JEFF FAUX
PRESIDENT, ECONOMIC POLICY INSHTUTE
PRESIDENT, ECONOMIC POLICY INSHTUTE
The current 5-year economic expansion in the U.S. economy, together with slow employment growth in Europe and Japan, has reinforced the notion that the United States has found the correct "model" for job creation and prosperity in the new global economy.
This claim is echoed daily in the mainstream media, in the business press, and in the halls of the International Monetary Fund, the World Bank, and other international institutions. The reason for Western Europe's slower growth, goes the story, is that its markets are encumbered with labor protections and welfare benefits that impede efficiency. Japan's problems are also said to be caused by too much regulation and concern for worker security. In contrast, the American script calls for deregulating markets, opening up the economy to unrestricted trade, undermining unions, shrinking and privatizing the social safety net, reducing taxes on business, and lecturing citizens on their responsibility to work harder for less in order to assure that a few people have the opportunity to get fabulously rich. Do this, the governments of the world are told, and U.S.-style prosperity is sure to follow.
Promoters of the American model admit that the United States does not always adhere to its own model. Like other nations, for example, the U.S. government is willing to interfere in markets to protect its most politically powerful industries. But the world is not perfect, they say, and the closer the world's nations get to the American model the better off everyone will be.
Recently, some doubts about the cost of transition to this laissez-faire future have surfaced among the global elites. But their concern is more about how fast, rather than whether, to dismantle social protections. The worry is that the costs to the "losers" from free trade and too rapid deregulation might create a political backlash against globalization. But there is little dissent from the idea that the world's economies should be following the U.S. path.
This has put the trade unions around the world on the defensive. The union movement in the United States is the weakest in the industrialized world. If one believes that America has the best model for creating jobs, then it follows that unions are irrelevant at best, and may even be an obstacle to full employment. This argument is not only popular among business leaders and their conservative allies, but among political moderates as well. Indeed, many trade unionists, although they may not like it, accept the logic of the American model and assume that they must somehow accommodate it.
But trade unionists should look more closely at the claim that the so-called American model represents the road to success in the post-cold war global economy. We must distinguish between the strong job performance of the U.S. economy over the past five years and the claim that this performance is the result of the deregulation of labor markets. When we look more closely, we will find that many of the characterizations of the U.S. model are simply wrong and that its application to other nations is dubious. We will also see that the model has not solved the basic problems of work and income in an advanced economy, but is making them worse. There are aspects of the American economy that other nations might find useful, but deregulated labor markets are not one of them.
I will start with some facts.
1. Faster U.S. job growth is nothing new. Jobs in the United States have been growing faster than jobs in Europe for decades. This was true even in the 1960s and 1970s, when the European model was thought to be performing better. For the past half-century, jobs have grown faster in the United States than in most other industrialized nations for the same reason that they have grown faster in countries such as Australia and Canada: the rapid increase in the working-age population, resulting from larger streams of immigration and higher birthrates.
2. In recent years, the principal reason for faster U.S. growth and a lower employment rate has been more expansive macroeconomic policies and a rise in consumer borrowing. In the 1980s, America ran huge fiscal deficits that stimulated a decade of growth. In the 1990s, while we have reduced fiscal deficits, the U.S. central bank (the Federal Reserve) has followed expansionist monetary policies.
The United States has no Maastricht constraints. And unlike Japan, it was able to contain its banking crisis in the late 1980s because it has a tighter system of bank regulations (e.g., banks in the United States are limited in their ability to invest in equity and in the geographic range of their business). The United States has therefore been freer to stimulate overall demand. Indeed, the U.S. central bankers' resistance to faster growth has been slowly beaten back. A short while ago, the conventional wisdom in financial circles was that a 6.5 percent unemployment rate would trigger unacceptable inflation. Then the threshold was lowered to 6 percent. Then to 5.5 percent. Then to 5 percent. We are now slightly below 5 percent with no sign of inflation in sight
As a result of monetary expansion, private sector consumer borrowing has replaced public borrowing as the major financial engine of U.S. economic growth in the 1990s. Thus, for example, from the third quarter of 1996 to the third quarter of 1997, consumer spending rose 5.8 percent while consumers' after tax disposable income rose only 4.7 percent. The ratio of consumer debt to disposable personal income is the highest ever, and personal bankruptcies have increased dramatically despite five years of steady job growth. Savings have fallen to 3.6 percent of personal income.
3. Gaps between Western European and U.S. unemployment rates are often exaggerated. When adjusted for the difference in definitions of who is unemployed and who is not, the rates turn out to be much closer. For example, adjusted to the U.S. definition, the unemployment rate in Germany last year was 7.2 percent. The United States' rate was 5.4 percent. If one further adjusts for the larger share of the U.S. working-age population that is in prison (in relative terms, about ten times the share in Germany), the U.S. rate rises to 6.4 percent.
