An economic argument that goes opposite to what we ordinary folk think about new model...<<immediate cause of the recent economic decline in Japan and the sharp slowdown in Germany is a slump in demand, partly due to over-tight monetary policies>> <<In contrast, America?s lax (perhaps too lax) monetary policy has fuelled rapid growth. >>
Desperately seeking a perfect model
America is widely held to be a clear winner in the world?s economic beauty contest. But have the judges really studied the figures?
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SUPERMODELS beware: a serial killer is on the loose. In recent years, once popular models from places as far apart as Sweden, Germany, Japan and East Asia have all, in turn, been pronounced dead. Meanwhile, the American economy has gone from strength to strength. The obvious conclusion is that all countries, rich and poor, should adopt the American model of flexible labour and product markets, and shareholder capitalism. But has America?s performance really been superior?
It is true that most of America?s rivals are on the casualty list. A decade ago, many pundits urged America to follow the Japanese model to improve competitiveness. Now that same model is seen as fatally flawed. Only two years ago, the East Asian tigers were being paraded as paragons of economic virtue. Now, in the midst of depression, these countries are being widely condemned for crony capitalism. As for Germany?s once admired social-market model, it is now often criticised as a Wirtschaftsblunder that has been responsible for slow growth and high unemployment. Even New Zealand?s model, of which The Economist has been a big fan, has been looking somewhat sickly: it was the only rich country besides Japan that suffered from recession last year.
Meanwhile, America?s performance has been unrivalled. Or has it? The Economist has judged the big three economies on three measures: growth in output; productivity; and job creation.
America has certainly thrived over the seven years from 1992 to 1998, with average annual GDP growth of 3.1%, compared with a feeble 0.8% in Japan and 1.7% in Germany. But these popularly touted numbers are misleading. First, since 1992 America?s economy has steadily expanded, whereas both Japan and Germany have suffered recessions. There is no easy way to strip out the impact of the economic cycle, but a longer period makes it easier to avoid comparing apples with oranges: ten years takes in America?s most recent recession as well. And, second, America?s population has grown much faster than that of other countries.
The single best measure of economic performance is growth in GDP per head: this has averaged 1.6% in America over the past decade, exactly the same as in Japan, and less than in Germany (see chart). Germany?s growth has been inflated by the boost from unification, but even after allowing for this, the country?s growth per head was broadly the same as America?s. True, Japan?s 1.6% average growth was inflated by a couple of years of its bubble, but then America?s economy currently also looks bubble-affected?with a high risk, therefore, of a sharp slowdown or recession at some stage over the next few years. It is also worth noting that the British economy, which has done the most to copy America, has grown more slowly than either Germany or France over the past decade.
The second gauge of economic performance is productivity, an area in which America, it is claimed, is enjoying a miracle. Its level of productivity (GDP per worker) remains higher than elsewhere, and in recent years the rate of increase has quickened. But over the past decade, America?s productivity has grown slightly less rapidly than Japan?s, while Germany?s has grown twice as fast. It is true that America?s official figures probably understate productivity growth, but such measurement problems affect other countries, too.
The only area where America clearly outperforms is in our third measure, job creation: unemployment has fallen to only 4.2% of the labour force, less than half Germany?s rate of 10.5%, and now, for the first time, below Japan?s (probably understated) rate of 4.6%.
Overall, however, the notion that the American economy stands on top of the world is questionable. It is also vulnerable to criticism because of its wider income inequality. It is often asserted that America has traded higher inequality for faster growth; yet over the past decade, average incomes have risen by similar amounts in the three countries, despite America?s bigger income differentials. The richest 20% earn nine times as much as the poorest 20%, compared with a ratio of four times in Japan and six times in Germany. Despite higher average incomes in America, the poorest 20% in Japan are about 50% better-off than America?s poorest 20%.
Used models
If America?s economy were now to go into recession, its ?model? would come under fire from other directions as well. Does that mean that it is no better than any others? Not necessarily. There are several possible explanations for why America?s performance has been similar to its rivals? over the fairly long term. In Japan and Germany, GDP per head lags America?s, so it is easier for them to grow. Catching up, by adopting technology invented elsewhere, is easier than being the economic leader.
