L'Europe et les États-Unis : Deregulation : a key factor to sustained economic growth in the United States

Tirant les leçons d'un voyage d'études effectué aux États-Unis par le Groupe des Belles Feuilles, les auteurs nous proposent un diagnostic sur les raisons du "miracle économique américain" des six dernières années. À l'heure où l'Europe poursuit, non sans douleur, la dérégulation de ses marchés, l'expérience américaine montre que ce processus, s'il est conduit à temps et en profondeur, constitue une source incontestable de progrès permettant une croissance soutenue dans le contexte de la globalisation. Sur le front de l'emploi, l'expérience américaine montre aussi que la flexibilité du marché combinée avec une plus grande transparence est fondamentale pour réduire le chômage et créer des emplois qualifiés.

Product and capital market deregulation of the 80s have forced major restructuring within American companies, which are now world leaders for productivity and technology in many sectors. This strong competitive position allows them to experience very strong growth at home as well as abroad. The demand abroad is booming following the opening and deregulating of many economies throughout the world (globalization). This growth resulted in the creation of many skilled jobs in the USA. Indeed, 80% of the jobs created since 1990 paid salaries above the median. Studies from the McKinsey Global Institute show that the USA has deregulated economic sectors profoundly (lower trade barriers in manufacturing and less regulation of services). Flexible product markets ensure more intensive competition at home and greater exposure to global best practice, which are the key drivers of productivity and economic growth. Deregulation of the airline industry in the early 80s has fed through more competition, and higher productivity, resulting in cheaper airfares, and eventually leading to increase in demand for air travel and a
bigger hole in the ozone layer. Lower trade barriers and tolerance of foreign direct investment in the automotive sector have forced American car producers to catch up in efficiency with the Japanese best practice companies. This has also resulted in cheaper cars for the American consumer as well as in higher competitiveness abroad. Less stringent zoning laws have favoured the growth of service intensive modern development areas. The US software industry has indirectly benefited from the more intensive competitive environment, as this forced companies to adopt IT (information technology) solutions at an earlier stage. Companies in the US use 50% more IT per unit of production than their European counterparts. Gillette offers a good example of how deregulation can benefit economic development in the long run. It was forced to dramatically restructure its operations under the threat of cheap imports, notably from India. As a result its global position has been reinforced : it is about to become the market leader in the promising Chinese market. More flexible capital markets (fewer State-owned companies and increasingly strong corporate governance being demanded by the pension funds) have also pushed companies to restructure more quickly in order to avoid financial losses or takeover threats.

More Developed and Sophisticated Financial Markets

Our visits to the financial markets and institutions of New York and Chicago underlined the fact that the capital markets in the US are much more developed and sophisticated than in Europe. The market capitalization of companies is much larger, notably because there are large stock markets for small and medium-sizecompanies (NASDAQ and American Stock Exchange). The securities markets are also the birthplace of most innovations (futures and options in Chicago, securitization of asset pools in New York). The size and sophistication of the securities markets are also fueled by the rapid development of institutional investors, such as JP Morgan, which recently acquired a pension fund manager, or Fidelity, fighting for a larger share of the growing pool of personal pensions. This trend has been accelerated by the move towards pension schemes with fixed contributions rather than fixed benefits, which tends to encourage competition in the asset management business and comparisons based on performance. In the process of acquiring Duracell, Gillette had to go to great lengths to persuade financial analysts that this strategy would not affect its stock value. This in order to protect the wealth of many of its employees who happen to be paid partly through stock options. Gillette employees follow its stock price daily on monitor screens located in their offices and factories all around the world. Higher productivity matters because it is the key engineof economic growth through cheaper prices and innovation. It is also the only source for the creation of high-skilled jobs. Although Gillette had to destroy many low-skilled jobs in its production facilities, it was more than compensated by creating high-skilled jobs, in particular in IT (information technology) and marketing related activities. This was obtained by increasing automation in production and back office operations, introducing more sophisticated mana- gement information systems and expanding brand/product/country. Productivity also matters because, according to Cultural Materialism, a historical study by the famous anthropologist Marvin Harris, more productive societies havetended to impose their culture on lesser productive ones.

More Flexible Labor Market

The US labor market became increasingly more flexible in the 70s and 80s, which allowed many industrial workers to be reemployed in the service sectors. The minimum wage decreased in real terms in the US throughout the 70s and the 80s (which has been compensated by a negative income tax paid by the Federal Government, see below). This allowed low-skilled labor (whether newly entering the labor market or being displaced by productivity gains in the industry) to be reemployed, in particular, in the retail and personal service sectors. In (continental) Europe, very high and increasing minimum wages have prevented low-skilled labor (young people with no qualificationsand workers laid off from industry) to be economically employed in the service sectors. Unemployment benefits are also lower and shorter, giving the unemployed more incentive to find and take new jobs. These flexible labor markets have helped Illinois State, that we visited, to recover quickly from unemployment through massive industrial restructuring, which took place in the 80s, by allowing employment to grow in services. Current unemployment rate in Illinois is 4%, down from a peak of 12% (these figures are based on interviews with the State of Illinois Department of Labor).

