For more than a decade, the US business press has defamed European economies as rigid, and their societies as morally bankrupt. European governments tax innovative business leaders and coddle the young, the poor, the unemployed. Their growth is slow and unemployment unacceptably high. In this worldview, the US was the star player. Lower taxes and less regulation of labor and capital markets spurred growth. The greatest risk to the US was that it would catch the European fever. What a difference a year makes. The great risk today is that Europe too deeply imbibed the US business elites self-congratulatory rhetoric. Neither side of the Atlantic has much to be proud of recently. Both need to reconsider their own histories and think less arrogantly about the complex task of combining sustainable growth with social justice.
Even before the world economic crisis, the US story never stood close scrutiny. During the immediate post World War II period European nations expanded universal health care systems, improved unemployment insurance, expanded public transit and fostered broader educational opportunities. Far from slowing growth, these egalitarian policies spurred rapid and broadly shared economic development.
Only as their economies, both in goods and in capital flows, became more global did the major European social democracies face major problems. Nations spending money to stimulate their economies found their neighbors benefited as much as themselves. And world currency traders responded to the least suggestion of expansionary fiscal policy or inflation threats by punishing the offending nations currency. World currency markets and IMF policies forced British Labour to devalue the pound in the seventies, a blow to its political image Tony Blair was determined to repair. More broadly, European unification was premised on a demand, most strongly expressed by the Germans, that the European Central Bank remain politically independent and accept as its only mandate control of inflation. The ECB has been more hawkish on inflation than Paul Volker and Allan Greenspan ever were. Inflexible labor markets may explain some European unemployment, but a central bank even more hawkish than our Fed deserves more blame.
But if European nations retreated in monetary policy and direct job creation, they have not fully repudiated welfare state traditions. Indeed, those inflexible labor markets look a little more inviting today as even the New York Times recently acknowledged. The German government provides partial compensation, funded by corporate taxes, to companies that reduce hours for all rather than resort to layoffs. These policies may slow upward growth, but also cushion economic declines. In the US, not only are such programs unheard of, our basic unemployment compensation system is sadly deficient. It varies considerably by state, seldom covers part time workers at all, and is very limited in terms of weeks of coverage. Not surprisingly the system is especially skewed against women and minorities.
As Paul Krugman points out, the European welfare state, however, has not been adequate by itself to restart their economies. Krugman argues, correctly, that Europe will need to embark on broader stimulus measures like those in the US in order not only to get its economy started but to avoid greater tension over welfare states in which those who work see increased taxation going to fund generous welfare benefits.
But in both Europe and the US, two specters continue to haunt medium and even short- term prospects. In both sides banks are in very bad shape. Some European banks are leveraged as much as 50 to 1. Spanish banks are especially vulnerable, but Spain lacks the resources to bail them out and the ECB lacks the political will. In the US, Obama persists in bank bailouts that retain managements engaged in the same gaming techniques that landed us in the current crisis. Here he could learn from British experience, where even Gordon Brown accepted full scale albeit temporary nationalization in the face of big bank failure.
Ultimately the health of banks and the economy on both sides of the Atlantic requires that all who seek work can get jobs at fair wages. The press speaks of the real value of toxic assets. Nonetheless, that value depends on the level of economic activity. When workers have jobs with fair wages and produce product consumers can purchase, fewer homes will go into foreclosure and more mortgage- backed securities will remain solid.
Though Obama has correctly pushed Europeans to expand their stimulus, he fails to acknowledge how inadequate his is to the depth of the shortfall. In addition, even an adequate one-time stimulus package will not keep an economy going if wages do not keep pace with productivity gains.
Genuine full employment and growing wages raise the issue of inflation. The specter of 70s inflation hangs over both the US and Europe. Unionized workers are often accusedsometimes accuratelyof demanding raises that went beyond productivity growth, thus fostering inflation. Yet such one-sided analysis neglects OPEC and the oil companies monopoly pricing power and the role of the Federal Reserve in creating asset bubbles. In addition, more broadly, the damage that Fed attempts to cool inflation by fostering unemploymentwith its long- term social and economic cost is overlooked. Even in the light of such concerns, business elites both in the US and Europe prefer to give an unelected Fed the principal responsibility for steering the economy.
The nature of corporate enterprise needs to be a bigger focus in both the US and Europe. With the continued ineptitude if not outright fraud of the banking sector, there may be more inclination to reexamine the structure of enterprise. A recent Rasmussen poll indicates that about two thirds of those under 30 question the validity of capitalism as an economic system. In both the US and Europe there are examples of non- statist models of economic enterprise in which power is dispersed. Workers have a say in major financial and enterprise planning, pay scales, and an ownership stake. Such enterprises allow workers to demand and receive fair wages but also provide incentives to assure that wage demands do not erode profits used to finance further business investment. Such forms of enterprise, coupled with generous safety nets and renewed public spending for health, education, and conservation would amount to a deepening of social democracy, a worthy project for both sides of the Atlantic.
John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email firstname.lastname@example.org.
From The Progressive Populist, May 15, 2009
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