Overview. Widening income disparities highlight the similarities of today’s economy with the Gilded Age at the turn of the twentieth century. That era was remediated in part by adopting innovative public policies from other democracies such as minimum wages and social security. To Americans of the day, those policies imported from abroad were as unfamiliar as the concept of codetermination is to Americans now. But like minimum wages, the practice of codetermination has a long history abroad as a successfully policy to reduce income disparities and strengthen local communities and wage growth. It is THE defining element in the ability of powerful capitalist economies such as Germany over the last half-century to achieving broadly based income growth at the same time that American income disparities have widened and most wages stagnated. And it is the most powerful weapon in the liberal democracy’s arsenal to ensure real wage growth and thereby prevent the rise of populists as in the US in 2018 and Italy in 2018.
The election of Donald Trump reflects failure of American capitalism to uphold the goal set forth by Adam Smith in his 1776 Wealth of Nations as a device to create rising prosperity widely shared. Misplaced corporate priorities are the primary explanation for stagnant wages, rising income disparities and job offshoring: The concerns of the broader economy, of local communities and of employees have been made subservient since the 1980s to those of shareholders as noted by Robert Reich, Joseph Stiglitz and others. Higher quality democracies avoid this predicament because corporate priorities are crafted within a corporate governance framework of codetermination. Seminal enterprise resource allocation decisions including plant location, hiring, R&D, the degree of employee upskilling, investment rates, wages, facility modernization and the like are made by corporate boards that balance various stakeholder interests rather than just shareholder and executive suite interests.
Introduction. Corporate governance in America since the 1980s utilizes what economists call the agency framework in which executive suites de facto behave as shareholder agents, adopting policies maximizing shareholder interests. This framework is not mandated by law. Driven by stock options, firm leadership has become unduly focused on immediate share price performance rather than longer term corporate competitiveness. It has resulted in wage stagnation, considerable job offshoring, declining economic mobility, relatively weak investment and disassociation of executive compensation from performance; it has also caused weaker firm productivity growth and lower shareholder returns than under codetermination. Donald Trump’s exploitation of the Obama administration's failure to remediate these trends was one of several pivotal factors in the 2016 election.
There are a number of widely cited micro options to address income inequality including raising minimum wages, redistributive tax and government spending policies, retraining, overtime pay mandates, strengthening collective bargaining and the like embraced by Democrats. But party officials mostly ignore the only seasoned and demonstrably effective structural remedy – reorienting the goals of American corporations through adoption of codetermination.
The history of codetermination began when executive suites in northern Europe in the wake of World War II were de jure required by British and American occupation forces to add employee representatives to corporate boards. The representatives were typically progressive attorneys, economists, academicians and the like selected by enterprise employees. (The goal was to weaken the influence of senior executives and large shareholders who tended to have been Nazi sympathizers.) These reconfigured boards were viewed as agents or trustees for society writ expansively, anticipated to adopt corporate policies that promote long-horizon enterprise and job sustainability while widely broadcasting the gains from enterprise activity to employees and local communities as well as shareholders. That is, they were expected to fulfill the goals originally envisioned for capitalist enterprises by Adam Smith. The success of this postwar reform in the decades since is exemplified by higher investment and real wages across northern Europe that in the US.
Codetermination in Germany. Over the past half century, the largest, most competitive German firms such as Adidas or Daimler have had codetermination board of directors, half of whom are employee representatives. If codetermination debilitated competitiveness, productivity growth or profits, the initial postwar concept would have been discredited – with laws hurriedly changed to discard the concept decades ago. To the contrary, its success has seen codetermination spread - utilized to varying degrees today by larger firms in 19 of the 27 (post-Brexit) EU members, including all the major ones except Italy. (Take a moment to check the board composition of any large German firm online; it will be revelatory.)
The most comprehensive assessments of codetermination are derived from its five-decade history in Germany. There, board of directors must be split between shareholder and employee representatives at firms with more than 2,000 employees; board seats at the 600+ largest German firms are split in half. (Tie board votes are broken by the board chair who may cast two votes at such junctures.) At smaller firms with 500-2000 employees, a minimum one-third of board members must be employee representatives. The law applies to boards of directors equally at privately held enterprises such as Bosch as well as listed firms such as Daimler.
Higher Investment Rates. Because codetermination boards make enterprise strategic and tactical investment direction, hire CEOs and establish compensation structures, they eliminate pathologies arising from short-termism common in American executive suites – such as maximizing short-term profits, compensation delinked from performance, over-reliance on mergers for growth, dubious share buybacks and excessively short investment time horizons. The longer time horizon of firms with codetermination boards translates to greater investment:
Eurostat investigations found that investment rates at non-financial enterprises in the European Union are higher than for American firms. And an analysis of German firms for the Berlin Social Science Center (WZB) in 2016 found that the capital investment ratio (investment in capital goods - long-lived durable goods) of codetermination firms was twice that of firms whose Boards of Directors just represented shareholders.
Higher Shareholder Returns. Investor appreciation of their greater investment profile may explain why American economists Larry Fauver and Michael E. Fuerst found that financial markets reward stockholders in codetermination firms with higher Tobin Q’s (market value divided by replacement book value of assets). In America, only privately-held firms mirror the superior investment behavior of northern European firms with codetermination governance. Analysts aver that the longer term perspective demanded by owners at privately-held US firms cause their enterprise managers to de facto mimic the behavior of enterprises with codetermination structures. That is significant because research under auspices of the NBER by Harvard and NYU economists found that investment rates (measured as shares of enterprise assets) by managers at privately-held U.S. enterprises are 2.5 times greater than rates at public U.S. firms (10 percent v 4 percent).
Minimizing Offshoring. Regarding offshoring, EY (Ernest & Young) in 2016 examined the job creation profile of firms comprising the German DAX 30 stock index, all of whom benefit from codetermination governance structures. The increase in foreign sales of these firms (28 percent) during the study period 2011-2015 considerably outpaced their creation of foreign jobs (8 percent). The difference was made up by adding jobs and productivity-enhancing investment at home to service export markets. That is why domestic German employment at these huge firms grew by more (6 percent) than their rise in domestic sales (5 percent). It is also why a large three-quarters (4.4 million units) of German auto production is exported rather than produced abroad. And it is why production facilities for the next generation (gen e) of cars is being constructed in Bremen (Daimler), Zuffenhausen (Porsche), Zwickau (VW) and the like. The domestic orientation of German enterprises is the precise opposite of policies pursued by American firms, who readily offshore jobs to low-wage nations. For example, a Wall Street Journal analysis covering the period 2000 to 2009 found that American multinational firms eliminated a net of 2.9 million domestic jobs while adding a net of 2.4 million jobs abroad. A second study by Tax Analysts found that U.S. multinationals cut a net 1.9 million domestic jobs during this period while adding a net 2.35 million jobs abroad.
Rising Real Wages. Empirical analysis has concluded that real wage and productivity growth are higher in firms with codetermination governance. German, Scandinavian and other such northern European firms have faced the same globalization and technology challenges as US firms in recent decades. Even so, they have steadily raised compensation over that period by about 1 percent annually in real terms, enabling wages adjusted for purchasing power to leapfrog American wages. As noted by Robert Reich, hourly pay adjusted for inflation in Germany, for instance, has increased nearly 30 percent since 1985, averaging about one percentage point annually. Codetermination is why labor compensation as a share of national income has rebounded in Germany since the 2007 recession, rising from 47.6 percent to nearly 51 percent. More broadly, real compensation since 2000 has increased in 18 of the 19 EU nations with codetermination practices. As documented by the US Conference Board, labor compensation per hour in the capstone manufacturing sectors in 7 northern European nations such as Germany is higher than in the US.
Despite notably higher wages, codetermination firms in these democracies are highly competitive with American firms. That reality debunks the claim by US executive suites and conservative economists that globalization and technology change are responsible for stagnant American wages (and job offshoring). Indeed, compelling new independent European research has concluded that the key determinant of a nation’s wage rates is its collective bargaining environment rather than globalization or technology change. This conclusion is powerfully supported by real world evidence from German, Dutch, Danish and other northern European firms who face the same globalization and technology challenges as US firms, but remain internationally competitively despite their uniformly high-wage enterprise profiles.
