The Engine That Could

In 2008, Sarkozy called on American Nobel laureate Joseph E. Stiglitz to head a commission looking at what might be called the real wealth of nations. "Sarkozy felt there was a tension between what citizens were asking him to do about the environment, noise pollution and all these other quality-of-life issues, but also the pressure around maximizing GDP," says Stiglitz. "They seemed to be inconsistent with one another, but he felt they shouldn't be. So, we thought we'd try to get a better way of measuring growth, one that would take into account all these factors."

Measuring the intangible assets for what amounts to a revolutionary accounting project is "extremely difficult," Stiglitz says, "but it's conceptually correct. We don't yet have a new kind of metric that can replace GDP, but what we want to do is start a conversation around this issue. Governments have a misguided way of accounting that looks only at debts, rather than also incorporating assets."

None of this is to suggest that it's better to borrow than not, or that all government investments are made wisely. Many developing countries have shown what happens when massive borrowing is squandered on ill-conceived projects. The burden of servicing the debt starts to impinge, and in some cases overwhelm, every effort to deliver the services and security—the intangible assets—that governments are supposed to provide.

Before the crisis, when French state debts were topping 66 percent of GDP and the United States was in the same range, leaders including Sarkozy were concerned that the burden would weigh on France's ability to compete. But several French economists, among them Anton Brender in books like France Confronted With Globalization, argued that the perspective changed radically if you compared debts to assets. As late as 2007, France's government debts were billions of euros less than its tangible assets alone.

As one French economist put it, speaking privately, even in Europe many commentators talk about the amount of debt each child is going to be born with. But they rarely talk about the amount of assets he or she inherits as part of a modern Western society. Europeans sometimes forget just how well off they are: "The income of a jobless French person," Brender wrote," is very much higher than most of the workers in the world!"

Which brings us to the critical question of consumption. Such is the relatively relaxed public mood in Europe that there are sometimes stunning displays of nonchalance. As the global economy looked like it was in total free fall a couple of months ago, Le Parisien, a popular daily paper with a mainly working-class readership, ran this headline across its front page: it's time to think about summer vacation. But Americans, looking at such examples, tend to miss the most important economic point. In European systems where you can still be a consumer even when you lose your job, the economy keeps cranking, cushioning the fall for everyone.

With U.S. unemployment at 8.9 percent, which exceeds France with 8.3, many Americans feel their backs are to the wall. Unemployment insurance varies from state to state, but generally kicks in later and terminates sooner than in Europe. A study at the University of Connecticut tried to calculate a "generosity index" comparing the U.S. with other industrialized countries. The Americans are way down the list, not only in terms of the unemployment compensation they earn, but, most strikingly, the potentially catastrophic impact of medical expenses. Add to that the problem of pensions that are tied to equity and bond markets: when the markets are tanking, the unemployed in the United States see their long-term as well as short-term future in jeopardy. The effect is to make Americans want to save in a crisis, not spend. And so the crisis risks getting worse.

One of the ironies of the current situation is that the Americans, who have been critical of the Europeans as spendthrifts for years, now knock them for not spending enough. Because the Europeans already have a protective system in place, extensive bank regulation and much less dependency on easy credit to keep consumers spending, they have had less interest than the Americans, and less need, to pour massive amounts of money into the financial system. And one place where the Europeans do not spend nearly so much money is on their militaries. The United States spends more on defense than all other nations in the world combined: more than half a trillion dollars a year. And that doesn't include the roughly $2.5 billion a week spent on the wars in Iraq and Afghanistan. While all that may prime the pump in some states and at some companies, it hardly has the same impact as healthy consumers who can keep spend-ing even when they lose their jobs.

So, what's the moral of the tale? In the real world it shouldn't be about winners and losers, in fact. It should be about the hare who learned a thing or two from the tortoise, then kept on going strong.

With Rana Foroohar in New York City and Stefan Theil in Berlin

© 2009