Second, the differences, as opposed to the similarities, between economic models tend to be exaggerated. In their zeal to make a successful economy fit their favourite theory, economists of one persuasion or another are too quick to swallow myths about the nature of that economy. The most extreme example of this is East Asia. Free-marketeers once pointed at the region?s rapid growth as proof of the virtues of market-friendly policies; many of them now blame its troubles on government meddling in banking, industry and trade?to which interventionists, in contrast, had previously given much of the credit.
The successful part of Japan?s economy in the 1970s and 1980s?meaning the export sector?actually looked more like the American free-market model than the supposed Japanese blueprint of government intervention. Indeed, in some respects, Japan?s government has meddled less than others: the country?s total tax burden is actually slightly lower as a percentage of GDP than America?s, and it is much less than Germany?s.
Nor is the American model quite what it is advertised to be. For instance, despite its reputation as an unfettered market for corporate control, anti-takeover practices, such as poison pills, flourish?and have even increased.
Economic studies suggest that the best recipe for growth is a long one, but with no single magic ingredient: it includes high saving, low taxes, openness to trade, good education, the rule of law, and sound monetary and fiscal policies. Each model emphasises particular ingredients, giving it particular strengths. Germany and Japan, for instance, offer better education than America and they have higher rates of saving. The American model is the most successful job-creating machine, but Germany and Japan are better at combining growth with equality. Although the point is often stretched too far, different models may also suit different countries, given their various cultures. This may partly explain the current interest in the Dutch model (see article) in continental Europe.
A third explanation of America?s rather modest performance over the past decade is that the ideal model changes with economic circumstances?and the American model might be only just coming into its prime. In the 1960s and 1970s Japan?s high-quality training and lifetime employment helped to solve labour shortages and prevent disputes, and the cosy relations between firms, banks and governments may have encouraged higher investment. Today, however, flexible, price-sensitive markets may be a bigger advantage in encouraging innovation, especially given fast-changing information technology.
It is possible that, without economic reforms, growth in Germany and Japan may lag behind America?s over the next decade. Equally likely, however, their growth rates could be slower for a different reason: a faulty diagnosis of America?s superior performance has encouraged some policymakers to focus too much attention on microeconomic policy (ie, economic models of how markets work) and to forget the importance of macroeconomics (monetary and fiscal policy). It is worth remembering that in the 1920s America?s economy looked a world-beater; in the 1930s it became a deadbeat, not because its model had changed but because of macroeconomic errors in monetary policy and trade.
The immediate cause of the recent economic decline in Japan and the sharp slowdown in Germany is a slump in demand, partly due to over-tight monetary policies, rather than a slump in productivity growth due to structural defects. New Zealand?s problems can also be blamed on a tight monetary policy at a time when the economy was being hurt by the East Asian crisis. In contrast, America?s lax (perhaps too lax) monetary policy has fuelled rapid growth.
As Paul Krugman, an economist at MIT, puts it: monetary and fiscal fine-tuning cannot turn an economic jalopy into a Porsche, but even a Porsche will not go far on an empty tank. With economic systems, as with cars, even the best models need good drivers and a supply of fuel.
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My opinion...........
The Economist closes its eyes to the superior faculties, R&D and clusterisation of world class companies in US, my only question that this articles fails to answer is where are Japan's MSFT's IBM's? or Why Germany could not take lead in the information technology sector? The gauges to determine economic prowess of country are faulty in my opinion with leading journals likr The Economist. Japan asset bubble in 1970 to 1986 was about real estate, the back to back bubble of stock market and real estate assets where banks use to lend on property to invest in stocks, the property use to sell 1 m $ a sqm in Tokyo, the hot money took the stocks to stratosphere, where real estate bubble collapsed the market had no clothes, similarly Germans they have cradle to grave protection and skewed labour laws, the social sector is stuck up in a cross between free market and socialist system.
Equality at the cost of low productivity, the two models are not comaprable to US,,,, we neither see that asset bubble look how internets were recently punctured nor we see that cradle to grave social protection, what we do see is huge and massive clusterisation of 'global companies' in a region called North America, either the wolrd produces parallel competence and excellence on the scale of the US model or shut up. Us modle would proove new paradigm and defy the unproven science of economy and its traditional claims of so far diverging 'truth', it is known that two economists never see eye ball to eye ball on one issue, here we are looking at new economy pangs of labour as it delivers itself free from limitations of one stage to an open world >>Ike
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