By HAZEL HENDERSON © 2005 (Word Count 1,713)

Despite and because of the enormous challenges it faces, the European Union is still the inspiration for all countries and peoples seeking harmonious and effective governance in our new century. No doubt, Europeans will continue their patient deliberations and painstaking efforts to align goals and policies as they manage their now 25 country-strong Union. Doubtless, the Constitution will be modified, simplified and ratification will become a more choice-filled feedback process than the arbitrary Yes/No referenda in France and the Netherlands. Understandably, European voters could not express the full range of their concerns – from the effects of globalization, outsourcing and immigration to cultural issues – that could have been better interpreted in a multiplechoice type ballot. Nevertheless, this noble EU experiment in multi-lateral governance is still a beacon and inspiration for other regions. I have discussed the European Union’s experience with many professional audiences in Latin America. They often respond that the EU is an important model for several of their regional alliances and their vision of a “mercosur” currency based on the success of the euro. Indeed, this successful launch of the euro has given the world the first viable alternative global reserve currency. The US dollar’s weakness since 2002 reflects the vulnerabilities of the USA: dependency on imported petroleum, the trade (current account) deficit at 6% of GDP, its over-extended consumers and their zero savings rate, a persistent gap between rich and poor and soaring budget deficits due to taxcuts and the war in Iraq. The US, the world’s largest debtor, is also drawing in most of the world’s capital – less for new investment than to subsidize wasteful consumption patterns. Worried holders of US dollars, having taken large currency losses, now have found a safe haven in the euro. Such currency diversification will continue, since it hedges against the risk that the US Federal Reserve will keep trying to inflate its way out of its debts with continued, historically low or even negative interest rates. Meanwhile, the European Union’s economic fundamentals remain much sounder than those of the USA. The EU is the world’s leading exporter of services and ranks almost equally with the USA as the world’s two top countries in total trade in goods. EU leads the world in aid to developing countries – dwarfing that of the USA. The EU imports from them more agricultural products than the USA, Canada, Australia, New Zealand and Japan combined. Added to all this is the EU’s trade surplus and healthy savings rate. So why do US financial media constantly extol the USA’s economy while downplaying the equally large and important global economic role and performance of the EU? The surprising answer lies in differing statistical “cameras” pointing at different sectors of the USA vis-à-vis the EU – comparing apples to oranges!

At the heart of current debates about measuring economic performance are differing methods of measuring productivity. The usual approach measures labor-productivity: output per person. The idea behind the Industrial Revolution was labor-saving, which meant increasing each worker's output using machinery and fossil energy. This made sense when natural resources were plentiful. Augmenting human labor with ever more capital, energy and machinery was the flywheel of technological innovation that powered the Industrial Revolution since its inception in Britain over 300 years ago. Most economic models based on general equilibrium theories missed this dynamic evolutionary process because technology was treated as a given parameter. The Economist (Nov. 4, 2004 “Economic Focus”) now agrees that labor-productivity is not the best way to measure economic efficiency, and joins in calling for multi-factor productivity measures. The erosion of jobs due to technological productivity – this “automation factor” is finally being acknowledged. Today, beyond labor-productivity are concerns about capital productivity (after the billions of dollars wasted in investments in dubious dot com companies); management productivity (as CEO compensation has soared); natural resources productivity (unsustainable forest clear-cutting; wasteful mining and extraction methods); and ecological productivity (maintaining biodiversity and ecosystem services). Broader measures like those used in the EU, and multi-factor or total factor productivity include capital as well as labor -- but still ignore ecological productivity. Comparable measures of productivity are needed to compare the fundamentals of national economic performance – particularly between the EU and the USA. The US focus on measuring labor productivity in private sector corporations, leads to downsizing workforces and fewer new jobs in the short run. Such job losses are a continued focus of politics in the USA. Outsourcing, globalization and immigration are certainly factors, but increasingly the role of technology is being examined as well. Since the late 1990s, many economists and financial journals frequently editorialized that technological productivity and globalization could continue to deliver low inflation and full employment with budget surpluses and lower interest rates as well. Today, we see the bad news about US-measured productivity gains: the flip side is understated unemployment, which may be as high as 10% when “discouraged” jobseekers are included.