Social Justice. In bringing a broader perspective to the crafting of corporate goals and objectives, codetermination enhances the corporate sector’s contribution to social justice. It would more accurately come to reflect, for instance, the foundational values expressed in Pope Leo XIII’s 1891 Rerum Novarum, in the protestant work ethic and in Judeo-Christian teachings about the dignity of hard work fairly compensated.
Summation. The centrality of codetermination to middle class prosperity is why German President Joachim Gauck terms it “an important cultural asset.” Yet, American economic journalists and economists are incurious. They devote paltry attention to codetermination despite being the only seasoned structural solution for the wage stagnation afflicting much of the American workforce. They are incurious about evidence developed by CEOs like Bill George, formerly of Medtronics and now at Harvard B School, and by economists such as Steven Hill, author of Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age (2010). Many perhaps accept the narrative, debunked in recent years by German research, that codetermination retards enterprise efficiency. In reality, analysis confirms that enterprise productivity is higher when employee representatives comprise even just one-third of corporate boards.
Ignorance or inattention to codetermination leaves Americans unaware of the powerful contemporary capitalist mechanism being utilized by other rich democracies to steadily raise middle class wages and minimize job offshoring. That inattention is abating somewhat with the introduction of legislation in March by Democratic Senators Baldwin (WI), Warren (MA) and Schatz (HI) requiring that boards of directors at all publicly-listed US firms be one-third employees.
Introducing Codetermination to America. Wage stagnation is a structural challenge that is ameliorated with codetermination. Its advocates will need to overcome opposition from executive suites and their Republican Party allies who argue spuriously that codetermination harms firm efficiency. In reality, evidence from Germany and elsewhere document that it reduces executive compensation while enhancing enterprise performance and shareholder returns. Frustrated Americans are open to innovative solutions to wage stagnation including codetermination. In fact, an April 2018 survey on Vox found that, once familiarized with the practice of codetermination, a majority of American respondents support the concept; indeed, they favored it by a margin of well over 2:1 (53% vs. 22%).
George Tyler, former economist for Senators Hubert Humphrey and Lloyd Bentsen, Senior Economist on the Joint Economic Committee, Conceptual author of Drugs for Neglected Diseases Initiative (Genève) and a DAS at the Clinton administration Treasury Department.
Codetermination is nearly always accompanied by the establishment of Works Councils.
Works Councils Explanation
From Cantner, Gerstlsberger and Roy, “Works Councils, Training Activities and Innovation: A Study of German Firms,” Jena Economic Research Papers, 2014, https://www.econstor.eu/bitstream/10419/98440/1/780578392.pdf .
“In Germany, works councils have a particularly strong position due to legal regulation (German Works Constitution Act 1952) that guarantees employees in establishments or firms with five or more permanent employees the right to establish a works council. Often, but not necessarily, works council candidates are nominated by the union or unions corresponding to the specific industry. However, the works councils have to represent all regular employees of their establishment or firm and are committed to support its economic stability in the first line and union interests in the second…. The main tasks of works councils comprise the protection of employee rights in various human resource management practices such as recruiting, layoffs, reorganization, vocational education and training, co-determination of incentive schemes, vacations and leave grants, flexi-time and overtime regulation, conflict handling, and prevention.”
by George Tyler on 22 June 2018 on Social Europe Journal
Amid authoritarian and illiberal forces buffeting social democracies, it is helpful to renew appreciation for their political architectures, especially the central role developed over a century and a half for the principle of proportional representation (PR). Its absence is one factor responsible for the poor quality of American democracy documented in Billionaire Democracy.
In contrast to the PR systems widespread in Europe, the American political system is designed to render voters unequal. It also rejects the seminal principle of democracy, with majority rule occurring only randomly. In addition, it is corrupt (pay-to-play) by judicial fiat and plagued by fake news exploited by the Republican Party and Russians alike.
Adding to this dark picture is the undemocratic 18th century American electoral system – judged by political scientists with the Electoral Integrity Project to be the least responsive system among all rich democracies – of lower quality even than election systems in Barbados, Brazil, Croatia, Mongolia, Rwanda, South Africa or Tunisia.
Readers may be familiar with the slavery-era Electoral College responsible for vaulting American losers like George W. Bush and Donald Trump over popular vote winners to become president. Less familiar is the structure of America’s electoral system responsible for its gigantic number of impotent or wasted votes and the nation’s widespread erratic and only coincidental relationship with majority rule: single-member legislative districts featuring plurality (winner-take-all) elections.
The PR system common in higher quality democracies was advocated by John Stuart Mill and Alexis de Tocqueville and has spread since instituted in Denmark during the 1850s to more than 20 European nations. Under PR, political parties are awarded legislative seats according to their share of all votes cast. This causes each voter’s voice to bear weight in legislative deliberations and to be reflected in policy compromises that are the hallmark of PR governance.
In contrast, the American single-member/plurality system is designed to silence voices. It results in about half of all votes cast carrying no weight when legislatures craft public policies. The preferences of losing-candidate supporters are ignored, their votes wasted. Indeed, in the common American electoral scenario where three or more candidates compete, it is not unusual for more than half the votes cast to be wasted.
For Want of a Nail… This apocryphal lament by Shakespeare’s ill-starred Richard III at Bosworth Field evokes the spectre of tiny events yielding hugely consequential outcomes. That concept is exemplified by an election in 2017 in the state of Virginia decided by one vote – dramatising how the American electoral system wastes votes. One-vote margin elections (or ties) are extremely rare, with only a handful having occurred in elections since 1839 across the globe ranging from Austria, Canada, India, UK, Philippines to the US. Of that tiny number, only a few were consequential, including a Philippine mayoral election and two (Zanzibar in 1961 and Virginia in 2017) that determined control of an entire legislature.
In Virginia, a single vote among the nearly 2.4 million cast determined control of its legislature (House of Delegates). Legislative dominance rests on the outcome of individual elections conducted in 100 geographically distinct legislative districts in that state. Under its single-member plurality electoral system, a one-vote loss in one of those districts left the Democratic Party one parliamentary seat short (49-51) statewide following the 2017 election. The 51 Republicans have consequently ignored the preferences of the 1.3 million voters supporting their opponents.
Further Attenuating Majority Rule: Gerrymandering
That election also exemplified another way in which the American political system flouts majority rule. While the Electoral College is responsible for failure of majority rule in American presidential elections, “gerrymandering” is responsible at the legislative level. For example, the 1.3 million votes for Democratic legislative candidates topped the 1.1 million votes cast for Republican candidates in the Virginia election. Democratic candidates garnered 54 percent of all votes cast but won only 49 races, while Republicans received just 45 percent of the vote but won 51 seats. This mismatch is a consequence of gerrymandering.
A boundary redesign of America’s tens of thousands of single-member legislative districts occurs across the nation every ten years (2001, 2011, 2021). Some 37 states absurdly permit legislators themselves to redraw their own legislative districts. The results are predictable, with legislative majorities drawing district boundaries to favour their political party, de facto picking their voters. That’s what Virginia Republican legislators did in 2011. While all districts have the same population, Republicans drew boundaries to spread loyal party voters broadly in a balanced fashion among a majority of districts while cramming Democratic-leaning voters into fewer districts.
Among the most egregious recent examples of majority rule being flouted are gerrymandered districts for the US Congress. For instance, in Pennsylvania in 2012, Democrats won 50.5 percent of votes cast statewide for Congressional candidates but won only five of 18 gerrymandered Congressional seats. You read that correctly – five. Democrats won 50.6 percent of the statewide vote for Congressional candidates in North Carolina in 2012, but won only 4 of 13 seats. And in Maryland in 2016, Democratic congressional candidates won 60 percent of the vote statewide but won 7 of 8 seats.
