The American Prosperity Myth

by Will Hutton

The Nation magazine, September 1/8, 2003

Everyone knows the story by now. America may have its social problems, but its highly productive, job-generating, innovative economy is the envy of the world. Europeans, on the other hand, are in a despond of high unemployment and economic sclerosis. Europe's addiction to welfarism-its overcooked social contract-is killing the economic goose that lays the social egg. Americans may pay a price in inequality for their economic vitality, but when you take the country's extraordinary social mobility and opportunity into account the price is worth paying. You might want to reverse Bush's tax cuts for the very rich, but nobody sane is going to tinker with the essence of the great American Business Model that delivers so much wealth.

I contend-unfashionably and, I know, incredibly, given the consensus-almost the opposite. The American economy has great strengths, but it is not so all-conquering. And the American Business Model, with its ruthless focus on shareholder profits, has profound weaknesses. Indeed, American industry is at its strongest where it has not observed antistate, pro-greed precepts and operated in more European ways. Smart action by the state, a viable social contract and efforts by companies to harness human capital and serve a purpose larger than short-term profit maximization turn out to be indispensable components of successful American capitalism as well-though America's public conversation hardly concedes these points. It's a gaping omission that is costing the country dearly.

Signs of trouble are everywhere. For a start, the United States is experiencing an alarming and unsustainable growth of international indebtedness. By the end of this year the country's net liability to the rest of the world will approach $3 trillion, and it is growing exponentially. At the current rate, liabilities will double again over the next five to seven years, taking the United States into banana republic territory. At some point foreigners will cease holding dollars and instead buy the alternative world currency-the euro. The dollar will crash and interest rates will jerk upward in response.

America has been running a trade deficit for so long that it has ceased to be worthy of note. Yet the consistent inability | of so many American companies in so many sectors to compete against their foreign rivals surely exposes faults in our approach to investment and productivity. From cars to aerospace, industrial gases to cell phones, American companies lag behind their European competitors in technology, production savvy and rate of innovation. Ford and GM are a decade behind Volkswagen in the sophistication of their production techniques. Nokia has 39 percent of the world mobile phone market, more than twice that of Motorola, its nearest rival- despite Nokia's being based in the highly taxed, highly unionized, generous welfare state of Finland. Boeing's government subsidies through its military contracts, grants and tax breaks comfortably match the diminishing support proffered Europe's Airbus, but it is Airbus that is pioneering the next generation of civilian aircraft and whose market share is larger. British Rolls Royce is the trailblazer in aero-engines. And so on. Beyond the sheltered world of America's defense industrial complex, where fat Pentagon contracts helped create outstanding technological leadership in weapons and the Internet, there is scarcely a high-tech sector where US companies can claim systematic leadership over their European competitors-a truth you would scarcely know from a casual inspection of the American business press.

America's once proud culture of business building has given way to a culture of financial engineering, a doctrine of shareholder value maximization and a cult of the takeover. The game is to keep the share price up, and every sinew-of the organization is bent to that end; shortcuts are ever tempting, and inevitably some companies resort to straight fraud. Nevertheless, the conservative inclination is to overlook one or two bad apples like Enron and WorldCom and to celebrate the rule of America's capital markets. It is Wall Street constantly holding corporate managements to account that drives up innovation and productivity, or so runs the conventional argument, with companies that fail to keep up facing a takeover.

Yet the evidence is that takeovers fail to raise shareholder value; consultant KPMG reports in a survey of 700 takeovers that more than four out of five either added no value or lost it. Still, investment banks continue to seduce overpaid CEO after CEO into believing that his deal will be the exception. And with share options that will provide fortunes if the deal comes off and golden parachute clauses that will secure an equally good pay-off if it bombs, most CEOs fall prey to the seduction. Despite a welcome wave of criticism of this febrile, amoral atmosphere, few took note in the heady days of the dot-com and telecom bubbles that this system was hollowing out the US economy. It is coming back to haunt the United States now.

American productivity measured as output for every person-hour worked is now lower than in France, the old West Germany, Belgium and Holland. Most other parts of Europe are catching up with the United States fast, a trend that began in the late 1 960s and has been continuing ever since. Economist Julian Callow of Credit Suisse First Boston calculates that after adjusting for the very kind way American statisticians compute productivity compared with those in Europe, Europe's growth in productivity outstripped the United States during the 1990s.

