The Anglo-American Model: Fact or Fantasy?

 


America's most popular export is the Hollywood film. The second most popular export also contains a large amount of fantasy. It is the notion that the United States experience proves that the so-called "Anglo-American" economic model is superior to other forms of the market economy - particularly the social democratic models of continental Europe.
 

It is often called the Anglo-American model because of its roots in the theories of 19 th century British economists, and because Margaret Thatcher was even more committed to it than her ideological cousin Ronald Reagan. Since those two held power in the 1980s, the model has come to dominate the thinking that determines economic policy throughout the world. It is sold under several different labels, such as "Neo-liberalism" the "Washington Consensus" or simply, the "American model" because it is the size and influence of the United States that gives the model its advantage in the global debate over economic policy ideas.
 

It is a debate not only about the future direction of Europe, but about the governance of the global economy itself. In 1996, Shortly after he became the first general secretary of the World Trade Organization, Renato Ruggiero observed: "We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy".
 

Unlike the writing of the new European constitution, the global constitution is being written largely in secret -without democracy or accountability. It is also being written piecemeal -- at the IMF, at the WTO, at the World Bank and other international institutions. Inasmuch as there is no mechanism for global political participation, the debate has spilled over into the streets, from La Paz to Jakarta to Genoa. The debate may be a bit abstract, but the political implications are very real.
 

According to those who market the Anglo-American model to the rest of the world, the reason why Western Europe has grown slower than the United States in the recent past is that its labor markets are inflexible. That is, workers are over-protected, welfare is too generous and there are not enough incentives to work hard. There is no doubt some truth to the critique of the European system. Everyone in this room can point to examples of rigidities in labor markets, heavy-handed regulation and inefficient bureaucracies on this continent. At the same time, we can point to examples of exploitation, vast inequalities and the corruption of government by private wealth in the United States.

 

Indeed, the honest champions of the American model readily admit that economic life in America for ordinary working people is less secure than in Europe, that community life is weak and that the public sector is neglected. One well-known example is the American health care system. Americans pay more for their health care, get much less coverage, pay the highest prices in the world for their medicine and have a life expectancy below that of Japan, the major nations of western Europe and scarcely above that of impoverished Cuba.
But, according to those who sell the American model, these values are less important to the average person than the opportunity to get rich. At the core of this view lies the notion, as Mrs. Thatcher once remarked, that "there is no such thing as society". Unfettered individual pursuit of wealth should therefore be the goal of economic policy.

 

Therefore, adopt our paradigm of deregulated markets, reduced power of trade unions, privatised social services, macro-economic austerity and lower taxes on business. If you do, US style prosperity is sure to follow. Whatever damage may be done to values of community, solidarity and equality will be more than compensated for by faster rates of productivity and economic growth, which will bring prosperity for all who are willing to work for it.

 

There is something fundamentally false about this argument. Like the Hollywood film, the so-called American model does not quite reflect reality. Just as a product for export can differ from the product with the same label sold in a nation's domestic market, the so-called American model is an over-simplified, idealized and distorted reflection of how the American economy actually works.
To a substantial degree, the economic paradigm many of my fellow American politicians and pundits market to the rest of the world reflects their dream of what they would like to impose on America, but have not been able to. In large part, because Americans would not buy it.

 

Ordinary Americans do not spend much time thinking about making the world over in their image. But my country's governing class has a tendency to inflict abstract notions on the rest of the world that we have not quite worked out at home. For example, after World War I, Woodrow Wilson, a Democrat, tried to impose his idea of democracy on others at a time when many of our own citizens did not have the right to vote. After World War II, American New Dealers, more successful than Wilson, influenced the reconstruction of Western Europe with social democratic ideas that were too radical for America at that time. Today, Republican ideologues want to remake Iraq into their version of what the American economy should look like. The US governor of Iraq recently announced his intention to establish a "flat tax" system that conservative Republicans have tried unsuccessfully to promote in the US for 30 years.

 

In their own self-interest, some Iraqis support this ideological agenda. Just as some in Europe would like to see an Americanized system here. But Europeans should take a hard look at America before they place an order for the American model.

 

Let us start with the claim that America's prosperity is due to the its more flexible labor markets. We all know that, in general, US labor markets are less protective and provide employers with more leverage over their workers than those of Europe. But this has been the case for at least a half-century, including several decades when US growth was lower and unemployment was higher than Western Europe's major national economies.

