Leaving a Legacy of Overdue Bills
By pre-Reagan criteria, American economic performance since 1980 has been at best mediocre. New jobs have been generated at a rate slightly below the Carter Administration’s record. Average unemployment has been higher than in any other eight-year period in the post-World War II era. Productivity growth has fallen well below the 2.5% to 3% of the 1950s and ‘60s. Not only Japan and West Germany but even Britain have registered larger productivity improvements.
As a result, growth in family income has been painfully small and largely the consequence of still-increasing labor force participation by married women. Most new jobs have been in service industries, some well-paid but most less well compensated than jobs in manufacturing. More Americans somehow survive below the poverty line than in 1980.
Moreover, at least four patterns of national behavior threaten future competitiveness in international markets.
Our saving rate remains stubbornly low, partly because our tax system perversely rewards borrowing. Second, our educational system continues to produce hordes of scientific and mathematical illiterates. A Japanese high school graduate leaves school as well educated as an American college graduate. Fewer and fewer Americans enroll in graduate science and engineering programs. The foreigners who flock to them sometimes stay here, but increasing percentages return to their own countries.
Even more disquieting is the low percentage of gross national product we have been devoting to civilian research and development--a third American weakness. We have surrendered high-definition television to Japanese producers. Basic research in superconductivity has been substantially American, but the Japanese seem poised to dominate its development and commercial application. Faithful to free-market principle, the Reagan Administration has been unwilling to counter Japan’s planned and coordinated strategies of market invasion with coherent initiatives of its own. On existing evidence, adherence to free-market dogma is no match for the neo-mercantilism of our Asian and European rivals.
Finally, there is the dangerous shift of corporate and financial emphasis from making tangible products to shuffling and reshuffling financial assets. Something is awry when the senior partners of Kohlberg Kravis Roberts & Co. walk away at year’s end with $50 million each. Leveraged buyouts enrich investment bankers, astute corporate executives, some but not all stockholders and high-powered lawyers. They create no manufacturing capacity, fund no research and development and destroy a great many jobs.
Since no corporation--not even General Electric or IBM--is exempt from the threat of a megadeal, top executives perforce waste precious time and resources in the hunt for protective strategies. A quiescent Federal Trade Commission and Justice Department smile benignly on such patently anti-competitive mergers as the marriage of Kraft and Philip Morris.
President Reagan leaves an economy awash in consumer, corporate and government debt, the last the reason why real interest rates are historically high. The exceptional corporation that expands plant or installs new technology pays far higher interest rates on borrowed funds than its West German and Japanese rivals. High mortgage interest rates exclude from the housing market increasing percentages of young families. So long as foreign funds are required to finance federal deficts, our monetary policy is held hostage to the returns deemed acceptable by the lenders. Debtors dance to creditors’ tunes.
Agreement is general among economists that the next administration must move swiftly and credibly to shrink the federal deficits. Harvard’s Benjamin Friedman in his persuasive book “Day of Reckoning” argues that, at best, improvements in living standards will for some years be reduced by our need to service and repay our debts to the rest of the world.
At worst, presidential and congressional cowardice threatens deep recession and financial crisis. Interestingly, a Republican loyalist like Murray Weidenbaum, Reagan’s first Council of Economic Advisers chairman, broadly agrees with Friedman’s diagnosis in his somewhat less ominously titled book “Rendezvous With Reality.”
In only one respect has Reaganomics succeeded. It has lowered middle-class expectations. Today’s baby boomers grew up in the Ozzie and Harriet era. Ozzie went to work and Harriet stayed home in their pleasant suburban house with the kids. Ozzie might have been one of William H. Whyte’s faithful corporate organization men or merely a production worker in a strongly unionized auto or steel plant. There would always be a U.S. Steel. In those days, corporations were proud of their names and products. When mortgage rates were low and wage and salary hikes routine, a single income bought house, car, boat, hunting rifle and standard package of appliances.
Two incomes in the 1980s frequently buy less than one did a generation ago. Members of the broad middle class--with family incomes between $25,000 and $60,000--work harder for less return than their parents did. A strange historical amnesia has apparently extinguished childhood memories. On the polling evidence, most of this group report satisfaction with their personal financial situation.
As the curtain falls on Reagan credit card prosperity, the country faces its consequences, an economy and society poorly prepared for continuing challenge from Japan and, after 1992, an intensified threat from an integrated European Community.
