Is The American Economic Model the Answer?

Not too many years ago, the conventional wisdom was that Europe and Japan did it all right, and the United States did it all wrong. And everything that could be learned, we could learn from them, and indeed, they had nothing to learn from us. Now, the new conventional wisdom is just the opposite; we're doing everything right, and Europe and Japan are doing everything wrong. Neither of those positions is correct.

-- Secretary of Labor Robert Reich, Detroit Jobs Conference, March 14, 1994.

The economic elites of most advanced nations now believe that the United States offers the best model for competing in the new global economy. As commonly formulated, the argument holds that, compared with Europe, the United States has:


  • Created more jobs. Thus, according to a recent commentary in the Washington Post:


    The record is unmistakably clear. Since 1970 the U.S. economy has generated 41 million new jobs. . . . By contrast, the European Union -- the new name for the European Community -- has created 8 million new jobs since 1970. With a population nearly a third larger than ours, it has generated only 20 percent of the jobs. Its unemployment rate is 11 percent, up from 3 percent in 1970.

  • Lowered labor costs. According to the New York Times, the United States is now the "low-cost provider of many sophisticated products and services from plastics to software to financial services."


  • Restructured its firms, which are now expanding world market shares. As another article in the Times recently put it:


    After more than a decade of painful change and dislocation, many American industries are leaner and nimbler, and others have seized the leadership of the sophisticated technologies that are ushering in the information age.


These claims are commonly offered as proof that the "American model" -- deregulation, weak unions, and a minimalist welfare state -- offers an exemplary competitiveness strategy for surviving in the global economy. Not surprisingly, this was the preferred model of the policy, business, and media elites who frame the discussion. Supposedly, the sooner Europe accepts the American way, the better off it will be.

But competitiveness, American-style, is the wrong goal. The right goal is high, rising, and broadly diffused living standards. And even on its own terms, the series of claims about American economic success is not supported by the evidence.


A Closer Look at Job Creation

It was during the Reagan years, of course, that deregulation took hold, business was encouraged to attack unions, and the social safety net was shredded. However, the record of job and economic growth during that period leaves one less than breathless about the American model. The graph above, based on calculations by Larry Mishel and Jared Bernstein of the Economic Policy Institute (EPI), shows that U.S. per capita GDP growth averaged 1.5 percent from 1979-89 (the business cycle peak-to-peak period), compared with 2.3 percent for eight other leading economies for which comparable data are available. Moreover, Mishel and Bernstein decompose the data to show the share of growth resulting from increases in productivity and changes in the ratio of employment to population. The share of U.S. growth attributable to productivity was the lowest of any of the other nations, save one. Thus not only was U.S. growth in the 1980s below average; it depended much more on an increase in the proportion of its population that chose, or was forced, to go to work.

U.S. job growth during the 1980s was high relative to other nations -- although lower than that of Canada and Australia, which are in general more regulated, have higher rates of unionization, and have more generous welfare states. As the table on the next page shows, the growth of jobs relative to the population in the United States was respectable but hardly spectacular. And it certainly does not justify the conclusion that the American economy is uniquely structured to create jobs.

Alone among the advanced nations, real wages of production workers in the United States fell from 1979 to 1989. As Bill Clinton said during the 1992 campaign, Americans were working "harder for less." At the same time, we had the Reagan/Bush deficits, which clearly were a major engine of job growth through the decade. Thus, to achieve the growth in jobs that it did, the United States had to lower the living standards for the majority of its people and quadruple its debt. This record does not support the simple-minded notion -- constantly repeated and amplified by politicians and the press -- that the deregulated U.S. economy outperformed the rest of the industrial nations and should therefore be the model for the coming decade. Moreover, when the U.S. welfare state was at its most expansive during the business cycle of the 1970s, American job growth was even better compared to Europe than during the cycle of the 1980s.

After 1989, the U.S. economy turned downward. During the next three years, real wages for production workers continued to decline. Deficits in 1990, 1991, and 1992 rose to 4.0, 4.8, and 4.9 percent of gross domestic product (GDP), respectively. Inasmuch as employment was stagnant over the long recession in the United States, job growth during this period certainly does not provide much evidence to support the superiority of the American model.

