Post-election Germany appears to be a political wasteland. This is yet another example of one of the greatest tension points of globalisation resistance of the body politic to the structural reforms necessary for economic revitalisation and cross-border integration. It's hard to forge a new world order without breaking down the barriers that define the old way.
Yet there is great debate over how to pull this off. The reforms of globalisation shake the social contracts that bind nations together leading to recurring clashes between capital, labour, and deeply entrenched political power structures. A globalised world must come up with a new model of the political economy. Germany is struggling mightily with just such a challenge. But it is hardly alone.
Two extremes frame the choices the United States with its minimal social contract and Old Europe with its deeply entrenched social welfare state. A couple of numbers say it all: Public sector social expenditures are currently running around 15% of GDP in the US well below Europe's 24% share.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Post-bubble Japan has been attempting to find a middle ground effectively tearing up the lifetime employment contracts that were long at the core of its corporate welfare state. Moreover, the Japanese electorate has now given Prime Minister Junichiro Koizumi a strong mandate to pursue further reforms. China has its own unique balancing act pushing hard on several dimensions of the reform front but holding tightly to its all-important stability constraint.
The contrasts between these approaches have turned globalisation into something of a foot race. America has emerged as the "hare" whereas Europe seems unwilling or unable to shed its "tortoise-like" attributes. But globalisation is a marathon not a sprint. And it is not a clear-cut conclusion that the front-runner has the stamina to hold the lead.
The increasingly chronic pitfalls of a saving-short US economy underscore the perils of the "shoestring" approach to globalisation. This raises the profound question as to whether the US approach is truly the gold standard of globalisation that other nations should seek to emulate. Or, in more literary terms, forget about the tortoise can the fabled hare actually make it to that ever-elusive finish line?
On the surface, there's little reason to doubt the superior performance of the American way. Contrasts between the macro performance of the US and European economies are stark. Over the past decade, the US has turned in a decade of superior performance on most fronts. By our estimates, real GDP growth averaged 3.3% in America over the 1996 to 2005 interval fully 65% faster than the 2% pace in Europe over the same timeframe. Similarly, the US unemployment rate has fallen from a peak of 7.4% in 1992 to 4.9% at present, while in Europe, the jobless rate has changed little from the 8% level of the early 1990s.
A superficial assessment of the US model usually boils down to one word flexibility. Americans are perceived to be risk-takers unafraid to re-invent themselves or their institutions in response to changing circumstances. Possibly the best example of this trait is the painful restructuring of the 1980s a direct outgrowth of the economic quagmire of the 1970s. President Ronald Reagan's willingness to go to the mat and break a strike by air traffic controllers in 1981 may well have been the tipping point emblematic of the coming sea change in the social contract for American workers.
Faced with unprecedented competitive pressures, over the first half of the 1980s, beleaguered factory workers opted for job security over wage rigidity. Collective bargaining contracts were subsequently re-opened and rollbacks of multi-year compensation packages became the norm. At the same time, deregulation became the mantra for a transition to "small government." The combination of wage flexibility and deregulation allowed the US to reap the benefits of the IT-enabled productivity revolution of the 1990s. The rest of the world stood by with its jaws wide open. The American model was on the ascendancy as never before.
At the other end of the spectrum, a superficial take on the European model can also be boiled down to one word in this case, rigidity. Europe's deeply ingrained social contract has forced labour market adjustments to occur through the quantity axis rather than through wages.
Shifting political winds compounded this trend. Courtesy of German reunification in the early 1990s, Europe's largest economy was hit with a wage shock a direct outgrowth of a politically-motivated exchange rate equalisation between the West and the East. Despite much lower productivity of Eastern German workers, they were put on parity with high-productivity workers from the West. At the same time, the left-leaning body politic in both France and Germany opted for a mandated shortening of work schedules in an effort to spread employment over a larger number of workers.