Yet what is rational and efficient at the company level may not translate into overall efficiency for society, which is the broader focus of EU statistics. Those thrown out of work and into taxpayer-supported unemployment benefits and social services have zero or negative productivity. Economic theory has always glossed over this problem by asserting that those formerly employed in less efficient industries would find work in more efficient or new start-up companies. Technological innovation would eventually re-employ redundant workers and the less efficient industries (e.g., textiles) would move offshore to developing countries with plenty of cheap labor. This conventional economic view underlies WTO rules removing textile quotas in 2005 and led to China’s now dominant position in this industry. Economics is not concerned with the social costs in the EU or the USA. Economists claim that entrepreneurs and venture capitalists will continue creating new technologies, and companies will keep investing in new factories. But this has not kept pace with the

US need for more jobs – which have come mostly from military and homeland security spending. With globalized finance, even near-negative real interest rates and tax breaks for new investments cannot keep new facilities from going to China or India. Economists now acknowledge that huge government investments must also be made in education, vocational training and re-training. They rarely acknowledge that the continuous displacement of employees translates into job insecurity, loss of health insurance, mortgage foreclosures and shrinking pensions. The US private sector's demand for "labor market flexibility" brings other uncounted social and environmental costs: disrupted communities, greater need for social services to ameliorate personal readjustment, drugs, crime and loss of stable neighborhoods. Environmental costs include boarded up storefronts, strip development, shuttered factories and more sprawl as new facilities avoid blighted areas and seek the lowest tax locations. Even many economists are now acknowledging the new problem of jobless economic growth. This major anomaly in orthodox economic theory is a subject on which I have commented (see for example Building a Win-Win World (1996) and Politics of the Solar Age (1981, 1986). Today's EU-USA debate hinges on appropriate methods for measuring productivity. US productivity measurements still flatter the US vis-à-vis Europe, with its different metric. When these two methods are conformed, there is little difference between US and European productivity. While, the US economy is burdened by record trade deficits, heavy consumer and corporate debt, and a real unemployment rate as high as 10%, The EU’s unemployment rate is also too high and its social safety nets are eroding amid sluggish GDP-growth.

Yet, this will likely not diminish the euro’s new role as an alternative global reserve currency, as long as central banks continue to diversify their dollar reserves to include euros. Cross-border euro denominated transactions have climbed from 27.7% to 31.2% of the world total. EU fundamentals are still solid and the Union is well-governed by the 1993 Treaty of Maastricht – whether or not a Constitution is ratified. This includes the euro and the European Central Bank, while the original Growth and Stability Pact is sensibly modified. Lastly, some analysts point to the high US growth rate in the late 1990s as the effect of $10 per barrel oil. EU energy-efficiency is still twice that of the USA. Today, $6070 dollar a barrel oil may continue – due to Katrina’s destruction, increasing demand from China and uncertainty in the Middle East. OPEC, reeling from their dollar price losses, continues straining to meet production quotas. OPEC may still react to the weak dollar by re-denominating its oil in euros. This would cause a rise in the euro and a further drop in the dollar and increase the price of gasoline in the US to the average world price of $5-6 per gallon. In the new politics of productivity measures, we see many diametrically opposing views of the same market data and official national statistics. Differing worldviews and assumptions underly both the statistics and the mindsets of the analysts on whose interpretations we rely. For example, Northwestern University economist

Robert Gordon, using a similar broader systems view to that used by the CalvertHenderson Quality of Life Indicators, compares standards of living in the USA and the European Union (See "Two Centuries of Economic Growth: Europe Chasing the American Frontier" Gordon shows how the US "productivity miracle" in the late 1990s created the misleading impression of a European lag. Since 1990, US productivity has risen by 1.6% per year while the EU's rose by 1.8%. Since 1950, US productivity averaged 2% while Europe's rose 3.3%. Gordon then analyzes why although GDP per personhour is so similar, yet the GDP per person measure is 25% lower in Europe. The difference is due not only to higher-measured unemployment, but to preferences for longer holidays, shorter workweeks and more leisure time. Gordon then calculates other factors that over-state US living standards by omitting the social and environmental costs of our higher crime rate and rising prison populations, urban sprawl due to government subsidies to automobiles and roads, energy waste, higher expenditures on heating and air-conditioning. We at the Calvert-Henderson Quality of Life Indicators hope more economists adopt similar broader views, which capture "defensive" expenditures (i.e., additional costs consumers and businesses must pay just to mitigate negative effects, like pollution) so as to further clarify such issues. By such broader measures, the European Union is a continuing success story and a model for our common future.


Sign up to vote on this title
UsefulNot useful