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 .
A generational effort is required to restore growth in U.S. wages.
Despite the sincerity of their sentiments, Democrats will fall flat in efforts to provide a structural solution to wage stagnation in the United States until they undertake a generation-long effort at educating voters.
That effort should be framed around closing the international wage gap – i.e., the growing disparity between prevailing wages in the United States and its peer economies. Wages are a toxic topic for Republicans, but the opportunity is there for the taking by Democrats. It offers a partisan advantage. As a campaign issue, the international wage gap would dramatize a Democratic economic agenda that systemically links wages to economy-wide productivity growth. It would pose a compelling contrast to tired or even fallicious supply-wide Republican policies.
What is the international wage gap?
U.S. Bureau of Labor Statistics data document that manufacturing wages in 13 other rich democracies in 2012 exceeded U.S. wages, many by $10 an hour or more, adjusted for exchange rates. Here are the data (hourly employer compensation costs including wages, government fees):
United States: $35.67
This gap has arisen because a hefty portion of rising productivity in these peer nations is added to wages each year, producing steady if unspectacular income growth that exceeds inflation. That is not the U.S. system and these results display the consequence.
Closing or even stabilizing this wage gap will not be an easy policy position, to be sure. Such a move will meet fierce resistance by U.S. high earners receiving most of today’s gains from growth. Their allies among Republican lawmakers will also be opposed and will continue to use arcane U.S. Senate rules to block any major Democratic efforts, even if Democrats re-capture the chamber.
Moreover, the instrumental role of private money in U.S. politics ensures vigorous Republican opposition. And they may be joined by some number of Democrats even if that party adopts the position widely. That role is documented by U.S. policy outcomes that chronically reflect an income bias, as Martin Gilens and Benjamin Page recently concluded.
However, there could be support from surprising quarters, if Democrats carefully prepare legislation to narrow the international wage gap. For example, one strategy would be to promote and provide incentives for the Codetermination model of corporate governance as practiced in northern Europe. I have made this argument previously in The Globalist.
Such a strategy, actually imposed in West Germany by the U.S. and British occupation, features employee representatives on corporate boards and involving them more in decision-making. Not only has this been proven — not surprisingly — to lead to higher wages, but it has also paid off well for many German and other northern European firms, relative to their quarterly-profit-oriented U.S. peers.
Adding employees to corporate boards improves the performance of firms by featuring cooperation. And it is the key to boosting anemic U.S. R&D and woeful corporate under-investment to match firms in nations such as Germany. While activist shareholders andCEOs seeking immediate gain would object, a number of U.S. corporate shareholders might well accept Codetermination that enhances long-term enterprise growth.
Empowering employees with worksite reforms is a useful starting point, as Larry Summers and other experts have recently advocated on both sides of the Atlantic. However, ensuring that real U.S. wages rise steadily year after year will require more, especially linking wages and productivity growth. If a company does very well for itself, some percentage of those profits reasonably should be translated into higher wages for employees, rather than merely being as now plowed into stock buybacks, dividends and executive compensation packages.
A generational challenge
Making that case, however, will be a generational challenge for wage advocates, including Democratic lawmakers.
Why generational? The Reaganesque division of gains from growth since the 1980s has de facto been achieved by making war on wages. And that pattern has become institutionalized. American history has shown that once even a damaging economic arrangement has been established, it is extraordinarily difficult to uproot.
Examples include the U.S. Constitution’s embrace of the slave economy built during colonial times, the Jim Crow era lasting nearly a century after the Civil War, and the employer-centered health care system whose reform was first propose in the 1940s.
Indeed, history teaches that such entrenched arrangements are only uprooted by unique circumstances – including a Civil War or a rare filibuster-proof progressive majority in the Senate. Medicare, Head Start, Medicaid, Obamacare, ending Jim Crow and Franklin Roosevelt’s reforms like Social Security were fruits of such once-in-a-generation circumstance.
That history means the next legislative opportunity to adopt structural linkages between wages and productivity, which are common in other rich democracies, could well be many decades away in the United States. And wages will continue to stagnate in the interim except for temporary episodic boomlets that trickle down to higher wages.