4. Recent U.S. job growth has little to do with so-called labor flexibility. In fact, U.S. labor markers are more regulated today than they were in 1992, when the current job expansion began and the unemployment rate was 7.5 percent. The United States now requires employers to provide (unpaid) family and medical leave, has substantially raised the minimum wage and, since the Clinton Administration came to power, has more strictly enforces workplace regulations.
5. All the net new job creation in the United States during the current expansion has been in the service sector of the economy. Most of the gains have been in the low-wage retail trade and consumer services sectors.
The Clinton Administration's Council of Economic Advisers has caused some confusion on this point by asserting that a majority of the new jobs are in occupations that pay above-average wages. This is technically true. But we know that the people getting these jobs are being paid less because median real wages have declined during this expansion. Although over the last few months tighter labor markets have finally begun to produce a small upturn in wages, real median wages in the first half of 1997 were still about 10 percent lower than they were in 1979 and 4 percent lower than they were at the bottom of the recession in 1992.
Here is an example of how the numbers can be confusing. If a steelworker loses his or her production job paying $18 an hour plus health and pension benefits and finds a new one as an assistant night manager in a fast-food restaurant paying $9 an hour with no benefits, most of us would consider that this worker is worse off. But the Clinton Administration claims that the worker is better off because he or she is now a "manager" and on average managers make more than production workers.
6. The share of workers covered by health insurance and pension plans has also continued to decline in this economic expansion. In addition, we have seen a steady increase in the share of workers forced to work under part-time and other nonstandard work arrangements. Thirty percent of American workers now hold part-time, temporary, or independent contract jobs. The largest private employer in the United States is Manpower, Inc., a company that provides temporary workers to business.
Job insecurity has also increased. According to Alan Greenspan, the chairman of the U.S. Federal Reserve Board, the share of U.S. workers who are afraid of losing their job has risen from 25 percent in 1991 to 46 percent in 1996.
To keep up family income, more members of American families are working and more people are working longer hours by taking on overtime and multiple jobs. Today, the typical U.S. worker is working about one month per year longer than he or she was twenty years ago. Not surprisingly, this has reduced the time available for family life. Thus, "latch-key" children, children who come home from school in the afternoon to an empty house, have become a growing social problem.
7. Inequality of income and wealth is also a hallmark of the recent behavior of the American economy. Between 1947 and the mid-1970s, the ratio of the income of the top 5 percent of families to the lower 20 percent dropped from a ratio of 14-1 to 11-1. Since then the ratio has risen to 19-1. Over the past seven years, real incomes fell on average for the bottom 60 percent of households.
In 1974, the CEOs of major corporations were paid an average of 34 times the earnings of the typical worker. Today they are making more than 200 times the average worker's pay. More significant is the steady shift of income from labor to capital. Labor's share of income in the private corporate economy rose during the postwar period but began to fall during the 1980s and has continued to drop over the course of the current expansion. In 1991, labor's share of corporate income was 83.4 percent, capital's was 16.6 percent. By 1996, labor's share had dropped to 78.9 and capital's had risen to 21.2 percent. Capital's expanding share explains the extraordinary rise in stock market values over the past few years.
Poverty rates in the United States, despite the recent economic expansion, are two to three times those of Western Europe. France is often cited by promoters of the American model as an example of a mismanaged economy. Yet the poverty rate for children under 6 in France is 6 percent. In the United States it is 22 percent. Which nation is doing a better job of preparing for the future?
8. Despite the sacrifices by labor, the U.S. economy is not more competitive. One obvious measure is the twenty-year-old trade deficit, which hit record levels in 1996.
Another measure is the United States' low overall productivity growth, which is half that of the other major industrial countries. This, in part, is an outgrowth of the increased reliance on cheaper labor in the United States. Even in manufacturing, despite the enormous downsizing and rationalization that has taken place, U.S. productivity growth is lower than the average of the G-7 countries. In fact, a recent study by the U.S. Business Conference Board concluded that both West Germany and France in 1995 reached absolute levels of GDP per hour worked that are above that of the United States. Japan's level of GDP per hour worked was 58 percent of America's in 1987; eight years later it was 68 percent. This is not an impressive record for the United States, given that it has enjoyed a cyclical upswing while Western Europe is depressed by the Maastricht criteria and Japan has been flattened by a financial market collapse. U.S. domestic private investment rates in this recovery have been about average, also not an impressive record considering the fact that profit rates are the highest in more than three decades. It is consumption, not investment, that has fueled U.S. economic growth.
Other nations that have embraced the U.S. model are having similar problems.
The United Kingdom has seen a redistribution of income to those at the top of the income pyramid, including the journalists who celebrate Britain's economic performance. Yet the overall performance hardly seems good enough to justify the sacrifices that working people have had to make for it. For example, over the past half-dozen years the rate of employment growth in Britain has been lower than that of Germany, France, and Japan. Today, there are one million fewer jobs in the United Kingdom than there were in 1992.
