Europe's no basket case.

• Author: Legrain, Philippe
• Position: Book: Cowboy Capitalism: European Myths, American Reality - Book Review

Olaf Gersemann, Cowboy Capitalism: European Myths, American Reality, Cato Institute, 2004.

"Shock! Horror! Cato Institute declares American capitalism superior to European social democracy." That was my cynical initial reaction to Cowboy Capitalism: European Myths, American Reality, a new book published by the free-market Washington, D.C.-based think tank that comes recommended by the usual right-wing suspects: Milton Friedman, James Buchanan, and Henry Paulson, the boss of Goldman Sachs.

But my first reaction was slightly unfair. Cowboy Capitalism is written by a German journalist, Olaf Gersemann, and was originally intended for a German audience. Its aim was to shake Germans' complacent assumptions about the superiority of their economic model and dispel some of the commonly believed myths about the weaknesses of the U.S. economy. There is no denying that Germany's economy faces serious problems--and the German edition of this book is an important contribution to the debate about how the country should reform.

But the newly published and expanded American edition has a much more ambitious goal. It seeks to demonstrate that the U.S. economy is not only much more successful at delivering higher living standards and employment than Europe's, but that it does so without causing greater injustice and insecurity. As Gersemann puts it, "The message is simple: While U.S.-style capitalism may or may not have delivered results to be proud of, its performance, as measured by economic and social indicators, has clearly been superior to that of its continental counterparts." Unfortunately for him, he fails to prove either point convincingly. Repeatedly, when weighing up the evidence, he gives America the benefit of the doubt, while interpreting the facts about Europe in the darkest light.

Consider his dramatic opening paragraph: "Over the last 25 years the U.S. economy has enjoyed an average annual real growth rate of 2.9 percent. That's 55 percent more than the German economy mustered, 48 percent more than in France." Game, set, and match to Gersemann? Hardly. America's population is growing by some 1 percent per year, while Europe's is broadly stable, so comparing GDP growth rates tell us little about how well each economy is doing at delivering the goods for its citizens. A better yardstick is how fast living standards are rising, for which the growth in GDP per person is a decent proxy. According to my calculations from the IMF's World Economic...