The idea that the United States is in decline might itself have been expected to decline with the collapse of the Soviet Union and our emergence as the only remaining superpower. But declinism, instead of disappearing, has now shifted its focus from the political, ideological, and military conflict with the Soviet Union to the issue of economic competition, especially (though not exclusively) with Japan. Unlike the declinism of the late 80’s, moreover, this latest mutation has found support not only among liberals, for whom it served as a weapon against the arms build-up sponsored by Ronald Reagan, but also among conservatives like Edward N. Luttwak (who had been critical of the old school). Other conservatives, however, such as Robert L. Bartley, are if anything even less convinced by the new school of declinist thought than they were by the old.
Mr. Luttwak, who holds the Arleigh Burke Chair in Strategy at the Center for Strategic and International Studies in Washington, D.C., is working on a book that will develop the themes he explores here. Mr. Bartley, editor of the Wall Street Journal, has already completed a book on these and related matters, and he draws on it for his own article below; the book is called The Seven Fat Years: And How to Do It Again and will be published by the Free Press in May.
Edward N. Luttwak:
When will the United States become a third-world country? One estimate would place the date as close as the year 2020. A more optimistic projection might add another ten or fifteen years. Either way, if present trends simply continue, all but a small minority of Americans will be impoverished soon enough, left to yearn hopelessly for the lost golden age of American prosperity.
Nor can American decline remain only economic. The arts and sciences cannot flower and grow without the prosperity that pays for universities, research centers, libraries, museums, the theater, orchestras, ballet companies. It was the ample earnings of Italian traders and bankers that fed the scholars, painters, sculptors, architects, and poets who gave us the Renaissance. When Italy was by-passed by the new flows of oceangoing trade, its impoverished merchants and bankrupt financiers could no longer commission artists or keep scholars at their work, so that economic decline was followed in short order by the bleak downfall of Italian art and scholarship.
Finally, democracy too must become fragile once better hopes are worn away by bitter disappointment. What Americans have in common are their shared beliefs, above all in equality of opportunity in the pursuit of affluence. It would be too much to expect that democratic governance would long survive the impoverishment of all Americans except for a small privileged minority of inheritors, agents of foreign interests, and assorted financial manipulators.
When Buenos Aires was still a leading world metropolis, when the people of Argentina still enjoyed their famous steak-at-every-meal abundance that lasted into the 1950’s, they would never have believed that their future would be a 40-year slide into poverty. Equally, the citizens of the U.S., still today by far the richest country in the world, steadfastly refuse to recognize what future is in store for them unless they can alter the course they are now on. Yet the simplest numbers confirm the slide, and suggest the chilling forecast.
In 1970, Americans were two-and-a-half times as productive as the Japanese, and twice as productive as the citizens of the European Community on average.1 By 1980, the pattern of decline had already set in. The United States was still well ahead of the European Community and Japan, but its edge had been cut in half in a mere ten years, while West Germany had actually overtaken it.2
At that point, in 1980, a simple straight-line projection of the sort that professional economists deplore as much too simplistic would have suggested that in one more decade the United States would be overtaken by the richer Europeans and by Japan. And that is exactly what happened.3
This being a 20-year trend and not just a brief downturn, it is perfectly reasonable to calculate what the future numbers would be if the United States were to remain on its present path. Already in the year 2000, Japan’s gross national product per person would be twice that of America, while the richer European countries would have a 50-percent edge over the United States. Ten years after that, Japan would be more than three times as productive per person as the United States, and the richer European countries would be almost twice as productive per person as the United States.
Finally in 2020, when the children of today’s middle-aged Americans will themselves be middle-aged, the richest Europeans would be more than twice as productive, while the gap between Japanese and Americans at 5-to-1 would be just about the same as the 1980 gap between Americans and Brazilians. At that point, the United States would definitely have become a third-world country—at least by Japanese standards. Certainly Americans would no longer be in the same class as West Europeans.
Actually, this particular trend is already well-established. In the 1950’s, even young Americans traveling to Europe on student budgets could stay at the best hotels and eat in the best restaurants. Coming from a far more productive society, they found that the pocket money of summer jobs or minor parental handouts was quite enough to pay for European luxury. Today American students still travel to Europe, though they now complain that the high prices keep them out of all but the cheapest lodgings. As for the luxury hotels that once depended on American customers, they are now filled with Japanese and European tourists, with only a few Americans still able to afford their rates. If the 2020 projection holds true, none but the wealthiest Americans could travel to Europe unless there were a demand for casual labor, more or less as the poor of Latin America and Caribbean peasants now come to California and Florida for the harvest.
As of now, tens of thousands of young Americans live in Japan as illegal immigrants at any one time. Many teach English to pay their way, but many others work in bars and night clubs or as models of various kinds. American girls serving as bar hostesses and part-time prostitutes are now so common in Tokyo that their services no longer command a premium—though there is still a fair demand for blondes. When a country is in economic decline, not only its currency but also its flesh is cheapened.
There is no doubt that to project the future by simply extending the past is a procedure truly simplistic, because unexpected changes can always outweigh continuities. But so far, at least, the path seems straight enough—and straight downhill. It is also true that international comparisons can easily be distorted by abrupt exchange-rate fluctuations: one reason Switzerland reached the astounding gross national product of $30,270 per person in 1989 was that the Swiss franc happened to be very high during that year. Moreover, all fluctuations aside, exchange rates routinely deform comparisons because they reflect only the international supply and demand for capital, goods, and services denominated in any particular currency (as well as speculation and central-bank manipulations), and not the much greater amount of purely domestic transactions. Hence currencies can be greatly overvalued or undervalued as compared to their purchasing power at home.
Because the United States has chosen to open its markets to imports to a much greater extent than most other countries, let alone famously import-phobic Japan and Korea, the great outflow of dollars reduces the exchange rate far below the dollar’s purchasing power at home. If we rely on a measure based on purchasing-power parities, we find that the United States scores much higher in international comparisons.4 Yet while purchasing-power values can depict living standards more or less realistically, it is only comparisons based on straight exchange rates that determine the “who-does-what-to-whom” of the international economy—including the little matter of which parties can buy attractive pieces of other (open-door) economies, and which parties can only sell them off. And that, of course, can make the enjoyment of even splendid living standards somewhat ephemeral.