Unfortunately, the American electoral system suffers from other pathologies beyond a gigantic 60 million wasted votes and anti-majoritarian elections. Unlike Europe, partisan state and local election officials routinely discourage opponent voting with unwarranted voter ID laws, limit opportunities to register or vote, conduct unwarranted purges of voter lists and ban non-partisan campaigns by groups like the League of Women Voters intended to expand voting.
What Can Be Done?
PR is the prescription for eliminating wasted votes and finally (after 229 years) planting true majority rule at the center of American democracy; by eliminating single member districts, it eliminates gerrymandering. PR is is resisted by US political parties. In its few American applications in the 20th century, it dramatically improved the democratic process. In New York City’s election for the Board of Aldermen in 1935, for instance, Democratic candidates received 66 percent of the vote, but won 95 percent of the gerrymandered seats. After making the switch to PR in 1939, they won 65.5 percent of the vote and 66 percent of the seats. The only vestige of PR left in the US is the city of Cambridge, Massachusetts.
There are no constitutional barriers to eliminating the American single-member plurality electoral structure or adopting PR. Yet, it is such a profound reform that – like eliminating pay-to-play or corralling fake news – it assuredly requires affirmation by the US Supreme Court. Unfortunately, Donald Trump’s 2017 court appointee has likely put such a visionary Court at least a generation away. Indeed, his appointee was the deciding vote cast in the recent Supreme Court decision that affirmed gerrymandering.
Even so, there is significant reformist ferment at the state and local levels, mostly led by private citizens. For instance, twelve states with 32 percent of the US population have acted to de facto end the Electoral College by requiring their electors in the college to vote for the national popular vote winner for president (rather than the state winner). To reduce pay-to-play, taxpayer funding of elections has been established in 12 states (most comprehensively in Arizona, Connecticut, Hawaii, Maine and Minnesota) and in numerous cities like Long Beach, California, Montgomery, Alabama, Santa Fe, New Mexico, Seattle, Washington, Tucson, Arizona and New York City. Six states have abandonedgerrymandering, with independent entities rather than legislators designing districts. Twelve states have instituted automatic voter registration whenever citizens interact with government agencies. And advocacy groups like Fairvote persist in educating voters and in urging Congress to support PR legislation like that proposed by Congressman Don Beyer.
The lesson is that steps to raise the low quality of American democracy are feasible. Citizen-led reforms are improving the American democratic experience. And that process is a dynamic one, providing valuable testing grounds and accumulating evidence to support even further reforms in the years ahead.
by George Tyler on 23 May 2018 on Social Europe Journal
Fake news in America’s public square is a failure of its information marketplace. Remediation should occur through enhanced marketplace competition, not government censorship.
I have argued that the quality of democracy is lower in America than in much of Europe. It lacks co-determination, for instance, which is why US wages stagnate even as inflation-adjusted wages in northern Europe have risen steadily for decades to leapfrog American ones. More broadly, the preferences of Americans are less reflected in public policies than in Europe, feeding discontent with US democracy. Americans have less confidence than Europeans in their legislative and judicial institutions. Fewer than half of Americans believe it’s “absolutely important to live in a democracy;” the share rejecting democracy is more than double that in Northern Europe. And one-third of Americans have come of late to support “a strong leader who doesn’t bother with Congress or elections.”
America’s pay-to-play politics and unrepresentative electoral system are causal factors (conservatives mock reformers as “simplistic” majoritarians). But equally important is the failure of its information marketplace, awash with fake news.
Enlightenment And Censorship
The age of enlightenment informed by the Inquisition and censorship victims such as Socrates, Joan of Arc, Galileo, and Thomas More energetically embraced free speech. Its clarion call was John Milton’s 1644 Areopagitica speech to Parliament. Milton has been restated famously in Supreme Court Justice Oliver Wendell Holmes’ 1919 opinion (Abrams v. United States) rejecting censorship unless speech “so imminently threatens immediate interference with the lawful and pressing purposes of the law that an immediate check is required to save the country.” Censorship is unwarranted, argued Holmes, except in extremis because fables typically fade in the marketplace of ideas: “the best test of truth is the power of the thought to get itself accepted in the competition of the market.”
Enthusiasm for Milton’s desideratum by America’s constitutional fathers was tempered by failure of what we today would term Holmes’ information marketplace. In the wake of Shay’s Rebellion in 1787, for instance, Elbridge Gerry lamented the dissemination of fake news in the new nation by “pretend patriots … (voters) misled into the most baneful measures and opinions, by the false reports circulated by designing men.” And James Madison considered the “artful misrepresentations by interested men” an existential threat to the new nation, warning ominously (with sobering contemporary relevance), “a popular government, without popular information, or the means of acquiring it, is but a prologue to a farce or a tragedy.”
Even so, the censorship regime that has evolved in America is more permissive than in Europe where hate speech – informed by the 20th century abuse of free speech by Nazis and other home-grown fascists – is criminalized. The deaths of 80 million will bring that. Reflected in the European Convention of Human Rights and the International Covenant on Civil and Political Rights and supported by the European Court of Human Rights, European nations (and Canada) temper speech. For instance, the ECHR is obligated “to sanction or even prevent all forms of expression which spread, incite, promote or justify hatred based on intolerance ….” In contrast to the open display of Nazi paraphernalia in Charlottesville, for example, France prohibits its sale while Germany bans Nazi emulators and would jail neo-Nazi marchers that the US Supreme Court embraced in its decision National Socialist Party of America vs. Village of Skokie(1977).
The Broken American Information Marketplace
Canada, France and Germany sanction hate speech while broadly encouraging a plurality of opinion and fact-based reporting by broadcasters and print media. That has caused fake news to become concentrated on social media there, most prominently in Russian propaganda campaigns. Indeed, the Kremlin has targeted both European and American voters, stirring racial animosity and promoting favoured candidates including Geert Wilders, Donald Trump, and Marine Le Pen. In response, the EU led by France and Germany is seeking to corral fake news on social media. In contrast, the American reaction has been dilatory, despite objective recent research demonstrating that it likely accounted for the election of President Trump.
American indulgence of fake news is unwarranted. Contrary to the position of US conservatives, voters demonstrably do not intuit the truth during periods like today when fake news dominates, information markets lack objectivity, and factual reporting is demonized. Indeed, the Third Reich, and the millennia featuring the divine right of kings, the biblical foundation of slavery and the like provide ample evidence that Justice Holmes’s expectation of truth prevailing in the marketplace of ideas ignores the woeful lessons of history.
For truth to prevail, the information marketplace must be competitive and facts nurtured. Utilizing the Holmes formulation, the American information marketplace is broken, factual reporting drowned out by mostly conservative partisans. Fabulists in the White House and Kremlin along with entities such as Fox News and Sinclair Broadcasting have weaponized fake news. They have demonized fact-based journalism so effectively that more Americans believe that the mainstream press is their enemy than trust it. Indeed, President Trump’s wielding of fake news and attacks on factual reporting are major factors responsible for America’s plunge to 45th place in the World Press Freedom Index by Reporters Without Borders. Norway ranks first.
Resurrect The Fairness Doctrine To Repair America’s Broken Information Marketplace
Government censorship is one remedy for information market failure. A better option is to enhance the competitiveness of the American information marketplace by resurrecting the Fairness Doctrine. It was a rule issued in 1949 by presidential appointees at the Federal Communications Commission (FCC) responsible for regulating television and radio. Over four decades, American broadcasters were obligated under the Doctrine to provide competing viewpoints objectively and air a full range of opinion while allowing rebuttal opportunities to those criticized. The Fairness Doctrine did not guarantee that broadcasters only report facts. But the obligation to provide equal coverage discouraged fake news. It biased broadcasters toward self-regulation that embraced fact-based reporting and away from embarrassing half-truths and fake news.
History affirms that the Doctrine is an effective device to add new, factual voices to the marketplace. It produced a common body of facts available to all voters, continually tested and expanded by independent investigative journalists vigorously competing with each other. The American information marketplace occupied the sweet spot where national leaders, Russians, ideological media proprietors and political partisans had to contend daily with thousands of rival journalists enjoying equal access and airtime to present fact-based reporting.
