Is the American Economy Significantly Different than Europeans Think?

“Do you realize how strange it is that professionals can move around Europe more freely than they can in the U.S.? And that overall, Alabama has more autonomy over its regulations than France does?”

 

Most Americans assume that despite social and political divisions currently eating at the heart of the country—with perhaps temporary reprieve under a new President—the United States of America can at least rejoice in the fact that it has the most open, free, and productive market economy on the planet. If nothing else unites, at least the economy does.

Even the European Union, a single market project par excellence, began by looking to the United States as a shining example of what a free and open market could look like and then set about emulating it.

And why not? Imagine if the United States had historically allowed each state to act like a separate country as European nations had historically done with their continental diorama of historically warring nations, border guards, regulations, and cultural animosities that hindered trade. Early America had toyed with similar outcomes but overcame them. Today, the United States’ giant, single market is a beacon of what can be achieved economically when united.

But what if that story is false? 

In reality, the United States is more economically fragmented than it thinks it is, and Europe is more economically united than it ever thought it was. That is the finding of researcher and trade expert Dr. Craig Parsons at the University of Oregon.

And if the United States is to hold itself together socially and politically, it might have to start with the economy.

Some, such as David French, author of Divided We Fall, have argued that solutions to the United States’ social, political, and economic problems should be solved by devolving decision-making down to more homogenous, cohesive, local entities. According to Parsons, American markets would work better with more centralized economic rules.

Yet, streamlining what is effectively a fractious fifty-state union could prove extremely difficult—perhaps even more so than solving the political and social unrest. Unifying the nation’s economy would, unfortunately, require consideration of an existential thought to which most Americans are deeply averse—giving more power to the federal government.

In Dr. Parsons’ academic research, which compares the European Union and the United States of America, he recognizes that handing more power to the United States’ federal government may be unpalatable to many Americans. However, he suggests that there may be some practical, decentralized, and “American-style” options for integrating what is currently an economically disunited nation.

Prior to the general election of 2020, Dr. Parsons and I sat down for a chat. We ignored presidential personalities. Instead, we stuck to the boring stuff—college kids, chemicals, and who Americans think they are.

In a recent paper about Europe“Ever Tighter Union?,” you argue that the European Union is the paragon of internal free-market trade. That honor—contrary to common perception—does not belong to the United States. Is that a correct assessment of your research findings?

Yes, and the funny thing about it is that the Europeans think that they are copying the United States. Ever since the beginning of the European project, the United States has been envisioned and imagined—both by Europeans and Americans themselves—as this super free market zone, where people and goods and services flow around without any significant barriers.

We do have higher flows of trade and geographical mobility in the United States than in Europe—quite a bit higher—and everybody has assumed that’s because there aren’t regulatory barriers between the states. That is based on a deeper assumption that economic flows are highly responsive to regulatory barriers. But that’s not necessarily the case.

Americans share an identity. They share a language. They share—to a substantial degree—a culture and, in particular, a culture of mobility itself. Studies have shown for a very long time that Americans are unusually mobile. And for all these reasons, which aren’t regulatory reasons, they trade with each other at a higher rate than Europeans. American flows are high not because we don’t have regulatory barriers but despite regulatory barriers.

And the opposite is true on the European side. Europeans have hired tens of thousands of people in Brussels to chip away at regulatory barriers, but this still isn’t getting most Europeans to trade and move like Americans. They are still French, German, Greek, and so on.

Ultimately, these economies are stories about social identity. Language is a really big piece. It is a more powerful lubricant—or glue—for a free-flowing economy than many aspects of regulation.

Do you have examples of regulations that are inconsistent across American states?

Almost everything.

There are a few areas where the federal government sets tight standards, like energy efficiency for appliances or auto emissions. The more common situation, though—for prescription drugs, toys, chemicals, etc.—is that federal rules set a floor on what can be placed on the market. States can set additional requirements beyond those floors, and they do so very erratically.

In other countries, if the central government approved a product, you could then sell it across the country. The EU has a version of this rule called “mutual recognition”: With very rare exceptions, if any EU member-country approves a product, all other countries have to accept that product. But, in the United States, states routinely don’t accept products that are legal in other states.

And these issues are even more obvious if you go into services, which is 80% of our economy. A few big sectors are mostly governed by federal rules—telecommunications, transport, finance. But, in general, to sell services in a state, you need to fulfill all its own licensing requirements, business registration rules, HR practices, insurance procedures, environmental approvals, and so on, even if you’re already meeting all those requirements for the state next door. Businesses are forced to approach states as separate arenas.

The EU is close to the reverse: It has some sectors where there are still some barriers, but it has established a default general rule that if you’re meeting the licenses, registration requirements, etc. in one state, you don’t have to do anything additional to operate in other states.

So, it is strange how much we hear Americans claiming to be the paragons of free markets. The U.S. actually stands out for not having very coherent and open market regulation.

The general narrative is that the EU could learn something from the United States about internal trade, but you’re saying no; it is the other way around.

Right. But America is big, powerful, and fairly inward-looking. It is pretty resistant to learning things from other countries.

Much of your career has been in France, hasn’t it?

Yes, the world knows me as an expert on the EU—and France, in particular—and this is the first time I am seriously studying the United States. I think that’s why I’m able to ask some new questions in this research. My colleagues who are American-politics specialists tend to see fragmented regulation as normal, but I come in and ask, “Do you realize how strange it is that professionals can move around Europe more freely than they can in the U.S.? And that overall, Alabama has more autonomy over its regulations than France does?”

