The U.S. tax rate is 15% for long-term (i.e. over 12-month) capital gains. This means that those who invest early in highly risky investments (like Google stock when it went public at $85), get to keep most of what they earn when things grow. If one is skeptical of this claim, look at what happened in the 1960's when JFK reduced the capital gains rate, or in 1982 when Ronald Reagan reduced it to 15%. In both cases, venture capital and new corporate formation soared. We are still living in an era where venture capitalists receive and invest over $30 billion per year. In Europe, by contrast, there are no Bill Gates, Steven Jobs or Larry Ellison's. The reason? European taxes are confiscatory, discouraging capital accumulation. Mitterand famously said that he wanted "Steve Jobs without the money (Hornby, 2006)."
Secondly, the U.S. has let its industries 'die.' The famous claim that we've exported all our car jobs is not true -- we still have 2 million U.S. auto workers; many of them now work for Toyota, Mercedes and Honda in the U.S., rather than Chrysler, GM and Ford. Thus even the 'dying' industries are, through free-market forces, able to retain employment and increase productivity.
The U.S. has lost significant number of jobs in a lot of industries: carpet-making, cloth mills, even shoes manufacturing moved offshore in the past decades. One of the issues when an industry becomes less competitive is that the layoffs are concentrated in a geographic region or amongst a certain number of companies -- which can create political problems for the representatives in that district or state. In Europe, problems with cloth mills, shoe manufacturing and olive oil production have met with massive government subsidies to keep those businesses running -- despite being uneconomic. This means that the resources are diverted to less-productive areas, and change is delayed.
Do Europeans Want Innovation? No!
Do Europeans want innovation? This author argues that, on balance, those in "old" Europe would rather protect...
The reason is that innovation, while it creates jobs, also displaces incumbent manufacturers. Great Britain insisted on keeping a home-based auto manufacturing industry despite all indicators that it could not compete. Its final devolution of British Leyland during the Thatcher years had two surprising effects: European and Japanese car makers poured in resources and expertise to make UK car factories highly innovative and productive, and Great Britain was freed to exploit natural strengths, such as design and financial markets. Today's Brit is better-off than his/her French or German counterpart as a result.
Conclusion
Innovation is harmful to existing political interests. It is clearly a job-producer over the long-run, but a job-killer in politically sensitive areas. Governments in Europe claim to want innovation, but are unwilling to allow the private sector the fiscal and regulatory freedom to produce it. As long as this unfortunate blend of government policies continues in Europe, the U.S. And other parts of the world will benefit by a brain drain of talented European entrepreneurs and inventors emigrating to friendlier climes.
Bibliography
BBC. (2002, March 5). EU unemployment stabilises. BBC News, p. n.p.
BLS. (2004, July). How the Government Measures Unemployment. Retrieved November 1, 2007, from BLS, Dept of Labor: http://www.bls.gov/cps/cps_htgm.htm
Burgess, S. e. (n.d.). A Dynamic Approach to Europe's Unemployment Problem. Bristol: Bristol Economics.
EU. (2005). New EU report shows active labour policy can increase employment rate despite low growth. Brussels: EU.
Hornby, T. (2006, December 20). The NeXT Years: Steve Jobs before His Triumphant Return to Apple. Retrieved February 5, 2008, from LowEndMac: http://lowendmac.com/orchard/06/1220.html
Schumpeter, J.A. (1942). Capitalism, Socialism and Democracy. New York: Harper.
European Innovation Crisis