Generally conservative proprietors bridled at the equal access rules and persuaded President Ronald Reagan to abandon the Doctrine in 1987 despite majority support in Congress. It has since fallen into obscurity. Even Democratic Party Presidents Clinton and Obama were unwilling to risk the ire of powerful broadcasters by resurrecting the Doctrine. The censorship of disfavored information and dissemination of fake news in the decades since by broadcasters is a reductio ad absurdum of conservative criticism of the Fairness Doctrine.
While Trump and the Republicans who garner political advantage from weaponized fake news will resist, appointees to the FCC by a new president could resurrect the Fairness Doctrine without constitutional hindrance. The American Supreme Court in Red Lion Broadcasting v. Federal Communications Commission (1969) embraced that Doctrine. It concluded that the information-access right of viewers and listeners is superior to any speech rights asserted by broadcast proprietors. Indeed, as explored in Billionaire Democracy, that Doctrine should be applied to social media as well: the right of voters to factual information as expressed by America’s founders is superior to any right of media proprietors to profit from fake news clickbait.
Fake news is the strongest possible signal that US information markets are broken, the factual information required for a high quality democracy obfuscated. Those markets should be rehabilitated and strengthened by reestablishing a modern Fairness Doctrine.
by George R. Tyler March 18, 2014 12:15PM (UTC) on Salon
Our GDP growth is currently outpacing Europe’s, but their future still looks brighter. Here’s why.
This article originally appeared on The Globalist.
The fact that GDP growth in the United States currently outpaces European growth by a large margin might lead one to believe that America’s economic future is brighter than Europe’s. Nothing could be farther from the truth.
Despite all the reflexive triumphalism, the U.S. economy has produced poor investment and wage outcomes for a generation. Meanwhile, northern European economies have achieved something that increasingly eludes the United States – a growing middle class.
Remember the famous line “I’ll have what she’s having” from the movie “When Harry Met Sally”? It is apt in our context: Americans need what northern Europeans have.
There are those who argue that making this point amounts to heresy. After all, the European Union is struggling to reorder its flawed architecture, stabilize public debt and, most important, regain a decent pace of economic growth.
Yet beneath those daunting challenges, the seasoned and potent internal institutions, crafted in the postwar years in northern Europe to broadcast prosperity widely, continue to function smoothly.
U.S. obsession with quarterly capitalism
Unfamiliar to Americans, these corporate governance and wage systems have succeeded precisely because they reject the American executive incentive structure. Europeans have studiously not embraced what Nobel Laureate Edmund Phelps has called “short-termism.”
At the core is the continuing U.S. obsession with quarterly capitalism. This is an unnatural focus for any business that can be explained only by the fact that a stock-optioned management is focused on near-term performance.
But its real life effects are truly problematic: For example, if that means being parsimonious with corporate outlays for R&D, wages, investment and the like in order to spike quarterly earnings, so be it.
In the U.S. model, what matters is not the long-term success of the company, but one’s own ability to extract maximum personal benefits while one is along for the ride. That is a most rudimentary form of capitalism, one that may compete with Manchester capitalism for the trophy in wrong-mindedness.
Europe does well
Let’s look at specifics and begin with productivity, the most important economic indicator of economic prowess. Since 1979, annual productivity per hour worked in northern Europe has grown one-third faster than in the United States year in and year out. Equivalence now exists on the factory floor in the United States, France and the Low Countries.
Weak U.S. investment is the most conspicuous reason. In a big change from the postwar years, investment by non-financial firms in Australia and northern Europe has outrun investment by U.S. firms in recent decades, as documented by Eurostat economists in 2009.
U.S. net investment is less than one-half the level it was in the late 1980s. Studies document that U.S. managers apply excessive discount rates when evaluating future investments. They do so by screening out worthwhile options, due to inappropriately short investment time-horizons compared to managers in these other rich countries.
An error to blame globalization
Quarterly capitalism arose in the United States from the incentive structure created by inept attempts in the 1970s and 1980s to address the age-old “agency problem.” According to that, management prioritizes returns by what it means for executive suites rather than for shareholders.
The unintended consequence of the solution manifests itself today in the weak corporate boards of publicly held U.S. enterprises.
In a short-term world, higher wage bills also affect corporate bottom lines, just like higher investment and R&D outlays. Unlike European counterparts, U.S. enterprises have made it their cause to compress wages. They have done so by weakening unions and by offshoring. (I have detailed this delinking of wages from rising productivity in my book What Went Wrong.)
That decoupling has not occurred in Australia or northern Europe. Indeed, comprehensive employer labor costs and wages have grown roughly apace with productivity there. They now average $10 per hour more in purchasing power parity terms than in the United States.
Globalization is erroneously blamed for U.S. wage compression. That is an argument belied by the fact that higher-wage northern European nations are considerably more engaged in cross-border trade than is the United States.
OECD statistics show that the top 10% of Americans receive $16 dollars in income for every $1 received by the lowest tenth. That is more skewed than the income distribution in Portugal and nearly comparable to Turkey, two economies dominated by thin layers of the affluent. The distortion of U.S. income distribution is twice as severe as any other rich democracy.
Improve skills and change corporate governance
In a short-term world, human capital investment can also be seen as a drain on bottom lines. Accordingly, U.S. firms have come to eschew up skilling, in stark contrast to nations abroad. That is why Australia and every nation in northern Europe has leapfrogged the United States to now have more skilled workforces, in contrast to the situation in 1998.
The ability of Australia and the northern European economies to broadly deliver rising real incomes during the era of globalization dramatized the American failure to do so.
The key remedy is to change the prevailing incentive structure. This would require confronting U.S. management with the architecture of northern European corporate governance and ending short-termism.
This would also mean adopting the successful German codetermination governance model in which employees sit on corporate boards (ironically, an innovation imposed by British and American officials in the early post-WWII era).
Viewed over the longer haul, as opposed to isolated annual quarters, corporate owners and shareholders will benefit from higher returns that result from higher investment, including in the workforce.
A healthy byproduct of codetermination has been higher wages, as nations across northern Europe have adopted local variations of the Australian wage determination mechanism, which links wages to rising productivity year after year.
Americans are fortunate to have well-tested models abroad to rectify the deficiencies of their own quarterly capitalism. The question is whether the American genius for adapting new technologies extends to practices from across the globe.
Doing so requires acknowledging that other countries’ models have something to offer and then overcoming resistance from those who benefit most from the current allocation of gains from growth.
Game on, American people.
By George R. Tyler, February 8, 2018 on The Globalist
Why can’t the U.S. follow the example of other, truly democratic nations in limiting the influence that very rich people can have on elections?
The U.S. election system is a stark outlier among wealthy democracies. Nearly all other wealthy democracies tightly proscribe campaign contributions and independent political spending to prevent political inequality, the distortion of public opinion and corrupted lawmakers.
Another goal is to prevent American-style polarization caused by negative advertising. Particulars vary, but nearly all mimic Germany and the United Kingdom in preventing what is called pay-to-play in the United States by sharply capping electioneering campaign spending.
Moreover, peer nations also subsidize candidates and small donors to further free political parties and candidates from reliance on large donors.
These higher quality democracies also restrict political TV and radio advertising opportunities, with those limited opportunities usually provided free or inexpensively.
Election campaigns are limited to a few months in duration as well. In addition, financial contributions by corporations and entities that are independent of candidates and political parties (similar to Warren Buffett or the Koch brothers’ Americans for Prosperity) are prohibited or strictly circumscribed during elections on behalf of politicians or policies.
As a result, American-style negative advertising on TV and elsewhere is absent in virtually all Western democracies. (The glaring exception everywhere are social media).
There are tight limits on electioneering spending by parties or candidates in higher quality democracies. For instance, the nationwide campaign spending by the CDU, German chancellor Angela Merkel’s party in 2013 was $27 million. It was even lower in France in 2012 and 2017.