Groundwork to realize this generational agenda
Even then, it is not merely enough to have a filibuster-proof margin in the Senate after a landslide election born of general crisis. If a sweeping set of reforms is desired, voters have to be educated, ready and waiting.
We cannot know when the next moment of great opportunity will strike, but the interim time can fruitfully be utilized to lay the groundwork. This means education, activism and incremental steps for linking wages to productivity. Economists and the various centers studying corporate governance should devise a base of research, data, and analyses of the various systems in other rich democracies linking wages to productivity. Task forces, forums, think tanks, academics, advocates and activists must engage to provide the kind of energy that has inspired and mobilized mass reform movements before, such as civil rights and the environment.
This process is underway to some degree. For instance, Democratic Party legislators in California and in Congress have proposed tax incentives for the private sector to link wages to productivity or to CEO pay.
A key role must be played by state and local government leaders, in line with the U.S. tradition of using states and cities as smaller “laboratories of democracy.” They can provide invaluable proof of concept – as they have done repeatedly in the past in setting the national pace for environmental reforms, minimum wages and the like.
In doing so, they will also expand the share of the workforce where wages are linked to national productivity performance, further easing the transition when the time comes for national legislation.
It will take a generation to thwart the war on wages. There is no more time to waist.
Stagnant wages have robbed the American middle class of opportunity. Since 1979, wages have barely kept up with inflation and for tens of millions of relatively unskilled Americans, earnings have actually declined.
This wage compression is why fewer Americans now believe they are middle class; remarkably, the share of Americans who self-identify as below-middle class has risen 60 percent since 2008 to near equivalence in size with those identifying as middle class. Horatio Alger has emigrated to Australia and northern Europe where wages and economic mobility are higher. The consequence is continuation of a trend that began in the 1980s where Americans need to pick their parents very, very carefully to have even reasonable odds of prospering as adults. Utilizing quintile income data, Julia Isaacs at Brookings and the Pew Mobility Project concluded that the only odds higher than a rich man’s son in the U.S. being rich himself three decades hence (40 percent) are the odds that a poor man’s son will be poor (42 percent).
President Obama's failure to offer substantive solutions will be his economic legacy.
The President’s minimalist response is a wage agenda featuring more education, minimum wage hikes and the like. Good ideas all, but meek. In truth, his prospects for broadly-based wage gains hinge entirely on hopes that labor markets will episodically tighten as they seem to be now – just more cyclical Republican trickle-down like in the late-1990s. That is why I have argued that historians regarding economics are certain to cast him as a James Buchanan figure rather than a Lincoln – a timid President kicking the wage issue down the road for a more visionary successor to solve.
A new agenda is needed that breaks the wage stagnation paradigm, a textured one that leans heavily on successful programs such as those in Australia and northern Europe. What is that agenda?
Democrats Need To Acknowledge Four Economic Realities
First, shareholder capitalism is responsible for deterioration in the composition of the American workforce. The uber free market ethos prevailing since Ronald Reagan has chilled hopes of using public policy to offset the wage compression effects of globalization, technology acceleration, financial sector liberalization, rent-senking by executive suites and the like. High value jobs are routinely exported, replaced by domestic ones paying less with paltry benefits, many featuring on-demand part-time or contract work.
Second, U.S. wage stagnation is an aberration among peer nations, with real wages in other rich democracies continuing to climb steadily. That is because U.S. wages are delinked from productivity growth. Not so abroad. The consequence, according to the U.S. Bureau of Labor Statistics, is that wages in more than a dozen other peer countries have leapfrogged American wages. Exchange-rate-adjusted American wages in manufacturing in 2012 were below $25/hour. That ranked 14th globally, well below Denmark, Switzerland, Australia, Germany and the like; these superior economies also feature quality, affordable university educations, health care plus retirement security. Moreover, unemployment in Germany is below the U.S. while labor force participation is higher. These data belie the argument that low American wages are the inevitable trade-off for handsome employment statistics.