Finally, if we switch to the purchasing-power plus gross-domestic-product criterion, we find that although the United States is still ahead, the trend is just as unfavorable as it is with other measures, and the pattern of relative decline just as evident.5
To be sure, both the gross national product and the gross domestic product are indeed gross measures: a car accident increases both of them by the amount of ambulance, hospital, and bodyshop bills, while a healthy drop in cigarette smoking reduces them as sales and excise taxes go down. Nor can any international comparison be free of all sorts of distortions, large and small, no matter what criterion is employed, if only because the different consumption preferences prevalent in different countries are hard to equate. And yet, after all possible objections and all proper reservations are listed, it cannot finally be denied that the totality of all the relevant numbers contains irrefutable evidence that the American economy has long been in severe decline by world standards—and still is.
Many observers would reach the same verdict without need of any numbers. Follow a traveler from Tokyo to New York—though it would be much the same if he came from Zurich, Amsterdam, or Singapore. After leaving his taxi at Tokyo’s downtown City Air Terminal—a perfectly ordinary Tokyo taxi and therefore shiny clean, in perfect condition, its neatly dressed driver in white gloves—our traveler will find himself aboard an equally spotless airport bus in five minutes flat, with his baggage already checked in, boarding card issued, and passport stamped by the seemingly effortless teamwork of quick, careful porters who refuse tips, airline clerks who can actually use computers at computer speed, passport officers who act as if it were their job to expedite travel, and bus crews who sell tickets, load baggage, and courteously help the encumbered while strictly keeping to departure schedules timed to the exact minute.
Then, after an hour’s bus ride over the crowded expressway to the gleaming halls of Tokyo’s Narita international airport, and after the long trans-Pacific flight, when our traveler finally arrives, he will be confronted by sights and sounds that would not be out of place in Lagos or Bombay. He has landed at New York’s John F. Kennedy airport.
Instead of the elegance of Narita, or Frankfurt, or Amsterdam, or Singapore, arriving travelers at one of the several JFK terminals that belong to near-bankrupt airlines will find themselves walking down dingy corridors in need of paint, over frayed carpets, often struggling up and down narrow stairways alongside out-of-order escalators. Those are JFK’s substitutes for the constantly updated facilities of first-world airports. The rough, cheap remodeling of sadly outdated buildings with naked plywood and unfinished gypsum board proclaims the shortage of long-term money to build with, of invested capital. Equally, the frayed carpets, those defective escalators, and the pervasive minor dirt reveal how day-to-day money is being saved: by deferred maintenance—the most perfect sign of third-world conditions, the instantly recognizable background of South Asian, African, and Latin American street scenes, with their potholed streets, dilapidated buildings, crudely painted signs, and decrepit buses.
If the sheer lack of capital to provide proper facilities is the first third-world trait, the second is undoubtedly the lack of skill and diligence in the labor force. This phenomenon will be brutally obvious as soon as our traveler arrives in the customs hall, where baggage is contemptuously thrown off the incoming belts in full view of the hapless passengers. By then he will be too exhausted to complain: after a long flight, he is likely to have waited for hours to have his passport examined.
In due course, if our traveler transfers to a domestic flight, he may well encounter airline porters already paid to place suitcases on conveyor belts who nevertheless ask for tips in brusque undertones, just as in Nairobi or Karachi, sometimes hinting that the baggage might not arrive safely if no money changes hands. And he will in all probability then be trapped in slow lines while imminent flight departures are called out, waiting to be checked in by untrained clerks who tap on computer keyboards very slowly, with one finger.
Here, then, is the final trait typical of the third world—the chronic disorganization of perfectly routine procedures.
If our traveler is headed for a Manhattan hotel, he can choose between a dirty, battered, and possibly unsafe bus, or a dirtier and more battered taxi, usually driven by an unkempt lout who resembles his counterparts in Islamabad or Kinshasa rather than in London or Tokyo, where licensing requirements are strict and dress codes are enforced. At that point, a first-time visitor may still believe that both airport and taxi are glaring exceptions to the America he had always imagined—clean, modern, efficient. If so, he will immediately be disillusioned by the jolting drive over potholed highways and crumbling bridges, through miles of slums or miserable public housing.
Not as colorful as in Jakarta or Madras, the passing scene will still amaze those who come from the many European and even Asian cities where slums are now reduced to isolated survivals in remote parts of town (New York tour guides report a growing demand for the thrills of the South Bronx from European tourists quite uninterested in its pleasant greenery or the zoo, but eager to see open-air drug dealing at street corners, and the rows of burned-out buildings). After this unsettling encounter with an America already in full third-world conditions, an affluent tourist will next reach the luxurious glitter of a Manhattan hotel, but even there beggars may be standing near the door, just as in New Delhi or Lima.
It seems only yesterday that the professional optimists among us were still pointing to the continued American dominance of the world’s entertainment, biotechnology, and aviation industries to reassure us that all was well, in spite of the virtual extinction of the U.S. consumer-electronics industry, the steady retreat of the auto industry, the drastic decline of the steel industry, and the widespread collapse of the machine-tool industry, still very much the foundation of all other industries.
Since then, Columbia Pictures has been sold to Sony, which had already purchased CBS Records in a previous transaction; the multimedia industry leader MCA has been sold off to Matsushita; Time-Warner, which includes HBO, has been partly sold to Toshiba and C. Itoh for $1 billion; and other notable names now belong to French and Italian interests. Word has it that it is only a matter of time before the remaining entertainment giants will go on the block in full or in part. Even hugely successful Disney, long the toast of Wall Street, chose to sell off the ownership of the hugely profitable Disneylands in France and Japan to local investors, in a typical exercise of capitalism-without-capital in the new American style.
Thus, Michael Jackson records may still sell by the millions all over the world, and American films may continue to dominate the global market, but the profits and the resulting opportunity for further capital accumulation now accrue to foreign owners.
Then there is the biotechnology industry, the locus classicus of the dynamic creativity and bold entrepreneurship that are supposed to compensate for all the other weaknesses of the American economy. The names of both buyers and sellers are far more obscure than in the Hollywood pairings, and the deals are much smaller (e.g., Chugai’s $100 million purchase of Gen-Probe), but the great sell-off is under way just the same.