Influencing election outcomes
Other tight limits apply to citizen donations and independent spending. Voters in other wealthy democracies are comfortable with such tight caps. They would be shocked if opaque, powerful groups could spend unlimited amounts of money for years to mold public opinion and influence election outcomes. Heavy-spending individuals such as the billionaires Sheldon Adelson or Paul Singer are effectively allowed to speak with the voice of tens of millions.
Indeed, peer nations are so determined to avoid vote buying that even the Financial Times — Britain’s equivalent of the Wall Street Journal — rather remarkably demanded in a 2015 editorial that private contributions be entirely abolished. British politics should be funded solely by taxpayers:
“If the political class at Westminster is to have any chance of winning back public trust, it needs to end the suspicion that the culture of political donations is corruptible. The only way to do this is a system of taxpayer funding . . .”
Britain and the Declaration of Independence
This is more than ironic. Britain — the abhorred example of political corruption for colonial Americans — has come to hew far more closely than the United States to the original intent of the founding fathers to excise all political corruption, defined most broadly.
Australia is the only wealthy democracy other than the United States to allow unlimited political donations and independent third-party political spending, including by corporations.
The similarities end there, however. Australian pay-to-play is on a tiny scale. The ten biggest donor corporations, for instance, contributed a total of $3 million during the 2016 general election there — a rounding error in American pay-to-play.
Limiting electioneering spending
More than 70 nations further reduce the need for private campaign donations by providing candidates with public funding to defray electioneering costs. The goal is to avail citizens of a factual, full airing of genuine policy differences between candidates and between political parties.
The outcome is robust and highly competitive elections where the weight of ideas and policy prescriptions are the determining factors rather than weight of wallet.
European nations provide candidates and their political parties an average of about $5 per voter in public funding, with the greatest level at $15 in Norway.
Such subsidies represent about 40% of spending by candidates and political parties over an election cycle. In France, for instance, public subsidies equal 47.5% of permitted electioneering spending.
The balance of campaign funding is derived from small donations, typically incentivized by tax credit as in Canada, France and Germany. Political parties in Germany garnering 0.5% of votes for Bundestag (federal) candidates receive €1 ($1.25) for each of their first four million votes and 83 cents per vote received thereafter. Plus, there is an upper cap on tax credits granted for individual and total donations.
Combining a limited need for campaign donations with public funding has successfully freed lawmakers from reliance on wealthy contributors. The proof is voter sovereignty: Policy outcomes of other wealthy democracies do not reflect an American-style income bias.
Editor’s note: This feature is adapted from Billionaire Democracy: The Hijacking of the American Political System (BenBella Books, 2018).
by George Tyler on 26 March 2018 on Social Europe Journal
The high quality democracies of northern Europe are an unnatural construct, history teaching us that the universal default setting of human society is authoritarianism. There are many key elements in crafting and sustaining such high quality democracies, including engendering a common body of trusted information, a communitarian spirit, the rule of law and the like.
The element most under stress in the European Union at the moment is the pillar of an electorate informed by a common body of facts. That stress exists because of conflict between the core responsibility of media platforms as truth tellers and the business model of social media platforms like Facebook and Google. Resolving that conflict to ease the existential danger it poses to the high quality democracies requires that social media platforms conform to the traditions and obligations of other media (print and broadcast) platforms as fact-driven societal rapporteurs (by mission at least).
In April, the European Commission will release its first set of notions on how member governments and social media platforms tech groups should tackle internet fake news. Critics warn it will fall drastically short of crafting a social media environment comparable to the European print and broadcast media environment emphasizing truth-telling.
Instead, the notions will be drawn in part from a report requested by the EC and issued on March 12. The industry-friendly authors concluded that steps to stem fake content should be addressed with voluntary guidelines. The report quixotically recommended that social media platforms help users identify fake news and support fact-based journalism. (Will Google soon hire investigative reporters and Facebook share profits with Berliner Zeitung, the Guardian, Le Monde and the New York Times?) The participants’ most fundamental error was failing to draw equivalence between the obligations of social media platforms analogous to those borne today by other media platforms as truth-tellers.
EU officials are intimidated by social media platforms, the industry attitude summed up by Twitter representatives testifying before British officials in early March, “We are not the arbiters of truth.” Social media platforms are loath to censor fake content, acutely cognizant that its novelty and sensationalism makes it more alluring to readers than factual content. It travels faster and further, each repetition producing revenue-generating clicks.
The differential allure of fake news was most recently documented by researchers at the Massachusetts Institute of Technology. Utilizing the huge data base of every tweet written between 2006 and 2017, they found that fake tweets were 70 percent more likely to be retweeted than factual news. The most repeated fact-based news reached perhaps 1,000 people while the top 1 percent of fake news reports (about politics, for instance) reached up to 100,000 readers.
Dithering by the EC in corralling social media platforms has the most serious consequences for democracy. For instance, there are over 30 Czech language websites actively disseminating pro-Russian propaganda as you read this – a mendacious xenophobic blend of praise for Putin, invented conspiracies, fake news coupled with demonization of political opponents, NATO, Germany, France, foreigners and the European social democratic model. These sites have become the main source of information for a full quarter of Czechs. They form the core of support for the pro-Russian Czech president Milos Zeman, applauding his intended dissolution of an independent press and Czech judiciary. Authoritarian propaganda carried by Facebook, Google and the like has skewed national attitudes, causing Czech support for NATO to fall below 50 percent; even fewer support the EU. Similar active sites exist in every other EU nation with a similar goal of debilitating democracy by fomenting disunity and discord.
Change Is Coming?
There are three options for cleansing social media: Flagging, ex-postcurating (censoring) and ex-ante curating.
Flagging: Social media platforms have deflected pressure to curate fake content by enlisting third parties like Correctiv, Snopes and PolitiFact to investigate user complaints and flag offensive postings. Google, for instance, has enlisted Wikipedia to evaluate and flag YouTube’s content. (Google’s revenue was nearly €100 billion in 2017; Wikipedia is volunteer-driven and funded by donations.) Moreover, flagging may well exacerbate the content crisis. Yale University researchers found that flagging caused a scant 3.7 percent of readers to be less likely to believe the fakes. Worse, it appears to make the flagged flamboyant content or heinous acts click bait.
Ex-Post Curation: The dodging of accountability for content by internet firms incentivized Germany to pass the 2018 Network Enforcement Law imposing fines of up to €50 million on platforms that fail to take down fake or heinous material within 24 hours of being reported. The EC followed suit this month. Yet, ex-post curation is imperfect. For instance, Google has granted only 43 percent of the 2.4 million requests received under the EU’s “right to be forgotten” 2014 ruling by the European Court of Justice, requiring firms to delete results fingering individuals or corporations. Far more worrisome, the concept of ex-post curation is fatally flawed because it allows fake content to metastasize, globally disseminated, unrecoverable, even if the initial posting is promptly deleted. Ex-post curation will not stop the proliferation of fake news, doctored videos, beheadings, Russian disinformation and other pathologies being published by social media.
Ex Ante Curation: Social media platforms largely avoid the onerous chore routinely borne by other media platforms of ex-ante content curation. Yet, they have that prowess. The platforms already ban some users who run afoul of government regulations or platform rules. Facebook recently took down some terrorist sites. After many risible delays, it banned the conservative firm Cambridge Analytica for harvesting user data without permission to subliminally manipulate tens of millions of American voters. It will soon ban cryptocurrency scams. And it also recently removed the Islamophobic “Britain First” hate group that routinely ran doctored videos and incendiary fake news to sow racial discord. (In each of these instances, Facebook reluctantly acted only under public or government pressure.)
Playing Russia’s Game
Social media platforms are the centerpiece of Russian state efforts to destroy the common body of knowledge central to Europe’s high quality democracies. Russian military intelligence views the platforms as useful idiots. Facebook, Google, Apple and the like should reconsider their roles as Russian enablers. They should commit to fulfill the traditional obligations of media platforms as truth tellers. That will be a difficult undertaking involving the ex-ante curation of most proposed user feeds in order to broadcast only factual content that meets community standards. (As private enterprises, they enjoy the legal right to ex-ante curate under both American and European law.)
