Almost all economists agree that European countries have rigid labor markets and nationally protected product markets. But from the analysis of the crisis in Portugal (and it's European neighbors) that is coming out of U.S. academic and policy circles, one might think that instead Europe is by far a more flexible economy than the U.S. Just note:
1. The DC and media consensus is that Portugal should cut spending and raise taxes to eliminate its budget deficit. But isn't that true of California as well? And isn't California closer to collapse, and haven't its problems been there for longer than Portugal's? For the record, Portugal has increased taxes many times in the past 10 years, cut its budget deficit from 6.1% to 2.7% between 2005 and 2008, and raised the retirement age partially solving the underfunding of Social Security. Compared with the legislators in Sacramento, Portuguese politicians are saints of fiscal virtue and flexibility.
2. Portugal would benefit from a depreciation of the real exchange rate to restore its competiveness. Many have said that Portugal can achieve this by cutting wages, and I even recently read that the government should do this by legal decree. Uhmm, okay, but then what is your advice for Michigan? If you worry about Portugal's uncompetitive industries, then Detroit's auto industry should give you nightmares. Enacting a state-mandated 10% cut in wages in Michigan is so out of the realm of what is politically and legally feasible, that no one would risk the ridicule of proposing it. Comparing the evolution of unemployment and wages in Michigan and Portugal, and walking around Detroit or Flint versus Lisbon or Minho, it is some regions of the U.S. that seem like they need some shock therapy.
3. Others have suggested that Portugal leaves the euro for a few months and devalues the currency. Funny, but I don't remember hearing this proposal for Massachusetts woes in the 1990s or for Kansas in the last 30 years. Why not secede from the union for a while? You wouldn't think that the followers of Abraham Lincoln down in DC would mind, would you? European countries must have a remarkable institutional flexibility, compared to the rigidity imposed by the pesky prospect of civil war in the U.S.
4. The final advice that celebrities give when passing by Portugal in their lecture tours is to raise productivity growth. Each one has a different pet-industry on where to bet, from tourism, to microchips, to renewable energy. It is a shame that West Virginia is not as charming as Porto, so it never gets the same attention. If all of this brain power spent its time dreaming industries where West Virginians could become world leaders, it surely wouldn't have the lowest median household income in the U.S. today. Portugal's product markets must be incredibly flexible to allow for these great leap forwards that U.S. states can only dream of.
There is of course a different interpretation. It is not Portugal, but rather theoretical models that are always more flexible than real people and countries. The compromises that democracy forces on you, the suffering of your unemployed neighbor, or the sadness of seeing abandoned houses in the street where you grew up give most academics pause before trying to play social planner when it comes to the U.S. But foreign countries like Portugal have the irresistible allure of a far away land where everything is possible.