Third, the U.S. corporate governance model incentivizes behaviors that Nobel laureate Edmund Phelps has labeled “short-termism,” with harmful consequences as explored by Harvard Business professors Clayton Christensen and Derek van Bever. Share prices and executive remuneration spike while R&D, investment, wages and labor force upskilling slump. Business equipment spending, for instance, since 2009 (5.2 percent of GDP) remains well below levels averaged since the 1960s (6.5 percent). And over a longer term, investment by nonfinancial firms in Australia and northern Europe has outpaced investment by American firms for nearly two decades. It is instructive that board oversight is far tighter at privately-held U.S. firms, forcing management to adopt longer time horizons: John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly-held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately-held firms.
The fourth reality is that the danger posed by secular stagnation has captured the imagination of economists worldwide. While the U.S. recovery is proceeding, economists such as Gauti Eggertsson and Neil Mehrotra in a study for the National Bureau of Economic Research document the longer term dangers to America of low growth from inadequate demand and production. Weak public and private investment is one problem. And other explanations include the effects of eroding wage shares and widening income disparities as argued in a briefing paper prepared by Sherpas for the November Brisbane G-20 meeting.
Eroding wage shares and widening income disparities are a particular problem because most rich democracies are wage-driven rather than profit driven in the terms utilized by Marc Lavoie and Engelbert Stockhammer in a study for the International Labour Office. They concluded that a 1 percentage point decline in the wage share of U.S. GDP reduces aggregate demand by .808 percentage points, the most severe marginal reaction of any rich democracy to rising disparities.
A Visionary Agenda To Raise Real Wages
These realities offer a target-rich environment for President Obama if eager to leave a visionary rather than a vacuous economic legacy. Moreover, they are promising foils for reforms capable of capturing middle class imaginations and votes, especially those of working class Americans. Two structural changes are needed to create an economy like those in Australia or northern Europe where wages are linked to productivity – changes that would enable most Americans to share in the gains from growth.
First, reform corporate governance. Short-termism is enabled by low-quality American board rooms. That means upgrading U.S. corporate governance as hinted by economists such as Robert Solow of M.I.T. must be a central plank of any wage agenda. Indeed, that reform is imperative in light of the centrality of public corporations as a state-sanctioned device to generate and sustain broadly-based prosperity. Corporate America is failing to widely broadcast the gains from productivity growth – and weak internal oversight coupled with a Randian rent-seeking syndrome among CEOs are the reasons. Governance remediation featuring Codetermination can draw on successful practices abroad, especially from Germany, the highest functioning capitalist economy on the globe.
Strengthening corporate governance hinges on a recomposition of boards of directors of U.S. enterprises. Compelling evidence of the potential offered by such recomposition is provided by the potent performance of German enterprises such as VW or Daimler whose supervisory boards are split between shareholder and employee representatives. Indeed, the weight of analytical evidence is that shareholders would benefit from a strengthening of American supervisory boards in mimicry of German-style Codetermination, as documented by Larry Fauver and Michael Fuerst.
An immediate option involves pension funds whose trustees could play a pivotal role in strengthening governance. Funds such as Calpers could incentivize board recomposition through investment policies. And the Obama administration could facilitate that strategy by clarifying that board recomposition is a furtherance of trustees’ duty to invest solely in the interest of participants and beneficiaries.
Government can do more. It has a host of options involving penalties or incentives to induce board recomposition. And there are no legal impediments to establishing recomposition standards for firms licensed by states or even those incorporated elsewhere which nonetheless conduct considerable economic activity within a specific state. Thus, progressive state governments could and should become laboratories to explore a variety of those options. Indeed, states like California already have provided proof of concept: they have set the pace for some safety and environmental practices by the private sector subsequently adopted nationwide. And progressives in Congress could mimic German law by incentivizing all public corporations with more than 2,000 employees to recompose supervisory boards, with members drawn equally from shareholders and employees.