The pattern is by now well established. Americans still do most of the inventing, but because they cannot find capital at home to build the required facilities, they sell out to Japanese and European companies, receiving millions in license fees for products whose sales can eventually earn billions. Unfortunately, it is only those millions—and not the billions that will be earned mainly by foreign companies—that can be taxed to pay for basic research as well as all other government expenditures. As it is, the United States spent $5 billion on biotechnology research in 1990 as compared with only $1.7 billion for Japan, and less for Europe, but it is the Japanese and Europeans who are prospering, in great part by selling products originally developed in the U.S., mostly at the taxpayers’ expense.
Now it is the turn of the aviation industry, which contributed $23.6 billion of exports to alleviate the U.S. trade imbalance at the last count. For all its success, it too is desperately short of capital. Boeing’s only U.S. competitor, the McDonnell Douglas Corporation, recently announced that its commercial division, maker of the familiar DC-9, among other aircraft, is to become a separate company, so that 40 percent of it can be sold to the Taiwan Aerospace Corporation for $2 billion. Of that, only half a billion is for fresh investment—much less than the cost of engineering a single new airliner nowadays—while the remaining $1.5 billion is to reduce the company’s crushing burden of debt, amounting to $2.6 billion at the last count.
That places McDonnell Douglas in a very crowded field. For it is not only our public and private finance that is already in third-world conditions, with the federal government,6 many state governments, and most large municipalities hugely in debt. Nor is it only a multitude of banks and insurance companies as well as the notorious S & L’s that are badly undercapitalized, if not actually insolvent—with another 400 expected to fail in 1992. Many industrial and commercial enterprises of seemingly solid standing are also afflicted with the McDonnell Douglas disease of excessive debt; they too are surviving on bankers’ doles (“unscheduled refinancing”), just like the much more colorful real-estate tycoons who once bought everything in sight with money recklessly borrowed and recklessly lent. And every day another great name among our major corporations falls below even that minimal standard, with bankruptcies that leave pension funds short, medical benefits cut off, and customers as well as suppliers abruptly stranded, often with large invoices unpaid. Because many of them are in turn badly undercapitalized, they too can easily be dragged down into bankruptcy, spawning still further insolvencies.
But to return to the airline industry: some time before the McDonnell Douglas sale was announced, even Boeing decided that it could not afford the investment needed to engineer and produce its next airliner on its own. Having failed to find partners in the capital-starved U.S. aircraft industry, it turned to a Japanese consortium which now has a 20-percent risk-sharing partnership in the future Boeing 777.
As in the case of biotechnology, therefore, a leading industry, whose advancement owes much to basic research and specific technologies that U.S. taxpayers have funded in one way or another, is selling pieces of itself to foreign buyers, instead of only selling them its products.
When a farmer is reduced to selling off his broad acres rather than only his crops, his ultimate fate is not in doubt. Of course the analogy should be false because instead of a waning stock of acres, there is the unending flow of new technology that comes from the constantly celebrated creativity of our pluralist, multi-ethnic, undisciplined but ever-dynamic society.
Note, however, the small print that accompanied the dramatic announcement of the very latest example of that famous creativity. As soon as the suitably Korean-born chief developer of digital High-Definition (HD) TV revealed that the suitably small company he works for had totally overtaken the Japanese giants and their merely analog HD-TV, the company’s owner, General Instrument, let it be known that it would not even try to raise the capital needed to produce and market the new invention, preferring to license production to established TV manufacturers, i.e., the Japanese TV giants.
In a manner literally pathetic, for pathos is the emotion evoked in the spectators to an inevitable downfall, a company spokesman hopefully speculated that if 20 million HD-TV sets were sold annually, its royalties at $10 per set could amount to as much as $200 million a year, a nice bit of change as they say—but truly mere change as compared to the $20-25 billion that the actual producers would earn each year, largely, no doubt, by exports to the United States.
But that is by now standard operating procedure, given our bootless capitalism-without-capital. It was Ampex, a U.S. company, which first developed the video-recorder technology that was then licensed for mere change to Matsushita, Sony, and the rest of those vigorous exporters—though of course their VCR export earnings did come back to the United States, through the purchase of CBS Records, Columbia Pictures, and MCA.
It is all very well to speak of the “globalization of industry” and to deride concerns for the nationality of production in an era of “transnational manufacturing,” but when Taiwan acquires 40 percent of Douglas, or Japan’s consortium has 20 percent of the next Boeing airliner, they assume no such responsibility for funding future U.S. aviation research, or Medicare for that matter—and the future earnings from those efforts will accrue to their balance of payments, and not ours.
What is happening to the U.S. aviation industry in particular exposes the embarrassingly wide gap between the realities of what I have labeled geo-economics, and the free-trade-plus-globalization fantasy that remains unchallenged dogma for so many Americans, not least in the Bush White House.
To begin with, the American aviation industry’s only significant foreign competitor is the European consortium Airbus Industrie, which has been very successful of late even against Boeing, by selling its government-subsidized aircraft with the aid of government-subsidized loans at low interest. Similarly, Taiwan Aerospace is a government-guaranteed company, no more exposed to the vagaries of the free market than the Vatican; as such, it will always be able to count on government subsidies to underbid Douglas subcontractors, thereby taking over specialized manufactures conducive to its own planned growth into an independent maker of civilian airliners.
The wider meaning of such narrowly-aimed industrial subsidies and “national technology programs” is plain enough. Just as past generations were put in uniform to be marched off in pursuit of geopolitical schemes of territorial conquest, today’s taxpayers in Europe and elsewhere have been persuaded to subsidize geo-economic schemes of industrial conquest. The free-trade true believers smile at such foolish generosity, and invite us to enjoy the resulting subsidy of our own consumption. Thus they safeguard the interests of the citizen-as-consumer, while ignoring the interests of the citizen-as producer, but of the two roles it is only the latter that comports with the satisfactions of achievement and the dignity of employment. Moreover, the benefits of subsidized consumption that displaces our own production can only last so long as we still have acreage, famous buildings, golf courses, industries, and new technologies to sell off.
As for globalization, while 40 percent of Douglas can freely be bought by Taiwan, or 40 percent of Boeing could be bought by Japan at any time, a U.S. buyer would have rather greater chances of being allowed to acquire 40 percent of the Sistine Chapel than 40 percent of Mitsubishi Industries.