This brings us to 1993 -- the remaining year left for making the case. The federal deficit was reduced, interest rates fell, and the government contribution to the economy shrunk. Even in 1993, however, the first two quarters were quite sluggish -- GDP grew at 0.8 and 1.9 percent.

This narrows the case down to the last two quarters of 1993, in which growth accelerated smartly. This was certainly a good performance, but it was not out of line with previous recoveries. In fact, if current job growth was as robust as the average for previous recoveries, the United States would have another three to four million jobs. Thus, the celebrated case for the American model rests primarily on the evidence of two quarters of elevated growth in a recovery that otherwise has been somewhat anemic.

But if the U.S. economic record has been unimpressive, hasn't the European record -- particularly in employment -- been even worse? According to the conventional wisdom, Europe's currently higher unemployment rates stem largely from stronger labor unions and more generous social benefits that deter flexibility and discourage work. But there is little evidence to support this argument. First, the current disparity in unemployment between Europe and America reflects different stages of the business cycle; Europe has been in recession, while the United States has been in recovery for three years. Second, European-style labor organization and social benefits have not prevented Canada and Australia from outperforming the United States in job growth. Third, the Europeans in the 1980s achieved higher levels of productivity growth than did the United States. Although the full explanation is undoubtedly complex, the observable facts suggest that higher European unemployment rates are largely the result of the macroeconomic rigidities of the German Central Bank, whose tight money policies have held Europe's job needs hostage to its inflation phobias.


Shrinking Real Earnings

The press often treats the downward pressure on living standards as if it were a mysterious phenomenon independent of the improved "competitiveness" of U.S. business, but few serious advocates of the American model would deny that lower labor costs are now reflected in economic and social pain among people who work. Nor is there much doubt that lower levels of real wages and benefits, drastic corporate downsizing and jobs-shedding, and a dozen years of efforts to undercut labor unions have been the major causes.

The pattern is by now familiar. The decline of real wages has put the squeeze on family incomes, accelerating the entry of married women into the work force and the rise of the number of people working at more than one job. Employers have expanded temporary and contingent jobs at the expense of full-time workers, reducing the cost of fringe benefits and making it harder for unions to organize. Meanwhile, full-time workers have seen their work day stretched out. Among workers in non-union firms, it is not uncommon for much of this "overtime" to be off the clock and therefore unpaid. In the lower and middle reaches of the white-collar world, many American workers report that the 50-hour week has become a standard.

Less familiar is the breadth of the earnings deterioration. The greatest losses are hitting the less educated, the younger, the non-whites, and the males. (Women's real hourly wages for those at the median level or above grew during the 1980s but from a much lower base, and the "gender" gap in wages remains substantial.) But the tide of job stress has been climbing up the educational pyramid; since 1987, real hourly earnings of male U.S. college graduates have been falling as well.

Corporate downsizing has struck both blue- and white-collar America with a vengeance. According to Professor Kim Cameron of the University of Michigan School of Business Administration, 85 percent of Fortune 500 companies have downsized over the last five years and 100 percent are planning to downsize over the next five years. Yet the evidence to date is that firing workers and forcing those who are left to work harder does not usually make the company better off. At least three surveys, each covering more than 1,000 firms, found one-half to three-quarters with lower productivity after downsizing.


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Benign Restructuring?

Promoters of the American model sometimes argue that we should not expect the deregulation of the late 1970s and early 1980s to produce results in time to be adequately measured over the business cycle of the 1980s. So they cite the relative reduction in U.S. labor costs in manufacturing that occurred from the mid-1980s on as a proxy for improved U.S. competitiveness. Typically, this is presented in terms of U.S. dollars, since in the marketplace, competitive advantage includes the effects of currency fluctuations. But the improved performance resulting from the drop in the dollar during the last half of the 1980s is hardly a measure of returning economic strength. When the numbers are adjusted for currency movements, the U.S. advantage shrinks drastically, and, vis-a-vis our major competitiveness problem, Japan, it disappears.

