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A tale of two economic models

by Jerome a Paris Thu Apr 5th, 2007 at 10:19:16 AM EST

Free trade hits income of workers, says IMF

For the first time in a significant policy document, the IMF says "labour globalisation has negatively affected the share of income going to labour in the advanced economies".

As a bonus, he IMF report (pdf!) tells us what an "Anglo-Saxon" economy (beyond the geographical definition of US, UK, Canada and Australia) is:

An Anglo-Saxon economy is an economy that hires more people by paying them less and less, relatively speaking (the number of workers has increased faster than the pay of workers).


While that might make sense in an abstract sense (lower the price of a service - in that case, labor - to increase demand for it), it has very real consequences, easily visible on this graph, which is what brought the headline from the IMF:

A steady decline of the share of national income that goes to labor. Unsurprisingly, this trend (as shown in the case of the USA in the bottom left graph) started in 1981 - the year Reagan came to power.

But it's actually even worse than that:

This says that unskilled wages have remained stagnant in the US while they grew elsewhere, and that as a result the ratio between unskilled and skilled wages has widened. Meanwhile, the number of unskilled jobs has increased, but not that much (+20% in 25 years, vs -15% in Europe), while skilled jobs increased at the same rythm (roughly +40% in all economies over the period):

The result: while skilled labor maintained its share of overall income, unskilled labor has seen it drop.

Increasing employment in the unskilled sector only (the "Anglo-Saxon" way, according to the IMF) is apparently the best way to increase company profits.

The permanent focus on France's or Germany's unemployment numbers beg a question: is it really worse to have a few percentage points more of the working population unable to find work, or to have a whole chunk of the working population empoverished?

The freemarketistas have a clear preference; maybe it's time to ask why - or more to the point, as we know the answer very well, maybe it's time to say it loud. A struggling, empoverished workforce is good for profits, in the short term - and they have not time to complain.

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but it's terribly self-defeating to use the word, "Anglo-Saxon." I bet fewer than 10% of Americans would think that term covered them. Pity the poor Saxons who haven't committed any famous atrocities since Charlemagne massacred and/or baptized them in 778!

Why not "Anglo-American"? Or (more correctly) just America Inc. Or (most correctly) American-plus-their-lapdog-supposedly-English-speaking-puppets?

by Matt in NYC on Thu Apr 5th, 2007 at 10:43:20 AM EST
I'm just quoting the IMF...

I actually find it quite remarkable in its own right that they chose to separate the UK economy from the rest of Europe for the purpose of this report.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Apr 5th, 2007 at 11:13:27 AM EST
[ Parent ]
I realized that! I wasn't criticizing you, perish the thought!

I'm just pointing out that it's cowardly and self-defeating not to call a spade a spade.

by Matt in NYC on Thu Apr 5th, 2007 at 11:27:08 AM EST
[ Parent ]
I actually find it quite remarkable in its own right that they chose to separate the UK economy from the rest of Europe for the purpose of this report

I'd have thought it was sensible. The UK, beginning with Thatcher, began a serious divergence from anything resembling the standard european social model of capitalism at the same time as Reagan began wrecking the US economy.

This process,almost completed under Brown/Blair, has resulted in the utter economic immiseration of most people in the UK.

I'd also imagine that Australia came under the same model too.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Apr 5th, 2007 at 12:48:23 PM EST
[ Parent ]
Pity the Angles too! What was their contribution to neo-liberal economic theory?
by lemonwilmot (lemonwilmot at gmail.com) on Thu Apr 5th, 2007 at 01:05:42 PM EST
[ Parent ]
"labour globalisation has negatively affected the share of income going to labour in the advanced economies"

It takes the IMF to say this, and it takes years for it to be said?

Increasing the labour pool several-fold is going to have that effect.

Anyway, what we have is not free trade, it's free movement of capital. Everyone is busy distorting the terms of trade in goods and services and restricting the movement of labour.

Financial market liberalisation is not Ricardian free trade.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Thu Apr 5th, 2007 at 10:50:44 AM EST
But of course free trade means free movement of capital.

Only the money on the money markets matters. Everything else is a cost, rather than a trade.

I suppose the ideal would free - as in cost-free - labour, and free - as in tax-free and duty-free - capital.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Apr 5th, 2007 at 11:44:19 AM EST
[ Parent ]
Cayman Islands Planet.