This is the reality behind the ballooning current account deficit numbers. The US economy may boast an innovative IT sector and technological leadership in the military industry; beyond that, its claims for universal competitive strength are more and more dubious. Of course, America is home to some great companies, but not so many to justify the fawning acceptance that the American Business Model is better in every respect than the European one.

Europeans do not view the company as a casino chip to be traded away in a single-minded quest to enrich directors and shareholders. Rather, they see companies as living things, each one a network of human relationships organized to serve an overriding economic and social purpose. In the European perspective, a company has a defining organizational reason-to-be that serves as a jumping-off point for maximizing profits, a repudiation of the idea that anything goes in the quest for a fast buck. A company needs to be built over time, as resources are husbanded, personnel are groomed and trained, customers courted and innovation nurtured; its directors need to manage a complex set of trade-offs between the demands of shareholders and stakeholders, marketplace trends, the need to innovate and the engagement of employees. In this view, if only one voice counts-shareholders who want fast returns now-the company risks ruin.

The United States is vandalizing this conception of the company-once inherent in American capitalism-and is pulling down the structures that support innovation and productivity. It is Europeans who now invest more, sustaining a range of institutions that produce a highly skilled work force and a business-building culture. They may at first sight look like economic tortoises; in fact, they are set to overtake the American hare. High European unemployment, concentrated in Germany, which has made massive mistakes in macroeconomic policy by fixing its exchange rate too high within the euro, disguises the real performance of the European economy: Unemployment is lower in seven European Union countries than in the United States, and on the continent as a whole the participation rate of 25-to-54 year-old men in the labor market is almost the same as in the United States. As the euro becomes embedded, Europeans will secure the advantage of a single continental market even larger than the United States; when they get their macroeconomic policy right, the advantages of their economic and social model will become more evident.

This economic strength pays for a social contract that offers most individual Europeans opportunity, mobility and security that is beyond the compass of most ordinary Americans. For here is another uncomfortable truth. American social mobility, traditionally comparable to Europe's, is falling as decades of tax cuts and spending cuts undermine the opportunities for advancement.

The chief culprit is the emergence of a highly stratified, increasingly class-based university system, whose very accessibility was once one of America's glories. The academic excellence of top US universities is not in question, but it is unclear whether they still contribute as they once did to equal opportunity and social mobility. For American universities have become very expensive. The competition to attract the world's best academic talent and fund cutting-edge research has meant an explosion of costs and a parallel explosion in tuition fees. For the private universities-and all but one of the top twenty are private-annual tuition, even before living expenses, tops $17,600. The rates are similar for the top law and business schools. Even public university tuition now averages more than $7,000 per year.

The conservative defense is that rich endowments allow private universities to practice "need blind" admission and offer students whose families cannot afford the cost a mix of grants, loans and work-study that together will see them through college. The same principle is meant to apply to public universities. Universities may be getting more expensive, so the mantra goes, but there is sufficient support to help the poorest. Equality of opportunity survives.

It is a lie. Endowment income is not matching the rise in tuition-now set to go substantially higher in public universities as states struggle to balance their budgets. At the same time, the Federal Pell Grant has been pared back by successive administrations in a conservative climate hostile to sustaining such "social" expenditures. With fewer grants, students have to incur huge loans to complete college, which unsurprisingly deters those from poorer homes. In 1979 children from the richest 25 percent of American homes were only four times more likely to go to college than those from the poorest 25 percent of homes; by 1994 they were ten times more likely. With the recent rise in tuition fees-up by a cool 20 percent on average since 2000- and further erosion of private and public grants, the divide can only have deepened.

University is becoming the preserve of the better-off in the United States to a degree unparalleled in the rest of the industrialized West, with attendance at the elite colleges, law and business schools-which serve as passports to the upper echelons of American life-increasingly restricted to the sons and daughters of the very rich. A new aristocracy is emerging in a country whose original ambition was to prevent such a phenomenon from ever taking place. It was only in Old Europe that status, opportunity and life chances were determined by accident of birth. Twenty-five years of conservative economic and social policies are burying that American dream.

The constricting access to university for students of middle- and low-income homes is remarkably underreported in the American media, as is the consequent impact on social mobility. The blithe assumption remains that opportunity in the United States is unparalleled. It is not. At the primary and secondary levels, public schools, profoundly underfunded, are a second-class system compared with private schools. Students in public schools are less likely to complete their courses, and achieve poorer grades when they do. But for the beleaguered community-college system, the United States has no formal means of giving extensive vocational and apprentice training. The combination of high dropout rates, gaps in the system, sheer lack of capacity and indifferent standards means that an astonishing 31 percent of American 18 year-old dropouts receive no vocational or other formal training after leaving school. In Germany, by contrast, that proportion is 1 percent.