It is this flat refusal of reciprocity that justifies concerns over the scope of Japanese direct investment in U.S. manufacturing and research companies—far more consequential acquisitions than Rockefeller Center or any number of golf courses. At the last count, total European direct investment in the U.S. was still very much larger, at $262 billion, than Japan’s $69.7 billion. But it is not racism that accounts for the widespread concern over the latter and not the former, as even well-informed Japanese sincerely believe. Almost all European countries positively encourage almost all U.S. acquisitions and almost all forms of U.S. investment, while in Japan, as in Korea, only the likes of soft-drink bottling plants can be established or acquired without hindrance.
For free-trade-plus-globalization true believers, this entire discussion of foreign investment in the U.S., and of the barriers to U.S. investment in Japan and Korea, misses the point entirely. Foreign investment, they ceaselessly point out, brings jobs, thereby neatly offsetting the consequence of their other article of faith: import-caused unemployment. Equally, U.S. investment abroad exports jobs, and if other countries are foolish enough to keep it out, the loss of optimal earnings for capital is compensated by the retention of employment within the United States. Both claims are perfectly valid, but to leave it at that, as many do, ignores the wider implications of foreign investment on both sides.
In the first place, when U.S. auto production, for example, is displaced by the output of foreign-owned “transplants,” the complete employment pyramid of technical designers, development engineers, stylists, corporate managers, and sundry ancillary professionals is decapitated, leaving only the base of assembly-line workers with a few junior-executive positions thrown in.
And this is precisely the object of the geo-economic competition that is increasingly dominating the main arena of world affairs, now that geopolitics is being provincialized to the unfortunate lands where armed conflict is still plausible, if not actually under way. The goal of geoeconomics is not to accumulate gold, as in mercantilism, for it is not kings in need of coin to pay their regiments who are the protagonists, but rather corporate executives and their bureaucratic allies. Their aim is not territorial security or territorial expansion but its geo-economic equivalent: the conquest of the more desirable roles in the world economy.
Thus geo-economics is the very appropriate expression of meritocratic ambitions projected onto the world scene, just as geopolitics once expressed quintessentially aristocratic ambitions. Transplants do replace some of the jobs lost to imports, but what jobs? Are they the jobs that we would want for our children?
None of this is to say that Japanese corporate expansionism, or foreign interests in general, are responsible for the woes of the American economy. Decades of unilateral market access have undoubtedly weakened American businesses and contributed to their decapitalization. But it would obviously be foolish to blame foreigners for our own policies, and our own delusions. I do not recall any commandos from Japan’s Ministry of International Trade and Industry (MITI) descending on Washington to impose unreciprocated Japanese access to American markets and American technology. Nor can Toyota or Hyundai be blamed if the U.S. government simply fails to insist on reciprocity, trusting instead in the gentle conduct of interminable negotiations that yield insignificant results.
Certainly neither our European competitors nor the Japanese can be blamed for the long list of self-inflicted wounds that have been engendering the third-worldization of America.
They did not arrange the regulatory and business-culture changes that brought the mores and urgencies of Las Vegas to Wall Street and corporate boardrooms across the land, to subordinate both future growth and current employment to immediate payoffs for well-placed principals.
They had no say in the most original invention of American statecraft: representation without taxation to extract “entitlements” galore, so that savings, already scant, have been absorbed in Treasury paper, instead of modern factories or updated infrastructure.
They did not seize control of our classrooms, to discredit the discipline and absolute standards that are the prerequisites of all education, nor lately appoint the “multiculturalism” inspectors who equate arithmetic with racism, and who annex the study of history to group therapy.
Nor did foreigners devise our spectacularly antisocial “social” programs, by now most nefariously entangled in both racial politics and the crudest racism. There are very few Afro-Swedes, yet because Sweden is very generous to unmarried mothers, such mothers account for 50.9 percent of all births, as opposed to 25.7 percent in the less generous United States, and only 1 percent in notably ungenerous Japan, where 99 percent of all children are still compelled to grow up with both fathers and mothers. That, no doubt, is yet another of those exotic Japanese practices devised by the sinister MITI—certainly nothing enhances a country’s competitive position more than a population properly brought up in stable families.
The list is by no means complete. The many new perversions of the administration of justice could add an entire list of their own, from ruinous product-liability awards against the manufacturers of 50-year-old machinery for one-year-old accidents, to the abandonment of the loitering laws, which leaves policemen powerless against urban predators. But even the few dysfunctions listed above would have been sufficient to propel our rapid slide into third-world conditions, complete with an entire generation of children as doomed as the street waifs of Rio de Janeiro. The newborn son of a long-gone teenage father and a fifteen-year-old mother, with a grandmother in her thirties and a great-grandmother in her forties—all of them unmarried, uneducated, and unemployed—has become a rather common American type, destined from birth to roam the streets in between episodes of casual labor, crime, addiction, and imprisonment.
A search for the deeper sources of all the blatantly obvious diseases of American society would take us very far—though it might be said in passing that Anglo-Saxon style individualism could only be successful so long as there was still enough Calvinism to go around. But at least the immediate causes of our third-worldization are simply economic, a matter of capital and labor. And while the inadequate diligence of our labor force obviously has no simple cause, the immediate reason for our disastrous shortage of capital is plain enough. Americans have little to invest because they save so little.7
Obviously, it is possible to invest without saving, if others lend the necessary money. And of course the United States has borrowed hugely in recent years, and also absorbed a vast amount of foreign investment.8 Yet given the size of the American economy, even the huge inflow of money from abroad could not possibly remedy the disastrous difference between our rate of savings and those of our competitors.9
In any case, the relentless erosion of the entire economic base of American society is revealed by undisputed statistics that have none of the flaws of international comparisons. During the last 20 years—half a working lifetime—American “non-farm, non-supervisory” employees actually earned slightly less, year by year. As a matter of fact, by 1990 their real earnings (corrected for inflation) had regressed to the 1965 level.10 Will they regress further—perhaps to the 1960 level by 1995, and then to the 1955 level by the year 2000? It seems distinctly possible. Given the lack of invested capital, it is only with ever-cheaper labor that we can compete internationally. Therein lies our own path to Bangladesh.
Who are these poor unfortunates whose real earnings have been declining since 1965? Are they perhaps some small and peculiar minority? Not so. In November 1990, the last month for which those statistics are complete, they numbered 74,888,000, or just over 81 percent of all non-farm employees—that is, more than eight out of ten of all Americans who are not self-employed, from corporate executives earning hundreds or even thousands of dollars per hour, to those working at the minimum wage.
