America has been running a trade deficit for so long that it has
ceased to be worthy of note. Yet the consistent inability of so many
American companies in so many sectors to compete against their
foreign rivals surely exposes faults in our approach to investment
and productivity. From cars to aerospace, industrial gases to cell
phones, American companies lag behind their European competitors in
technology, production savvy and rate of innovation. Ford and GM are
a decade behind Volkswagen in the sophistication of their production
techniques. Nokia has 39 percent of the world mobile phone market,
more than twice that of Motorola, its nearest rival--despite Nokia's
being based in the highly taxed, highly unionized, generous welfare
state of Finland. Boeing's government subsidies through its military
contracts, grants and tax breaks comfortably match the diminishing
support proffered Europe's Airbus, but it is Airbus that is
pioneering the next generation of civilian aircraft and whose market
share is larger. British Rolls Royce is the trailblazer in
aero-engines. And so on. Beyond the sheltered world of America's
defense industrial complex, where fat Pentagon contracts helped
create outstanding technological leadership in weapons and the
Internet, there is scarcely a high-tech sector where US companies can
claim systematic leadership over their European competitors--a truth
you would scarcely know from a casual inspection of the American
business press.

America's once proud culture of business building has given way to a
culture of financial engineering, a doctrine of shareholder value
maximization and a cult of the takeover. The game is to keep the
share price up, and every sinew of the organization is bent to that
end; shortcuts are ever tempting, and inevitably some companies
resort to straight fraud. Nevertheless, the conservative inclination
is to overlook one or two bad apples like Enron and WorldCom and to
celebrate the rule of America's capital markets. It is Wall Street
constantly holding corporate managements to account that drives up
innovation and productivity, or so runs the conventional argument,
with companies that fail to keep up facing a takeover.

Yet the evidence is that takeovers fail to raise shareholder value;
consultant KPMG reports in a survey of 700 takeovers that more than
four out of five either added no value or lost it. Still, investment
banks continue to seduce overpaid CEO after CEO into believing that
his deal will be the exception. And with share options that will
provide fortunes if the deal comes off and golden parachute clauses
that will secure an equally good pay-off if it bombs, most CEOs fall
prey to the seduction. Despite a welcome wave of criticism of this
febrile, amoral atmosphere, few took note in the heady days of the
dot-com and telecom bubbles that this system was hollowing out the US
economy. It is coming back to haunt the United States now.

American productivity measured as output for every person-hour worked
is now lower than in France, the old West Germany, Belgium and
Holland. Most other parts of Europe are catching up with the United
States fast, a trend that began in the late 1960s and has been
continuing ever since. Economist Julian Callow of Credit Suisse First
Boston calculates that after adjusting for the very kind way American
statisticians compute productivity compared with those in Europe,
Europe's growth in productivity outstripped the United States during
the 1990s.

This is the reality behind the ballooning current account deficit
numbers. The US economy may boast an innovative IT sector and
technological leadership in the military industry; beyond that, its
claims for universal competitive strength are more and more dubious.
Of course, America is home to some great companies, but not so many
to justify the fawning acceptance that the American Business Model is
better in every respect than the European one.

Europeans do not view the company as a casino chip to be traded away
in a single-minded quest to enrich directors and shareholders.
Rather, they see companies as living things, each one a network of
human relationships organized to serve an overriding economic and
social purpose. In the European perspective, a company has a
defining organizational reason-to-be that serves as a jumping-off
point for maximizing profits, a repudiation of the idea that
anything goes in the quest for a fast buck. A company needs to be
built over time, as resources are husbanded, personnel are groomed
and trained, customers courted and innovation nurtured; its
directors need to manage a complex set of trade-offs between the
demands of shareholders and stakeholders, marketplace trends, the
need to innovate and the engagement of employees. In this view, if
only one voice counts--shareholders who want fast returns now--the
company risks ruin.

