July 17, 2002

Project Syndicate

For most of the past decade people outside the United States have been treated to lecture after lecture by Americans who want to tell them just how perfect the U.S. economy is. Continental Europeans have been told to liberalize their labor markets, so that businesses that want to hire the unemployed can do so without losing money and so that unemployed workers who find new jobs don't see the wages they earn almost or completely offset by a cut in welfare-state benefits. Japanese have been told to socialize the losses their banking system incurred when Japan's bubble burst by nationalizing the banking system, re-privatizing those parts of it that have a chance of success as going concerns, and liquidating the rest. East Asian Tigers have been told to transform their financial systems from the Germano-Japanese universal banking to the Anglo-American market liquidity model--and do a better job of regulation. Other developing countries have been told that their trade barriers, their love of inflationary finance, their failure to curb tax evasion, and their lack of a government strong enough to enforce property and contract against local notables, organized bandits, and--most important--its own functionaries have kept them from participating in the cornucopia of prosperity extending from the redwood forest to the New York island.

Now it is time for the rest of the world to lecture Americans on how they should fix their no-longer-so-perfect economy. This opportunity will prove irresistible. But what can people from other countries say that will be constructive and helpful, rather than wrong or simply unhelpful examples of schadenfreude?

The first and most obvious piece of advice is that America's financial system needs to become--in James Fallows's words--more like itself. In part of the world corporate managers' leashes are held by the representatives of large universal banks that have the power to vote large blocks of shares. This has advantages and disadvantages, but it is not the American way. In part of the world corporate managers' leashes are held by families of plutocrats who exercise control through pyramids of companies and special classes of stock. This also has advantages and disadvantages, but this is also not the American way. The American way for the past ten years has been to have corporate managers (i) fear that failure to perform will trigger a hostile takeover, for there will be enough information about how the company is doing to make underperformance clear and plain, (ii) fear a directors' revolt in anticipation that things are headed in a direction that might trigger a hostile takeover, (iii) greedily pursue good performance at all costs, for their fortunes are tied to it, and (iv) run unleashed to a considerable degree.

But for this system to work there has to be enough good information disseminated for underperformance to become obvious--and it is in no one's short-term interest, certainly not in the short-run interest of an accounting firm that makes most of its money from consulting contracts, for this leakage of good information out of the company and into the market to occur. For this system to work top managers fortunes truly do have to be tied to the fortunes of the company--as opposed to "heads you win, tails your options will be repriced and you will still win." For this system to work, government must have the power to and undertake the responsibility for the dissemination of good-quality, timely information about corporate performance--yet we have a White House anxious to downplay the importance of the timely reporting of insider stock sales (by President Bush), of the timely reporting of changes in the accounting treatment of unrealized revenues (by Vice President Cheney), and of executives' knowing enough about their business to know when their subordinates are committing large-scale fraud (Army Secretary White).

The second piece of advice is that the U.S. economy, like all industrial economies with aging populations, may well face a long-run savings crisis: keeping the promises the social insurance state has made to aging generations requires higher national savings rates, faster economic growth, and more realistic views of future tax rates and spending plans than exists today. The high-surplus "save Social Security first" political consensus of 1998-2000 has melted away with remarkable speed. And people as well-placed as retiring Congressional Budget Office Director Dan Crippen are enormously frustrated at the failure of nearly all of the high politicians--presidents, cabinet members, and congressional leadership--to even begin to think about tax and spending choices in the long run.

Third and last, the past two decades have seen an enormous stretching of America's distribution of wealth and income. America has changed itself from a largely middle-class society of the same genus as European social democracies into a creature with much greater extremes of wealth than seen since the pre-World War I Gilded Age. The smart money is that one of the principal driving forces behind this, or at least the driving force that may be easiest to correct, is America's retreat from its uniquely high twentieth-century emphasis on education. The widening gap in income in the United States is in large part a widening gap in the earnings of those with different levels of education. The decline in public school quality, or at least the failure of public school quality to continue to improve, downward pressure on funding for public higher education, and a failure of political will to make higher education affordable to all have produced a situation in which the economic case for an individual to invest more in his or her education is stronger than ever before, and in which the public policy case for spending more to make edcuation easier seems overwhelming.

I realize that it is the turn for us Americans to get lectured on how to create a better economy, and that this turnabout is only fair play. But if you all overseas could try to focus your lectures on these three points, I at least would be very appreciative.

Posted by DeLong at July 17, 2002 01:13 PM | TrackBack

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