Nice weather too.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Apr 5th, 2007 at 12:48:52 PM EST
[ Parent ]
I think we need to call what is happening the "Circuit City Effect" - see this thread if you need to understand the backstory:

http://www.eurotrib.com/?op=displaystory;sid=2007/4/4/154347/4904

My definition of this effect is that firms have realized that certain type of work is only "worth" so much. There is no reason to ever pay more. They can get away with this because this type of labor cannot fight back. The principle reasons being lack of strong unions, pressure from immigrants, excess workers in the pool of potential employees and competition from foreign firms.

On the other hand the earnings of those who don't make anything tangible can be unlimited. For example a sports or entertainment figure is a unique individual and thus what they are worth depends upon how big their audience is. People in the financial sector (taken broadly) also have no fixed limit. Deals based upon money can be priced at any arbitrary level and thus those profiting from the transactions can also reap unlimited amounts.

If we had a steady-state economic model workers living at a fixed income level would not be a bad thing. It is only an issue now because the social safety net is under threat, so workers are actually getting poorer and because the excessive earnings of the top class are being misdirected in such spectacular ways.

The plutocracy has also broken the social compact since the growth in wealth is not being used to benefit the country at large. This can be seen in the poor shape of the infrastructure in many places as well as the loss of ability to deal with ecological change.

It is inevitable that the industrialized states will see a decline in their standard of living. The EU and US together are less than 20% of the world's population. They can't keep up their pattern of consumption and control of international trade as new states get stronger.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Apr 5th, 2007 at 10:58:56 AM EST
I agree with all you say, but this begs additional commentary:


They can get away with this because this type of labor cannot fight back. The principle reasons being lack of strong unions, pressure from immigrants, excess workers in the pool of potential employees and competition from foreign firms.

this is true, but these factors did not just happen, they were actively encouraged:

  • lack of strong unions - it's no coincidence that the main acts that Reagan or Thatcher are remembered for are their victorious wars with the air traffic controllers and the miners, respectively, which brought historic weakening of unions; it's been a general theme since that unions are antithetical to worker "freedom" (to get paid more by working more - but thus not to be protected by general rules either);

  • pression from immigrants: yep, and immigration has always been encouraged by corporations, to bring about cheap labor (and in the case of illegal immigrants, pliant and powerless labor) to bring downward pressures on wages - and to create a great wedge issue to distract poorer Americans from the real cause of their hardship;

  • more generally, the theme of lower taxes and deregulation has been to take out the only entity strong enough to stand its ground against companies - the State; thus leaving workers isolated and easy to cherry pick and abuse. The elimination of regulation (or the lack of enforcement) has also further reduced protection from various forms of abuse of workers; the constant harping about taxes and inefficiency of government has deligitimised the role of across the board (and thus fair) rules and made government increasingly unable to do its job.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Apr 5th, 2007 at 11:12:21 AM EST
[ Parent ]
Please tell me that you've crossposted this to Daily Kos.

Just a few comments, before I have to really get started writing (this topic is what I'm concentrating on for my paper for my classes.)

1. Look at the number of hours worked.

I think that you've posted income adjusted for hours worked before, to show that on average European economies actually produce higher wages.  Look at the OECD figures for hours actually worked for the liberal market economies, very high compared to most of the social markey economies.

2.  In my discpline, political science, this is the bread and butter of the varieties of capitalism literature.

Why do advanced industrial economies diverge?

Is the relevent antecedent bank based capital and the patient long term focus of bankers as compared to stockbrokers, leading to the concentration of capital into large scale entreprises that are more easily called upon to support social goals?  So that economics is antecent to politics?

Or is it that politics is antecent to economics?  So that the political context creates the desire for capital to concentrate into large blocs as in Germany. (I honestly believe the German model to be far superior to either the Anglo-Saxon, or French model, because it empowers workers.  BTW Dodo was right about much of the German model being indigenous.)

Think of it this way.  Who should we take at their word, Schumpter or Marx?  Unmitigated capitalism appears to be on its way to the dustbin of history, but will its collapse be precipitated by economic or social forces?

Back to the earlier question, what causes divergences between countries that are advanced capitalist countries?

Say America wants to become more like Germany, how do we do that?  Through economic action to concentrate wealth so as to create ownership blocks conducive to social management?  So do we thus end American antitrust laws, and the traditional approach that divides ownership to prevent economic hegemons?

Or is the relevant factor politics?  Do we pass laws that place such an agent burden on the diffuse ownership of capital, that captial is redirected from the stock market where managers have little guidance from owners, to bank based capital, where managers are guided by bankers?  