 

Over the last two decades, of course, America's economy has grown faster than Europe's. The question is, can we attribute the recent faster growth in the US - or even a significant part of it -- to more flexible labor laws? If by "flexibility" you mean management's ability to deploy labor in the most efficient way, as opposed to simply working people harder and paying them less, the answer is, no. In fact, if anything, US labor law has become a little less flexible over the last decade. After the election of Bill Clinton in 1992, Congress passed a national law to permit workers to take time off to take care of sick family members without being fired or otherwise penalized. It increased the minimum wage. Federal agencies that regulate the labor market were expanded with more aggressive staff to investigate violations of health and safety regulations, unfair labor practices and labor exploitation. It is true that unionization rates have fallen, but that has been true for the last 25 years and is a function of the hollowing out of manufacturing and the restrictive labor laws that have been in effect since 1946.

 

The dates are important, because if "flexibility" were the key to success, it would show up in superior productivity. But US productivity growth has only been faster than Western Europe's since 1995. Before that, all of Western Europe's major economies had faster growth in GDP per hour worked for several decades. By 1989 West Germany, France, Belgium, the Netherlands and Norway had surpassed the US productivity levels.

 

If, on the other hand, "flexibility" means forcing people to work longer hours and exploiting the must vulnerable parts of the labor force, then there maybe something to this claim. Annual work hours in the US are now the highest in the industrial world. Moreover, the illegal exploitation of immigrants, especially illegal immigrants, is becoming widespread. The Bush Administration is, of course, attempting to turn the clock back. But, so far, there has been little, if any, change in the structure of US labor markets because it has run into stiff resistance from the public - and its own party. For example, the Bush government, under pressure from business, has been trying for a year to re-classify occupations so that fewer workers will be eligible for over time pay.

 

Despite the fact that Republicans are in control, both the US Senate and the US House of Representatives recently voted to prohibit such action. So what accounts for the faster growth and lower unemployment rates in the US? Most of the answer lies in macroeconomic policy, rather than structural differences between the US and the Euro zone. Despite the deflated reputation of John Maynard Keynes among the policy-makers in Washington, American governments - regardless of party - have been consistently more Keynesian than have European governments.

 

Today, for example, with an unemployment rate of 6 percent, the estimated US government fiscal deficit for calendar 2003 is 4.6 percent of GDP. The combination of tax cuts and increased military spending has sparked a huge jump in economic growth in the third quarter of this year. George Bush, who characterizes himself as an enemy of big government spending, is currently making speeches to American audiences taking credit for this deficit-driven stimulus. This is not a supply-side argument.


The president's chief economic adviser recently said: "The president's package put money in the hands of consumers, and you saw very strong consumer spending." Over the past twenty years we Americans have been much faster to lower interest rates and expand fiscal deficits in the face of rising unemployment.

 

What Richard Nixon said in 1969 remains true: "We are all Keynesians." Ironically, the most Keynesian president of all was Ronald Reagan, whose deficits floated the economy out of the deep recession of the early 1980s. Contrast this with the smaller deficits the EU as a whole is running - 2.5% of GDP - when faced with a much larger equivalent unemployment rate - 8.8 percent. The Maastricht deficit limitation is a political question for Europeans. But whatever the political benefits, the economic costs are clear.

 

Similarly, the Federal Reserve has been running a generally more expansionist monetary policy than the European Central Bank. For the past three years, real comparable interest rates in the US have been consistently lower than those of the European Central Bank, despite the higher unemployment rates in the EU. Just as important, has been the faster monetary policy response. As we have learned from the recent history of the Japanese economy, cutting interest rates rapidly in the face of a slowdown in growth is as important as cutting them deeply.

 

Spending creates jobs. It is the commitment to maintain spending- not flexible labor markets - that explains America's consistently better unemployment rate. At the beginning of the decade, the majority opinion of the policy class in the US, perhaps like that of Europe today, was that the problem of unemployment was primarily one of insufficient skills, rigid union rules and anti-social attitudes. Yet, large numbers of workers, who in 1990 were considered "unemployable", were working at steady jobs in 1999. What happened? Did they suddenly develop different attitudes? Did they get trained? Did unions disappear? No. What happened was that fast growth created tight labor markets and employers offered them jobs. And when labor markets are tight, employers are more likely to invest in laborsaving equipment, which helps explain higher productivity.