The EU is expected to adopt General Data Protection Regulations in May. That is an opportune moment for EU members to craft a process and schedule requiring social media platforms to meet the traditional responsibilities of other media platforms.
Failure of EU member states to mandate equivalence will make them as complicit as Facebook, Google and Apple in the Russian campaign to destabilize their democracies.
by George Tyler on 30 January 2018 Social Europe Journal
Aristotle measured the quality of democracy by the extent to which politics constrains the economically powerful, allowing the preferences of the landless to be reflected in public policy. According to a new analysis, American democracy gets a failing grade on Aristotle’s test while the countries of northern Europe are star pupils.
Path-breaking recent research has established a causal relationship between preferences of elite earners and public policy outcomes: the income bias. Aristotle’s maxim in the context of the US is the precise hypothesis that Benjamin Page at Northwestern and Martin Gilens of Princeton tested in research. Some 1,779 contentious Congressional votes over two decades were matched with contemporaneous US public opinion surveys. The survey data were parsed by respondent incomes into low (tenth percentile of family income), fiftieth percentile and ninetieth percentile silos.
Gilens-and-Page documented affluence dominance, finding a “total failure” of middle income voters to influence Congressional policy outcomes. For instance, as the share of top earners favoring a particular policy rises from 10 percent to 90 percent, the odds of that outcome occurring increases by 45 percentage points. In contrast, as the share of supportive middle income earners rises from 10 percent to 90 percent, its odds of enactment improve by less than 4 percentage points.
The melding of political and economic influence documented by Gilens-and-Page has placed America on the pathway described by Oxford’s Stein Ringen: “In Athens, democracy disintegrated when the rich grew super-rich, refused to play by the rules and undermined the established system of government."
Pay-to-play is the pathology at the center of America’s low quality democracy. In pursuit of campaign contributions, the Republican Party in particular has succumbed to the income divergence agenda of the nation’s conservative political donor class – low, regressive taxes, wage suppression and fewer public goods. Hobbled by that party’s opposition, the Obama administration made little effort to restore real wage growth, reverse eroding social mobility and the like – and frustrated non-college white voters in America’s Rust Belt repaid the Democratic Party in kind in 2016.
Donor class support of their Republican acolytes was more responsible than the Russians for the 2016 election pathologies that delegitimized US democracy. Nine-digit spending by the Koch brothers was channeled into mendacious personal attacks on opponents and baseless attacks on mainstream factual reporting. The billionaire Mercer family is singlehandedly responsible for the emergence of the incendiary Breitbart website. And both Rupert Murdock’s Fox News and the mammoth far-right Sinclair conglomerate of 173 television stations lavished billions of dollars worth of fables lauding Republicans and demonizing opponents.
The outcome is the most polarized American electorate in five generations since the Civil War. More believe the mainstream press is their enemy than trust it. Surveys by Transparency International find that Americans now have less confidence than Europeans in legislative and judicial institutions. Worse, fewer than half of Americans believe it’s “absolutely important to live in a democracy;” the share rejecting democracy is more than double the share in Northern Europe. And one-third of Americans have come of late to support “a strong leader who doesn’t bother with Congress or elections.”
Now look at the situation in northern Europe. Economic mobility is higher, education including college cheaper, vacations longer, health care less expensive and job security greater. There, the preferences of average households are heard and heeded by public officials. Thanks to co-determination and collective bargaining, for instance, wages measured in purchase power terms in the capstone manufacturing sectors of thirteen European nations are more than $10 an hour higher than American wages according to the US Bureau of Labor Statistics. And real wages in Germany during 2014-16 alone rose as much as real wages for most Americans have in the entire span since 1979.
Evidence is also found in data on government redistributive efforts. Changes in the Gini Coefficient measure of income dispersion as a consequence of government tax and spending policies reflects the intensity of efforts to expand prosperity. The diminution of market-income inequality achieved by public policies is nearly twice as great in Belgium, France and Germany, for instance, than in the US. That is unsurprising since American federal tax and spending policies redistribute $1.35 to the highest quintile of earners for every $1 to the lowest quintile. Little wonder than America’s income disparity after government taxes and transfers resembles that of Turkey.
Finally, the electoral failures of Geert Wilders, Marine Le Pen and the German AfD party document that Trumpian tribalism and racism has less appeal in northern Europe than in America. The explanation is multifaceted, including European electoral rules that minimize negative political ads while providing voters accurate policy and candidate information. It also includes the not-distant memories on the continent of fascism. And it includes the more assertive response by Western Europeans to the poisonous threat posed by über-partisan and inaccurate social media posts. But most importantly, the high quality of western and northern European electoral systems reflects success in largely excluding private money from politics. That success is why Gallup finds that Germany (41 percent approval) is today’s top-rated global power, with the US (29 %) bunched with the other faux democracies of China (30 percent) and Russia (27 percent).
Rebuilding the quality of American democracy may take a generation because it begins with ending pay-to-play, dependent on recentering the Supreme Court by Democratic presidents and senators. The interim should be devoted to energizing voter participation with public funding of elections, open primaries, promoting proportional representation, automatic voter registration, election-day registration and other reforms.
The high quality democracies of northern Europe confront formidable challenges detoxifying social media and confronting avaricious authoritarians in Poland, Hungary, Russian, China and the like. Even so, they provide seasoned, practical models for the reformation of America’s ersatz democracy.
History is rich with ironies, but few as significant as northern Europe displacing an oligarchic America as the indispensable nations, spreading democracy abroad while exhibiting its success at home in spreading prosperity widely.
by George Tyler on 15 February 2016 Social Europe Journal
The Republican presidential aspirant nominated at this summer’s convention is likely to become that party’s nominee in part by invoking jingoist and xenophobic themes drawn from the playbooks of eastern European authoritarians. Miloš Zeman, the Czech President asserts, for example, “I do not want Islam in the Czech Republic.” And Hungarian premier Viktor Orbán has declared “We would like Europe to remain the continent of Europeans.” Such nationalist populism also has a prominent historic role in the U.S., featuring at times scapegoating of Irish, Catholics, Asians, Jews and Eastern Europeans.
Now the targets are Muslims and Latinos. This theme can be countered by Democrats with appeals to cosmopolitan America’s better angels – its Judaeo-Christian, immigrant and liberal democracy roots, its diverse and welcoming culture and its visceral anti-authoritarianism. But those angels will be more persuasive when combined with a compelling Democratic narrative of economic populism.
There lies a problem. Democrats have been in power for 8 years with paltry results for the middle class. Real wages have risen steadily in Australia and northern Europe in this period, yet stagnated in the U.S., income disparities widening. Indeed, the mean 2.5 percent real wage gains by German workers in 2015 alone exceeds the cumulative rise in median real American weekly wages since 1979. Wall Street malfeasance goes unpunished. Collective bargaining is not prioritized despite supermajority support for unions as devices to raise wages. The carried interest tax loophole remains wide open. Trade agreements give short shrift to wage concerns. Tax inversions have become commonplace. America has earned a reputation globally as a tax shelter for the rich, worse than Luxembourg or the Cayman Islands. Even long overdue EU steps to close tax loopholes exploited by multinationals are demonized by Obama administration Treasury officials.
Warring on WagesSome of this dismaying record reflects Republican Party intransigence. But a considerable portion is self-inflicted by President Obama, lending credence to Republican attacks on wage stagnation. Such attacks are disingenuous because higher wages have been a third rail of Republican politics since President Reagan. Its recent history is a litany of wage suppression: a political party determined to slow the recovery while opposing minimum wages, collective bargaining, higher overtime pay, paid sick-leave and the like. They reject linking wages to productivity gains or to CEO pay. That party is centered in corporate America unduly prioritizing profits at the expense of wages. Demographically, it is centered in the American south, home of right-to-work laws. And Republicans have enjoyed some success in expanding right-to-work laws and in torpedoing minimum wage laws to the Midwest, causing regional wages to drop: the wage differential between the Midwest and the non-union South across all industrial sectors, for instance, fell from $7 per hour in 2008 to $3.34 per hour in 2011.