In Mexico, the government has been following the U.S. model of uncontrolled trade, deregulation of finance, and privatization for more than a decade. The result: a collapse in 1994-1995 of its currency in the wake of a speculative boom, a 40 percent drop in real wages and the impoverishment of its middle class. Instead of helping Mexico get out from under the burden of international debt, the adoption of the new American model has raised that nation's foreign debt burden, which workers will eventually have to pay off, by another 50 percent.
Similarly, the financial crisis in Southeast Asia has revealed the contradictions in the international applications of the American model A short time ago, the nations of Southeast Asia were the darlings of the international financial markets. These countries were promoted by the U.S. Department of Commerce as immensely profitable "emerging markets." Their governments were applauded for welcoming foreign capital, deregulating their banks, and linking their currencies to the U.S. dollar to suppress inflation. Today, the same nations are being denounced for borrowing too much foreign capital, not regulating their banks sufficiently, and failing to break the linkage of their currencies with a rising dollar.
As in Mexico, the Southeast Asia stock market will undoubtedly recover more quickly than the people. As interest rates rise and investors become more risk averse, domestic economic growth in these nations will slow down. This will reduce imports and increase pressure to export, which in turn will add to the growing supply of goods in global markets without commensurate increase in consumer buying power. As one investment analyst in Tokyo commented in early November: "If you look at the two key industries for Asia, which are cars and consumer electronics, demand used to rise by between 8 and 10 percent [per year]. It is now stagnant if you're lucky."
Let us now look at the question of how the real American model measures up as a strategy for future prosperity.
Investment it the act which shapes the future economy. Over the current expansion, the rate of growth of private investment in new structures is actually below the historic trend. On the other hand, investment in equipment primarily the purchase of computers has been somewhat above the long-term rate. Some economists maintain that the statistics overstate the amount of private investment because the price deflator now used for computers is too low (which, if true, overstates the amount of real investment in computers). But putting that aside, the overall rate of investment is about normal for expansions since the end of World War II.
However, because the American model is biased against public spending, public investment, by any measure, is falling further behind that which is necessary to maintain a productive society over the long run. The share of Gross Domestic Product represented by federal non-defense spending (including transfers to state and local governments) for physical infrastructure, education and training, and civilian research and development in 1996 was 40 percent less than it was 20 years earlier. The slack has not been made up by state and local governments. As a share of GDP, state and local government spending on capital projects and for education has fallen since the early 1970s. The United States now invests relatively less in its basic infrastructure than the other major industrial nations.
For a number of years, the drop in public investment was considered a necessary price for reducing the U.S. fiscal deficit. Now, however, the deficit is virtually eliminated. Yet earlier this year, the President and the Congress agreed to a five-year budget plan, which provided for large tax cuts, most of which went to upper-income families, and further reductions in investment programs. By the year 2002, U.S. public investment will be significantly lower than it is now.
Neglect of schools is one example of how strong the bias is against public investment. A government study last year concluded that another $100 billion was needed to fix up American schools-to repair roofs and crumbling foundations, and to wire the schools for computers. The allocation for this item in the five-year budget is zero.
There are things other nations could learn from the United Stared but not the things the press and the business and financial establishment are promoting. First, as the Federal Reserve has reluctantly shown here, there is plenty of room for non-inflationary employment growth in the world's advanced economics. Given low rates of inflation, interest rates are still too high.
Second, when jobs do expand, most come from the consumer services sectors, where productivity is low and workers are paid less. The shift to these jobs drags down wages and benefits in manufacturing and other high-wage production sectors. To counter this trend, Congress raised the minimum wage and subsidized low-wage jobs through an earned-income tax credit, which reduces taxes for low-income workers. More important in the long run, the U.S. labor movement is making stronger efforts to organize low-wage workers in the service industries.
Third, the United States has one kind of labor flexibility worth copying. Our schools, businesses, and other institutions are more open to people who have failed or dropped out early in life. It is easier for people in the United States to start a new career or a new life in their 30s, 40s, 50s or even later. America's lesson to the world lies in the opportunities it provides for upward social mobility, not in its reactionary labor laws or its harsh treatment of the poor and unemployed.
In reality, there is no one model. Neither current U.S. economic policy nor that being pursued by any of the governments in Western Europe or in Japan is adequate to promote the interests of workers in the new global economy. An adequate model will be constructed by taking the best from all of them: from the United States, faster growth through more expansive macroeconomic policies. From Europe, the social contract that protects working families from the brutalities of the unregulated market. From Japan, a concern with making employment stability a top national priority. To this mix should be added international agreements guaranteeing labor rights and environmental standards, and debt relief that would free up nations of the Third World to stimulate their own domestic economies.
We do not know what politics will bring us in the future, but we are sure of one thing in the present: The so-called American model is not working for most workers ee even in America.