Overall U.S. business productivity growth actually decelerated after 1985, averaging less than 1 percent per year through 1991. In 1992, productivity rose 3.3 percent but then turned negative in the first two quarters of 1993. Again, as with the job growth argument, this rests the productivity case for the American model on the narrow evidence of the second half of 1993.

Inasmuch as the numbers are not convincing, many enthusiasts of the American model cite anecdotal evidence: the reversal of fortune of some U.S. firms that now claim to be expanding their market shares, not simply on the basis of lower labor costs but by virtue of having "reinvented" the corporation. According to this argument, U.S. management, relatively unfettered by union rules and social restraints, has reengineered its firms to make them more efficient and better able to cope with the accelerated pace of change and intense competition of the new global marketplace.

Much of this claim is overblown, filled with the self-congratulatory hot air that diffuses through the pages of business magazines to comfort a readership anxious to be reassured that its profits do not represent a taking from society but a giving of just rewards. The vast majority of U.S. firms that have "come back" are doing so by squeezing wages, outsourcing to Mexico and other Third World countries, and forcing longer hours on their workers. There is no need for fancy explanations to understand what is going on in most of them.

Yet there is some evidence of a more benign movement to reshape U.S. firms that can empower workers and enhance job satisfaction, notwithstanding the dangers of employee manipulation that may be involved. Indeed, the greater flexibility of American managers may have enabled them to move faster in this direction than managers in Europe. Eileen Appelbaum of EPI has surveyed so-called high-performance workplaces in a number of U.S. firms and has identified cases where genuine downward redistribution of power and authority has taken place as a result of management initiatives in both union and non-union settings.

But as she has also discovered, other aspects of the American model work against this kind of transformation. The tyranny of the financial markets' short-term outlook is a critical impediment. Rather than reward firms for the improved worker-management relations that a high-performance workplace requires, Wall Street investors put a premium on ruthless labor policies that they take as signals of management's dedication to efficiency. Indeed, some U.S. firms that had launched pioneering efforts to create empowering workplaces in partnership with unions have recently reversed themselves to accommodate investors, despite hard evidence of long-term success.

Appelbaum has also found that the transformation of the workplace requires a large up-front investment in training that most firms, obsessed with the next quarter's net earnings, are not willing to make. In America, training employed workers is seen almost exclusively as a private responsibility; little public money is available to defray the costs. During his campaign, President Clinton proposed a French-style program in which a small payroll tax would be levied on corporations and then forgiven to the extent that the firms establish a qualified training program. But the proposal has been shelved because of business opposition.

Another impediment to the transformation of the workplace is the high mobility of American workers. Firms that invest in training risk seeing those investments captured by other firms that can afford to pay higher wages precisely because they have not paid for training. A low-wage, contingent-work labor market discourages loyalty to the firm even more.


The Clinton Variation

Is the Clinton administration willing -- or able -- to revise the American model? Its domestic efforts are encouraging, but they are hobbled by a perceived shortage of funds and a reluctance to address the deeper issues posed by global economic deregulation.

The administration, happily, is trying to move America away from the model's worst aspects -- mindless deregulation, hostility toward unions, and minimalist government. In a sense, Clinton is trying to respond to the failure of the Reagan/Bush policies with a minimum challenge to business ideology. Unlike his immediate predecessors, the president and most of his economic advisors acknowledge the basic principles of Macroeconomics 101. They came into office proposing a fiscal stimulus, led by public investment. When that effort failed in the Congress, Clinton shifted to a "second-best" monetary stimulus. The White House agreed to spending cuts and tax increases to reduce the deficit on the understanding that the Federal Reserve Board would accommodate lower long-term interest rates. The Treasury Department helped by shifting its financing of the deficit away from long-term bonds, which raised their prices and lowered their yields. The policy was successful, generating good growth in the second half of 1993 that was led by interest-sensitive industries such as housing and consumer durables. But the Federal Reserve has put us on notice that it has no intention of allowing the economy to reach full employment.

