by Steven Hill, Social Europe Journal, November 21, 2011
In the post-collapse era, economic and ecological sustainability increasingly will take center stage. Despite the eurozone crisis, Europe’s social capitalism, steady state economy, pluralistic democracies and environmental policies still provide the best foundation for comprehensive sustainability.
The 21st century world is facing two immense challenges: how do we enact a desirable quality of life for a burgeoning global population of 7 billion people? And how do we accomplish that in a way that does not burn up the planet in a Venus atmosphere of our own creation (due to excess carbon emissions, pollution, and other downsides of development)? That is a tall order to fill, yet it is the defining task of our generation. Economic as well as ecological sustainability now demarcate the twin horns of our existential dilemma. We are passing like a ship through the perilous strait between Scylla and Charybdis, where the price for poor navigation will be costly.
More than anywhere else, Europe has been fostering the types of innovations that point the way forward to meet these challenges. The economic crisis has overturned much of what we understood as the way to foster successful economic development. The Washington consensus that dominated the post-World War II era has been smashed into pieces like a jigsaw puzzle, with confused world leaders trying to reassemble the parts that make sense in this anxious new era. Despite the trials of the euro zone crisis, Europe’s brand of “social capitalism” is a better development model for the 21st century than America’s “Wall Street capitalism” or China’s “communist capitalism” because it is more rooted in an awareness of the need for comprehensive sustainability, as well as the institutions and practices that have grown from that awareness.
The “steady state” economy
In the post-World War II era, Europe’s social capitalism has evolved into a delicate balance of free enterprise and government regulation in what properly should be called a “steady state economy.” A steady state economy grows not too fast but not too slowly; it steadily expands the economic pie without inciting inflation, and also ensures that as many people as possible get a piece of the pie. A steady state economy requires a refined tuning of the various economic levers and pulleys in order to foster vibrant commerce at a steady growth rate. At the same time, the goal is to provide sufficient jobs, adequate compensation and supports for families and individuals, but without stifling entrepreneurship and reasonable profit making or destroying the habitable ecology. Finding the “sweet spot” between all these competing claims and constituencies has become the Holy Grail, and not an easy one to locate.
But Europe has managed this quest better than anywhere else. How? First, by maintaining one of the consistently highest levels of labor productivity in the world, producing more goods and services per hour worked than just about any other economy. And second, by being better than anywhere else at using the wealth generated by its economy to take care of its people. Researcher Klas Levinson, at the former National Institute for Working Life in Stockholm says his research shows that, “Europe doesn’t need the economic growth rate of China or the United States because its productivity is so high, and because it is so good at spreading the wealth around more evenly and efficiently than those two countries do.” He estimates that economic growth of two percent per year is sufficient in an economy with high productivity and the political will and institutional design to foster a broadly shared prosperity.
That’s welcome news for countries trying to figure out how advanced economies can provide for their people without having roaring growth rates, asset bubbles that burst and hyper consumption. It’s also crucial to figuring out how nations can develop in a way that is economically as well as ecologically sustainable. European leaders on the left and the right are not as far apart as it might seem on these matters. Conservative German Chancellor Angela Merkel has spoken eloquently at times about the importance of maintaining “social Europe,” and avowing, “It is essential to return to a sustainable growth path. In many countries growth was built on debt and [speculative] bubbles.” What we have learned from this crisis is that sovereign debt can be a blessing or a curse: it can play an important stimulus role if it is invested wisely to increase productivity, sustainable growth and a broadly shared prosperity; but if it is spent foolishly it only sandbags current and future generations with a burden. The key then to a sustainable growth path is a steady state economy driven by wise investment that results in productivity gains in every corner of society and that fosters a broadly shared prosperity.
The productivity imperative
In this new multipolar era of increased global competitiveness, each nation (or bloc of member states) will be charged with living within its means as it tries to provide for the welfare of its people with the amount of wealth generated by its economy. Moreover, with developing countries like China, India and Brazil demanding their deserved seat at the table, all of the developed countries will need to learn to do more with less. Increased productivity in every sector will be crucial to maintaining living standards, not only labor productivity but also higher productivity in all the various systems that support people today, including health care, retirement, energy, family security and more.