Economic Populism: A Reform Agenda of Codetermination and Wages Linked to ProductivityPew polling finds that Democrats are viewed as more attentive than Republicans to middle class worries. But electorally, this edge is threatened by Republican nationalist populism and economic frustration. And their electoral success in November may well hinge on a visionary agenda of economic populism. The gig economy certainly poses unique challenges, but more seminal are concerns about job offshoring and wage suppression.
The poster child for wage suppression globally is Amazon which delinks wages from productivity and aggressively rejects collective bargaining. Even in Germany, competitors like Otto or Hermes Fulfillment are obligated to pay more under regional collective bargaining agreements reached by employers and workers, with rogue Amazon profiting by being the first to drive wages to the bottom.
The one proven remedy across the globe for offshoring and wage suppression is codetermination. It should form the heart of a visionary Democratic agenda, drawing on its proven success in Germany and her neighbors. German codetermination has succeeded decade after decade in nurturing and sustaining a high wage economy because corporate policies at larger (> 1,000 employee) enterprises reflect considered deliberations by boards of directors not in thrall to short-termism or narcissistic activist investors. Is codetermination socialism? No. It strengthens capitalism. Wages are higher; labor force skill levels are higher; and offshoring enhances rather than harms domestic wages. Indeed, investors award a higher Tobin Q to firms practicing codetermination, powerful evidence that shareholders stand to gain.
The vision should also include the anticipation that every worker will share in the gains from growth. That means a national expectation like Australia or Germany that wages in every job in every corner of America will rise each year by the sum of inflation and a hefty portion of productivity growth. Another conceptual precedent is the de facto UK wage increase standard documented recently by the Financial Times.
Electoral success for Democrats in November will hinge on muting Republican nationalism with economic populism centered on raising wages. Democrats should break with the uninspiring Obama legacy by redefining their vision of the American economic experience to include reformation of corporate governance and linking wages to productivity. Few Americans would defend the behavior of U.S. executive suites and most would welcome a powerful, seasoned alternative to misfiring quarterly capitalism.
Social Europe Journal
by George Tyler on 10 August 2015
Corporations are at the center of market fundamentalist capitalism practiced in the UK and US. Yet, in contrast to northern Europe, they are only weakly embedded in their communities, insufficiently attuned to the aspirations and needs of the wider stakeholder community. Rather than government diktats, the solution is cultural changes whereby inspired societal norms produce pressure for more communitarian corporations.
In his recent interview with Social Europe, economist John Kay of the Financial Times argues that the market fundamentalist capitalism in the UK and US would benefit from a set of cultural changes. “Good Corporations” need to become inspired by the broader interests of customers, employees and the like rather than just maximizing shareholder value. “What we need is to change the rhetoric and that’s a job for people like me who write. It’s even more for politicians to frame the terms of public debate.”
Northern European capitalism has succeeded in rehabilitating corporate governance, investment and raising real wages broadly. The cultural changes necessary for the UK and US to emulate those successes are best framed by political campaigns. Yet, the emerging US presidential campaign holds little promise in that regard. Indeed, one major party even disputes that higher hourly pay should be a goal at all. Republican Party faithful reject stronger unions, higher minimum wages, labor law reform, overtime pay, paid family leave and the like. Unwilling to touch the third rail of raising hourly pay, party aspirants such as former Florida governor Jeb Bush have proposed instead that Americans raise incomes by working more hours. That is an awkward remedy since Americans already average 300 more hours of work annually than peers in northern Europe. Indeed, the Bush vision for America eerily resembles Soviet-era Eastern European economies characterized by meager investment and productivity growth, with men and women employed for long hours at wages that stagnate year after year.
That gives an edge to the Democrats should they prove willing to draw lessons from northern Europe. They offer agendas featuring more education, daycare support to increase female participation, a corralled financial sector, incentives to invest for the long term, higher minimum wages and the like – good ideas all. The most adventurous proposal comes from former Secretary of State Hillary Clinton, who urges greater profit sharing by U.S. firms on the model of Southwest Airlines or Google. Evidence from northern Europe and Asia show that firms following that model have higher productivity and less turnover than competitors. That is why the Financial Times editorial board embraced it, even while concluding that her broader agenda was quite insufficient to fulfill her vision: “To achieve anything like the income boost Mrs. Clinton desires would require nothing less than a cultural revolution in American capitalism.”
Not So Revolutionary After AllIt should not surprise that the London-based FT has lauded Clinton for “casting around for new ideas” to raise wages. Intimate with northern Europe capitalism, however, the "new ideas" they have in mind are in fact quite mundane. Indeed, cultural changes leading to policies to raise incomes that American voters may view as revolutionary scarcely appear that way to peers in many other rich democracies. That is because voters in these nations since World War II have repeatedly and consistently endorsed a version of capitalism explicitly designed to raise incomes, one where the interests of employers and employees are harnessed to broad-based prosperity. What strikes Americans as revolutionary is standard operating procedure in Australia or Germany. Across many rich democracies, annual wage gains are linked de facto to productivity growth, typically through union negotiations. Wage settlements in organized industries such as metallurgy in Germany or groceries in Australia routinely become the template for nationwide wage increases year after year.
Ironically, the model for this success was postwar America itself where wages negotiated by General Motors and the United Auto Workers were national templates. It produced widely broadcast wage gains for decades, until derailed by Reaganomics. Since then, experience in Germany documents that wage growth has not been hobbled by the hobgoblins of technology or globalization, but by structural changes at the US workplace. These changes include weaker labor laws and unions, Presidents and lawmakers bedazzled by market fundamentalism that disproportionately rewards elite earners, and weak corporate board oversight allowing the ascendency of short-termism and rent-seeking in management ranks.
These post-1980 American practices have not spread abroad thanks to the higher quality of democracy in Australia and northern Europe. Pay-to-play is eschewed, while high voter turnout and responsive governance architectures more effectively translate majoritarian preferences into economic policies.
As I have noted previously, one consequence of this recent history is that the U.S. has devolved to a low-wage nation, hourly pay only 14th among the rich democracies. Including all government social program taxes, for instance, hourly factory wages in Holland and France that were 18 percent lower in 2001steadily rose to surpass American wages by 11 percent in 2012. And benefits are far better as well. Importantly, enterprises in other rich democracies have invested considerably more than U.S. firms since the 1980s, as documented by Eurostat economists Denis Leythienne and Tatjana Smokova. Output per hour worked has grown faster since the recession in nations such as Australia and Germany, with productivity levels at the factory floor in some now overtaking America.
Short-Termism: Weak American ManagementContributing to these deficiencies has been the structure of corporate management in the U.S. compared to firms in nations such as Germany. America’s entrepreneurial culture and innovative enterprises are global leaders. But most U.S. firms are hobbled by weak boards and cultures embracing short-termism which features CEO pay without performance. In contrast, exemplified by the German codetermination model, firms in northern Europe focus on investing for the long term thanks to corporate boards comprised equally (at larger German firms) of employee and shareholder representatives. In fact, Berthold Huber, former head of the IG Metall labor union, is the current VW board chairman.
Another factor promoting productivity growth is the higher wages characteristic of Australia and northern Europe. Economists have concluded for some time that relatively strong labor rights do not impose inflation, productivity or growth penalties on societies. Total factor productivity is not weakened by labor market regulations nor does deregulation of such markets improve it, a finding most recently explored in the IMF’s World Economic Outlook in April 2015.
Moreover, rising wages incentivizes productivity growth, with employers routinely upskilling workforces to justify that pay. Indeed, it turns out that rising wages and productivity growth are complementary, with studies finding “that a one percent change in wages causes a 0.3 – 0.5% change in the growth of GDP per working hour.” Investment, R&D and upskilling are important but so are the synergistic effects on innovation of the high wage model featuring job security. Having invested in upskilling, employers in northern Europe and Australia favor employee retention, and benefit from what labor market economists call creative accumulation or Schumpeter Mark II innovation. Job security translates into a greater accumulation of firm-specific knowledge and problem solving, promoting deeper integration of employees in contemplation of their tasks and in enterprise success.
