I’m sort of getting tired of the U.S. vs. EU discussions, which usually involve comparisons between the two regions’  rates of employment, GDP growth, business environment, etc. Particularly since Bush started bad mouthing some members of the EU who refused to go along with the Iraq war, this discussion seems to be more of a "who’s winning" odd kind of economic race.

This is all fun and games, but now the pissing contest has brought in developing countries like China. Michael Pettis points us to a paper written by a couple of folks at the New York Federal Reserve Bank on productivity growth.  The basic question concerns why productivity growth in Europe and Japan, which rose so quickly from the 1960s, has slowed in recent years.

A couple of reasons. First, as these economies have developed and added capital since the 1960s, the marginal product of capital has declined (remember Econ 101?). Second, it is a lot easier for relatively undeveloped countries to imitate, or leapfrog, developed countries from a technology standpoint, but much harder to maintain productivity growth through innovation.

However, there is another reason cited for slower productivity growth in the EU and Japan, referred to in the article as "labor and product rigidities." This is econ-speak generally for government involvement in markets. Furthermore, it may be the case that such government involvement hurts an economy even more after it is already developed; innovation is key to further productivity gains and market interference can hinder innovation.

Now, this paper (I have not read the original, just Pettis’ comments) probably does not contain any policy conclusions - not really the point. However, I can see how this could be used by policy makers and pundits to suggest not only that the U.S., which is held out as having the "winning" economic model because of GDP and productivity stats, but also that China, as a developing nation, should emulate a U.S.-style system as opposed to a European model. Hey, another reason why China should do everything the U.S. government wants it to do!

Pettis raises the question about China’s market rigidities and whether this will have a negative effect on growth here after the productivity gap has been narrowed. This is a fair comment, and no doubt some of those market problems associated with government intervention will indeed pose problems for future (as well as current) growth in China. However, I hope that the political types do not take eminently reasonable economic arguments about growth and use this sort of thing to make pronouncements about the relative merits of American and EU regulatory frameworks.

For a great "reality check" article on EU growth, read 5 Myths About Sick Old Europe (h/t to Eschaton). And, needless to say, for the nationalistic overtones of all this, please read my post earlier today on why nationalism sucks.