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Tuesday, July 20, 2004

WHY HAS THE US BEEN THE RICHEST COUNTRY WORLD SINCE THE 1880s? 6th In A Series

This, the 6th article in a series on the performance of the US economy --- viewed comparatively, especially against its major rivals in West Europe and East Asia --- takes up the argument that was left hanging fire in the 5th article, published a week or so ago. The argument there wound its way back and forth through three parts, worth briefly summarizing here . . . not least for some new survey data to reinforce the key point made in part three.

PART ONE:
SUMMARY OF THE ARGUMENT IN ARTICLE 5




(i.) Declinism and Alice-in-Wonderland's Looking Glass

In part one, the analysis set out and probed the once chic declinist polemics of the late 1980s and early 1990s. Their overall thrust? The US economy, it was claimed, was performing poorly compared to Japan and Germany, two large countries whose economic systems were far more heavily regulated and subject to cartel-like arrangements in industrial manufacturing . . . with far different arrangements for mobilizing capital and allocating it for investment purposes.

As it happened, those polemics got everything topsy-turvy. Since the start of the 1990s, the US performance has far outclassed those of other industrial countries (save tiny Ireland) in per capita income growth. Meanwhile, their economies buried under small mountains of market inefficiencies, all adding up to rigidities and vested interests around the status-quo, Germany and Japan have racked up the worst growth performance of any industrial economy since the Great Depression of the 1930s. The average EU per capita income is now slightly less than 65% of the US's --- where it was more than three decades ago. Japan's is slightly higher; Germany's slightly lower.

 

What went wrong with the declinist predictions?

For one thing, its advocated ignored the major reasons for the gradual narrowing of the gap in per capita income between the US, the lead country for generations, and dynamic follower countries like Germany and Japan since the early 1950s: convergence catch-up growth. For another thing, ignoring the Schumpeterian thesis that radically restructuring technologies washed over capitalist countries in long-term waves --- roughly, in gale-like force every 50-60 years since the industrial revolution --- the critics of Anglo-American style capitalism, especially its American variant, couldn't understand that the US was caught up in the throes of creative destruction, another Schumpeterian concept, as its economy shifted equilibrium and spearheaded the revolutionary breakthroughs in information and communication technologies, plus bio-tech.

 

(ii.) The US and Radically Restructuring Technological Innovation

In the second part of article 5's argument, the superior innovative performance of the US economy --- which has enjoyed the highest per capita income since the 1880s, roughly half the time since the industrial revolution of the late 18th century --- was briefly sketched in. It comes down, in the end, to a more efficient system of national innovation . . . another Schumpeterian concept overlooked by most mainstream economics until the bursting impact of the new revolutionary technologies in ICT and biotech made themselves felt in hard-to-deny ways, including more than a doubling of the growth rate of productivity in the US economy after 1995.

The causes of this performance, it was claimed, add up to a matchless system of national innovation in the US --- a series of inter-acting institutions and policies, reinforced by certain cultural habits such as optimism about change, however dislocating the change might be . . . especially in its initial stages. Economic disruption and social dislocation are precisely what radically restructuring technologies will do. Every 50-60 years, they have surged over existing economies with turbulent intensity. The faster they're introduced, the more disruption to the status quo will be inflicted.

 

In the immediate wake, what will happen to the economic status quo within a country?

Tersely put, numerous old industries will be left entirely obsolete: think of the horse-and-buggy trade when Ford motor company introduced the Model-T Ford in 1907. Bankruptcies will likely be numerous. Lots of regions within a national economy will be rattled. Other well-established industries will no doubt survive, but the new revolutionary technologies --- almost all brought to the market-place by entrepreneurial start-up --- can make their existing inventories, equipment, work-force skills, and managerial styles outmoded . . . in drastic need, if the established giant corporate firms are to survive, of costly restructuring the ways they are organized and operate. That's been true in the US since the 1980s even in the retail business: think of Walmart and its revolutionary impact on Sears or Penny's or Safeway, or the no less disruptive impact of Amazon on the book business.

Without a clear rupture in the institutionalized economic status quo --- including, as Schumpeter noted back in the mid-1930's, a clean break with the established routines in the business world --- radical technological innovation would be impossible.

Enter the forces of creative destruction. Only by letting these obsolete or uncompetitive industries and the firms in them shrink or disappear --- or at a minimum, carry out havoc-causing restructuring --- will these forces do their work and sweep through the status-quo. In this way, they will free financial capital, managerial talent, engineers and scientists and skilled-workers for the newer, more profitable industries on the technological frontier. Over the long haul, such radical change is essentially the only way a rich economy, with high-cost labor, be able to bring bold innovative ideas to the market-place successfully, at home or abroad, and stay competitive . . . especially in a system of rapidly globalizing capitalism, with new, swiftly growing industrial competitors in East Asia and now India.

Here, on these scores, economic and social flexibility are at a premium. So is a widespread acceptance of change, which includes a willingness to cut ties to established organizations, prevailing routines, and habitual ways of thinking. Without flexible institutions and habits of thought and behavior, those who would be hurt by major changes in the economic status quo --- call them, for simplicity, the losers (whether firms, workers, or regions and the politicians representing them) --- will almost always be able to block creative destruction and hamper shifts in market structures, in market power, and in wealth, wages, and prestige that the potential winners hope to gain.

Little more needs to be said by way of summary here, not least because the thrust of the current article's argument is to clarify the meaning of a system of national innovation and set out the evidence for the superior innovative capacities of American capitalism.

