European Capitalism
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Wednesday, October 11, 2006; 11:00 AM
Washington Post business columnist Steven Pearlstein was online Wednesday, Oct. 11 at 11 a.m. ET to discuss his column about the meltdown at Airbus and the refusal of France and Germany to give up their instincts for government-run capitalism.
Read today's column:
A transcript follows .
About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.
His column archive is online here .
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Silver Spring, Md.: I gotta say... perhaps all those political problems do exist within Airbus, but it seems more like a simple market demand issue. It was insane to develop a huge plane like that in the current state of affairs. Take the next largest aircraft, the 747 - who flies that in America - the big name airliners... who are all barely out of bankruptcy still, 5 years post-9/11. What airlines are doing well? The discount airlines. I'm pretty sure every Southwest flight I've ever taken has been a small, simple 737. Same idea for Jetblue, Airtran, and the gaggle of discount European airlines flying between any two cities in Europe, ya never even knew existed. I'm not saying the political problems don't exist, but that seems hardly like the root of their problems with this one.
Steven Pearlstein: Well, that may be an overly American view of things. The big growth in aircraft purchasing will come, in the future, from Asia and, to a degree, from the Middle East, and for those guys big planes are definitely part of the mix. They have long flights to Europe and North America where frequency of service is not as big a factor in passenger decisions as it is on shorter flights. Both Boeing and Aribus do a very nice, brisk business in the single-aisle, smaller planes, but it is so competitive that they don't make much profit from ti because of the intense price competition.
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Airbus mid-size business?: I too have been surprised by the three-year turn-around in the relative fortunes of Airbus and Boeing. Apart from the super-jumbo fiasco, what's wrong with their mid-size planes? As you pointed out, they used to be more efficient and selling better than Boeing's. Does Boeing's new model really leapfrog Airbus's by that much, or is there something else going on?
Steven Pearlstein: The advantage of the Boeing model is that it is very fuel efficient and cost -effective in other ways. Airbus tried to offer a "new" midsized plane that was really just a modest improvement on its existing models, and it didn't fly with the airlines, which like the efficiency of the new Boeing 787. So they are back to the drawing boards now, apparently considering an all-plastic plane.
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Bethesda, Md.: The "wiring of the in-flight entertainment system -was] at the heart of the two-year delay." ?? This seems too crazy, even for the French and Germans. Do you have more details?
For example, I know the important wiring needs to be straight when they put the pieces of the fuselage together, but to avoid a two-year delay, seems like they could wire the cabin for entertainment after the fact.
Steven Pearlstein: I'm way over my head here, but apparently it is very complex, very labor intensive. And for some of the first models, it has now had to be completely redone, which is harder once the full sections of the plane have been completed and shipped. I asked folks yesterday if this was the problem, why they don't just hire on some more people or work more overtime. And I was told that they have as many people working on it as is physicially possible at the moment.
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Laurel, Md.: You state/imply that European capitalism, symbolized by Airbus, has inefficiency problems due to nationalism.
How do these differ from U.S. demographic issues; that proposed changes to health programs or plant openings are challenged as disadvantageous to women, racial minorities, the environment near where poor people live etc.? Don't we have the same "you can't be unfair to us" issues, but defined in demographic, not nationalist terms?
Steven Pearlstein: Every system has its strengths and weaknesses, and in each place, the two are often inseparable parts of the package. You can't just take the best of our system and the best of theirs and put them together. But when you consider, overall, the competitiveness and dynamism of the two systems, the US is winning -- and the gap is getting wider. I think the evidence on this, much of it anecdotal, is unambiguous now. And the Europeans are now going to have to rejigger their system. Government ownership has largely given way to government interference, but it is still a drag on large, global companies. And you see it in the investment pattersn of European based global companies, which now invest disproportionately outside their region, in part because of the desire to have the freedom of action that they don't have when work is done in Europe. Its not the whole story, by any means. But it is an important cultural and political change that business people know has to happen -- that government officials know has to happen -- and yet they just can't let go.
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"I am not a capitalist": Holy cow. I think virtually everyone in the U.S., regardless of their level of wealth or income, would describe themselves as a capitalist (the loony lefties in Berkeley, etc. excluded of course). They're still fighting the class wars of the French Revolution and the Weimar Republic, apparently.
Steven Pearlstein: That's the historical underpinning of all this, no doubt about it.
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Arlington, Va.: Is the "bankrupt socialist ideal" responsible for the fact that the US is lagging behind Europe in job creation, with US employment growing more slowly than the EU-15 over the past five years?
