Friday, February 19, 2010

Consider the German Economic Model

Thomas Geoghegan's recent article "Consider the Germans" in Harpers (March 2010) lays out a pretty convincing, in my mind, argument for adopting the German model of works council, co-determined board, and wage-setting institutions as a way to strengthen the long-term prospects of the US economy. As he points out, Germany has created a high-wage, strongly unionized economy that up until recently has led the world in exports, and certainly has strongly beaten the U.S., even though the U.S. has "almost every comparable advantage" - including "more research spending, more land, more labor, more capital, and higher levels of formal education."

The co-determined board especially seems to provide a good check on runaway executive pay. I've long been angry at an American system that continues to reward executives at increasing rates relative to employee pay at the lowest level. According to the Economic Policy Institute, "in 1965, U.S. CEOs in major companies earned 24 times more than an average worker. In 2005, the average CEO in the United States earned 262 times the pay of the average worker, earning more in one day than the average worker in a whole year." It's probably even more today.

This practice suggests that CEO's are the most important part of a business, without acknowledging that a CEO's success is based in large part on how the whole team functions. If the company does well, all team members should be rewarded and it could be argued they should be rewarded as much or more than the executives. Instead, we laud CEO's like former GE CEO Jack Welch in our press giving them far too much credit. As recent history has shown, Welch's business decisions for which he was praised and put on countless magazine covers (as well as given millions in a sweetheart retirement package that continues to this day, even after the SEC made Jack return some of it) were actually detrimental to GE in the long run. That's just one example.

Here's an idea: Take any large company and remove the CEO for a month (or even a week), say he's out sick. Now take the same company, and starting from the bottom in terms of wages, remove every worker for the month until their cumulative wages equal the CEO's entire compensation. Obviously, it would differ for each company, but let's say it's the bottom 5% of the workforce. Now, let's see whose more important to the functioning and success of the company.

What is the best approach to changing the status quo? Is it just an awareness issue, or do people just not care, or are there just no institutions strong enough to counter the CEO-Media Complex?

And one final question. How can conservatives argue with a straight face for closing our borders to immigrants while they are simultaneously preaching for free, unregulated markets? The labor market is a huge part of the market system. If they are not willing to allow labor to move freely across borders, then it seems their whole principle of free, unregulated markets does not stand on firm ground. Why don't the media or anyone else point out this hypocritical stance? Instead, we hear this principle preached to us again and again everyday in all forms of media, yet it obviously has limitations. So why can't we be honest about the fact that those who espouse free markets are actually unwilling to support them if truly put into practice?