Can this be accomplished by requiring mandatory works councils, and social reports so that if companies are abusing their workers, the workers have a chance to let potential investors know?  Should the Anglo-Saxon legal conception of the corporation existing solely to maximize shareholder value, be modified to require that managers account for social and environmental costs?  Should a linear, unbounded economic model that consumes beyond replacement levels be modified to create a model that is constrained by social and enviromental consideration, so that it is sustainable in the long term?  

Is that the path America takes to become more like Germany?

Is the battle for hearts and minds through the formulation of dominant economic paradigms most relevant?

Am I taking up far to much space for a comment?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Apr 5th, 2007 at 12:09:05 PM EST
[ Parent ]
Unmitigated capitalism appears to be on its way to the dustbin of history, but will its collapse be precipitated by economic or social forces?

So you are thinking that Exxon's and other's record setting billions/quarter and CEOs making 25 million for a few months 'work' are just the last gasp.

I would say, much as I would like to see capitalism go, that this is a pipe dream of the highest magnitude.

I would say, much as I could make the argument that America is going to have a catastrophic collapse soon, that the rich class there (and likely in most places) will just figure out (as they always have) how to rig the system to their advantage. If capitalism goes, it will be replaced by some other mechanism for the to keep their lives of royalty and the middle classes to struggle no matter which segment of the middle they are in, and the lower classes to wonder which god they have to pray to in order to survive better in their next lives.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Apr 5th, 2007 at 03:15:08 PM EST
[ Parent ]
Unmitigated is the key word.

Capitalism in America has become disembedded, which is to say that it has largely managed to evade the regulations and restrictions place on it during the 1930's and 1940's.  

Capitalism without social restraints can only last so long before it destroys the social institutions upon which it relies to operate.

So I think that another period in which liberal capitalism is placed back into the context of society, so that social needs supercede those of the market is forthcoming.

One of the recent developments in this direction is the recent passage of the Employee Free Choice Act (EFCA) by the US House, which will make it much, much easier to organize unions.

Ultimately, I believe that the most preferable economic system is the German model, where the state largely acts as a referee (or abritrator) rather than spending state resources to intervene to the benefit of capital or labor.  The market is contained within a social context that is antecedent to both state and market.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Apr 5th, 2007 at 07:07:17 PM EST
[ Parent ]
I agree with what both you and Robert say. The companies and individuals who manipulate situations like this have indeed broken the social contract...presuming that there ever was one in america.

But there are some basics. I am only going to pay so much for a record player at these stores (and likely I would buy off the net anyway.) Maybe circumstances have forced people to consider a Circuit City salespersons job as a lifetime vocation, instead of a cool place to work an avocation while going through college. But the reality is that a company built on lowest prices cannot increase them too much before people just stop coming in the door.

This isn't to justify the theft of pension money, or even the whole arena of no worthwhile pensions or medical plans for employees or any of the other belittlements that the current system has concocted.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Apr 5th, 2007 at 04:17:26 PM EST
[ Parent ]
Of course!  We, in America, have been telling our kids for 25 years that they have to get a great education because if they are in low skilled jobs they are going to be competing with people overseas that are thrilled to make something like $2 an hour.

The only way anything different could happen is to put protectionist policies in place, and keep making all kinds of commodity products in the US at a higher cost.  (that or give everyone in the country a living wage, which someone proposed on this site recently--I'm afraid it just won't happen in the US.)

Given the situation, I'm a little surprised real wages in unskilled jobs have not decreased.  As the above data shows, they have slightly increased the last few years, after actually falling from something like 1986--1999.  And of course these numbers don't reflect the lower tax rates at the lower income levels, nor the earned income credit features which subsidize workers at the lower levels.  

I'm not saying changes are not needed, because I think they are.  For example, I would like to see more money put into the earned income tax credit program.  I would also like to see a basic health insurance program in the US for those without.  And I would like to see more money in job re-training for those who lose jobs to overseas competition, or are in jeopardy of doing so.

But I didn't need the IMF to tell me that

For the first time in a significant policy document, the IMF says "labour globalisation has negatively affected the share of income going to labour in the advanced economies".
Most people could have told the IMF that that would happen in the US with our trade policies, which basically have been supported by both parties.  Pat Buchanon has been the only person running on a protectonist platform until now.  I think John Edwards is now running on one.  So we in America will certainly once again have a clear choice on this--but we have steadily chosen this course for more than 25 years.
by wchurchill on Thu Apr 5th, 2007 at 11:31:43 AM EST
Wages are only part of the picture. What is missed is that workers are getting less in the way of fringe benefits, both direct and indirect.