Far from being a minority whose fate cannot affect the base of American society, then, they are the base of American society, the vast majority of the labor force of manufacturing, mining, construction, transport, utility, wholesale and retail trade, finance, insurance, real estate, all other service enterprises, and government employees.
How can the entire structure of American affluence and advancement from luxurious living to scientific laboratories not decline when the vast majority of all working Americans are earning less and less? And how can the U.S. not slide toward third-world conditions if this absolute decline continues while in both Western Europe and East Asia real earnings continue to increase?
Inevitably, the most telling comparison is with Japan. In 1970, Japanese manufacturing employees earned only just over a quarter (or more precisely 27 percent) as much as their American counterparts. In 1988, they earned 7 percent more. If the trend were to continue straight on both sides, in 18 more years American earnings would be reduced to less than a quarter (23 percent) of the Japanese level, almost the same proportion as now obtains between Brazilian and American hourly wages in manufacturing.
It stands to reason that by then the United States would become Japan’s Brazil, an amusing, sometimes unsettling country of vast expanses with a cheerful but impoverished third-world population. The casual banter that nowadays greets errors of blatant incompetence in American offices, factories, and shops; the patient silence evoked even by acts of willful negligence and aggressive apathy; the learned ability to ignore unkempt urban vagrants and all their importunings; and generally our increasing acceptance of breakdowns, delays, and all forms of physical decay—all this shows that we are indeed adapting to our fate, by acquiring the necessary third-world traits of fatalistic detachment. But they, of course, ensure that the slide will continue.
Robert L. Bartley:
To the ordinary, everyday senses of mankind, America has not declined, it has prevailed. Its foe of two generations has collapsed and now even seeks to adopt American institutions of democracy and market economics.
Though to people who use their eyes and ears it is obvious that American influence in the world is on the rise, we have not been able to put the notion of decline behind us. For a segment of American opinion refuses to use its eyes and ears. Instead, proponents of decline confuse themselves with statistics they do not understand, or in some cases willingly distort. They invoke jingoism by turning international trade into some kind of combat, instead of a series of mutually beneficial arrangements among consenting adults.
The notion of decline has recently been a fad of the Left, in alliance with a coterie of non-ideological special interests. It is instructive to remember, though, that as the 1980’s opened decline was a theme of the Right. Conservatives, notably but far from solely Jean-François Revel, warned that the West was falling behind in the military competition with the Soviet Sparta. It found itself manipulated by Soviet campaigns like the one that stopped the neutron bomb. The United States, the natural leader of the alliance, was wracked by inflation and stagnant productivity at home, preoccupied with hostages held by a primitive cleric, and unable even to fly six helicopters across the desert.
In those days, conservatives worried that the West lacked the will to use its superior economic resources even to defend itself. They can take heart that their warnings were heeded, that free peoples found the will to resist, that fear of Communist arms did not stunt them into self-doubt and inaction. But American will is now being tested in a more subtle way by the theme of decline, another recipe for confusion and self-destruction. If America generally falls prey to this delusion, it may throw away its birthright as the hub of a new and progressive world civilization.
On the Right, the notion of decline faded as Ronald Reagan filled the military spare-parts bins, frankly labeled the Soviet Union an “evil empire,” invaded Grenada, bombed Libya, and revived the option of missile defense. The diplomatic turning point was 1983, when the West withstood a determined Soviet campaign, including street demonstrations and the suspension of arms negotiations, to stop the deployment of Pershing missiles in Europe. At the same time, the United States was curbing its inflation with Paul Volcker’s monetary policy and reviving economic growth with Ronald Reagan’s tax cuts. Seven years of uninterrupted economic expansion did wonders for military preparedness, diplomatic creativity, and public morale. The economic revival that started in the United States and quickly spread to Europe proved the final undoing of the totalitarian challenge.
The containment policy the West had patiently pursued for two generations predicted that under steady pressure the Soviet empire would mellow or crack. Then it happened at a stroke. In 1989 the Berlin Wall was breached, and by 1991 the Communist remnants proved themselves inept even at coup-making. Meanwhile, an American-led attack decimated the world’s fourth-largest army in six weeks of combat and at the cost of 148 Americans lost in action. The world’s new military balance was clear, leaving only the mysteries of why President Bush stopped short of Baghdad and how the hysterical Cassandras who had predicted a desert debacle managed to retain their bona fides as military experts.
Nor is American predominance merely or even primarily a matter of military power. American ideals of democratic pluralism and market economics were spreading not only in the former Soviet Union but throughout South America, Eastern Europe, and even Africa. America remains the favored destination of the world’s refugees and immigrants. Its university system (despite the political-correctness plague) is unparalleled: it graduates many foreign nationals in science and engineering, of course, but many of them choose to stay in the U.S. For all the accomplishments of the industrious Japanese, America still dominates scientific innovation. Many transnational corporations, even if based in Germany or Switzerland, locate their research divisions in New Jersey or North Carolina. Japanese auto companies open design labs in Los Angeles. Above all, the U.S. utterly dominates the single capstone technology of our era, which in every language is called “software.”
Whatever the momentary economic ups and downs, too, the plain fact is that the United States is the wealthiest society in the history of mankind. Or at least this is plain to the economically literate, who understand that no meaningful comparison can be based on momentary exchange rates among different national currencies. In translating among currencies to make international comparisons, the only meaningful basis is purchasing-power parity (PPP), the exchange rate at which two currencies would each buy the same basket of goods. The Organization for Economic Cooperation and Development spends endless hours of tedious calculation to churn out PPP rates precisely for the purpose of facilitating such comparisons.
Under the current regime of floating exchange rates, currencies can vary widely from their purchasing-power parity. This distorts comparisons and above all trends—for temporary and reversible variations in exchange rates are likely to swamp any changes in underlying fundamentals. As recently as 1985, the dollar was well over its PPP rate, exaggerating the American standard of living. In later years, the dollar has been below PPP, making America look less wealthy than it actually is.
So current comparisons built on current exchange rates show America falling behind, but properly adjusting the comparisons to PPP makes the picture entirely different. The Economist Book of Vital World Statistics, for example, found that at 1988 figures and exchange rates, the United States ranked only ninth in the world in gross domestic product per capita—behind Switzerland, Japan, and the Scandinavian countries. But it also reported that at PPP exchange rates, the American standard of living was far above other advanced nations. With the U.S. at 100, Canada rated 92.5 and Switzerland 87.0. Then came the Scandinavian nations and some small countries, including Kuwait. West Germany rated tenth at 78.6, and Japan twelfth at 71.5. Other developed nations trailed.
