Friday, March 30, 2018

What’s Europe’s Problem?

The NBER is pretty good about trumpeting what new papers they have. Sometimes you can find these on the author(s) websites. This one I found easily, but I gave up after a few minutes on the one in the post before this.

Obviously, Europe is prosperous, and has some pretty nice places (economically speaking).

BUT, top to bottom, even the best performing European countries (say Germany) have trouble keeping up with the U.S. across the board. Why is that so?

It turns out that there’s a lot more dispersion in firms’ marginal products in Europe. That’s an economists way of saying there’s too many little firms, and countries would be richer if they merged and got bigger. For example, perhaps Germany, France and Italy should not all have their own car companies, but rather just a few big European ones.

Unfortunately, diversity sounds nice in some social situations, but when your diversity is in performance … not so nice.

A lot of the reason for this is that while capital flows in Europe to where it’s needed, labor doesn’t move enough. Of course, that may also mean that the U.S. having a single language is a bigger advantage than we might guess.

They also decompose marginal products to examine whether dispersion seems to be from differences in resources (say, we’re a small country and it’s really hard to sell enough cars here to be viable) or differences in how political, social, and cultural institutions affect the utilization of those resources.

In an interesting counterfactual they actually put numbers on something everyone already suspects: if you ran Greek firms with German institutions, the Greek firms would have less dispersion in their productivity. But they also check out the opposite case: if you ran German firms with Greek institutions, you’d induce a lot of dispersion in productivity.

This research also shows that the dispersion problem appears to be getting worse, not better. Oops. Why they’re getting worse is not something the paper goes into deeply.

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