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.