That doesn’t fit our conventional wisdom about either America or Europe. We think of the United States as having a powerful federal government whose authority was largely built around its “Commerce Clause” powers over interstate trade. We think of Europe as struggling to imitate that American model across far more different and powerful states. But if we look at the actual rules on the ground today, somehow Europe got ahead on these issues. It ended up with stronger rules for interstate openness than America. French regulations face all sorts of openness-related constraints that Alabama’s regulations don’t.

In research that you are currently undertaking, is there something you expect to find? 

Two years in, I think I’ve mostly found what I expected to find—a big long list of regulatory barriers that the European Union has done away with, that still exist in the United States.

Thanks especially to a grad student of mine who first noticed some of these things, Leif Hoffmann.

My favorite example, as an academic, is out-of-state tuition at American universities. It is routine for American universities to charge three times as much tuition to out of-state students. This drives the budget model of my university, the University of Oregon. We can only operate because we get a lot of Californians who pay triple tuition. And who is the other set of people we depend on in the same way? Foreign students, especially from China, who also pay triple tuition. So, for the University of Oregon, Californians and Chinese students are in the same category. That’s what the absence of a single market looks like.

In the EU, universities cannot charge different tuition to students from other EU countries.

Despite these rules, Americans pursue out-of-state degrees at almost fifty times the rate of Europeans. That’s intriguing on both sides. Europeans don’t seem to move much for higher education, even if you make it easy. Meanwhile, American students are not deterred by price.

The number of Californians willing to come up to the University of Oregon and pay $38,000 a year for a middle-ranked public university makes them look remarkably insensitive to a state “tariff.” Among American students, there seems to be a cultural presumption that ambitious young people are supposed to move around. Among European students, there is much less of a cultural presumption of mobility, plus it is harder to imagine studying in another culture and language. They tend to stay home.

Higher education is an unusual sector, of course. But it actually reflects more general regulatory rules in these economies. In the U.S., we have a shambolically decentralized regulatory system. It is a mess. I’m not the first person to say this, but I think my overall US-EU comparison is pulling together the data points in a way nobody ever has. In terms of internal openness, there is no industrialized country that has anywhere near as fragmented, uncertainty-generating, problematically-unclear regulation as the United States. And the Europeans, for all their differences, have worked out solutions to many of the problems that we don’t seem able to address.

Overall, I arrive at almost the opposite of the classic American narrative, which is that we became great and powerful thanks to our fabulous model of governance. On these issues, I think that it’s despite our governance that the American economy continues to do well. I should add that I don’t mean that across the board—there are many things American governance gets right—but in terms of internal openness, which we’re supposedly famous for? Not great.

Let’s assume this dilemma is not going to fix itself anytime soon. Do you think trading blocs might emerge among states—say California with Oregon and Washington?

Not so much.

At a fine-grained level, you can find some hints of this in our economy: I’ve talked to lots of construction firms that operate in two or three states because they think it is too much hassle to expand to others, or beer or spirits producers who similarly choose a few states and stick with them. But those are often firm or product-specific choices that don’t really aggregate up into the kinds of big patterns that could motivate trading blocs. American firms have grown up within this fragmented regulatory landscape. Like out-of-state students, they are surprisingly untroubled by it overall. If you ask them, they’ll freely tell you that interstate regulatory issues create all sorts of costs for them, but they basically just factor them into the cost of doing business.

To take another example, think about a big law firm. We do have quite a few big law firms in the U.S. Many of them do business all across the country, but their lawyers have to take bar exams for separate states, and they carry a bunch of different licenses. The big firms don’t have a huge problem with this: They’ll have some staff who help their lawyers deal with those issues, and they pass along the costs to clients.

In the EU, meanwhile, lawyers have been able to practice across countries without getting a new license since the 1970s. Think about the legal differences across European countries. Italian law really is pretty different from Dutch law. Nevertheless, EU rules say that a Dutch lawyer can practice in Italy. American states’ law is far, far more homogeneous, so it is much more plausible that a Pennsylvania lawyer could work without much problem in California law, but the market rules don’t allow that. States govern licensing, so the Pennsylvania lawyer needs to get another license to work for one day in California.

Until that changes, will nothing change?

Well, there are ways to approach many of these problems of standards and licenses and different state regulations that do not necessarily involve a ton of elaborate new federal rules.

They involve something the EU pioneered that is known as “mutual recognition.” If Americans wanted to say that an electrician (or a lawyer, architect, doctor) who works in one state should generally be able to work in other states, we don’t have to draw up new federal regulations about how people get to be electricians. We could just pass federal legislation that requires mutual recognition of state licenses, as Europe has done.

That seems to me like a fairly American-style idea, in principle. It doesn’t require a big federal bureaucracy. The states still do the main administration, and they could retain safeguards allowing them to verify people’s qualifications and records.

Somewhat close to this is actually beginning to happen, with a movement of state-level “universal recognition” laws in licensing. Arizona and some other states have passed laws saying that if you want to come into Arizona and you have a license from another state, our default position is that we will recognize it.

Is that reciprocal?

Very messily. Pennsylvania passed their version of it, but it has conditions that make it complicated. There are a number of states that have either passed or are considering reciprocal legislation.

If you want a real solution, a central solution would be a thousand times more efficient.

I can’t say I’m optimistic that federal-led solutions to these issues will come about, since skepticism about central action runs so deep.

In the longer run, I think there might be an opportunity for a centrist political coalition to address these issues. But we’ll have to see if my research can convince anyone that we might want to look in these directions.

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