The United States is vandalizing this conception of the company--once
inherent in American capitalism--and is pulling down the structures
that support innovation and productivity. It is Europeans who now
invest more, sustaining a range of institutions that produce a highly
skilled work force and a business-building culture. They may at first
sight look like economic tortoises; in fact, they are set to overtake
the American hare. High European unemployment, concentrated in
Germany, which has made massive mistakes in macroeconomic policy by
fixing its exchange rate too high within the euro, disguises the real
performance of the European economy: Unemployment is lower in seven
European Union countries than in the United States, and on the
continent as a whole the participation rate of 25-to-54-year-old men
in the labor market is almost the same as in the United States. As
the euro becomes embedded, Europeans will secure the advantage of a
single continental market even larger than the United States; when
they get their macroeconomic policy right, the advantages of their
economic and social model will become more evident.

This economic strength pays for a social contract that offers most
individual Europeans opportunity, mobility and security that is
beyond the compass of most ordinary Americans. For here is another
uncomfortable truth. American social mobility, traditionally
comparable to Europe's, is falling as decades of tax cuts and
spending cuts undermine the opportunities for advancement.

The chief culprit is the emergence of a highly stratified,
increasingly class-based university system, whose very accessibility
was once one of America's glories. The academic excellence of top US
universities is not in question, but it is unclearwhether they still
contribute as they once did to equal opportunity and social
mobility. For American universities have become very expensive. The
competition to attract the world's best academic talent and fund
cutting-edge research has meant an explosion of costs and a parallel
explosion in tuition fees. For the private universities--and all but
one of the top twenty are private--annual tuition, even before
living expenses, tops $17,600. The rates are similar for the top law
and business schools. Even public university tuition now averages
more than $7,000 per year.

The conservative defense is that rich endowments allow private
universities to practice "need blind" admission and offer
students whose families cannot afford the cost a mix of grants,
loans and work-study that together will see them through college.
The same principle is meant to apply to public universities.
Universities may be getting more expensive, so the mantra goes,
but there is sufficient support to help the poorest. Equality of
opportunity survives.

It is a lie. Endowment income is not matching the rise in
tuition--now set to go substantially higher in public universities as
states struggle to balance their budgets. At the same time, the
Federal Pell Grant has been pared back by successive administrations
in a conservative climate hostile to sustaining such "social"
expenditures. With fewer grants, students have to incur huge loans to
complete college, which unsurprisingly deters those from poorer
homes. In 1979 children from the richest 25 percent of American homes
were only four times more likely to go to college than those from the
poorest 25 percent of homes; by 1994 they were ten times more likely.
With the recent rise in tuition fees--up by a cool 20 percent on
average since 2000--and further erosion of private and public grants,
the divide can only have deepened.

University is becoming the preserve of the better-off in the United
States to a degree unparalleled in the rest of the industrialized
West, with attendance at the elite colleges, law and business
schools--which serve as passports to the upper echelons of American
life--increasingly restricted to the sons and daughters of the very
rich. A new aristocracy is emerging in a country whose original
ambition was to prevent such a phenomenon from ever taking place. It
was only in Old Europe that status, opportunity and life chances were
determined by accident of birth. Twenty-five years of conservative
economic and social policies are burying that American dream.

The constricting access to university for students of middle- and
low-income homes is remarkably underreported in the American media,
as is the consequent impact on social mobility. The blithe assumption
remains that opportunity in the United States is unparalleled. It is
not. At the primary and secondary levels, public schools, profoundly
underfunded, are a second-class system compared with private schools.
Students in public schools are less likely to complete their courses,
and achieve poorer grades when they do. But for the beleaguered
community-college system, the United States has no formal means of
giving extensive vocational and apprentice training. The combination
of high dropout rates, gaps in the system, sheer lack of capacity and
indifferent standards means that an astonishing 31 percent of
American 18-year-old dropouts receive no vocational or other formal
training after leaving school. In Germany, by contrast, that
proportion is 1 percent.

Thus the children of poor and middle-income families are doubly
victims. They are less likely to go to a top-ranked university, and
they are more likely to enter the labor market with no
qualifications. It should be no surprise, therefore, to find that
24.9 percent of American children live in poverty, while the
proportions in Germany, France and Italy are 8.6,
7.4 and 10.5 percent. And once born on the wrong side of the tracks,
Americans are more likely to stay there than their counterparts in
Europe. Those born to better-off families are more likely to stay
better off. America is developing an aristocracy of the rich and a
serfdom of the poor--the inevitable result of a twenty-year erosion
of its social contract.