Steven Pearlstein: That's simply nonsense. Where did you get that. Nobody -- and I mean nobody-- thinks Europe is better at generating new jobs, new companies and new ideas than the U.S or Britain. Nobody. Its just not true. They are better at providing job security, and income equality, and making sure everyone has access to health care. Their public sector hasn't been allowed to atrophy as much as ours. Their capital, in some instances, can be cheaper, but only becuse they shortchange their savers. But job creation is not one of the strongpoints, as all those 28 year olds still living with their parents and drawing unemployment can tell you.
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CAPITOL HEIGTS, MD: REF: 787: Do you think Boeing will be more sucessful then Airbus receiving their products from from foreign suppliers?
Steven Pearlstein: Well, Airbus has a global network of suppliers, with a good network here in the U.s. in fact. But it is still more Euro-centric than the Boeing network, particularly with the new 787, for which almost the entire fueselage will be made in Asia, as I understand it. The reason for that is as much courting customers as it is cost. But for whatever the reason, Boeing has increased its global outsourcing in recent years.
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Herndon, Va.: FYI Steve (Clay McConnell with Airbus here)... the wiring issue is complex because of scale (big airplane) and because of customization. While other airframes (A340, for example) have more than 60 percent of their wiring harness as standard for all aircraft (with the remaining less than 40 percent based on the individual airlines' configurations), the A380 has only about 20 percent wiring harness commonality (the remaining 80 percent based on customer configurations). So, we have to design and install unique wiring harnesses -- each more than 300 miles long -- for every customer. Not an excuse (after all, customization is one of the key selling points of the A380), but it helps explain the complexity and scale of the issue we face.
Steven Pearlstein: Thanks, Clay. I should have mentioned that. I suppose the question on that is whether production engineers, obviously knowing of the customized orders, miscalculated on the extra time it would add to do so many variations. Perhaps this reminds us of the old wisdom about the learning curve, where the first versions of any configuration take a whole lot more time, until people have the experience and work out the bugs of actually doing it.
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Washington: What Airbus did wrong with the wiring on A380 as well is that they promised all their different customers that each one could set up the airplane's cockpit and cabin with all the electronic goodies it wanted. Trouble with that is, the more variety from one team's airplane to another, the more complex it gets -- you have 15 sets of plans for the same airplane.
Steven Pearlstein: There's been a big movement in industry generally toward mass customization. Dell is the classic example: thjey will custom build you a computer very quickly. But this works when large parts of the process can be automated, with lots of compatible plug in components. In building airplanes, particularly the bigger ones, I am told, most everything is still handwork and the process of "plugging in" components isn't like plugging in components in a PC. This is all understandable. I guess the question is why it wasn't predictable -- and why Airbus didn't set things up so that it at least started its production run with a choice or one or two standard versions, with the promise of greater variation a year or two into the program. As lone as you are dealing with the basic components (seats, serving carts, galley equipment, audio-visual equipment), that would make sense.
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Re: Use of Super-Jumbos: We tend to forget about the cargo market, too. Just because Southwest and its imitators are the only airlines succeeding in hauling people in the U.S., there are other companies that are very successful in hauling our stuff. And they are not limiting their airplane orders to 737s.
Steven Pearlstein: Good point -- and, increasingly, an important point.
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Mt. Lebanon, Pa.: And Euro Capitalism - the bailout and subsidy of large scale industries - is exactly different from the U.S. government does with our megabusiness welfare cases how, exactly?? A distinction. Not a difference. Thanks much. Registered engineer in private unsubsidized practice
Steven Pearlstein: Sorry. We have all sorts of tax breaks, that function as a subsidy. And, yes, states give modest subsidies to attract some big production facilities. But we do it no where on the scale that they do in Europe. Trust me on this one. We're not even close.
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Seattle: In re: Cargo. That's very true. But it's also true that the Boeing 747 is killing the A380 in the cargo market over the past couple years.
Steven Pearlstein: I suspect the A 380 is now priced too high. In time, the price will come down, and I imagine that those cargo sales are part of that long-term sales plan.
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Washington, DC: Hi Steve, You write that there is unambiguous anecdotal evidence that the US system is winning. If we grant you that, the missing element to the question is "for whom?" There is unabiguous statistical evidence that the US economy is not working for ordinary, average Americans -- wages are flat, hours spent at work (and away from family) are up, and our healthcare costs are exploding.
Alan Greenspan, certainly wild-eyed revolutionary, doesn't think this is a very tenable situation. I don't happen to agree with him and one need look no further than the comment on this discussion that we're all "capitalists," -- even though by definition one needs to own the "means of production" to be a capitalist -- to see that even if economy isn't working for them personally, many Americans still identify with the successful. What say you?
Steven Pearlstein: That's all a very legitimate issue, encapsulated in my reference to "income inequality." But let's talk about that.
