The European Economic Model Lives

Back in the early 1990's, American officials like me who were making long-term forecasts for the Clinton administration cautioned that it would be rash to forecast an average long-run growth rate of more than 2.5% per year - and that actual growth might turn out to be even slower. Now we look back at a decade during which the American economy has grown at an average rate of 3.4% per year.

Indeed, the United States today is 9% richer than we would have dared forecast a decade ago, and that is true despite labor-market slack and thus the largest production shortfalls below potential output in two decades. In America, the "new economy" has proven to be real, and there is every reason to think that growth in the next decade will be faster than it was in the past.

The acceleration of US economic growth in the late 1990's posed a puzzle for those of us who looked across the Atlantic at Western Europe: where was Europe's "new economy"? We could see it in Scandinavia, and in scattered pockets elsewhere, but the strong imprint of improved computer and communications technologies on the growth rates of output and productivity economy-wide seemed to be missing. Europe seemed to be falling further and further behind the US.

Yet today, if we look at transatlantic comparisons, Western Europe appears to be doing much better than one would expect if one were to judge from the past decade's business press. Western Europe's productivity per hour worked, for example, is now only 10% or so below America's.