What this points to is that in a sustainable economy a middle class standard of living is not only about income levels or economic growth rates but also about adequate support for workers and families. Their health and happiness are the sinew of a steady state economy, and each nation will be charged with taking care of its population with the amount of wealth generated. Toward this goal, Europeans have established various vehicles to foster health and quality of life, including universal, affordable health care, decent retirement pensions, adequate paid vacation and leisure, paid parental leave and sick leave, affordable childcare, low cost higher education, vocational training, a shorter work week and more. Properly understood, these supports are not “welfare” as Americans understand that term, with its connotations of lazy people kicking back on the dole; I call it “workfare,” because it’s targeted at how to keep the worker bees healthy and productive. Research demonstrates – and common sense confirms – that workers that have adequate health, family security and leisure are more productive workers. France’s workers, for example, are ranked as the most productive in the world.
Nevertheless Europe’s workfare system has been much maligned in the US as socialism run amok. But in actual fact it has proven to be an efficient way to allocate finite resources and better ensure that a nation’s population is nourished by the amount of wealth produced by its economy. European member states can offer services such as healthcare, childcare, education and more for lower cost and achieve higher quality than in the US because the Europeans collect their tax dollars into pools of “social insurance” which allows them to design relatively efficient, cost-effective systems. But the US has created scattered, hodgepodge systems, many of them for-profit and privately financed, which are inefficient, expensive and lacking in quality and coverage. That’s why, compared to Europeans, Americans pay twice as much for healthcare, at least six times more for child care, 20 times more for a university education (American students graduate tens of thousands of dollars in debt), have less vocational training, must save more out-of-pocket for retirement (beyond their meager government pension), and many have to self finance their own parental leave after a birth, sick leave when they get sick and senior care when they are old.
Health care spending is perhaps the most emblematic of the differences in efficiency and productivity between Europe and the United States. Despite spending twice as much money per capita on health care, the quality of U.S. health care is ranked 37th in the world — just ahead of Cuba and Kuwait, with France ranked first and many other European countries ranked in the top twenty. Fifty million Americans have no health care at all other than a hospital emergency room, truly an indictment of America’s inefficient, for-profit system. Certainly not every European member state enjoys the highest level of workfare supports, with western Europe generally having more than central and eastern Europe. But even in Greece, which has been beset by deep economic woes, people still have more of these supports than most Americans or Chinese. Social spending in Europe runs 35 percent higher per capita than in the United States, and in this economically unstable age European nations have done more than anywhere else to reduce inequality and provide economic security for families and workers. Moreover, as British medical researchers Richard Wilkinson and Kate Pickett have demonstrated in their book The Spirit Level, inequality dramatically affects other social ills, such as infant mortality, crime, homicides, incarceration (the US incarcerates eight times more people than European nations do), life expectancy, mental illness, drug abuse, alcoholism and more. These social ills are expensive to treat and an additional drain on America’s economy and social fabric, lowering its sustainability quotient.
What becomes clear is that greater social spending is not just the decent and humane thing to do, it is also good for the broader macroeconomy. The automatic stabilizers inherent in these policies provide ongoing fiscal stimulus, and it maintains a healthy, educated, well trained and productive workforce. If the charge for governments of developed economies today is to make their economies more efficient and to “do more with less,” the European system is far more efficient than the American system and better prepared for this new era. It uses wealth more effectively and more sustainably so that growth rates do not need to be as high as they are in the U.S. “trickle down” economy, which has a poor distribution system and fails to provide adequately for all Americans (even when the U.S. economy periodically performs better than Europe’s). Europe already is “doing more with less,” compared to America.
True, the more deregulated U.S. system is known for allowing individuals to keep more of their pay check—presidents from Ronald Reagan to George W. Bush were famous for declaring, “We let you keep your own money in your pocket”—and leaves it up to each Americans’ individual discretion whether to prepare for the long run by saving for the costs of health care, retirement, child care, and family security, or spending it all in the short run. This is the “ownership society,” better named the “on your own” society because that’s what you are. And in theory, this should lead to Americans having greater discretionary income than Europeans. But this assumption has been mostly an illusion.
That’s because while Europeans pay higher income taxes than Americans, in return for their taxes Europeans receive a whole host of workfare supports for which Americans must pay extra, out of pocket with their supposedly discretionary income, in addition totheir taxes. Yet in an age of globalized capitalism and increasing economic insecurity, these supports are hardly discretionary: health care, child care, senior care, university education, job training, and adequate retirement, to name a few, are necessary in order to enjoy a basic level of security and comfort. Yet America’s hodgepodge, “on your own” approach only manages to provide these services inefficiently and for a lot more money, hurting U.S. competitiveness and draining Americans’ discretionary income. When you sum up the total balance sheet, including all the out-of-pocket expenses and taxes paid and compare it to benefits received, you discover that Americans pay out just as much as Europeans but receive a lot less for their money because the U.S. system is so lacking in productivity and cost effectiveness.