 

(iii.) Superior Innovation and Per Capita Income Growth Isn't Necessarily
The Same As Superior Well-Being or Happiness


Above all, in part three of the 5th article, the point was stressed that a superior innovating economy with a peerless record of per capita income growth does not necessarily add up to superior well-being or satisfaction. The latter notion is much more subjective, a matter largely of different values and preferences across countries.

Almost all the EU peoples seem to prefer more leisure to income and hard work, and more job-security and welfare transfers, than Americans; the trade-offs for the West Europeans are not just lower income --- roughly a third lower than the US average worker's --- but also higher taxes, a much larger underground economy (2-3 times higher in the EU than in the US), and much less flexibility and dynamism when it comes to the combined forces of adapting to revolutionary technological change and globalizing forces. Japanese tend, on the whole, to prefer job-security and social stability every bit as much as the West Europeans, and accept a much greater role of bureaucratic regulations and hierarchies in their lives than Americans.
Americans, by contrast, not only work longer by far over a year --- roughly 30% more than the Germans on an average --- but at a faster pace and with less job security. The counterpart is an economic machine of matchless ability to create new jobs --- especially good ones, requiring more skills and education --- and hence lower levels of unemployment, far more opportunities for start-up businesses, and much higher levels of income than either the Japanese or the West Europeans. Americans also pay lower taxes, but then have to live with more uncertainties about the vagaries of life --- including the need to change jobs or even careers and professions in mid-life, and in some instances, worries about medical bills.

 

Something New Here: Some Survey Evidence, But Hardly Conclusive

Given all this, which capitalism system then produces more well-being?

  • The American free-market one, shared by the British, Canadians, Australians, and New Zealanders (and to a fair degree Ireland) with its more individualistic, free-for-all competition? And, to judge by the rankings in the IMD's latest poll, find that they are all generally among the most competitive countries in the world? Remember, three of those countries --- Britain, then Australia and New Zealand --- purposefully scrapped their regulatory welfare-states to re-ignite economic dynamism after a generation of slow or stagnant growth. Ireland, once the poorest country in the EU and now the richest, has introduced pro-business policies that are constantly criticized by the EU Commission of technocrats and regulators in Brussels.


  • Or the EU Continental Welfare-State with its greater state role, higher taxes, and higher welfare transfers, with little job-creation in the private sectors?


  • Or the Japanese Regulatory-States with its much larger state role, cartel-like links between banks and giant corporate enterprises, preferences for social stability, and hierarchical and group-laden social system?


The answer: no one can say for sure, not objectively anyway.

Lots of Americans, for instance, might prefer more stability and job-security in their lives, plus more welfare benefits, just as they might prefer more vacation time. If, though, you tell them that the trade-off would require that they accept, on an average, a 30% reduction in real income, less chances for their children to find good jobs than is the case for West Europeans or Japanese, and far fewer chances to change their own careers in mid-life if they see fit --- including starting a business of their own --- they might have second thoughts. Survey data might be useful here. Not only is there none that the buggy prof knows of, but the results of such surveys might be suspect, given that we'd be dealing with imaginary scenarios, rather than actual behavior as attested through performance on a job, or votes in elections for this party or that party, or refusal to immigrate to other countries with different economic systems.

What we do have are various stand-in proxies, including survey data about job-satisfaction . . . with all the problems associated with asking people "what if" questions. Such data don't, you understand, directly measure American or European or Japanese preferences for a different sort of economic system, only things like satisfaction with the existing job you have. There is one exception, a recent EU survey that we'll cite in a moment or two. In the meantime, keep you attention focused on why such survey evidence is at best suggestive, nothing more.

If, for instance, 85% of Americans at the end of 1999 that they would like to have more time with their family, it also turns out --- in surveys taken at the same time measuring job-satisfaction --- none of this entails questions of the trade-offs, such as reduced income that would follow. It seems a longing, maybe heartfelt; but little else. What's more, this longing isn't brought out by repeated surveys of job-satisfaction in the US. In late 2001 --- just after a recession, when unemployment was already rising from around 4.0% to way above 5.0% --- job satisfaction was at an all-time high in the US economy, according to the ongoing Harris poll on this subject, the last one published.





"The trended questions suggest that recent events have had several effects on employee attitudes:

  • Job satisfaction is very high and has increased—Fully 94% of all employees say they are satisfied with their job, up from 91% two years ago and 58% are very satisfied, compared to 54% in 1999, when the economy was still growing rapidly.


  • Employee loyalty has increased—Only 24% of employees think it is very likely that they will choose to change jobs in the next five years, down from 32% in 1999. The 54% who say this is "not very likely" or "not at all likely" is up from 49% in 1999 and from 46% in 1997.


  • Fear of losing one's job is still low but has increased—While only 18% of employees think it very or somewhat likely that they will be fired or laid off by their current employers, this is higher than the 11% who felt that way two years ago.


  • The employees with the highest job satisfaction, defined as being somewhat or very satisfied, are in the West (64%), white (62%), college graduates (64%) or post-graduates (65%) or people with household incomes of $50,000 to $75,000 (68%), or above $75,000 (61%).


  • The employees with lowest job satisfaction are in the East (50%), African-American (45%), Hispanics (33%), or with household incomes below $25,000 (41%)."


The No Less Suggestive EU Survey Results

Interestingly, too, in a survey conducted in Europe in June 2004 by the Harris Poll --- carried out in the five largest West European countries --- the US economy was admired by more West Europeans than any other, including Japan's and far more than any in the EU itself. Does that mean most West Europeans would actually prefer an American style economy in place of their own?

That seems very dubious. Moreover, the US does poorly when it comes to comparative judgments about its health system, environmental record, and present government.