Second, institutionalize annual real wage increases. Governance reforms will help restore the link between productivity and wages. But Australia and the northern European economies have gone further by institutionalizing that linkage. Industry, region or national wage agreements struck by labor unions and employer organizations – monitored by the public sector – provide national templates for annual real wage increases. Encouragingly, tentative approaches are being explored in the U.S. to restore that linkage. The Democratic caucus in the House of Representatives, for instance, endorsed legislation in 2014 to raises taxes on CEO compensation unless firms raised wages. The proposal permitted firms to keep taxes low by increasing wages by the sum of inflation and nationwide productivity growth. Democrats in California have been similarly innovative. American CEOs earn well more than 300 times the median wage of employees. That is an unwarranted windfall because the ratio is far lower in every other democracy. For instance, it’s 64 times in Australia. Democrats in the California State Senate set out to reduce that ratio by rewarding firms with tax cuts who cap at 100-fold higher.
These and similar efforts to relink wages to productivity also hold promise for easing the longer term risks of secular stagnation. Economists ranging from Paul Krugman to Lawrence Summers argue for more fiscal stimulus and public infrastructure investment as one means of boosting wages and output. And Adair Turner in the pages of the Financial Times recently even argued for such stimulus to be supported by helicopter (printing) money. The problem is that such approaches will raise wages only indirectly. Surely a more efficient approach is to focus on reforms that directly raise real wages and to do so in a structured setting that also incentivizes investment, R&D and productivity. Other rich democracies have figured out how to blend these goals and America can benefit from their experience.
A Visionary Obama Economic Agenda Will Reframe the Wage Debate
The wage issue bears on the great philosophical question of how broadly should prosperity be enjoyed in a democracy. Capitalism can provide for widely enjoyed prosperity, a position advocated by the President. Today’s Republicans disagree, evidenced by resistance to ballot and legislative initiatives and to union efforts in spots such as Tennessee to raise real wages. And they may also resist upgrading corporate governance. The President has not been intimidated by partisan criticism in the past and should not be deterred from offering a visionary and expansive wage agenda. An additional concern is that the Democratic Party like the Republicans are reliant on campaign donations from large dollar donors, as noted recently by former labor secretary Robert Reich. That argues for a wage agenda which features incentives rather than coercion. The agenda outlined here are practical, proven steps to relink wages and productivity.
President Obama should use his bully pulpit to reframe the wage debate around this agenda and thereby establish a visionary legacy.
Weak American investment and weak wages are the consequence of weak corporate governance, with solutions to be found in Australia and northern Europe. Here are the facts:
First, real U.S. wages have gone flat since 1980 despite continued productivity gains, while in Australia and northern Europe they’ve mostly kept pace with productivity. Today, wages and comprehensive employer costs for labor are about $10/hour higher in Australia and northern Europe than in the United States. In manufacturing, German wages are $20/hour higher according to Bureau of Labor Statistics data from 2012 (latest year).
Second, investment by nonfinancial firms in Australia and northern Europe has outrun investment by American firms for decades, as documented by Eurostat economists Denis Leythienne and Tatjana Smokova in 2009.
Third, U.S. managers apply unreasonably high discount rates when evaluating future investments, truncating their investment time horizons compared to managers in these other rich democracies. James Poterba at MIT (and President of NBER) and Lawrence Summers, as early as 1995, documented that German managers devote a considerably higher share of R&D budgets to the long term than U.S. managers. Moreover, the Americans would forego “a very positive net present value project” merely to smooth out earnings per share data, as reported later in an NBER study by John R. Graham, Campbell R. Harvey and Shiva Rajgopal.
Fourth, Australia and every nation in northern Europe now has 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 leapfrogged the U.S. level, where firms eschew human capital investments. Employee loyalty now comes in two-week segments until the next paycheck, with longer term upskilling and the concept of employee commitment to the firm hollowed out. Firm management in these other rich democracies have done a superior job of investing anew, changing product mixes, upskilling workforces and offshoring few domestic jobs.
What are we to make of this?
Globalization is fingered as the culprit by many who’ve written on U.S. wage stagnation, but it’s a rather baffling explanation in light of the considerably greater integration of these higher wage nations like Austria, Denmark or Germany in cross-border trade. A few, including former labor secretary Robert Reich and James Galbraith are closer to the mark, pinpointing a variety of structural factors, like offshoring, Randian executive suites, weaker labor unions and deregulation.They and others such as Nobel laureate Edmund Phelps, call this agency problem “short-termism.” It’s a focus by stock-optioned American management on near-term performance, being parsimonious with corporate outlays for R&D, wages, investment and the like in order to spike quarterly earnings.