 

There is another important ingredient of the American model that is not mentioned on the label for export. It is easy credit. Credit is the lifeblood of capitalism, and America pumps it as rapidly as possible through the arteries of its economy. Credit cards are sent out to everyone, including children, illegal immigrants and even, sometimes, the dead. Easy credit not only maintains high demand, but it has helped create a culture that keeps retail stores and services open 24 hours a day, 7 days a week and an explosion in on-line shopping.

Unlike labor market flexibility, the rate of borrowing is something that did change dramatically over the course of the US boom of the 1990s. Debt as a share of consumers' disposable income rose is at an all-time high. The personal saving rate dropped from 8.5 percent of disposable income in 1992 o 2.2 percent in 2000.


The US Government subsidizes easy credit. With very little money down, Americans have access to 30- year mortgages, which the banks then repackage and sell in government-sponsored secondary mortgage markets. Homeownership, in turn, creates virtually the only opportunity most Americans have to accumulate wealth, and it provides a steady source of demand for construction and a market for household furnishings.

 

Easy credit is also subsidized by a very liberal system of bankruptcy that allows debts to be liquidated, and the bankrupt consumer or company to quickly work themselves back into the credit market. One recent dramatic example is that of the giant telecommunications firm, World Com, that collapsed in scandal in June 2002, owing $41 billion. The bankruptcy courts have erased all but $5.8 billion of the debt, and the company has been allowed to postpone interest payments while it accumulates cash. By January it is expected to be out of bankruptcy and back in business to make profits.


Thus, does the real American model protect consumers and businesses against suffering the consequences of their financial mistakes. Contrast the way in which the so-called conservative administration of Ronald Reagan responded to the collapse of the US savings and loan banks in the 1980's with the way that the Japanese government has responded to its banking crisis.

 

Despite its free-market rhetoric, the Reagan government did not hesitate to take over the industry, which meant letting Federal Government bureaucrats decide which banks would live and which would die. It spent between $300 and $500 billion of the taxpayers money to reorganize this private sector. In contrast, Japanese, who are supposed to be more sympathetic to government intervention, have not acted and the debt of its financial institutions have remained a burden to the economy for more than a decade.

 

Thus, if you look behind the "laissez-faire" label on the American model, you will find that Americans do not hesitate to have government intervene in its private economy. The largest and most successful US export sectors - military goods, agriculture and hi tech information-systems - are all products of massive government investment and subsidization. The instruction booklet that is sent out with the export version of the US model lectures the buyer on the value of austerity and the evils of government borrowing. It fails to mention that America is now kept afloat by foreign borrowing. We borrow because we buy more from the rest of the world than we sell, and we do not save enough to pay for the difference.

 

Therefore, we have been running a current account deficit for the past 25 years. Since the mid-1980s our net "debt" - loans and other foreign claims against our income - has been relentlessly growing. It is now 25 percent of GDP. On our current trajectory, it will reach 40 percent in another three years - roughly the point at which Argentina's economy recently collapsed.

 

What makes the US different from Argentina, and every other nation, is of course the worldwide use of the dollar. It is - so far - the world's reserve currency. Which means that most of the world's nations hold US Treasury bonds to back up their own money. The dollar is also the chief method of payment for oil and other international transactions. And it has been considered the "safe haven" for investors fleeing economic and political turmoil in other parts of the world.

 

But even a country as large and rich as the United States cannot forever buy more than it sells, and borrow to make up the difference. Sooner or later, the trade deficit will have to be substantially reduced, if not eliminated. This will require either a further and sustained drop in the value of the dollar and/or a huge and sustained slowdown in the growth of the US economy.

 

A Wall Street bond manager was recently quoted as saying: "Sooner, perhaps later, our Asian creditors will wake up." The result will include, "rising inflation, perhaps chaotic financial markets, a lower standard of living". Already there are some signs that we might be reaching the limit. The Euro has been tested and has now bounced back to its original level against the dollar. Accordingly, financial markets have begun to hedge against further dollar devaluation. There has been a slow but steady shift to the Euro in international transactions and to Euro-denominated securities in the reserves of developing nations.

 

Looking at the US dollar today is like looking at the US stock market at the end of the 1990s. We all knew that the stock was over-priced and there were growing signs that the bubble would burst. We just didn't know when.