For example:
Health care is now less comprehensive, or has higher out of pocket expenses or doesn't cover retirees any longer.

College expenses are increasingly paid for by the students rather than by their parents, thus pushing the costs into the future so younger workers have a continuing expense (student loans) that prior generations didn't have.

Increased debt as current expenses are paid for with borrowed funds. Equity in homes has also declined as more people paid mostly (or only) interest for a good fraction of the mortgage duration.

As for the EITC this is a way to spread the cost of labor onto the general population rather then requiring firms which underpay to provide a decent wage. Taken to its logical conclusion we would have socialism. That it has been successful in reducing poverty just shows how poorly labor can defend itself.

Job security is worth something even though it's economic value is hard to measure. Studies consistently show that workers will accept less income for assured employment. So those with less secure jobs now have lost something of economic value.

Don't be fooled by government figures. Not only do all governments lie, but the current batch seem to do it all the time. The number of distortions just grows with every day, whether it's casualty figures, employment statistics, drug safety claims, scientific research results or inflation.

Governments lie when they are cheating the public and need to keep their true actions concealed. Think about it - your own government is working against your interests.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Apr 5th, 2007 at 11:57:47 AM EST
[ Parent ]
The only way anything different could happen is to put protectionist policies in place, and keep making all kinds of commodity products in the US at a higher cost.  (that or give everyone in the country a living wage, which someone proposed on this site recently--I'm afraid it just won't happen in the US.)

I think that we have just seen the first of many protectionist policies (coated paper in this instance) go into place.

But it won't matter. The disparity between the costs (presuming) America could even make the goods and those of the supplier countries, Mexico, China, India, Turkey and many many others, is just to great. Shipping costs have doubtless gone up with higher fuel costs, and that hasn't changed a thing in the cost of items at Walmart. The workers in China, etc., are making more (in a sense) and that hasn't changed a thing in the cost of items at Walmart.

It has only increased the income of the stockholders of Exxon and Walmart.

And, the major point of these graphs, is that there is no positive correlation between the growth of the economy and whether the worker who is at the level of the jobs that might be created. They would not get a wage that would match the rise in the commodity costs. There is little forward motion in the way of getting these people a living wage. They would sink while the newspapers trumpet the growing economic base. It would be the 70's all over again...and I dare say that they would even find another reagan all over again to 'fix' it.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Apr 5th, 2007 at 03:41:54 PM EST
[ Parent ]
I would think you would see the real wages of the hourly worker slightly up over the next 10 years, not much different than the last 10 years.  so his plight will improve, but only slightly.  As you suggest, I think, Americans are just not going to compete well in that segment--they haven't and they won't.  But I just feel like it's no surprise--my parents were telling me this, and therefore the importance of education and a skilled job in the '60's.  Their message is just as true today as it was then.  skilled workers with education will continue to do well--probably very well.

I do expect changes in the American social system that will be favorable for lower income workers--some type of basic healthcare plan for everyone, increasing incentives for lower income workers like the earned income tax credits, etc.  But I just don't see changes that will drastically push the US to a more socialized model.

by wchurchill on Thu Apr 5th, 2007 at 07:58:20 PM EST
[ Parent ]
is it really worse to have a few percentage points more of the working population unable to find work, or to have a whole chunk of the working population empoverished?

Well, the rub here is that it is not impossible to have it both ways imho. Unfortunately, now that there is the Euro, this needs more or less to be EU-wide, for monetary policy plays a big part.

Full employment should be the goal of any proper left or left-leaning political party or movement, for work is an essential part of self worth for most people. We cannot legislate while ignoring humans as they really are without expecting to lose the battle of ideas, And this is particularly the case among younger workers, workers starting out, for whom what they do is very important in defining who they are, and what they hope to become.

Take this possibility away and you end up with great disatisfaction, and worse, you open up our natural voters to appeals like this:

Ma France, c'est celle des travailleurs qui ont cru à la gauche de Jaurès et de Blum et qui ne se reconnaissent pas dans la gauche immobile qui ne respecte plus le travail. Je veux leur tendre la main...