Unfortunately, these actions backfired. The combination of wage subsidies to low-productivity German workers, along with legislated constraints on the utilisation of labour, resulted in unprecedented levels of unemployment that are still very much in evidence today.
Beneath the surface, the contrasts between these two approaches are even starker. In particular, the American model has taken consumerism to an extreme, with private consumption having averaged 71% of GDP since early 2002. By contrast, the European consumption share is currently around 58%, whereas in Japan, it is only 55%; the Chinese consumption share trails the pack at 42%.
Ironically, the excesses of US consumerism have been accompanied by a shift in the shares of national income away from labour and back toward capital. In the US, the worker compensation share fell to a 30-year low of 65% in 2005 whereas "economic corporate profits" currently stand at a near-record 11% share of GDP. By contrast, worker compensation shares are higher elsewhere in the advanced world 67% in Japan and 68% in Europe. Not only does America slice the pie differently, it has a very different appetite for eating it as well.
The American paradox of running a consumption-led growth model while tilting the rewards away from labour is a striking testament to the emergence of the Asset Economy. Courtesy of unusually low real interest rates and the wealth effects they have spawned, the US model is also characterised by a profound shortfall of domestic saving and an equally large current-account deficit. America's international creditors especially Asian central banks have elected to recycle their surplus saving into dollar-denominated assets. And that plays a key role in capping intermediate and longer-term US interest rates.
That pretty much sums up the tactical objectives of the global body politic providing subsidised interest rates that underwrite the free-wheeling ways of the saving-short, overly-indebted American consumer. "If you buy our goods," goes the logic, "we'll buy your Treasuries."
While tactical gratification may work well for a time in today's world, beneath the surface, there are serious questions about sustainability. That's especially the case with a world economy that remains on an extraordinarily unbalanced growth path. As long as the global body politic fails to appreciate the perils of its imbalances, the more treacherous the endgame.
Nor is it clear that the American model is the ideal that other nations or regions should aspire to emulate. Wealth-dependent consumption excesses leave the US exposed to the dark-side pressures of a debt overhang and a current account adjustment. And with post-Katrina aftershocks unmasking the long simmering problems of an impoverished underclass, the debate over America's social contract or lack thereof has now been re-opened. America's shoestring economy may wake up to find itself ill equipped to provide the enhanced safety net needed for a reordering of social and political priorities.
So far, the breakthroughs of globalisation have been confined to the real side of the global economy and the capital and information flows that drive world financial markets. The revolution has yet to spread to the political arena. Resistance from the body politic is evident in all major constituencies in the global village.
That's true in the US, where China-bashing and protectionist threats are on the ascendancy. It's true in a still relatively closed Japanese economy, where imports remain only 10% of GDP well below America's 16% share. It's true in China, where currency flexibility exists in theory but not in practice.
And, as its post-election political quagmire vividly demonstrates, it's very much in evidence in Germany underscoring the risks that anti-reform politics could well spread to the rest of Europe. In all cases, governments remain captive of local constituencies unwilling or unable to act with broader global interests in mind.
Therein lies one of the biggest challenges for the rebalancing of an unbalanced world. This past weekend, another meeting of leading international policy makers has come and gone without any meaningful actions on the global policy front. Constrained by their own parochial agendas, there is little willingness to accept the shared responsibilities of rebalancing.
That's not to say the major powers haven't been warned. The official institutions of globalisation the IMF, the World Bank, the BIS, and the OECD have all sounded the alarm recently over the perils of mounting global imbalances. Those warnings have all gone largely unheeded fairly typical of the denial that usually precedes a crisis.
The longer the political economy of globalisation remains at odds with the powerful trends driving cross-border economic and financial-market integration, the greater the likelihood of a hard landing in the not-so-distant future. I would still place about a 40% probability on such an outcome at some point during the next 12-18 months.
By Stephen Roach, Morgan Stanley economist, as published on the Global Economic Foru
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