In contrast, the commoditized labor model characteristic of American short-termism discounts the importance of accumulated knowledge, disrupting this Schumpeterian process of innovation. Insecure employees always look ahead to the next job and thus tend to focus on generalized job knowledge that enhances future employability rather than deeper knowledge of their current particular tasks. Delft University innovation economist Alfred Kleinknecht explains that the American workplace features less firm specific training, more bureaucracy, more turnover, and greater leakage of trade secrets and proprietary technology to competitors. The stagnation of wages also made this U.S. de-emphasis on productivity feasible, because it relieves pressure on firms to upskilled employees to justify higher wages:
The above implies strong complementarities between labour market institutions and innovation models. It also explains why, after the Reagan Revolution, the US had great difficulties in competing against German and Japanese suppliers in mature industries such as automobiles or steel. It explains why Detroit, unlike Wolfsburg, is today a dying city.
The cumulative impact of workplace innovation, higher wages and strong investment has steadily improved the skill level in Australia and northern Europe. And evidence is provided by OECD statistics documenting that labor forces in these nations now have higher skill levels than the low-wage United States. As recently as 1998, it wasn’t that way but skill levels in nations like Austria, Denmark and France have since leapfrogged the U.S.
A Cultural Revolution In American CapitalismVoters, lawmakers and economists in most rich democracies find nothing revolutionary in the practices that have led to their prosperity. Codetermination and wages linked to productivity are effective and nuanced elements of capitalism adoptable by any visionary American politician wishing to restore income growth. Indeed, they are necessary, elemental facets of that vision. Yet, presidential candidates, Democrats included, have shied away. It is a telling commentary on the poor quality of American democracy that seasoned and necessary proposals for rehabilitating low skill, low wage U.S. capitalism remain off the table.
MEMORANDUM TO PRESIDENT OBAMA, SECRETARY CLINTON AND OTHER 2016 PRESIDENTIAL ASPIRANTS
SUBJECT: Seize the Future by Linking Wages to Productivity Growth
RECOMMENDATION: The Democrats should adopt a new national economic doctrine that American enterprises link wages to productivity growth, just as their competitors do in Australia and across northern Europe.
DISCUSSION: As exemplified by their lawmakers’ positions on issues like raising the minimum wage, advocating for higher wages has become the third-rail in Republican Party politics. That has placed the burden on the Democratic Party for devising policies to address wage stagnation, the leapfrogging of American wages by other rich democracies and the resulting international wage gap.
Since 1979, American wages adjusted for inflation have stagnated. A relative handful of elite earners have done well, especially in finance and the professions. And some skilled workers (about 5 percent of the labor force) in booming sectors such as IT have also beat inflation over this span. But most Americans have been fortunate if earnings even kept pace with the cost of living. The evidence comes from Bureau of Labor Statistics data documenting that median weekly earnings of full-time workers (all private industries and occupations) rose from $232 in 1979 (1st quarter) to $ 802 in 2015 (1st quarter). That is a huge increase, but after adjusting for inflation, the actual increase was a tiny 2 % or $16 per week.[i]
Wage stagnation is the culprit responsible for income disparities widening by 23 percent over this span. It is the culprit responsible for the middle class shrinking by 17 percent in recent years, one-in-six falling out.[ii] It is why some 42 percent of U.S. workers now earn below $15 per hour.[iii] And it is the culprit responsible for only 21 percent of Americans in 2014 believing that their children will live better, a record low in polling. It stood at 54 percent just before the election of President Reagan launched the era of inequality. [iv] Until then, families had fared well as the postwar boom created history’s greatest middle class; men and women could control their own economic futures in an opportunity society where striving produced a secure and rewarding life.
Wages in Peer Nations Have Leapfrogged U.S. Wages
The outcome for workers in other rich democracies has been dramatically better. Real earnings have risen steadily enough for decades that manufacturing wages in thirteen other rich democracies have overtaken to now surpass U.S. wages. [v] Wages in Germany, for instance, which were 3 percent lower in 2001, were 28 percent higher by 2012. [vi] And this wage gap grows wider each year. In Australia and northern Europe, real wages have grown to be more than $10 an hour higher than in the U.S. And these figures are encompassing, including direct pay, social insurance fees and labor-related taxes. The U.S. has become a low-wage nation. As befitting higher wage nations, the quality of life abroad for most families is better, with secure retirements, longer vacations and necessities such as quality, affordable public education, college and health care more broadly available. That is because the gains from growth are broadcast widely across society, causing income disparities to be far smaller than in the U.S. For example, the income of the top decile of Australians rose 60% from 1990-2010, while income of lower-paid workers rose 40%.[vii]
The Secret to Steadily Rising Wages in Peer Nations: Wages Linked to Productivity
Wages in Australia and northern Europe are linked to productivity growth. Various techniques are utilized to achieve this proven, decades-old connection, usually involving government agencies or labor unions. The consequence is that about one-half of the increase in productivity each year goes to wages. It works like this:
For most employees in these nations, wages increase by the sum of cost-of-living last year plus about one-half of the growth in productivity last year. If inflation was 2.5 percent last year and productivity grew 2 percent, for example, wages the following year will tend to rise an average of 3.5 percent, i. e. 2.5 + (.5 x 2).
This Australian wage system means about one-half of the gains from economic growth each year go to workers or labor, with the other half supporting investment, job training, R&D, profits and the like. In America by contrast, virtually none of such gains from growth flow to labor. Because wage increases abroad are linked to productivity, inflation is not a danger and, as Australia and Germany exemplify, neither R&D nor investment is harmed. Indeed, because wages are linked to productivity, international competitiveness is not impaired. In fact, it may be improved. Linking wages to productivity incentivizes workforce upskilling. Consequently, Australia and every nation in northern Europe now have more skilled labor forces than the United States. As recently as 1998, it wasn’t that way, but skill levels in nations like Austria, Denmark and France have since risen above U.S. levels.[viii]
Where would U.S. wages be now had this system also been utilized in the U.S. since 1979?
Between 1979 and 2014, labor productivity increased 66 % in the nonfarm business sector, the largest combined U.S. economic sector, according to BLS.[ix] If one-half of the 66 % gain in productivity since 1979 had gone to wages as it does in peer nations, then the increase in real wages would have been 33 % instead of 2 % over that span. And the median weekly earnings of full-time workers in 2015 would have been $ 1,045 ($786 x 1.33) or $243 per week more than at present for the median wage earner.
Looking ahead, American wages will continue stagnating except for brief periods of economic boom. Is the Democratic Party satisfied with such trickle-down, or is it willing to rewrite history with seasoned structural reforms from abroad that have proven capable of yielding broadly based prosperity.
[i] BLS - http://www.bls.gov/webapps/legacy/cpswktab1.htm . At that BLS website site, retrieve current and constant median wage data for all over 16 years of age. Then on new page, request statistics for the period 1979 – 2015.
[ii] Richard Reeves, “Classless America, Still?” Brookings Institution, Aug. 27, 2014.
[iii] Harold Meyerson, “What Clinton Must Do,” Washington Post, April 16, 2015.
[iv] Dana Milbank, “American Optimism is Dying,” Washington Post, Aug. 12, 2014.
[v] BLS, Manufacturing data tables, 1996-2012 (XLS), table 1.2., http://www.bls.gov/fls/#compensation.
[vi] BLS, Manufacturing 1996-2012 (XLS), table 1.1., http://www.bls.gov/fls/#compensation.
[vii] Clancy Yeates, “Advance Australia Fair? Maybe Not,” Sydney Morning Herald, Jan. 27, 2014.
[viii] Education at a Glance, OECD, 2008, Table A1.6, http://www.oecd.org/education/skills-beyond-school/41284038.pdf .
[ix] BLS - http://www.bls.gov/lpc/prodybar.htm .