America has one other large demerit on its balance sheet, and that is its unsustainable level of military spending. The U.S. spends three times more on its defense budget than all conceivable enemies combined, with over 700 military bases around the world, spending more than twice as much of its GDP on its military as Europe. But much of the spending is massively wasted because it has little relevance to America’s actual security and defense needs. For example the U.S. still spends billions to build outmoded weapons systems, not for defense purposes but because these weapons have become large jobs programs and a major source of ongoing economic stimulus. It’s also a source of pork for the use of politicians in their re-election campaigns who can brag about bringing home money to their districts. Yet as a fiscal stimulus it’s extremely inefficient. Many studies have shown that the economic ‘multiplier effect’ that causes each dollar spent to ripple through an economy is much higher for spending on physical infrastructure – maintaining roads, bridges, airports and harbors, for which the American Society of Civil Engineers says the U.S. has fallen $2 trillion behind – than military spending. Unfortunately the U.S. economy has become hooked like an addict to this wasteful military stimulus and so it will be difficult to transform.
Yet a sustainable, steady state economy requires both wise public spending and deficits that are a result of investment rather than waste; and it requires workfare supports for workers and families that maintain their health and productivity, all of which benefit the broader macroeconomy. The U.S. has major deficits when it comes to all of these crucial domains, not only compared to Europe but also Japan, Canada, Australia and other developed nations. The U.S. really is the outlier in so many ways. America can take great credit as the inventor of the middle class, but Europe has figured out how to put the middle class on a more solid footing by providing supports for families and workers that also help make their economy more sustainable.
Democracy and sustainability: two sides of the same coin
The role of political power is crucial to sustainable development. A sustainable, steady state economy requires a democratic mechanism for deciding a fair allocation of resources as well as ways to increase productivity so that the benefits are broadly shared. Europe has blazed a new path by not only making its national political democracies robust and pluralistic, but also by inserting a degree of democracy into its macro- and microeconomies.
After centuries of kings and dictators, Europe has forged pluralistic political institutions and electoral methods like proportional representation, public financing of campaigns, free media time for campaigns and automatic/universal voter registration that have produced the most representative democracies in the world at the national level (at the European Union level, however, which is relatively new and still in formation, the institutions have not yet resulted in sufficient levels of democracy or accountability). These modern practices have fostered inclusiveness, participation, multiparty representation and policy based on broad public support and consensus-building. Europe’s robust political democracies ensure that politics rule over economics, instead of the other way around, resulting in the benefits of its social capitalism being broadly shared. But in America’s Wall Street capitalism, powerful economic forces have captured the political system and turned the economy into a trickle-down one; the 400 wealthiest Americans now have $1.4 trillion in wealth, greater than the GDP of India with a billion people (this stark inequality has given rise to the Occupy Wall Street movement and its framing of “the 1% vs. the 99%”). And in China’s “consultative dictatorship,” a small cadre of political and business leaders try to manage the nation like a giant corporation, which so far has resulted in vast inequality.
This democratic ethos is so deep-seeded in European soil that it also has taken root in the economy. A degree of economic democracy has proven useful as a means of enlisting all sectors in the goals of increasing productivity and sustainability, and fostering a broadly shared prosperity. Europe has encouraged a greater degree of economic democracy by deploying practices like codetermination, works councils, co-operatives, strong labor unions and more. Codetermination, first pioneered by Germany, allows workers at major corporations and Fortune 500 companies to elect their own representatives that sit side by side with stockholder representatives on corporate boards of directors. From the American standpoint, this is like requiring Wal-Mart to allow its workers to elect up to 50 percent of its board of directors. It’s hard for Americans or the Chinese to even conceive of such a notion, yet many European nations employ some version of this as standard procedure.
Codetermination also includes worker-elected works councils in most workplaces, which give workers a great deal of input and consultation at the shop floor level. Europe in effect has reinvented the corporation and stockholder capitalism by empowering its stakeholders, yet most political analysts and economists, especially in the United States (and even among the left), have barely noticed. The impact of codetermination has been immensely significant, and yet it has not hurt Europe’s competitiveness. Indeed various studies have shown that these practices have helped the economy by fostering a culture of consultation, information-sharing and consensus-building between business managers and workers.