Thus the children of poor and middle-income families are doubly victims. They are less likely to go to a top-ranked university, and they are more likely to enter the labor market with no qualifications. It should be no surprise, therefore, to find that 24.9 percent of American children live in poverty, while the proportions in Germany, France and Italy are 8.6, 7.4 and 10.5 percent. And once born on the wrong side of the tracks, Americans are more likely to stay there than their counterparts in Europe. Those born to better-off families are more likely to stay better off. America is developing an aristocracy of the rich and a serfdom of the poor-the inevitable result of a twenty-year erosion of its social contract.

Philosophically, culturally and practically, the social contract has been attacked head-on and undermined at every turn; its destruction has been one of the great objectives of the renaissance of American conservatism. As a result, its supports have been increasingly eroded. If there is to be what political philosopher John Rawls calls an infrastructure of justice-one insuring that everyone, despite any accident of birth, gets a chance to develop his or her talents, participate in the life of society, exercise liberties and enjoy basic living standards-then a system must be in place to maintain it. And that system is of necessity the state, with its ability to tax and spend. In this conception, the state is not a coercive interloper but a trustee of social fairness, providing the foundation for any society's long-term social health and wealth.

Yet since the mid-1970s taxation has been depicted by the right as a coercive intrusion upon individual liberty imposed by an oppressive government. Grants to poor students, for example, are seen as wasteful subsidies that undercut self-reliance and the robust qualities of independence that the early settlers possessed and upon which America was built. Yet America's social contract, hewn out of searing experiences like the Depression and bolstered by respect for the Constitution's claim that citizens should have equal opportunity, requires that the state act as its trustee-with the tax revenue to pay for it. To attack taxation as a moral evil and economic drag, and the state as oppressive and inefficient, is to knock away the key underpinnings of the social contract.

There is no need to recite details of the consequences: lower life expectancy than in Europe, vicious inequality and desperate lack of social mobility. Yes, it is true that the European social contract can produce perverse incentives, so that, say, excessively generous unemployment benefits in Germany undermine individuals' desire to look for and accept work. But the solution is to reform the excessive generosity, as German Chancellor Gerhard Schroder is doing, rather than abandon the social contract altogether. The impact of America's approach on individual lives shows up in international surveys of happiness and sense of well-being, where Americans score so badly. An obsessive individualism in a society in which so many are harmed eats away at the capacity to empathize, and the very stuff of human association is undermined. A Hobbesian society, a war of all against all, is not an environment in which human beings can flower.

It also pollutes the economy, despite claims to the contrary. America is richer than Europe not because it works smart but because it works long. Americans work, on average, 300 hours more a year than people in Britain, France and Germany, a sixth more American women work than European women, more American old people are at work and fewer young Americans get to study. Americans have to work this hard because their productivity at work tends to be lower than in Europe, and that is because American companies tend to innovate and invest less; the injunction is to sweat assets rather than be creative.

The values that underpin a social contract-fairness, a belief in opportunity for all and respect for human potential-are precisely those that underpin a successful company. Great visionary companies inspire their work forces and enlist their energy, and that cannot be done when human values are subordinated to the enrichment of a few at the top. Equally, the institutions of a social contract-great public schools, universities and hospitals; codes of quality corporate governance; great transportation; affordable housing for all-are the same institutions that support long-term wealth generation. America, in the grip of conservative dominance, is undermining not only the well-being of its citizens but its capacity to create national wealth and economic growth.

To this Englishman, it is extraordinary that the American liberal tradition has given up so much ground to the resurgent American right. The evidence does not exist to support the conservatives' case. Moreover, translated into international relations, the same doctrine has had baleful results. Pre-emptive unilateralism and the militarization of foreign policy-a transfer of the dog-eat-dog model to international relations-is undermining the rule of international law and leaving America to assume ever more expensive burdens without even achieving the results it wants. Iraq is turning into a quagmire, while terrorist networks are still at large. At home and abroad, America's overconfident conservatives have led the nation into a cul-de-sac. It is time to say so-and loudly.

Will Hutton's A Declaration of Interdependence: Why America Should Join the World (Norton) was published in May.

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