Fault Lines: How Hidden Fractures Still Threaten the World Economy (17 page)

Does this mean the Anglo-American arm’s-length system is all bad? Not necessarily. Resources are reallocated more quickly to profitable uses: perhaps the car industry does need to shrink substantially. Apart from the added efficiency, the willingness to be ruthless helps innovation. Past experience and relationships are of little value in driving radical innovation: indeed, because the natural human tendency is to do more of the same and to serve existing clients and needs well, past relationships can be positively detrimental.
¹²
The arm’s-length approach has advantages here. For one, because new firms can be matched with new financiers, a wider range of matches is possible, and there is greater potential for new ideas to be financed. Also, because bad ideas are not permitted to continue sucking resources, this system can engage in riskier experimentation. The ruthlessness of venture capitalists in killing bad ideas once they are recognized to be unviable is far more important to their success than the ability to identify diamonds in the rough. The arm’s-length system plants a thousand flowers, uproots hundreds when they do not thrive, and nurtures only a few to bloom. New opportunities abound, while old, tired ways of doing business are ruthlessly eliminated. The system’s strength, then, is that it is not heavily biased toward preserving the privileges of incumbent firms and workers.

In the “relationship” system, incremental change comes easily because existing firms are able to develop variations on old themes, and financiers, having developed a deep understanding of the existing business, are willing to finance moderate innovation. But because few new firms can break in, and because the system is not geared toward generating dependable, hard information that would make new investors comfortable, dramatic innovation is harder. And because the system is not geared toward ruthlessly eliminating bad ideas, its willingness to experiment radically is also more limited. Badri’s employer retained its German plant longer than its American plant in large part because of the nature of the system each plant operated in. And the more prolonged death throes of the German plant suggest that more resources were indeed wasted there while trying to maintain an unviable operation.

That U.S. research and development tends to be more innovative is suggested by the following data: in 2008, the United States and the European Union, which are roughly similar in the size of their GDP, accounted for about the same share of journal articles published worldwide in science and engineering (28.1 percent versus 33.1 percent). But the United States had a 51.6 percent share of the most highly cited (and thus typically pathbreaking) articles, while Europe had only a 29.6 percent share.
¹³

The compatibility between the economic system and the nature of unemployment benefits is clear in the United States. The emphasis is on rapid restructuring in the face of distress, terminating dying enterprises, and financing new businesses. Recessions are a time of both destruction and new creation. Not only are jobs destroyed, but a whole set of new ones are created. Short-duration benefits give the laid-off worker the incentive to actively look for a suitable job. Mobility is easy across firms: because of the large number of workers being laid off, there is no stigma attached to unemployment. Entry into employment is also easy because jobs are not clogged up by incumbents; the constant churn frees positions. Badri, forced to find a job quickly, eventually moved to a start-up in the Midwest, earning a fraction of his earlier salary. But he is productively employed doing research on new materials and is acquiring an array of new skills.

The generous and long-duration unemployment benefits of the relationship system may appear less compatible with the relatively secure long-term jobs in that system. After all, greater job security would suggest a lower need for long-duration benefits. The reason that long-duration benefits make sense is the greater degree of specialization of jobs in the system and therefore the diminished mobility. The relationship system tends to be one of insiders and outsiders. Those on the inside—employed in firms or the government—have a fairly comfortable, secure existence. Those on the outside have a hard time breaking in, and the unfortunate few who lose their jobs and join the ranks of the outsiders are damned both because their past specialization may make it much harder to find appropriate jobs and because the system is not geared toward rapid and easy reentry. In such as system, unemployment benefits do little to expedite job searches; rather, they make a prolonged existence on the outside more tolerable and appease the anger of the unemployed.

Thus each system has developed unemployment benefits that are compatible with its underlying economic structure. This is not to say everything is perfect. Badri’s job was clearly highly specialized, yet he was cast adrift overnight, without protection. Moreover, it is hard to say which came first: the benefits or the structure. Indeed, it is also possible that a common third factor, such as ideology or politics, drives both.

The United States is parsimonious not just with unemployment benefits but with other forms of social welfare also. At the time of writing, it does not have universal health coverage, despite spending a greater fraction of GDP on health care than nearly any other advanced country. And it spends less on many other welfare programs. For instance, the United States spent 7 percent of GDP on old-age pensions and disability payments in 1998, whereas France spent 13.7 percent and Germany 12.8 percent.
¹⁴
Retirement benefits to people over age 65 were only 19.3 percent of the average worker’s pretax income in the United States, compared to 58.6 percent in France and 37.2 percent in Germany. It is not that Americans have plenty of savings to compensate: the McKinsey Global Institute indicates that two-thirds of the early baby boomers—those born between 1945 and 1954, and among the wealthiest generations in history—do not have enough assets to retire comfortably.
¹⁵

There may well be special aspects of the U.S. historical experience that drives its antipathy toward all forms of welfare benefits. Among these include the libertarian tradition in politics, the absence of strong nationwide workers’ organizations, the concentration of poverty in segments of the population that are racially different, the large size and easy mobility within the economy, and the existence of competing economic jurisdictions that make centralized legislation difficult.