And of course Europe has been a global leader in enacting policies for environmental sustainability and readying for global warming; Europe has maximized energy productivity to the point where the average European uses half the electricity of the average American, and it takes 40 percent more fuel to drive a kilometer in an American car compared to a European vehicle. But the typical knock against Europe by critics has been that these levels of support for workers, families, communities and the environment are unsustainable, and make the European economies low-growth and weak. The current economic difficulties of the euro zone have only increased these criticisms. But even after the economic collapse of 2008, and in the middle of the current euro zone crisis, Europe still has the largest economy in the world, producing over a quarter of the world’s gross domestic product, larger than the United States and India combined. It has more Fortune 500 companies than the U.S. and China together, and some of the most competitive national economies according to the World Economic Forum. The E.U. is now the largest trading partner with both the U.S. and China. Europe’s economy also has more small and medium-sized businesses (SMEs) than the U.S. that provide two-thirds of Europe’s jobs, compared to half the jobs in the United States. In many European countries, the SMEs are world-class exporters, making products that are crucial to industrial growth in the developing as well as the developed world.
One critical area where Europe has done a miserable job of nurturing its sustainability quotient is in its banks and financial system. It’s true that Europe has been steadily reforming its financial sector, cracking down on the “greed culture” by limiting bonuses, pushing for a financial tax on stock market transactions, proposing alternatives to the corrupt rating agencies, more tightly regulating hedge funds, derivatives and short selling, increasing cash reserves for banks, and requiring the originators of asset-backed securities to retain at least 5% “skin in the game” (meaning they must retain ownership of 5 percent of those securities they have created, which disincentivizes Goldman Sachs-type financial fraud). Europe also has greatly increased supervision by launching four new agencies that police Europe’s financial institutions, protect consumers and taxpayers, and monitor and warn of excessive risk in the financial system.
But Europe, like the US, allowed its banks to become gambling casinos backed by tax payers’ money. While European banks are not as guilty as Wall Street for causing the global crash that still bedevils policymakers, nevertheless Europe was extremely vulnerable because it has yet to figure out the proper role for a financial system in a sustainable, steady state economy. As in the US, discussions of core principles such as whether some banks can become “too big to fail” have been shelved. Europe has yet to develop a concept of “social banking” that outlines how financial institutions can play the crucial role of providing suitable amounts of credit for businesses and the economy, but in a way that would “make banking boring again,” as former Federal Reserve chairman Paul Volcker has called for. The financial system and its banks remain one of Europe’s greatest failures, and also a confounding challenge as it tries to maintain and develop its steady state system.
Two steps forward, one back…
Properly understood, Europe’s social capitalist economy, political democracies, workfare support system and environmental policies are all components of an identifiable European Way that points the world in the right direction toward a sustainable, steady state political economy. It forms a well-integrated framework in which a capitalist economy has been harnessed to finance a broadly shared prosperity as well as environmental sustainability. In addition, the economic engine finances a social system that better supports families and individuals in an age of globalized capitalism that threatens to turn most people into internationally disposable workers. The advent of this steady state economy necessitates a whole new metric to gauge its utility and effectiveness. Traditional measuring sticks used by economists, such as gross domestic product, average income, economic growth and more, provide a distorted picture about sustainability and quality of life. New indicators and quality of life indexes are needed to help us understand the significance of these developments and already are being developed by the United Nations, European Commission, World Economic Forum and others.
Certainly the current euro zone crisis is a threat to this model. But it’s important to pause for a moment and give due recognition to the parts of this model that have worked extremely well. Some analysts and pundits predict the unraveling of Europe as a result of the euro zone crisis but these same experts have been predicting the “end of Europe” for many years and have gotten it wrong. The process of integrating economies is complex. Europe is in the process of deciding how united it wants to be, and that process is going to take decades, just as it did for a young America that took many decades from its founding to cease being a collection of regions and to become one nation. Indeed, a full 70 years after its first government in 1789, America fought a bloody and bitter civil war over “states’ rights” (and the related issue of slavery), which at its core was a violent disagreement over the powers of central government and member state integration. Young Europe today can best be understood by realizing that it is in its Articles of Confederation stage, entangled by many contradictions and tensions as it continues to fashion its union and decide how integrated it wants to be. But none of these challenges amount to the level of those that led to a civil war in the United States.
In this make-or-break century beset by a worldwide economic crisis, global warming and new geopolitical tensions, and with the world facing the daunting dilemma of figuring out how to achieve economic and environmental sustainability, the European Way has much to offer as a development model. Its fulcrum institutions – economic, environmental and political — as well as its values of solidarity, social capitalism and ecological and economic sustainability, have great potential to carry the world forward.
[Steven Hill is a political writer and author of Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age, 10 Steps to Repair American Democracy and other books.