What if Europe and the US
converged on a set of economic policies that brought out the worst in
both -- European fiscal austerity combined with a declining share of
total income going to workers? Given political realities on both sides
of the Atlantic, it is entirely possible.
So far, the US has avoided the kind of budget cuts that have pushed
much of Europe into recession. Growth on this side of the pond is
expected to be around 2.4 percent this year. And jobs are recovering,
albeit painfully slowly.
But a tough bout of fiscal austerity could be coming in six months.
The non-partisan Congressional Budget Office warned last week that if
the Bush tax cuts expire on schedule at the start of 2013, just as
$100bn of budget cuts automatically take effect under the deal to raise
the debt ceiling that Democrats and Republicans agreed to last August,
the US will fall into recession in the first half of next year.
Even if these measures were to reduce the cumulative public debt, a
recession would increase the debt as a proportion of gross domestic
product -- making a bad situation worse. That is the austerity trap much
of Europe now finds itself in.
Meanwhile, real wages in the US continue to fall. A new "World
Outlook" released by the International Monetary Fund last Friday showed
that in the three years since the depths of the downturn in 2009, total
national income has rebounded in most of Europe and in the US. But the
share of national income going to workers has fallen sharply in the US,
while rising in Europe as a whole.
The trend is even more striking measured from the start of the
recession. It used to be that when a downturn began, profits fell faster
than workers' income because companies were reluctant to lay off
employees and couldn't easily cut wages given union contracts or the
threat of unionization.
That is still the case in Europe, courtesy of stronger unions and
labor-market regulations. But it is no longer the rule in the US. Since
the start of the recession, the share of total US national income going
to profits has risen even as the share going to the workforce has
plunged. Profits in the US corporate sector are now at a 45-year high.
American workers have been willing to settle for lower wages in order
to retain their old jobs or secure new ones. At the same time, US
companies, intent on increasing profits, have more aggressively
outsourced abroad, substituted contract workers and temps for full-time
employees and replaced workers with computers and software.
The workforce's share of total income includes the salaries of
managers and professionals as well as the non-salary income of
high-flying chief executives and financiers who receive capital gains,
interest and stock compensation.
The widening gulf between the stratospheric compensation packages of
the latter and most other Americans suggests why the median wage is
dropping, adjusted for inflation, notwithstanding a growing economy and a
The trend is all the more remarkable considering that the share of
national income going to workers used to be substantially higher in the
US than in Europe because Americans have to buy what most Europeans
receive free -- including university education and healthcare.
A dozen years ago, 64 percent of US national income went to the
labor force, according to the IMF, compared with 56 percent in Europe.
Today, however, the shares going to workers are converging -- 58 percent
of national income goes to the workforce in the US and 57 percent in
Political realities in Europe may be pushing policy makers in the
same direction. Germany's Chancellor Angela Merkel has finally started
talking about spurring growth. Under increasing political pressure at
home, she seems to have accepted the need to add measures promoting
growth to the EU's treaty on fiscal discipline.
But Ms Merkel and her conservative allies haven't given up on
austerity economics. She is still opposed to fostering growth through
more spending, insisting that would only worsen Europe's debt problems.
Instead, she wants to spur growth with "structural reforms" -- by which
she presumably means giving companies more freedom to hire and fire,
outsource jobs to contract workers and, in general, be less constrained
That is of course the American model -- which has been fueling corporate profits at the same time as it depresses wages.
If Europe were to move towards structural reforms that create a labor
market similar to America's while pursuing fiscal austerity, while
America embraces fiscal austerity as US corporations continue to shrink
payrolls, we are likely to experience the same results on both sides of
the Atlantic. Real wages will decline, we will have less economic
security and our public services will be diminished. That is not
sustainable, economically or politically.