It is useful to ask the question: How well does the US model work in countries without the extraordinary advantages of having the world's currency and other advantages that the current generation of Americans have inherited? Over the last 20 years the policy classes of many countries have been trying to make their economies more like their image of America's. The results are not very positive. Real GDP growth has fallen from the previous 20 years, the distribution of income among countries has worsened and the distribution of income within most countries, although harder to measure, has probably worsened as well. If you take China out of the calculation, on the grounds that its capitalism is obviously very much state-controlled, the numbers are much worse.
 

Evaluating economic policies in some 200 countries in a world of over 6 billion people is obviously difficult. But there is a clearer example in the effort to build a continental economy in North American on the basis of the Anglo-American model. Like the European Union, the North American Free Trade Agreement is more than an arrangement for free trade. To paraphrase Renato Ruggiero, it is the constitution for a continental economy. But NAFTA is a constitution that protects the rights of only one type of citizen - the multinational corporate investor. If it had been just a free-trade agreement, NAFTA could have been written one page. Instead is 1000 pages requiring each nation to give extraordinary protections to the rights of investors, including intellectual property protections, the right to repatriate profits in hard currency and the right to sue governments over laws that might endanger future profits.

 

On the other hand, workers, consumers, the environment, public health have no place in NAFTA. Had this formula been proposed as the governing constitution of Canada, Mexico or the US, the electorates of each nation would have no doubt overwhelmingly rejected it. But, by defining the debate over its adoption as a dispute between abstract notions of "free trade" and "protectionism," the promoters of NAFTA hid the larger political significance of the agreement.

 

In exchange for providing investors with extraordinary rights, the promoters of NAFTA promised that Mexico would see a sustained burst of rapid economic growth that would dramatically reduce poverty and raise living standards. Mexico's growth would in turn produce an enormous middle class consumer market for the US and Canada. Ten years later, Mexico's growth has been, at best, half of what it needs to create enough jobs for its expanding labor force. Since 2000, Mexico has scarcely grown at all.

 

While the economic benefits fell short, the human and social costs have been high. The livelihood of millions of workers in all countries has been destroyed. Among other consequences had been a massive dislocation of rural Mexican workers, driven off the land by US agribusiness whose "comparative advantage" lies in massive government subsidies. Despite the shift of manufacturing from the US and Canada to Mexico, average real wages in Mexican manufacturing in January 2003 were some 9 percent below their January 1994 level. No doubt some Mexicans have benefited from cheaper prices of expensive US and Canadian goods. But in a country where the poverty rate is above 50 percent, the basic cost of living for most people seems to have gotten worse. For example, in December 1994, the minimum wage (currently $4.20 per day) bought 45 pounds of tortillas. Today it buys 19 pounds. In December 1994, it bought 25 litres of gas for cooking and heating. Today it buys seven.

 

With no jobs in Mexico, the dangerous migration across the border to the US goes on. This past May 19 undocumented Mexican migrants found asphyxiated in a truck in Texas. "If you're going to improve your life", commented one of their Mexican neightbors, "you have to go to the United States." The continued illegal migration across the border demonstrates the failure of the Anglo-American export model to produce growth. This failure does not mean Europe has nothing to learn from the actual American economic experience.

 

Making credit available for homeownership has provided for both social and economic stability and the only way for most working people to build up a capital asset for their old age. It also provides for a steady stream of demand for housing and household products. Having more flexible monetary and fiscal policies makes sense in any market economy. I also think that more social and occupational mobility - and less emphasis on narrow education credentials - provides for an important kind of labor market flexibility that Europeans might find useful. In this regard, one strength of the America is that it has been the land of the "second chance" where it is easier for people to start new careers or businesses or a new life, after they have failed once.

 

There are things that Europeans can learn from Americans, just as there are many things that the United States profitably learn from Europe. But it is important to look at our real-life experiences, and not simply accept the Hollywood version. So, before you decide to import any more of the American economic model, I would advise you to take a careful look at how the American economy actually works.

* Intervento di Jeff Faux, Presidente dell'Economic Policy Institute (EPI) di Washington, al Convegno "Europa sociale: problemi e prospettive" organizzato dalla Fondazione Di Vittorio in collaborazione con CISS (Roma, 18 novembre 2003).
Jeff Faux

Jeff Faux, Member of the CISS Scientific Board, is the founder and former president of the Economic Policy Institute and the author of the new book "The Servant Economy: Where America's Elite is Sending the Middle Class". Jeff Faux is the founder and former president of the Economic Policy Institute and the author of the new book The Servant Economy: Where America's Elite is Sending the Middle Class.