Wednesday, June 15, 2005

The End of Europe

Robert Samuelson writes about the end of Europe in the Washington Post today.

Ever since 1498, after Vasco da Gama rounded the Cape of Good Hope and opened trade to the Far East, Europe has shaped global history, for good and ill. It settled North and South America, invented modern science, led the Industrial Revolution, oversaw the slave trade, created huge colonial empires, and unleashed the world's two most destructive wars. This pivotal Europe is now vanishing -- and not merely because it's overshadowed by Asia and the United States.

The combination of low birth rates and a rapidly aging population (a 'demographic death spiral' as I think Mark Steyn called it) combined with socialist welfare states has dramatically cut Euro-zone growth from 3% to 1% in a generation while unemployment has risen from 2% to 9%. Most of this isn't new (certainly Monk and I have highlighted it) but two points struck me:

1. With high unemployment benefits, almost half of Western Europe's jobless have been out of work a year or more; the U.S. figure is about 12 percent. Or take early retirement. In 2003 about 60 percent of Americans ages 55 to 64 had jobs. The comparable figures for France, Italy and Germany were 37 percent, 30 percent and 39 percent.

2. Indeed, some scholarly research suggests that high old-age benefits partly explain low birthrates. With the state paying for old age, who needs children as caregivers? High taxes may also deter young couples from assuming the added costs of children.

With regard to 1., Americans are actually working longer and the retirement age will likely rise in the coming years. 2. has a certain compelling logic to it. If you follow the argument that children were assets in an agrarian economy and become much less so in an urban economy a generous welfare state could significantly reduce the propensity to have children. High taxes, which reduce real income, are a further disincentive. If you incent suboptimal activity, well you get suboptimal activity. I've always admired the Singaporean solution [which many will equate with eugenics or genocide] where they give tax BREAKS to qualified couples who have a THIRD child. It's a very good idea -- real, hefty tax breaks to MARRIED couples who have a third child in Europe could go a reasonable way to counteracting the demographic death spiral. And to prevent folks from gaming the system, benefits decline rapidly if the couple divorces.

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