In short, the American standard of living is substantially above that of Japan and most of Europe.
This is confirmed by physical measures. American automobile ownership, for example, is one car for every 1.8 persons. Iceland has two people for each car, while Canada, New Zealand, and West Germany have 2.2. France has 2.5, the United Kingdom 2.8, and Japan 4.2. Similarly, there are 1.2 Americans per television set, compared to 1.7 Japanese and 2.4 Germans. The United States is also one of the world’s great undeveloped countries, with 26.3 persons per square mile, compared to 102.1 in France, 233.8 in the United Kingdom, 246.1 in West Germany, 324.5 in Japan, and 395.8 in the Netherlands. While I have no figures handy, the American standard of living is most evident of all in housing; the Japanese measure apartment sizes in tatami mats.
As for the recent trends, the American economy led the world out of the economic crisis of the late 1970’s by staging so remarkable a boom between 1983 and 1990 that it is now hard to remember such bywords as “stagflation” or “malaise” or “Euro-pessimism.” In this expansion, the U.S. economy grew by 31 percent after adjustment for inflation, about equivalent to building 1982 West Germany from scratch. Real disposable income per capita rose by 18 percent. Productivity resumed growth after stagnating in the 1970’s, and in fact surged in manufacturing. Manufacturing output grew faster than GNP, and exports leapt by more than 92 percent. More than eighteen million new jobs were created, even while the Fortune 500 companies pared their payrolls. Tax revenues kept pace with GNP growth and, since this was supposedly a decade of greed, it should be noted that charitable giving grew at 5.1 percent a year, compared with 3.5 percent a year over the previous 25 years.
Again, a remarkable leap in living standards is confirmed by physical measures. In 1980, hard as it may be to remember, only 1 percent of American households owned a videocassette recorder. By 1989, the figure was more than 58 percent. For all practical purposes, every video rental shop in the nation was started during the seven fat years. In 1980, cable-television systems reached 15 percent of American households, mostly in remote areas with difficult reception. At the end of the decade, half of all homes were wired. In 1981, when the Apple II was a hackers’ toy, a little over two million personal computers were in use in the whole country. That year, IBM introduced its first PC, and Apple followed with the Macintosh in 1984. By 1988, the two million PC’s had exploded to 45 million. Of this number, roughly half were in homes.
The most remarkable feature of the 1980’s, though, was economic globalization. The 24-hour trading markets were stitched together; dollars circled the world at electronic speed. Rock-and-roll invaded Prague and Moscow, and Japanese auto companies built plants in Tennessee (Nissan), Ohio (Honda), and Kentucky (Toyota). “Interdependence” became the new byword, though one inadequate to describe the evolution of the world economy into an organic whole.
As the U.S. economy led the world out of the doldrums of 1982, the world voted with its money. In 1979, foreigners invested $38.7 billion in the United States; in 1980 this number was $58.1 billion. But investment inflows soared to $83.0 billion in 1981, $93.7 billion in 1982, $130.0 billion in 1985, and $229.8 billion in 1987. With the Volcker monetary policy and the Reagan tax cuts, America was where the world’s investors saw the most promising return. And demand in America created the export markets that led Europe out of its pessimism.
A great source of the confusion about the American economy, and a great source of the current poor-mouthing, is that the United States has still not come to terms with its integration into the world economy. Thus America’s sages gazed on the developments sketched above and decided the sky was falling. In sending their money here, those perfidious foreigners expected to get paid back. Indeed, the whole reason they were sending their money here was that they anticipated a higher return here than they could get at home. Their eagerness to invest in America instead of at home was turning us into—shame!—a debtor nation. And, of course, the American purchases that stimulated the European revival were reflected in—horrors!—a trade deficit.
In 1976 an official U.S. government advisory committee studying the international statistics suggested that
the words “surplus” and “deficit” be avoided insofar as possible. . . . These words are frequently taken to mean that the developments are “good” or “bad” respectively. Since that interpretation is often incorrect, the terms may be widely misunderstood and used in lieu of analysis.
Following the committee’s recommendations, the Commerce Department stopped publishing most of what had up to then been a plethora of different “balances”—the current accounts balance, the basic balance, the net liquidity balance, the official settlements balance. Because the bureaucrats thought they had to publish something, they kept the merchandise trade balance, which has been used in lieu of analysis ever since.
What the advisory committee understood, and what cannot be emphasized too much, is that international statistics are an accounting identity; they will balance tautologically, by definition. After all, for every buyer there has to be a seller. The various trade balances are only different stopping places in a great circle of transactions. Except for zero, there is no bottom line.
The most constructive way to look at the international accounts is to divide them into three parts, which must by definition net out at zero. The two big halves are, first, trade in goods and services, and, second, investment. These are essentially two sides of the same coin; normally a trade deficit is financed by an investment surplus, or inflow. And a trade surplus will accompany investment outflows. The third part of the international accounts is called “official financing”; if trade and investment do not offset each other, the central banks have to step in and act as balance wheel—this can represent a problem if, as happened with U.S. accounts in the mid 1970’s, there are simultaneous outflows of trade and investment.
In the normal investment-trade seesaw, though, a zero trade balance is not normal or even desirable. The U.S. ran a trade deficit for nearly all of its first 100 years, and generated trade surpluses under the Smoot-Hawley Tariff in the midst of the Great Depression. Normally, a rapidly growing economy will demand more of the world’s supply of real resources and run a trade deficit. It will also provide attractive investment opportunities and attract capital inflows. In a healthy world, the two will offset each other, for periods of perhaps a century.
Yet somehow we have come to measure our nationhood by the one statistic of the trade balance. The real mystery is why we even collect it; if we kept similar statistics for Manhattan island, Park Avenue would lie awake at night worrying about its trade deficit. We have even come to view trade as some kind of nationalistic competition. Winning, apparently, is selling more to the rest of the world than we buy from it. Leaving aside the fact that this is ultimately impossible, why? If we could do it, what would we do with the proceeds, bury them in Fort Knox?
