Chasing the losers.

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 economist at Ohio University and coauthor of Out of Work--a classic book on unemployment--calls the tax rate on labor the "tax wedge." The wedge is the difference between what an employee is paid, and what the employer has to pay in taxes and other costs to hire that worker. Mandatory worker benefits raise the cost to employers of hiring new workers, so, surprise, surprise, businesses cut back on employment to avoid these hidden costs. The Wall Street Journal recently noted that a huge number of firms in America have precisely 49 workers--because many labor laws begin to apply to firms once they have 50 employees. Hiring the 50th worker is an expensive proposition.

The nations with the most booming economies are not in Europe. Russia, China, and India are embracing capitalism, the flat tax, privatization of government assets, and private-property rights. And the formerly Communist nations of Eastern Europe want no part of their poverty-inducing socialist past. The Third Way still leads to the Third World.

TAXES DESTROY JOBS

Country                       Tax Wedge   GDP Growth   Unemployment

United States                   15.5%         4.3%           5.5%
Switzerland                     17.8%         0.0%           4.2%
United Kingdom                  18.3%         2.8%           4.8%
Australia                       20.4%         4.0%           5.9%
Japan                           23.2%         3.4%           5.0%
Canada                          23.3%         1.6%           7.4%
Austria                         29.5%         0.8%           4.4%
Denmark                         30.1%         0.3%           6.5%
Spain                           30.9%         2.7%          11.2%
Germany                         33.5%         0.2%          10.3%
Netherlands                     33.7%        -0.5%           6.2%
Italy                           35.5%         0.1%           8.4%
Belgium                         39.0%         1.2%          12.8%
Sweden                          39.5%         1.9%           6.0%
France                          40.0%         0.6%           9.6%
Correlation With Tax Wedge:                  -0.55           0.63