Foolish mergers are another element of the syndrome as examined by Jeffrey Harrison at the University of Richmond and Derek Olin of Texas Tech. This syndrome partly explains why net investment by U.S. firms is 4 percent of GDP now while profits account for 12 percent of GDP, when they both equaled about 9 percent in the late 1980s. That’s also why John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately owned firms. And it’s why productivity per hour worked in northern Europe has grown one-third faster than in the United States since 1979 to the point that equivalence exists on the factory floor now in the United States, France and the Low Countries. These nations are as productive as the United States and pay notably higher wages.
The culprit is quarterly capitalism. What kind of managers would run U.S. companies like that, crimping longer term prospects? Well, managers like those eighteenth century expat East India Company officials lamented by Adam Smith in The Wealth of Nations. Then as now, changing their management incentive structure is the answer. And that means drawing on corporate governance techniques of firms in those peer democracies who figured out how to avoid short-termism. The architecture of American corporate governance should learn from the successful codetermination structure of northern Europe, which is, to a large extent, responsible for Germany being the world’s highest performing economy. Shareholders will applaud codetermination because it means greater returns, as Larry Fauver at the University of Tennessee and Michael Fuerst at th University of Miami concluded in 2006. And a healthy byproduct of codetermination is greater investment and higher wages, with firms supporting the Australian wage determination structure linking wages to rising productivity.
There are several reasons to look askance at northern Europe, struggling to generate growth and reform the architecture of its monetary union. But those valid macro-economic concerns should not deflect from the long-term success of their sturdy internal processes in broadcasting rising real incomes widely year after year.
What a contrast to the grim outcomes and prognosis for U.S. family economics, featuring further income disparities, stagnant wages and weak productivity, GDP and job growth as far as the eye can see.
It is time for Americans to do what they do very well: draw on the best and brightest from across the globe for a solution to its poorly crafted corporate governance structure.
From Salon Tuesday, Mar 18, 2014 08:15 AM EDT George R. Tyler
What America can learn from Europe about income inequality
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.
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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.
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.
The Best News Democrats Will Hear This Summer: Evidence Confirms That Open Primaries Dilute Tea Party Extremism
Experimenting with Fully Open Primaries
Since 2010, conservative Republicans have gridlocked government, creating the most toxic political environment since the antebellum era. Critical to that tactic has been pay-to-play, enabling staunchly conservative donors to empower party activists including tea partiers holding views outside the mainstream. These activists fight well above their weight because they unduly influence party primaries, selecting candidates in their own image. Recent research suggests that the overrepresentation of right-wing extremists in candidate selection can be muted by making primaries nonpartisan.
With median voters more centrists on most issues than party partisans, expanding the primary electorate has an intuitive appeal as a remedy, but supporting evidence has been sparse - until now. California instituted a full-blown nonpartisan primary system in time for the 2012 elections in which the top two vote recipients regardless of party move on to compete head-to-head in November. The evidence is in from the first session of the 113th Congress and NOTT (Nonpartisan Top Two) had a dramatic impact in moderating votes of the California Republican delegation in 2013.
Held constitutional by the Supreme Court in 2008 (Washington State Grange v. Washington State Republican Party, et. al.), NOTT primaries are utilized only in Louisiana, Washington and California. The enormous size and political diversity of the California delegation offered a perfect control groups to test the open primary hypotheses. As it turned out, while Congress has become increasingly polarized, the Republican Congressional delegation from California in 2013 resisted that trend. Statistics compiled by the author from National Journal ratings reveal that the California Republican delegation in 2013 shifted notably toward the center compared to the voting record of all other members of Congress and compared to their own votes during the previous 111th (2009/2010) and 112th Congresses (2011/2012). Redistricting reduced California’s Republican delegation in 2013, but eleven of the remaining party members have served in Congress since at least 2009. And the reaction of these seasoned lawmakers to the new NOTT primary system in the 2012 election caused their very conservative voting records compiled in prior years to morph into moderation.
