I returned from Helsinki tonight – where I’ve been for the last four days. It is always insightful to read the news when I’m outside the U.S. The local news always has more relevancy and I see the U.S. news with a fresh perspective.
At its root, the different perspectives frequently come down to global competitiveness – where the U.S. fits in and where Europe fits into an increasingly competitive global landscape. The news on Europe always seems to focus on becoming more globally competitive and yet I rarely see the signs in practice that would lead to a steeper growth curve. For example, it never ceases to surprise me how short the days are in Europe. And this isn’t just Finland where the days were shortened by winter. Across Europe, many businesses don’t open until 11AM and are closed by 5PM or 6PM. When output is a function of time worked, you simply can’t match the output of a country willing to work longer.
Over dinner on Wednesday I spoke with some Finnish entrepreneurs regarding the differing environments in the U.S. and Finland. They argued the ability to get a completely free education in Finland actually hurts growth because individuals will obtain additional degrees with government financial support and live the student life as opposed to entering the work force. In other words, individuals opt for more education than is perhaps optimal because of subsidizes. At the same time they also argued however that the U.S. environment is much more flexible in that individuals can be trained and/or educated in fields different from their first degree and can therefore switch job tracks more easily. I would argue this also happens extensively within corporations. U.S. companies are extremely flexible in helping their employees find new (and different) opportunities within the company – even if the new opportunity is far afield from what they were originally hired to do. It should be no surprise that individuals who are happier at what they are doing will do it longer and be more productive.
One Finnish entrepreneur I spoke with has been living in the US for the last 10+ years. His first degree came from a Finnish university where it was completely free. After working for a few years in Finland he enrolled in the Stanford Graduate School of Business where he received his MBA. He recounted how all of his Finnish friends at the time argued against going into large personal debt for a second degree. Herein lies one of the big differences between Europe and the US. In the U.S., the outcome spread between successfully and unsuccessfully assuming risk is much wider. In the U.S. we rightly see higher education degrees as signals to the market. It isn’t what you learn as much as it is what you signal to the market. There is tremendous risk in attempting to signal to the market and as a result there is compensation for that risk. If you are unsuccessful at sending the right signal, you could find yourself on the wrong side of six figures of debt.
The spread in outcomes of risk taking is also evident in compensation. I would imagine in Europe the spread between those on government welfare and the average European salary is much narrower than in the U.S. The upside is also likely true. Incomes for the top 1% in the U.S. start at around $385,000 – while the average household income in the U.S. is around $44,000. The poverty threshold for a family of four is about $23,000 in annual income and about 15% of the U.S. is living belong the poverty threshold. The choice to not work in Europe isn’t as detrimental as it is in U.S. while the incentive to work to extreme levels is also not as evident.
Whenever I’m in Europe it always seems easy to see some of the issues that throttle growth. I also can’t help but think that in the U.S. we are often doing all we can to implement many of the same policies and tack the same course. In Friday’s FT there was an analysis on the U.S. tax system. The infographic compared tax revenue as a percentage of GDP for the U.S., several European countries, and several other developed nations including Canada, Japan, and Australia. The key message of the infographic was that the U.S. was at the bottom with just 24.8% – the lowest total tax revenue as a percentage of GDP for those countries included in the graphic. The analysis offered ways the U.S. could increase tax revenue. Essentially – how the U.S. could become more like Europe. The article stated a “shocking shortfall: the tax system generated $2.45T in revenue in 2012, not nearly enough to cover the $3.54T in spending by federal government.” The European perspective is to raise tax revenue to cover federal spending. We are taking this perspective too frequently in the U.S. today instead of looking at what spending might be cut or other ways in which the U.S. economy could grow. We focus on the numerators rather than the denominators of these ratios. Had the infographic included – as it should have – faster growth countries like China then the analysis could have taken a very different perspective. The Heritage Foundation estimates the same ratio for China is 17% so by comparison we are high. It isn’t Europe’s growth we are trying to match so in examining correct policy approaches we should look to those who are winning on a global scale.
The Finnish entrepreneur I mentioned above took his company public last year on the NYSE and today employees some 400+ individuals in the U.S. He mentioned his Green Card had been denied on three different occasions. In order for the U.S. to remain competitive we simply have to fix our ability to retain the world’s brightest. The U.S. is a country built upon those who risked it all. They left what they knew. They left family, friends, homes, support networks. They spent at times their entire net worth in order to have the chance to reinvent themselves in America. We want these risk seekers. We need these risk seekers. We too often forget we are a people built upon these risk seekers.
Much of the international news on Thursday and Friday covered British Prime Minister David Cameron’s address on Europe and his promise of an in-or-out referendum by the end 2017. As London Mayor Boris Johnson put it, “what most sensible people want is to belong to the single market but to lop off the irritating excrescences of the European Union.” Fundamentally, Cameron was making a case for change with Europe but in so doing falls prey to one of the biggest hurdles facing European growth.
One of the key problems for European growth is the highly fragmented nature of the Union. Each individual country has unique properties like tastes and preferences of it’s individuals citizens, unique regulations, and languages which makes scaling businesses across the continent difficult. More, once started, businesses don’t have the resources to scale “Continentally” because their home markets aren’t sufficiently large to give them the base needed to push into new markets. For example, Finland only has five million citizens so even a successful company in Finland probably hasn’t garnered enough resources to scale. As I’ve written about in the past, because of the high fragmentation with Europe there are elections somewhere within Europe nearly every month. This means that somewhere in Europe there is discussion, debates, and ultimately pushes to change Europe. A tremendous amount of time and energy is dedicated to dialogue on European change. The U.S. doesn’t face such a high frequency of dialogue about changing the marketplace.
I left the Washington, DC on Monday evening – just hours after President Obama had given his second term inaugural address. The airport was quiet for a Monday and I saw a few clearing security with freshly minted inaugural paraphilia. On Wednesday much of the International press was still discussing the inaugural address. I read David Brooks’ New York Times column “The Collective Turn” in the International Herald Tribune. David Brooks’ column was squarely about the differences between Europe and the U.S. and how we are increasingly inclined to take a European approach. Brooks writes,”
Obama wasn’t explicit about why we have failed to meet these challenges. But his critique was implicit. There has been too much “me” – too much individualism and narcissism, too much retreating into the private sphere…I was stuck by what he left out in his tour through American history. I, too, would celebrate Seneca Falls, Selma, and Stonewall, but I’d also mention Wall Street, State Street, Menlo Park, and Silicon Valley. I’d emphasize that America has prospered because we have a decentralizing genius… When Europeans invested in national welfare states, American localities invested in human capital…America’s greatest innovations and commercial blessings were unforeseen by those at the national headquarters. They emerged, bottom up, from tinkers and business outsiders who could never have attracted the attention of a president or some public-private investment commission.
I agree with Brooks. Obama seems to suggest that we’ve simply got the institutions wrong and doing a “better” job of defining and empowering the institutionalized parts of America will right the ship. But we need a new approach – one that is socially responsible, but remains fiscally conservative. An approach that keeps a wide financial chasm to incentive those willing to risk it all that they too might one day take a company public on the NYSE and employee 400+. We need an approach that doesn’t pick the winners and losers, but provides a platform that ensures the winners win big and they can only do it in the U.S. We need an approach that has us once again striving for greatness.