...Notre modèle républicain est en crise. Cette crise est avant tout morale. Au coeur de celle-ci il y a la dévalorisation du travail. Le travail c'est la liberté, c'est l'égalité des chances, c'est la promotion sociale. Le travail c'est le respect, c'est la dignité, c'est la citoyenneté réelle. Avec la crise de la valeur travail, c'est l'espérance qui disparaît. Comment espérer encore si le travail ne permet plus de se mettre à l'abri de la précarité, de s'en sortir, de progresser ? Le travailleur qui voit l'assisté s'en tirer mieux que lui pour boucler ses fins de mois sans rien faire ou le patron qui a conduit son entreprise au bord de la faillite partir avec un parachute en or finit par se dire qu'il n'a aucune raison de se donner autant de mal. Le travail est dévalorisé, la France qui travaille est démoralisée...

What's Sarko doing here? He's directly appealing to the same left voters who abandoned Jospin five years ago, and trying to weasel out of them that little core of a "reac" each of us tucks away and explains why so many PCF sympatisants ont basculé au FN, which end of day isn't all this far from Sarko on this score.

It's a very potent message, this. Dishonest? VEry much so, for your reasons enumerated. But potent nonetheless.

This is why 10+% unemployment (ILO standard), which France has been above for most of the past two decades, is unacceptable, and has to be unacceptable, to any party of the left. 3% should be the goal, and no party pretending to represent workers should militate imho, otherwise. It is especially why persistently high youth unemployment (warning, .pdf) is unacceptable, for this is a major factor in turning off long-term future voters to progressive or socialist alternatives to being stuck without any perspectives.

I understand the narrative you are outlining here, and at root, you know I agree with you that the answer to high unemployment and especially youth unemployment is not more "reform" or neo-liberal prescriptions.

But I disagree that there isn't a problem, and I strongly suspect that ignoring it, or applying bandaids to something which has been increasingly problematic since the 1970's, will undermine us in the long term.

Something has to give - our perspective should be more rassembleur, and less geared solely towards the bac+5 professional classes who vote PS. Else the bleeding of those not counting themselves in that crowd, to the right - of whichever shade of it - will continue.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Apr 5th, 2007 at 02:17:18 PM EST
Very important point:

is not impossible to have it both ways imho. . . . Full employment should be the goal of any proper left or left-leaning political party or movement . . .

If the issue gets framed as a trade-off between equality and efficiency -- jobs vs. wages (and wages for insiders at the expense of everyone else) -- the left loses.

by TGeraghty on Thu Apr 5th, 2007 at 04:22:58 PM EST
[ Parent ]
What annoys me is how unemployment is presented as the only economic problem that any country can have.

That the working poor are not a problem.
That the healthcareless workers are not a problem.
That workers forced to work part time in high numbers is not a problem.

And that the countries that chose some or all of the above are seen as so much more better than France.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Apr 5th, 2007 at 04:47:17 PM EST
[ Parent ]
One other point, related to this:

. . . this needs more or less to be EU-wide . . .

I'm wondering if we need to think even bigger, to a reworking of international labor-market and financial institutions to mitigate the problem.

The economic problems of the US (slow wage growth) and Europe (slow job growth) may well be two sides of the same coin -- at least partially the result of globalization.

As Europe, then Japan, then the other Asian tigers, and now China and India have entered global industrial and service markets via strategies of export-led growth (with the US as "consumer of last resort"), the world economy is suffering from global excess capacity. There needs to be mechanisms to make sure global aggregate demand keeps up with global productivity in a more balanced way than is currently the case.

International labor standards, and a more growth-oriented international financial architecture may also have to be part of the solution:

To build a new global social contract, the underlying logic of the international financial system must be radically altered. What is needed is a new international monetary regime that can open access to international trade and investment for all nations on equal terms by allowing all currencies to be used in cross-border as well as domestic transactions. Keynes's international clearing agency could serve as a basic structure for such a system, reclaiming the public sector's role in global payments through a process of debiting and crediting cross-border payments against reserve accounts held with the clearing agency by member countries, with changes in reserves used to determine periodic adjustments in exchange rates.

An international monetary system based on the idea of an international clearing agency could also be designed to create a true lender of last resort, replacing the current ad hoc facilities, which depend on taxpayer donations. This would provide an effective channel for containing damaging financial crises and maintaining the financial stability needed for balanced growth in the global economy. It would also permit a resumption of the demand-led growth policies that are a necessary support for a new, global social contract.

More here. And here.

by TGeraghty on Thu Apr 5th, 2007 at 11:32:28 PM EST
[ Parent ]
The OECD economies have been operating well below full employment for most of the last 15 years (0=full employment level):

by TGeraghty on Fri Apr 6th, 2007 at 12:27:12 AM EST
[ Parent ]


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