Philosophically, culturally and practically, the social contract has
been attacked head-on and undermined at every turn; its destruction
has been one of the great objectives of the renaissance of American
conservatism. As a result, its supports have been increasingly
eroded. If there is to be what political philosopher John Rawls calls
an infrastructure of justice--one insuring that everyone, despite any
accident of birth, gets a chance to develop his or her talents,
participate in the life of society, exercise liberties and enjoy
basic living standards--then a system must be in place to maintain
it. And that system is of necessity the state, with its ability to
tax and spend. In this conception, the state is not a coercive
interloper but a trustee of social fairness, providing the foundation
for any society's long-term social health and wealth.

Yet since the mid-1970s taxation has been depicted by the right as a
coercive intrusion upon individual liberty imposed by an oppressive
government. Grants to poor students, for example, are seen as
wasteful subsidies that undercut self-reliance and the robust
qualities of independence that the early settlers possessed and upon
which America was built. Yet America's social contract, hewn out of
searing experiences like the Depression and bolstered by respect for
the Constitution's claim that citizens should have equal opportunity,
requires that the state act as its trustee--with the tax revenue to
pay for it. To attack taxation as a moral evil and economic drag, and
the state as oppressive and inefficient, is to knock away the key
underpinnings of the social contract.

There is no need to recite details of the consequences: lower life
expectancy than in Europe, vicious inequality and desperate lack of
social mobility. Yes, it is true that the European social contract
can produce perverse incentives, so that, say, excessively generous
unemployment benefits in Germany undermine individuals' desire to
look for and accept work. But the solution is to reform the excessive
generosity, as German Chancellor Gerhard Schröder is doing,
rather than abandon the social contract altogether. The impact of
America's approach on individual lives shows up in international
surveys of happiness and sense of well-being, where Americans score
so badly. An obsessive individualism in a society in which so many
are harmed eats away at the capacity to empathize, and the very stuff
of human association is undermined. A Hobbesian society, a war of all
against all, is not an environment in which human beings can flower.

It also pollutes the economy, despite claims to the contrary. America
is richer than Europe not because it works smart but because it works
long. Americans work, on average, 300 hours more a year than people
in Britain, France and Germany, a sixth more American women work than
European women, more American old people are at work and fewer young
Americans get to study. Americans have to work this hard because
their productivity at work tends to be lower than in Europe, and that
is because American companies tend to innovate and invest less; the
injunction is to sweat assets rather than be creative.

The values that underpin a social contract--fairness, a belief in
opportunity for all and respect for human potential--are precisely
those that underpin a successful company. Great visionary companies
inspire their work forces and enlist their energy, and that cannot be
done when human values are subordinated to the enrichment of a few at
the top. Equally, the institutions of a social contract--great public
schools, universities and hospitals; codes of quality corporate
governance; great transportation; affordable housing for all--are the
same institutions that support long-term wealth generation. America,
in the grip of conservative dominance, is undermining not only the
well-being of its citizens but its capacity to create national wealth
and economic growth.

To this Englishman, it is extraordinary that the American liberal
tradition has given up so much ground to the resurgent American
right. The evidence does not exist to support the conservatives'
case. Moreover, translated into international relations, the same
doctrine has had baleful results. Pre-emptive unilateralism and the
militarization of foreign policy--a transfer of the dog-eat-dog model
to international relations--is undermining the rule of international
law and leaving America to assume ever more expensive burdens without
even achieving the results it wants. Iraq is turning into a quagmire,
while terrorist networks are still at large. At home and abroad,
America's overconfident conservatives have led the nation into a
cul-de-sac. It is time to say so--and loudly.

This article can be found on the web here.

If you like this article, please consider subscribing to The Nation at special
discounted rates. You can order online https://ssl.thenation.com or call our
toll-free number at 1-800-333-8536.

Subscribe to The Nation:
https://ssl.thenation.com/