Congressional Republicans Moved Sharply Toward The Center
Most of the shifts were quite sizable. Specifically, the median California Congressional Republican National Journal ranking moved from the quite conservative 85th percentile in 2009/2010 to the 60th percentile in 2013. Put another way, the voting behavior of these political veterans moved from a median position analogous to the 369th most conservative member of the House in 2009/2010 (and 329th in 2011/2012) to one comparable to the 263d most conservative in 2013. The NOTT system saw these career politicians rather dramatically recentering their actual voting behavior by 25 percentage points. Most Congressional Republicans from the central valley and northern and southern California are now voting like moderates representing New England.
The reaction among Democratic politicians to these two reforms was more muted. Those veteran Democrats in office from 2009-2013 moved toward the center in 2013 as well. But their shift was small, from a median position at the 11th percentile (quite liberal) in 2009/2010 to the 14th percentile in 2013.
Breaking the Grip of Tea Partiers on Republican Primaries
NOTT shifted conservative Republicans significantly toward the center, arguably reducing polarization just as political scientists such as Norm Ornstein have long speculated. But questions remain. Even though the results are from California with the largest state Congressional delegation, any one state cannot be dispositive. The sample size is small, drawn from just one year (2013) following one election (2012), and only time will tell is this shift is sustained. Moreover, California also installed a nonpartisan redistricting system in 2011 which may have lowered partisanship in the new Congressional districts. Recentering may hinge on both reforms rather than NOTT alone.
Republicans are held accountable by political scientists for much of the polarization afflicting government now. But at least among the California Republican Congressional delegation, the NOTT system appears to neutralize centrifugal forces that have been pushing them away from the center. NOTT may be a surprisingly powerful tool for reducing polarization and should be at or near the top of any reform agenda designed to ease the grip of powerful donors on candidate behavior and gridlock.
Obama is Leaving Economic Inequality for his Successors to Fix
President Obama is emulating former President James Buchanan. His economic agenda is to kick the can down the road, leaving his successors an America of widening economic inequality without prospect of remediation.
The Obama Presidency is facing the most toxic, polarized environment since the antebellum era. Yet, legislative gridlock is no excuse for its lack of economic vision in addressing Gilded Age-income disparities promising to extend in perpetuity.
Abraham Lincoln faced a similar challenge on the issue of slavery in 1860, likely to endure indefinitely. He is America’s greatest President because he rejected that future. Lincoln ignored the admonitions of former Presidents including his immediate predecessor James Buchanan to permit the horror of slavery to encompass all the territory (north as well as south) from the Mississippi to the Pacific. That would have avoided war, but at the calamitous cost of empowering slavery for generations to come.
Obama faces a similarly daunting economic environment without easy answers: weak private (and public) investment, job offshoring, weak unions, secular stagnation, stagnant wages and political opponents demonizing his economic performance. His remedies include higher minimum wages, more education, better training – all important but incapable of redressing the systemic roots of widening income disparities.
Oh sure, recovery will eventually tighten labor markets sufficiently for real wages to rise a bit as they did during the 1990s boom. But the seminal reality will persist: Americans have worked harder and smarter since 1980, labor productivity rising about 75 percent. Yet, inflation-adjusted wages in the U.S. have stagnated, most of the gains from higher productivity going to the famous 1 percent. That is what the widening income disparity is all about.
Real wages will continue stagnating in the decades to come, income disparities widening further. Indeed, the U.S. has settled into the default setting for most nations throughout history explored by Daron Acemoglu and James Robinson (Why Nations Fail) where political inequality begets chronic economic inequality.
Wages Have Continued Rising in Australia and Northern Europe, Unlike America
In contrast, real wages in purchase power terms are $10 an hour higher now in Australia and northern Europe, with investment higher as well. The past decades have been different for the middle class in these nations, with real wages and living standards rising steadily year in and year out to now surpass the U.S. And their future will be different as well. Families there will continue to receive a hefty share of productivity gains. And the reason is that those nations, beginning in the 1940s began importing the Australian wage system, a century-old refinement of capitalism used to widely broadcast the gains from rising productivity. It has proven to be a tremendous success.