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Arlington, Va.: Re. Europe creating jobs faster than the U.S., see http:/
Steven Pearlstein: We had a recession after a fantastic boom. They had no boom, and not much of a recession. So that time period is not a good one from which to draw any sweeping conclusions.
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Arlington, Va.: What do you think the troubles of Airbus portend for the WTO dispute between the U.S. and the EU on civil aircraft subsidies? It seems that the U.S. filed the case a couple of years ago when it seemed that Airbus was set to surpass Boeing. Now that Airbus has been hobbled, do you think that the U.S. will back off from pursuing the WTO case? Or will it lead to an escalation of the dispute if Airbus needs more government subsidies to stay afloat?
Steven Pearlstein: These developments will certainly put pressure on the European governments to come up with some more short term cash to finance the launch of the A-350, as well as cash to buy out BAE and finance the losses from the A-380. And if so, that will raise the tempoerature on the US-EU tussle at the WTO. Airbus says it won't happen. I'm not sure.
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Munich, Germany: If the transportation, travel and freight markets continue to grow as in the last couple of years, the Airbus 380 could still end up being a cash cow for Airbus, don't you think? A downtown in the markets could cause considerable existential pain, though.
Steven Pearlstein: I see it as having a future in the cargo market eventually, very much so. But at this point, price is a very big factor and the 747 development costs have been fully depreciated at this point, which gives them a big cost advantage.
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Flat wages: I've worked in Europe for years, France in particular. Even smart young professionals, with good education, are stuck in a lockstep income system. There's no way for the really hardworking, bright, and energetic people to reap any rewards from their contribution. And it's tough to be an entreprenuer there too. The French equivalent of the SBA is a joke. There's a significant internal brain drain from France & Germany into Ireland and the UK, where it's easier to set up a new business.
Steven Pearlstein: This is such an important point, and one Europeans don't want to listen to, because it offends their egalitarian sensibilities. If you think this is unimportant, look at what happened in Israel, another socialist paradise of the 1960s. Lots of people lived on kibbutz's then. Now, not so many. Why? Because gradually, in a society where people have choices, the most talented people left the "income averaging" kibbutz so they could enjoy the full economic benefits that come from being a high achiever. And gradually, the kibbutz's became unable to compete economically against free standing businesses in providing stuff for the market or even for their own residents.
Maybe its cruel to say some people are more valuable econoically than others. But its true, just as it is true that some are better at music, at sex, at drawing, at sports. Why is it so terrible to accept different "results" in economics but not in those other areas.
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D.C.:
One big question that of U.S. vs Euro business that I never have gotten a good answer for is to what extent are the GDP, Inflation, and jobs data from the two regions comparing apples to apples? My understanding is that the US BLS has made substantial modification to the algorithms for determining that data that do not match what the Euro's do, to the disadvantage of the European figures (huristic adjustments to inflation based on the supposed increased satsifaction of getting a 60 gig vs a 20 gig hard drive, etc). Also, definition of "unemployment" is not the same (the US category of "not looking for work" but not employed, etc).
To what extent does the government try to manage economic mood by propogandizing US economic statistics, in your opinion?
Steven Pearlstein: I don't think it is a conspiracy to make the numbers look one way or not, on an international basis. It just reflects different approaches that have grown up over time. You would think, however, that the OECD could come up with a handful of data sets that every country could create that are uniform, and allow for better comparisons, in addition to the ones they use now.
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New York, N.Y.: Not only is EU's wage growth higher, they are quickly addressing the labor situation in order to acquire skilled labor. Today, immigration for skilled labor in Europe is far more friendly than in US and has far less administrative red tape. A case in point is the Highly Skilled Migrant Program in the UK. US needs to address this situation since increasing wage growth differential with India, China and EU may hurt the US. What do you think ?
Steven Pearlstein: The UK is not Europe, for the purposes of this discussion. The UK is like the US -- that's why people like me refer to it as Anglo-American capitalism. And it applies, as well, to Israel, South Africa, Australia, New Zealand, Chile, Canada. France and Germany and Italy are losing some of their best one people. And its a growing problem.
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Oxford, Ohio: Steve, I enjoy your columns, and thanks for doing these chats. You discussed the political issues Airbus has in distributing its production across various constituencies - how is this different from what US defense contractors do?
Steven Pearlstein: Yes, there is no doubt that their are heavy political considerations in where defense work is done. But to a large degree, I think, it doesn't have a big impact on the efficiency of the development and production process, or the cost or quality. And if that is the case, then it may be annoying, it may be unfair, but it has little economnic consequence. In the Airbus case, I think the evidence is now clear that the politically-driven governance and production scheme now prouces a significant competitive disadvantage.
