Chasing the losers.(effects of employee income taxation in United States, Europe)

MILTON FRIEDMAN recently wrote that the enduring lesson of the last century is that "capitalism creates wealth; and socialism is a failure." Then he lamented that many politicians in America have deduced from this that "what America needs is more socialism." Count John Kerry in that camp.

With full-blown socialism now tossed in the dustbin of history, two competing economic models remain: free-market capitalism--let us call this "the American model"--and Western European socialism, sometimes euphemistically referred to as "the Third Way." What are the tenets of this bastardized form of command-and-control economics? Highly generous welfare benefits for the unemployed; workplace rules that make it difficult for employers to hire and fire; prohibitions against plant closings; mandatory worker-benefit packages that include health insurance; child-care allowances; paid parental leave; lavish retirement benefits; four to six weeks of vacation for employees; minimum-wage requirements that can exceed $10 an hour; shortened work weeks; and high taxes on business and labor to pay for these benefits.

The U.S. economy has some of these features, but to a much lesser extent. We take a more laissez-faire attitude toward employer-employee relations. The American Left cannot stand this. Why can't we be more like Europe, John Kerry seems to ask almost daily on the campaign stump? Of course, those suffering from Euro-envy also tend to be the same economists and advisers who asked, 15 years ago, why America couldn't be more like Japan.

I call Euro-envy the chasing-the-losers syndrome. The biggest victims of the worker "protections" in Europe have been European workers themselves. The chart below tells the story: The higher the tax rate on workers, the higher the unemployment rate and the lower the economic-growth rate. For all the talk of a "jobless recovery" in America, our unemployment rate of 5.5 percent compares favorably to Europe's 8 to 9 percent. Germany and France--two of the nations with the highest tax rates and the most socialistic economic institutions--have two of the highest unemployment rates in the industrialized world and economic-growth rates that can be detected only with the aid of a high-powered microscope.

Richard Vedder, an ...