French lessons for the US

Harvard economist Greg Mankiw uses the recent economic histories of four countries – Zimbabwe, Japan, Greece and France – to illustrates policy mistakes “that could, if we are not careful, presage the future of the United States economy”.

The four cases are different, and not equally relevant. I (and Mankiw) would argue that Zimbabwe’s hyperinflation has little or no relevance for the United States at this time. Of the other three cases, I would emphasise Japan’s deflation and prolonged economic slump. Mankiw emphasises France, not for its policy mistakes, but rather as an illustration of the tradeoff between income and leisure.

Here are two facts about the French economy. First, gross domestic product per capita in France is 29 percent less than it is in the United States, in large part because the French work many fewer hours over their lifetimes than Americans do. Second, the French are taxed more than Americans. In 2009, taxes were 24 percent of G.D.P. in the United States but 42 percent in France.

Economists debate whether higher taxation in France and other European nations is the cause of the reduced work effort and incomes there. Perhaps it is something else entirely — a certain joie de vivre that escapes the nose-to-the-grindstone American culture.

We may soon be running a natural experiment to find out. If American policy makers don’t rein in entitlement spending over the next several decades, they will have little choice but to raise taxes close to European levels. We can then see whether the next generation of Americans spends less time at work earning a living and more time sipping espresso in outdoor cafes.

N. Gregory Mankiw, “Economic View: Four Nations, Four Lessons“, New York Times, 23 October 2011.

Greg Mankiw is advising Mitt Romney, the former governor of Massachusetts, in his campaign for the Republican presidential nomination.

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