There is also good news in the Clinton administration's open acknowledgement that the government has a responsibility for reducing structural unemployment. The administration has initiated the beginnings of a civilian industrial policy, which includes more support for research and development and discussions with specific industries on ways in which the government can help get new ideas to market. It is also setting up regional industrial "extension services" for the diffusion of technology to small- and medium-sized businesses -- an approach inspired by the agricultural extension services that have long helped to raise agricultural productivity in the United States. On the human capital side, Labor Secretary Reich has been given a modest budget increase to expand and reorganize the federal government's training and labor market services. Extra help will go to dislocated older workers and a welcome expansion of vocational programs aimed at young people who do not go on to college. And there are the stirrings in Reich's department of the first serious federal effort to nurture programs of worker empowerment at the job site.

The bad news is that these efforts are too small scale, in both size and conception, to deal with the problems of structural unemployment. The administration's budgetary commitment to the adjustment and public investment programs falls short of the minimum needed to support its trade expansion agenda. Instead of investing more in human and physical infrastructure, the administration and Congress have agreed to a five-year budget plan that will leave the United States even further behind; the share of the GDP devoted to domestic public investments will actually decline.

Unwilling or unable to buck the deficit hawks or to force more cuts on the military, Clinton does not have the money for the investments his strategy requires. All he has left is the "cut and spend" tactic of chipping away small sums from some programs to shift to others, along with yet another variant of the hoary proposition that bringing business methods to government will somehow convince voters that the public sector will become more efficient, and therefore more loved. Some of this reordering of priorities and reorganization of agencies makes sense (although after 12 years of Reagan and Bush there is not a great deal of fat left in the domestic budget). The savings will be small, however, and the president will need to become embroiled in battles with Congress even to obtain those limited resources. A telling example is Clinton's stripped-down welfare reform proposal, which could throw more people onto the low-wage labor market and leave millions of poor people economically worse off.

Bill Clinton's sentiments toward the working middle class and the poor are clearly warmer than were those of Bush. And it is a relief to have people in government who want to improve programs and can draw on a dozen years of experiments at the state and community level. America is replete with examples of projects that have worked and people who know how to run them. But the money is too scarce for much more than small-scale activities. At best, this is so far a pilot program presidency. How much difference will it make? The distinction between a government that doesn't care and a government that cares but cannot find the money is likely to be lost on people whose financial lives, and personal lives as well, may be in tatters.

A further piece of bad news is that while Clinton is moderately interventionist in his domestic initiatives, he does not follow the same approach to global economics. In embracing the North American Free Trade Agreement and General Agreement on Tariffs and Trade with only minimal attention to global standards, the administration tries to square the economic circle by yoking economic management at home to global laissez faire.


Beyond Pain Allocation

Both the American model of low wages and high employment and the European model of high wages and low employment are ways of allocating pain -- the pain of adjustment to the brutally competitive new global economy. In the predominant view, only free trade and deregulation can generate a prosperous equilibrium. Thus, it is said, if we take the punishment now, squeeze out "excessive" wages and benefits, liquidate debt, and reduce the burden of social welfare, our companies will become leaner and meaner, move ahead of other nations, and ultimately enlarge market share and restore prosperity. This is neo-liberal folly at its most destructive.

None of those who confidently jabber on about the long-term benefits of short-term pain can answer the critical question: How long will it take? For example, economic theory, as well as common sense, tells us that when low-wage and high-wage workers are thrown into competition in the same markets with similar capital equipment, their wages will tend to converge. But the gaps are so large that the process extends far beyond the practical time horizon of economic policy. To give one example: if Mexican real wages were to grow at 4 percent per year and U.S. wages were to stagnate, it would take almost 50 years for them to equalize and, presumably, at that point for both to begin to rise together.

Although the circumstances are quite different, the current conventional wisdom is eerily reminiscent of the economic discourse of the 1930s. Economists justified a stubborn insistence on balancing public budgets in the face of large-scale unemployment on the grounds that the world had to rely on market forces to "restructure" its way out of the Depression. The economist Alvin Hansen -- later a prominent Keynesian -- expressed the consensus in 1932 when he wrote: "We shall come out of it only through hard work and readjustments that are painful. There is no other alternative."

