Globalization update

Brad Setser writes on how France and Germany are adapting to economic globalization.

My colleague Mark Thoma (Economist's View blog) reviews the figures on manufacturing employment in the US and abroad. (It's way down in all developed countries.)

From Brad Setser (quoting Steve Roach of Morgan Stanley):

That brings me to a column Stephen Roach wrote last week, one that I think should have received a bit more attention. He implicitly argued, accurately in my view, that the political response to rising competitive pressures in the global economy in US has not been terribly impresive.

After all, if China and India represent a de facto doubling of the global labor force that is driving down real wages globally, it hardly is obvious that the best response is tax cuts tilted towards those already likely to be on the winning side of globalization. And it seems pretty clear that the fast-paced global economy is inconsistent with America's company based system for providing health care to its working population, and, as importantly, to their children.

This is what Roach's said, slightly abridged:

The reforms of globalization shake the social contracts that bind nations together -- leading to recurring clashes between capital, labor, and deeply entrenched political power structures. A globalized 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. ...

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. ... 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 labor market adjustments to occur through the quantity axis rather than through wages. ...

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 labor 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 labor 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 characterized by a profound shortfall of domestic saving and an equally large current-account deficit ... That pretty much sums up the tactical objectives of the global body politic -- providing subsidized 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."

Interesting remark from Brad's comment section:

There is an inherent problem when a group of nations operate with a common monetary policy but without a common set of labor regulations. A country that liberalizes experiences all the attendant problems but receives only a fraction of the benefits. France is a “free rider” on Germany’s liberalization, without which the ECB would be more likely to tighten, damaging the French as well as the German economy. The US largely avoids the free rider problem by having a strong federal government that can set uniform regulations. (Why doesn’t Europe have a strong federal government? In part because the French rejected the EU constitution. Why does this not surprise me?)