In the midst of this burgeoning prosperity and creativity, the Left decided that America was declining, and undertook to prove it by peering into the international statistics. While there were earlier precursors, the theme came to its fruition with Paul Kennedy’s The Rise and Fall of the Great Powers. In 1988, as voters were rewarding a platform of “read my lips” and Willie Horton, book-buyers were handsomely rewarding Professor Kennedy’s thesis of “imperial overstretch.” In this view, the filling of the spare-parts bins and the reassertion of American military power abroad was not the cure for decline, it was the cause of decline. Indeed, it was decline itself.
Though it topped the lists for 24 weeks, The Rise and Fall of the Great Powers was no doubt an example of the contemporary phenomenon of the unread best-seller. Few could have been interested in Kennedy’s account of the Hapsburgs or Ming China, and he did not get to the predicament of the United States until pages 514-35. But on op-ed pages and in seminar rooms these pages triggered a national debate. It very much centered on the economy. Excessive military spending undermined the economy, the critique went, and the slackening economy could not support the military commitments. To be sure, the U.S. was still only in “relative decline,” still first in importance, but its lead was shrinking. For
the only way the United States can pay its way in the world is by importing ever-larger sums of capital, which has transformed it from being the world’s largest creditor to the world’s largest debtor nation in the space of a few years.
The Left naturally found great appeal in this double-barreled critique of the Reagan administration: the evident economic prosperity was marred by hidden flaws, and the root of the flaws lay in the military build-up. As for public opinion, in February 1989, a CBS/New York Times poll found that 48 percent of respondents either strongly agreed or somewhat agreed with the assertion that the U.S. was in decline as a world power. By March 1991, after the Gulf War, this figure plunged to 22 percent. (At that point Kennedy wrote in the Wall Street Journal that this was just what one would expect from a declining power.)
The liberal declinists, however, did find some allies on the presumed Right—most prominently, the heads of transnational corporations headquartered in the United States, like Chrysler and Motorola, who found that they could not keep up with Toyota and Sony, transnational corporations headquartered in Japan. They were understandably eager to blame their predicament on anything but their own shortcomings. They and their labor-union allies belabored the trade-deficit and debtor-nation themes in their campaign to erect protectionist walls athwart history’s march to an integrated world economy.
Then, too, there was a species of financial conservative who found debt worse than taxes. Bond traders and central bankers have a natural tendency to focus on the supply of and demand for credit (to whatever extent they can be measured). And though growing corporations add debt every year as a matter of course, the executives running them were taught in their childhood to judge government finance solely by whether current income matches current outgo. And finally, there is a jingoistic conservatism casting about for a new foe to fight after the decline of Communism; it has settled on the Japanese trading companies.
Given these various roots of support, it is perhaps not surprising that the notion of decline proved so resilient in the face of both self-evident prosperity and intellectual refutation. I thought the matter had been laid to rest in the Wall Street Journal by May 1988, when Charles Wolf of the RAND Corporation took his usual beady aim. Yes, said Wolf, the U.S. share of world product had declined from 45 percent in 1950, “a manifestly atypical year.” But against the mid-1960’s or 1938, the U.S. share remained at 22 percent to 24 percent. “Japan’s central-government debt is a larger fraction of its GNP than is that of the U.S., while the foreign indebtedness of the U.S. has been grossly overestimated in the official statistics.” Somehow statist politics and economics had spread internationally in the 1960’s and 1970’s, while market economics and democracy had advanced in the 1980’s. “The rhetoric of decline is wrong because it portrays a past that wasn’t, a present that isn’t, and a future that probably won’t be.”
There followed similar refutations from assorted centrist scholars. The economist Francis Bator of Harvard wrote in Foreign Affairs, for example: “The air is full of warnings against overestimating America’s economic strength. The more likely error, I think, is the opposite.” And Samuel Huntington and Joseph S. Nye, both also of Harvard, set out to make the case for maintaining American leadership.
My Wall Street Journal colleague, Karen Elliot House, who spent months interviewing hundreds of leaders around the world, found that they did not think America was threatened by decline. Jean-François Poncet, a former Foreign Minister of France, told her: “It’s hard to take seriously that a nation has deep problems if they can be fixed with a 50-cent-a-gallon gasoline tax.” Seizaburo Sato, a sometime adviser to the Japanese prime minister, recalled Henry Luce. “The 20th century was the American century,” he said, “and the 21st century will be the American century.”
At least it ought to be, because far from sinking into decline, America is now at the center of one of the great, exciting moments in mankind’s economic history. A second industrial revolution is remaking world society. Not since the industrial revolution itself has technological advance been so breathtaking, or more pregnant with changes in the way mankind lives and thinks of itself.
More breathtaking now, probably, than even then. James Watt’s steam engine pales beside what our generation has already seen: the splitting of the atom, the decoding of the gene, and the invention of the transistor and the computers it spawned. These are not only magnificent leaps of the technological imagination, they are potential precursors of currently unimaginable economic advance. Atomic power, unless cold fusion turns out to be real after all, has perhaps not realized what we once thought of as its potential. The first fruits of biotechnology are just now entering the markets. But already the transistor and the rest are changing the world.
Indeed, we live every day with the electronic revolution. As the first industrial revolution changed an agricultural economy into an industrial economy, a second industrial revolution is changing an industrial economy into a service economy. More specifically, into an information economy, in which the predominant activity is collecting, processing, and communicating information. We are headed toward a world in which everyone on the globe is in instant communication with everyone else.
It is this web of instant communication that has stitched the world into increasing interdependence. In fact, throughout this century the world economy has been more interdependent than anyone realized: the Great Depression, for example, was preeminently a world event, and its origins lay in disturbances in the international economy. But with today’s 24-hour financial markets and transnational corporations, economic interdependence is hard to miss.
The same web of instant communication is responsible for the political developments that have rocked our age. Orwell, in his Nineteen Eighty-Four, saw information technology as an instrument of Big Brother. We are now seeing clearly that it is quite the opposite. The onslaught of the information age played a key role in liberating Eastern Europe and in spreading democratic currents through the Soviet Union and the developing world. The totalitarians have found they cannot control a people in touch with the outside. In Albert Wohlstetter’s phrase, the fax shall make you free. Big Brother can of course build a society without computers, but that society will not be able to compete in the modern world, as China seems to be learning after Tiananmen Square.
