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The US model still has some very important strengths

May 1st, 2009 · No Comments

We have been rather critical of the US model here, but that’s only one side of our views. We did think they left their financial markets way too unregulated (leading to the crisis), and that there is an almost irrational fear for government spending (which is more than ever necessary now), but there is another side to things…

We have few ideological hangups and one of our favourite views is to look for what we call evidence based policies or institutions (with the proviso that institutions are much more difficult to copy outright, as these are embedded in an institutional landscape and culture).

Financial markets were terribly underregulated and derailed badly, but product and labour markets in the US have been regulated much better (although the opportunities for ‘Black Swan’ type imploding are rather slim in these markets).

This brings important advantages. Most important of all is the speed with which they can adjust to external shocks. Our bet was always on the US (apart from China) coming out of the present rot because of that. That’s also why we don’t really see the dollar fall to scary depts as some have it.

Here is one illustration of US strength:

  • Cramer said the real story behind the better-than-expected” earnings from companies like Starbucks (SBUX Quote), International Paper (IP Quote) and NYSE Euronext (NYX Quote) is that their profits didn’t come from increased sales, but rather from cost-cutting.
  • It’s clear that the massive reductions in head counts, along with other cost cutting, is working, said Cramer. Make no mistake, he said, these companies are not doing any better than they were last quarter. Business is not improving, but trimming the fat is working.
  • Cramer said there was only one company that actually grew the top line, and that was First Solar (FSLR Quote). He also praised his “four horsemen of tech” — Apple,, Research In Motion and Google — for also growing their top lines. Only these companies, he said, have better sales and lower costs. [Cramer’s Mad Money Recap]

Sure, there is cost cutting in Europe as well (they’ll have to, as top line growth is certainly not better there), but the swiftness with which the markets and the policy institutions (especially the Fed) have reacted is quite awesome, despite the fact that we’re no fans of the banking plans of this government.

It’s very difficult for Europe to ‘import’ US style flexible labour markets (if you want a grasp of just how difficult, there is no better book than Marsden’s “Theory of Employment Systems.” There is even a whole branch of economics that deals with issues like this, called ‘Institutional Economics.’)

Another good example of the difficulties of institutional ‘transplantation’ is the US car industry. When it appeared, in the late 1970s (at least for some) that Toyota had evolved an alternative, and in many ways superior way of building cars compared to the old ‘Fordist’ mass production system of Detroit, scores of management personnel took a learning trip to Japan and, surprisingly to some, they were received with open arms.

It took the US auto industry the best part of two decades to more or less catch up, and in important ways, they never really have….

One other key strength of the US model is it’s innovation system, although that has become dangerously dependent on the influx of foreign talent, as the US educational system (apart from the elite universities) has fallen behind.

So, our admiration for the US still stands, it’s a country that is willing to adapt and learn, even reinvent itself, albeit not always completely successful. But which country is..

Tags: Reform Capitalism