But, of course, the world did not wait for market-driven restructuring. Before the forces of supply and demand could drive incomes and prices low enough to spark a revival of investment, the political reaction to economic pain set in motion the most destructive war in history. As we all know, the unemployment problems of the 1930s were solved not by market forces but by government spending that was the exact opposite of the tight fiscal strategy advocated by the economic policy intellectuals of the time.

The internal economic debates in most of the advanced nations are today driven by the question, how do we compete in this new global economy? But the verb "to compete" lends itself to many interpretations. For example, balanced trade can be achieved with high levels of unemployment. Market share in individual industries can be maintained by constantly lowering wages. And a nation can often compensate for the unattractiveness of its goods by permitting its currency value to sink. Moreover, although international trade volumes are growing more rapidly than output, the majority of what most advanced industrial nations produce is still for their own domestic market. Among the member nations of the Organization of Economic Cooperation and Development (OECD), the share of GDP represented by imports is only 7 percent in Europe, 8 percent in Japan, and just 11 percent in the United States.

We should be asking ourselves a more pertinent question: How do we achieve full employment with rising real incomes? The difference between the two questions is critical. If the primary goal is to compete, European labor market systems, which support higher wages and a shorter work week, will be seen as an obstacle to reducing labor costs. But if the point is to raise incomes, such systems may well be necessary. The U.S. model requires more people to work longer hours to maintain family incomes. It's not clear that it makes a superior contribution to human happiness and social stability compared to a European economic model in which family incomes are maintained by fewer people working less.

Indeed, it is largely a waste of time to continue pondering the so-called "trade-offs" between high-unemployment/high-wage strategies and low-unemployment/ low-wage strategies. The more important issue is how to create an international economic environment that can support a high-wage path to accelerated job creation, which would give individuals the freedom to make tradeoffs between hours of work and leisure.

The advanced industrial nations not only have problems in common; their solutions must also, to some extent, be common. In the new competitive environment, there is a limit to the ability of any one nation -- even one as large as the United States -- to carry out policies to raise living standards at home unless other nations are taking similar steps. The challenge is to move from "beggar-thy-neighbor" policies, in which living standards are progressively sacrificed to the goal of competitiveness, to a cooperative effort in which competition serves to raise standards everywhere.

This challenge raises a question that is mostly off the table: How will the global economy be managed? The neoliberal answer is to leave it to the market. But that answer was rejected after it failed in the 1930s. After World War II, the industrial world could not have avoided the fate that befell it after World War I without a strong government hand to regulate national economies and a strong United States to regulate the global one.

That era is over. The vacuum left by the shrinking power of the United States has been partially filled by a global financial casino increasingly driven by competition for short-term profits. The effect has been to make it virtually impossible to create full employment in most advanced nations. Long before the limits of growth are reached, the demand for labor gets choked off by central banks that raise interest rates to discourage hypersensitive investors from transferring their hot money elsewhere.

There are many paths a market economy can take to prosperity; the search for a single model is an exercise in ideology, not economic policy. The much more pressing task is to reinvent the global economy, eliminating the conditions that prevent every nation from achieving full employment at rising wages. The priority items on this agenda include:


  • an agreement to dampen global financial speculation, including the imposition of an international security transfer tax as suggested by the economist James Tobin;


  • a strategy to synchronize advanced nations' macroeconomic policies;


  • relief for the debt burdens that still plague too many developing nations and an end to demands by the World Bank and other financial institutions that developing nations follow destructive export-led growth strategies as conditions for aid;


  • an international bill of worker and environmental rights as a requirement for any nation wanting to participate in world trade and financial markets.


As a first step, the leaders of other countries should scrutinize more carefully the idea that their economies could prosper if only they were to adopt the American model to suppress labor costs. They need to take a closer look at what is happening here. A lot of ordinary Americans could give them an earful. In a recent article on low-wage jobs, the New York Times interviewed a husband and wife who had two jobs apiece that earned them a total of $18,000 a year. When told by the reporter that the booming U.S. economy was now generating jobs at the rate of almost two million a year, the husband responded: "Sure, we've got four of them. So what?"

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