A number of historians have argued that there is something fundamentally liberal (in the classical or Lockean sense, that is, embracing the freedom of the individual and resisting significant government intervention in ordinary life) embedded in the cultural and political ethos of the United States. Having escaped the tyrannies and feudalism of the Old World, Americans did not have to combat a strong domestic aristocracy.
¹⁶
As a result, they did not develop a strong class consciousness or the need to use government to overpower oppressive domestic elites. The beliefs that are still expressed by many Americans in surveys—that the United States has virtually unlimited opportunities, that everyone has the capacity to become rich if they only work hard enough, and that anyone who remains poor probably has not tried hard enough—sit well with a desire for limited government and welfare. And although American opportunity and mobility may be a myth for the immobile and poor underclass and increasingly for much of the middle class, the reality of their experience has not yet altered the national ethos.
¹⁷

A parallel set of arguments ascribes the American difference to the absence of strong workers’ organizations in the United States. White American males did not have to fight domestic elites for the right to vote. As a result, a national workers’ movement never really took hold in the United States—in contrast to the United Kingdom, for example, where workers’ organizations developed during the fight for the vote in the nineteenth century.
¹⁸
The right to vote might have been an all-encompassing issue that united workers who were otherwise divided by local differences in work conditions and objectives. That it did not occur left labor unions fragmented.

Indeed, in the second half of the nineteenth century when strong labor unions were developing elsewhere, the fact that the United States was a large country with an uncultivated “frontier” meant that workers could simply pull up stakes and move if they found local conditions oppressive, and this flexibility in turn also limited the extent to which conditions could become oppressive for the mobile worker. The difficulty of organizing a nationwide workers’ movement in a country where differences in circumstances were sizeable, and workers had individual options to exit tough conditions by moving on, should not be underestimated.

A related argument for why strong nationwide worker organizations did not develop is that (except in the South) the United States lacked a large oppressed peasantry who could make common cause with workers, and it did not experience the desperate deprivation and breakdown of authority that occurred in many countries in Europe after each of the world wars. Indeed, only 20 percent of the labor force in Western Europe had some form of pension insurance before World War I, only 22 percent had health insurance, and unemployment insurance was almost unheard of. Workers, many of whom had become politically aware while fighting in the trenches of World War I, organized after the war to demand some form of protection against economic adversity.
¹⁹
Their demands were voiced by socialist parties that gained strength in the postwar chaos, and many European countries did enact pro-worker legislation. By contrast, socialist parties have never commanded much voting power in the United States.

We should also not minimize the importance of population heterogeneity. “There but for the grace of God go I” offers a powerful rationale for social insurance. People are more willing to be taxed to benefit others if they believe that the benefits go largely to people like themselves, and not disproportionately to groups they do not identify with. This may also explain why Americans give generously to charities: they have more control over who the beneficiaries are.
²⁰
Politicians who want to derail benefits legislation have often been quick to raise the specter of hard-earned taxpayer money going to the undeserving, irresponsible, and lazy, and such demagoguery is especially potent when the bogeymen look and behave differently from their constituents.

In much of the twentieth century, the targets for demagogues were African Americans, but over time Americans have learned to recognize the deeper purpose behind such language. More recently, illegal immigrants have emerged as the new target, and much angst is expended over the possibility that benefits may leak to them. Indeed, a battle has erupted in the most recent round of health care legislation over the access of illegal immigrants to any form of taxpayer-funded programs. In this debate, few legislators have asked how U.S. society can remain healthy and humane with a sick and unprotected immigrant population in its midst.

Finally, business interests and money power have always been an important force in the United States. Although these interests had the same difficulty in organizing as workers did in a large, diverse country—except when a specific piece of legislation collectively affected them and united them in opposition—they had two strengths workers lacked. First, firm owners aggregated the economic power of their firms and thus were individually much more powerful than any of their workers, even if owners as a group were not well organized. Second, if business conditions became oppressive in one state, owners could move investment to another state. The threat of the loss of business investment and the associated taxes gave states, especially industrial ones, strong incentives not to reduce business profitability.

Of course, not all benefits reduce long-term profitability. Firm owners are typically not hard-hearted Dickensian figures, squeezing every drop of blood out of their workers—indeed, such behavior rarely maximizes profits. Workers who feel safer (because of unemployment insurance and pension benefits) and are healthier (because of health insurance) might indeed be happier and work more enthusiastically for their employers, especially in skilled jobs where worker effort is essential but hard to monitor. It is likely, though, that in the early twentieth century, a significant proportion of U.S. employers were small and could not afford to pay benefits, and the nature of the work they offered did not require workers to be happy or enthusiastic. Fear of making these firms uncompetitive, and losing these kinds of businesses to other states, may well have prevented states from legislating benefits.
²¹

Nevertheless, the safety net in the United States, albeit weak, does exist. Despite all the above-mentioned difficulties, legislation protecting workers was indeed passed during the Great Depression. The centerpiece of the legislation was the Social Security Act of 1935, which instituted not only old-age social security benefits but also unemployment insurance. Why did it happen when it did? The answers are interesting, for they suggest ways in which change may occur again in the United States.

First, the pain workers felt from Depression-era unemployment was immense and persistent. Unemployment quickly rose into double digits by mid-1930, peaking at 24.9 percent in 1933 but never coming down into single digits throughout the 1930s, despite a supposed recovery (and another subsequent plunge) during the Depression.
²²
In 1939, at the onset of World War II, unemployment was around 18 percent. Moreover, it was nationwide. In John Steinbeck’s haunting novel
The Grapes of Wrath,
the Joads, Oklahoma tenant farmers whose farm is no longer profitable, go looking for jobs in the promised land of California, only to find that there are none there either. This time, moving on was not the answer, and the effect was to unify worker demands across the country.