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Silver Spring, Md.: How can you say the U.S. is 'winning' regarding the economic competitiveness of the two systems. This strikes me as American chauvinism at its worst. First of all, stop comparing GDP and start comparing GDP per hour worked. France's is HIGHER than that of the U.S. Then, add on top of that the fact that Europe is way ahead of the U.S. in terms of lower poverty rates, more inclusive (and cheaper) health insurance, lower crime rates and more equitable distribution of wealth. And, then, add on top of that the fact that Europe is not covered with strip malls and has preserved its historical and architectural heritage. Who's winning here???
Steven Pearlstein: Look, if you prefer the values and lifestyle of Europe, great. But in terms of the competitiveness and dynamism of its economy, its not a close call. That is my frame of reference as a business columnist writing in a business section of a newspaper. Its what I know about. The fact that people in France not only don't work 40 hours, but couldn't work 40 hours if they wanted to, has an economic consequence. And for you to suggest otherwise is simply ludricrous.
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Princeton, N.J.: Boy, you really wimped out on your answer about job growth in the US v Europe. Why don't you sat that period covers mainly the Bush period which everyone knows was run by morons.
Steven Pearlstein: Princeton, NJ? Are you a neighbor of Paul Krugman's. Because that would be his first instinct these days, to engage in political dating of economic data. Sorry, but that's probably not the main explanation. The recession had begun before the November, 2000 election. It wasn't Clinton's fault. It wasn't Bushes. And his tax cuts didn't have much effect on pre-tax wages or job growth (and to the degree they did, it was probably positive in the context of a recession and slow recovery).
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Arlington, Va.: Steven: While by no means am I a defender of European quasi-socialism and the Airbus production delays are crippling, some part of the reversal of Boeing's and Airbus' fortunes is due to luck. Each organization had to forecast well in advance what international travel would look like before betting on either the A-380 or 787. To some degree 9-11 (getting people on and off huge jets with heightened security is no fun, and the bigger the plane, the greater the target for would-be terrorists) and the huge run-up in fuel costs has as much to do with Boeing's recent success as our relative economic systems.
Steven Pearlstein: You are right. Luck is a bigger factor in most things than most of us are willing to credit it. But people also create their own luck, and their ability to deal with bad luck. On that latter point, our system -- to the degree it is more flexibile and market sensitive and our people are more adaptive--means we can respond to bad events more quickly and effectively. Indeed, that one factor may be the most important competitive strenth of the U.S. economy, along with the ability to incubate, reward and incorporate innovation. And if you think about it, they are really flip sides of the same coin.
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moonbat: I thought a lot of Airbus's problems were due to intercorporate fighting between divisions (essentially between the french team and the german team). Isn't that less a product of 'european capatilism' particularly, but of any large merged global corporation? like DamlierChrysler?
Steven Pearlstein: The tensions between the French team and the German team are symptomatic of a company that is not a vertically-integrated global production company, but a loosely organized network of suppliers each seeking to maximize its take in some zero sum gam. It is the heart of the problem. If the French and German teams spent half as much time worrying about the success of the entire enterprise as they do making sure they get their "fair share" of the jobs and investment, Airbus wouldn't be in as bad a pickle as they are now.
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Re: flat wages: Well...aren't issues like healthcare and minimal levels of income in fact more important than sports and sex? Was that a rhetorical question?
Steven Pearlstein: Not sure about the sex part.
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Silver Spring, Md.: How can you say the U.S. is 'winning' regarding the economic competitiveness of the two systems. This strikes me as American chauvinism at its worst. First of all, stop comparing GDP and start comparing GDP per hour worked
If the U.S. is 'winning' regarding the economic competitveness of the two systems, why is that France is more productive per hour worked than the U.S.? This figure is far more relevant per capita GDP since Americans work more hours per week than Europeans.
Steven Pearlstein: France is not more productive per hour worked when you are comparing auto worker to auto worker, journalist to journalist, etc. The reason we have lower productivity per hour, in an overall statistical sense, is that we have many, many, many more low-skilled jobs in our official economy. These jobs just do not exist in France (babysitters, gardeners for middle class people, housekeepers for middle class people, baggers at grocery stores). The labor and minimum wage laws don't permit it. As a result, they have more unemployment but higher average wages. Its a tradeoff -- and one, by the way, that makes their economy less efficient and discourages economic growth.
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Strip malls are everywhere!: Have you people ever left the tourist zones? Suburban Paris is wasteland of concrete 70s architecture. They have strip malls too - they just don't look like ours.
Steven Pearlstein: Thank you for that reminder.
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Steven Pearlstein: That's all the time we have, folks. See you next week.
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