging.

"I'm not saying that that's what I would do if I were dictator, but I think that it's clear that's the path that seems to be emerging," he says.

Hassett is right — Europe has been moving toward the U.S. model in some areas, says Ken Rogoff, a former chief economist at the International Monetary Fund. But now, he says, the big shift will come in the U.S.

"I think the United States is clearly going through a sea change to become more like Europe," he says.

The Potential For Higher Taxes

Rogoff, now a Harvard professor, warns that Americans need to understand there will be consequences. He says a move toward European-style capitalism, with its more generous social safety net and tighter regulation, will mean higher taxes — and not just for the wealthy.

"Certainly, the administration and the Democrats talk about raising all the money from the wealthy," he says. "But I think the empirical evidence shows that's not likely to begin to pay for everything, and the tax hikes are going to have to be much broader."

Given what the administration is contemplating on health care, the environment and other initiatives, Rogoff estimates taxes could rise by 25 to 50 percent. And he argues there's no question that higher taxes would slow U.S. growth and raise unemployment closer to European levels. While Rogoff says he might personally tolerate that in exchange for European-style social benefits, it's not clear that most Americans would.

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