Between 1999 and 2008, productivity rose 13 percent in the European Union, with 60 percent of the gains going into real wages, up 8 percent. Productivity growth has slowed since, but about 60 percent has nevertheless continued to flow into real wage gains year after year – gains that have averaged nearly 1 percent annually in Germany and France. And real wage gains have averaged .86 percent annually in Australia since 2002 as well. Not so in America.
With real incomes and living standards for most workers in these rich democracies rising 50 percent over a career, they have avoided the American destiny of a shrinking middle class. They offer a stark lesson should Obama be inclined to emulate Lincoln and recraft the future. The remedy this time around is more than 40 acres and a mule. He must take two steps to become a transformational President: 1) bring U.S. corporate governance into the twenty-first century, and 2) link wages nationwide to productivity growth as the American labor movement accomplished until weakened after 1980.
Reform corporate governance
Limited liability corporations are the devices capitalist societies have evolved to create wealth, overseen by boards of directors. American boards suffer from an important deficiency that allows executive suites to practice short-termism. That syndrome is extensively lamented by economists, most recently by Clayton Christensen and Derek van Bever in the June 2014 Harvard Business Review, and in my own book What Went Wrong. Management and share speculators benefit financially from short-termism, also called managerial or quarterly capitalism. But their behavior disadvantages everyone else, with U.S. firms – in contrast to those in northern Europe – compressing wages, offshoring valuable jobs, eschewing worker upskilling, shortchanging investment and rejecting profitable longer term R&D in order to spike quarterly profits.
That explains why investment by nonfinancial firms in Australia and northern Europe has outpaced investment by American firms for decades. U.S. publicly-held firms even invest far less than privately-held U.S. firms: John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly-held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately owned firms. Foolish mergers are another element of the syndrome as examined by Jeffrey Harrison of Richmond and Derek Olin of Texas Tech. And so is under-investment in employees. That is why 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 leapfrogged the U.S. level.
Firms in Germany and other northern Europe nations have avoided short-termism by adopting a system called codetermination. It puts adults with a long-term perspective in charge of corporations by stocking corporate boards of directors with employees. Employees hold one-half of the board seats of every single German nameplate firm, VW and Daimler, for instance. And shareholders will applaud codetermination because it means greater returns, as American economists Larry Fauver and Michael Fuerst concluded in 2006.
Link Wages to Productivity Growth
Under the Australian wage-determination mechanism, used there and in northern Europe, nationwide wage-setting is linked to productivity growth, ensuring that the gains from growth accrue to most rather than a few. It is how they have surpassed American living standards. And it’s a reform that America must adopt in order to begin rebuilding the middle class. A complementary approach is to reinvigorate the U.S. trade union movement, whose similar policies endorsed by both Republican and Democratic presidents built the great American middle class.
Any proposal to redirect economic flows will induce fierce opposition, these reforms especially so because they have a successful record of broadly spreading the gains from productivity growth. Once implemented, they will become a permanent feature of American capitalism just as they have become pillars of German capitalism. Their implementation will take years. But Obama’s legacy of accepting widening income disparities in perpetuity can be salvaged by a decision to place the reforms on the public agenda.
Obama Is Emulating James Buchanan When He Should Look to Lincoln
As Obama mulls that legacy, the President might consider another historical analogy. The founders crafted a Constitution with a Senate, an Electoral College and checks and balances intentionally designed to thwart abolitionists and the popular will. Historians term it the status quo bias against reform and it’s at the heart of dysfunctional Washington today. The founders sided with Edmund Burke who fretted about unanticipated consequences, rather than Thomas Paine who fretted about squandered opportunities.
In pondering his options, a cautious President Obama might erroneously believe he faces that same dilemma and continue to choose Burke. He would be wrong. The Australians and Germans have done the heavy lifting in crafting a refined capitalism of proven and seasoned performance, the outcomes knowable.
Obama’s actual choice for his economic legacy is between Lincoln and Buchanan.