The precision weapons demonstrated with such effect in the Gulf War are also an aspect of information technology. They promise to make combat once again the province of professional warrior against professional warrior; no longer need philosophers talk about “mutual assured destruction”—the targeting of women and children with nuclear missiles. Once we fully understand this, it will redound to the benefit of civilians everywhere.
Naturally our time and our nation have their problems. Americans should take education more seriously, instead of subordinating it to goals like racial balance and asbestos removal. Our legal system should let police enforce the law against vagrants, and should stop inflicting a parasitic tort-bar industry upon us. Our political system is so frozen it seems unable to address these everyday problems.
More broadly, there is such a thing as being too liberated, having too many options. We are still learning to live with our new freedoms. The onslaught of modernity has not been good for institutions such as the family. We are overly susceptible to fads—health scares, for example—and for that matter the fad of declinism.
For all these problems, what mostly needs to be explained is not what is wrong with America, but how so much of our articulate elite can so completely mistake reality. A great part of the answer is that progress is unsettling, as rapid change always is. Looking back over history, indeed, we see that ages of economic advance have often been ages of pessimism.
In particular, history’s all-time champion economic pessimist, Thomas Malthus, published his first essay on population in 1798; this was 29 years after James Watt’s first patent in connection with the steam engine. The first industrial revolution, in other words, was the venue for Malthus’s gloomy theorizing. He was explaining why economic progress was impossible just as mankind was taking the greatest economic leap in history.
Not surprisingly, the Malthus paradox attracted the attention of Joseph A. Schumpeter, our century’s greatest economic historian and one of its greatest economists. One chapter in his massive History of Economic Analysis relates how ancient societies were worried about overpopulation, but after about 1600 this changed completely. The prevailing attitude was that “increasing population was the most important symptom of wealth; it was the chief cause of wealth; it was wealth itself.”
“It is quite a problem to explain why the opposite attitude,” Schumpeter wrote, “should have asserted itself among economists from the middle of the 18th century on. Why was it that economists took fright at a scarecrow?” Malthusian pessimism did not develop despite the progress of the industrial revolution, Schumpeter concluded. It developed because of the progress.
Long-run progress, Schumpeter pointed out, causes short-run problems, and
in the industrial revolution of the last decades of the 18th century, these short-run vicissitudes grew more serious than they had been before, precisely because the pace of economic development quickened.
This is not to say that the short-run problems were imaginary. In the short run, technological advance destroyed agricultural jobs faster than it created manufacturing jobs, especially since guilds and the like created bottlenecks. A type of mass unemployment arose that had been unknown in the Middle Ages, and with it urban slums, gin mills, and great social debates over the Poor Laws. Malthus’s pessimism was echoed a few decades later by Dickens. But we now know that during the lives of both men mankind was rapidly building wealth.
If, then, we are currently experiencing a second industrial revolution, it is not surprising to hear such Malthusian themes as overpopulation and the exhaustion of resources echoing through our public discourse. From the primitive technology of a wooden sailing ship, the earth’s forces look overwhelming. Now that we have the technological prowess to put men on the moon, the earth looks like a fragile flower, puny beside our own powers.</p
1 As measured by the gross national product per capita, which was $4,950 for the United States; $2,360 for the European Community; and $1,950 for Japan.
2 The 1980 figures were: for the U.S., $12,000; for Japan, $9,870; and for the European Community, $9,760 (but West Germany came in at $13,340).
3 The 1989 GNP per capita for the United States was $21,000, while Japan’s had soared to $23,810. Distorted by the entry of three poor countries, Greece, Portugal, and Spain, the figure for the European Community was $15,980, or 76 percent of the American level, but Germany at $20,750 was substantially even, while Switzerland, Europe’s top performer, was well ahead at $30,270.
4 In 1988, the last year for which those particular figures are available, the gross domestic product (all factor costs plus indirect taxes minus subsidies, and excluding net factor income from abroad, which is included in the GNP) per person was $19,558 for the United States; $14,161 for West Germany as it then still was; $16,700 for Europe’s champion, Switzerland; and only $14,288 for Japan (as opposed to the straight exchange-rate GNP comparison for that same year, in which Japan’s $20,960 per person already exceeded the $19,820 figure for the U.S.).
5 In 1970, the figures for the United States, West Germany, Italy, and Japan were $4,922, $3,380, $2,848, and $2,765, respectively. Because there was so much inflation in the years that followed, all those figures had greatly increased by 1988. The U.S. figure for 1988 was just under four times greater (x 3.97, to be exact); the West German increase was somewhat greater (x 4.18); the Italian increase was greater still (x 4.55), in spite of the notorious undercounting caused by the explosion of Italy’s underground economy during those very years; while Japan’s figure was more than five times greater (x 5.16).
6 The latest official estimate of the fiscal 1992 deficit is $340 billion—a catastrophic number five times larger than early 1991 White House estimates.
7 From 1970 to 1989, total U.S. savings fluctuated between 12.1 percent and 14.1 percent of the gross domestic product, as opposed to 22.9 percent and 22.7 percent for the European Community average, and 38.9 percent and 34.9 percent for Japan.
8 As late as 1982, our net international investments, holdings, and claims amounted to $136.7 billion, but by the end of 1989 (it is worse now), our net position was minus S663.7 billion, very much more than the combined debt of Brazil, Korea, Mexico, Indonesia, Algeria, Turkey, Portugal, Argentina, India, Malaysia, Greece, and China—most of them countries still poor but developing quite rapidly, for which foreign borrowing is perfectly appropriate, and the entry of foreign investment a clear mark of progress.
9 In 1989, the numbers stood at $7,000 per person for Japan; $3,190 per person for the European Community (by then depressed by the admission of Greece, Portugal, and Spain); and $3,000 per person for the U.S. That miserable number is readily explained by the increase in personal consumption, from $8,650 in 1970 to $12,760 in 1989 (in constant 1987 dollars), as compared to $11,800 for Japan, and $8,830 for the European Community average in 1989.
10 Average hourly earnings in constant 1982 dollars were $8.03 in 1970, $7.78 in 1980, and $7.53 in 1990. Averages conceal many tales, of course, from the rising earnings of federal, state, and municipal employees no matter what, to the degradation of $18-per-hour industrial workers into $10-per-hour janitors, or even their desperate poaching of minimum-wage jobs, once the stepping stones of underclass achievement.
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