U.S. Economy Is Still Kicking : It’s More That Others Are Gaining Than That We Are Failing

<i> Robert J. Samuelson writes on economic issues from Washington. </i>

It’s an accepted bit of popular wisdom: We’ve become a nation of self-indulgent spendthrifts. We overconsume and don’t invest enough for the future. We’re digging our economic grave. Now come economists Irving Kravis of the University of Pennsylvania and Robert Lipsey of New York’s Queens College, who say that it isn’t so. Americans invest about as much as people do in other advanced nations.

Kravis and Lipsey are among a growing group of economists who argue that reports of the United States’ economic eclipse may be premature. Yes, they say, other countries have tended to catch up by adopting our technologies and business practices. But U.S. living standards remain higher than most other countries’. Nor is it clear that other nations can close the gap. Once they’ve exhausted the easy gains of the catch-up, their economic growth typically slows.

Exaggerating our economic decline abets a siege mentality. It makes us want to withdraw and protect ourselves against threatening foreign economies. The real lesson is that the advances of other nations make it more imperative than ever for us to remain internationalist. No nation has a monopoly on creativity. We now need to borrow good ideas and techniques from other countries, just as they’ve borrowed from us.


The lesson applies forcefully to the trade bills before Congress. Limits on imports or foreign investments in the United States will ultimately hurt us. Trade and investment bring new products, technologies and management approaches. They generate pressures for change, even if they’re sometimes disruptive. We cannot create a stronger economy by isolating ourselves. The temptation to do so reflects a distorted view of the United States in a state of irreversible economic decline.

It’s true that many nations have lost their economic supremacy--most recently Great Britain. Our day may come, but, as Princeton economist William Baumol writes, there’s no evidence that it has arrived. Other nations aren’t inexorably gaining. Japan’s economy grew about 10% annually from 1950 until the early 1970s; in 1986 it grew only 2.5%. Europe’s growth has slackened, and we can realistically expect that other fast-growing economies --South Korea and Taiwan, for instance--will slow once they’ve duplicated advances elsewhere.

Meanwhile, U.S. per-capita income--our total output divided by 240 million Americans--remains well above the levels in Japan and Europe. In 1986 the U.S. percapita income was $17,200, according to the Organization for Economic Cooperation and Development. By contrast, Sweden’s was $13,200, West Germany’s $12,900 and Japan’s $12,200.

These comparisons estimate the actual purchasing power of incomes in different countries. Consider a simple example: Suppose that people buy only shoes and that per-capita incomes in the United States and France are $1,000 and 1,000 francs. But Americans are more efficient in making shoes than the French. As a result, the average American’s $1,000 buys 10 pairs of shoes while the average Frenchman’s 1,000 francs buys 7 pairs. French incomes would then be 70% of American.

Other comparisons that show U.S. incomes slipping reflect only exchange-rate shifts and aren’t accurate. Since early 1985, for example, the dollar has depreciated more than 40% against the yen. At today’s exchange rates, Japanese incomes are slightly higher than U.S. incomes. But exchange rates don’t mirror peoples’ actual living standards. The Japanese obviously haven’t become 40% richer in two years, nor have we become 40% poorer.

Our ability to increase future living standards may depend on investment, but, as Kravis and Lipsey point out, it’s not clear that U.S. investment is too low. No one knows how much countries should invest. Saving and investing, instead of consuming, aren’t automatically beneficial. They make sense only if they improve future living standards or quality of life. The belief that Americans invest too little stems from comparisons showing that our investment rate (investment as a proportion of gross national product) is 15% to 40% lower than any other nation’s.

But these estimates, Kravis and Lipsey argue, involve two flaws: First, the conventional definition of investment (in housing and business) is too narrow; it excludes many things (education, research and development) that are also investments in the future. Second, machinery and other capital goods are relatively cheaper in the United States than elsewhere; our spending buys more. Adjusting for these defects brings U.S. investment levels close to most other nations’.

We can take only small comfort from these findings. Our problems remain. As a society, we are having more trouble raising living standards now than 20 years ago. In many technologies we are no longer the world leader. Our schools are often inadequate. But we aren’t the only country with problems.

It’s unsettling to live in a world in which we’re threatened, both psychologically and economically, by others’ advances. But we need to accept this new condition or risk losing the benefit of those advances. We have not declined so much as others have caught up. That’s the message from Kravis, Lipsey, Baumol and others. In an era of multinational companies, growing trade and improved communications, the process was inevitable. If we see it as our undoing, we may make it so.