More and Better than Expected Social Policies

Although high, the social price paid for this economic growth seems to be overstated by (continental) European economists. In any case, it could be lower with higher levels of (market friendly) redistribution of wealth and improved primary education, especially in the ghettos. The social price has been somewhat high : many Americans work more for less, especially lower-skilled workers, as a result of a much lower minimum wage. Americans have also had to move geographically more often because of lower and shorter unemployment benefits. However, geographic mobility is part of the American culture. But it is not as high as people in Europe usually think (interviews with the city of Chicago Health Department and the Childcare
Administration in Washington). Poor and/or low-skilled people have had easier access to the labor market (lower minimum wage) which is a source of social integration enabling workers to climb up the social ladder. Social mobility (especially upward) is higher in the US than in Europe. We encountered many taxi drivers who were taking night classes, as they were confident they could find better jobs. The minimum wage revenue is supplemented by an earned income tax credit from the Federal Government. Thus, the US decides to subsidise work rather than unemployment. This is an example of "market friendly"social policy which could allow one to achieve the same social objectives of a high minimum wage, but at a lesser economic price. People on low incomes have access to free healthcare in public hospitals and private hospitals are required to treat them in case of emergencies. Poor people also have access to free education in public schools and State universities, as well as scholarships for the privateuniversities (the proportion of poor people getting access to university is higher in the US than in Europe).The US government provides a minimum pension, in case people "forgot" to save. A lot of help is provided to poor people through private foundations and voluntary workers within local communities. One remaining troubling social area is the 5% of the American population which seems to be locked into poverty within urban ghettos at the margins of society. Although economic growth has helped to pull many people out of these ghettos, many remain. It is now believed that well-intentioned social policies like Childcare have had perverse effects. Childcare subsidies have encouraged young black women to have babies and not to participate in the labor force. These policies are being adjusted so that a young mother will receive financial help only if she works. Many efforts are also being put into education. After a decade of "non conclusive" Ph.D. studies, common sense seems to be crawling back. Classroom sizes are being reduced and much more emphasis is being put on mental arithmetic. Poetry is also used to influence (discretely) kids’ value systems. Parents are required to participate actively in their children’s education (they should tell them three bed-time stories every week). It was also found that a very important source of under-performance at school is due to teachers under-estimating the real potential of ghetto children. A key driver for higher teaching standards is the head of the local school, so incentives are being reviewed and best practice shared (interviews with professors from the Wiener Center for Social Studies, Harvard University).

Slow but Thorough and Reliable Political Process

Our meetings in Washington with thinktanks as well as with Congress and government representatives pointed to the fact that the political process, although slow and complex, allows for more thorough analysis and discussions of the issues. This could be the root for better economic and social policies. Because there are fifty States, because every congressman is considered to be accountable for his constituents for each of his votes, and because substantial private interests are affected by almost any policy decision, the political process is slow but thorough. The Congress has the largest library in the world and there are five hundred top-level researchers at congressmen’sdisposal. It is not unusual for a congressman to financially support a team of thirty people working for him. Thinktanks like the Rand Corporation and lobbyists are also far more numerous and sophisticated than in Europe, and are a key source of new ideas and concrete proposals. Specialized House Committees discuss every issue at length and in public. This can result in lengthy processes, as exemplified by the efforts being currently deployed to pass the "fast track" procedure to facilitate closure on trade negotiations.It should be noted that bipartisan politics do not really apply to this issue as a majority of Republicans are in favour, while only a minority of Democrats are supporting their President’s campaign for the fast track. All in all, although complex and lengthy, this political process allows for little room for big and costly mistakes to be made. It also encourages the involvement and education of the public at large on important issues.

Conclusion and Recommendations

A quick scan around the world suggests that economic and social performances are closely related with the age, extent and stability of the democratic political process. Thus, one key aspect of the European Union should be to ensure that it reinforces democracy. Although the challenge of passing new regulations through all member nations in a fully democratic way is currently troublesome, Europe will eventually greatlybenefit from sharing points of view and experiences, as well as pooling research resources together to reach better decisions on economic and social policies. This trip emphasized the power and importance
of flexible product, capital and labor markets in achieving superior economic performance. Market mechanisms ensure that managers "work their brain out" to deliver higher value to consumers in order both to face competitive threats and to meet shareholders' expectations. Competition and shareholder pressure not only lead to higher operational efficiency but also to greater product/service innovation and diffusion. Then these latter effects, when combined with flexible labor markets, have allowed the US to reach superior performance, in terms of both employment and other economic measures. Finally, as far as social policy is concerned, the US is also leading the way of implementing active policies which do not distort market mechanisms and incentives. These social policies are still relatively young and untested. One could argue that there are not enough of them in the US, but in principle they demonstrate that there are ways for Europe to achieve both its economic and its social ambitions.