Economies of Eastern Europe and the Soviet Union are in disarray. Communism has failed to provide what people need. Which raises a question about U.S.-style capitalism . . . : How Are <i> We</i> Doing

The U.S. economy, it would seem at first glance, is doing just fine.

Communist governments topple across Eastern Europe. The Soviet economy--once an ambitious U.S. rival--combats chaos. By contrast, most Americans’ worries seem trivial: a spurt of inflation, a bout of unemployment, a drop in sales.

All in all, “the U.S. is probably the richest country that ever was--by a long shot,” declares John H. Makin, a resident scholar at the American Enterprise Institute in Washington.

Yet, increasingly, America’s version of capitalism is viewed as a role model that is stumbling. In a variety of ways--from paying workers to competing in technology--other advanced societies are progressing faster than the United States. Gradually, America’s once-towering lead in prosperity is disappearing.

At current rates, a handful of nations will surpass America’s standard of living early in the next century: “It looks like we’re going to catch up with England on the downhill escalator,” warns Stephen S. Cohen, director of the Berkeley Roundtable on International Economy.

Certainly, U.S. economic decline is not preordained. Look at how dramatically Japan and West Germany have reversed their misfortunes since World War II. Still, if economies could be graded, many analysts would rate America’s a “C”--or worse--in some vital areas:

* Improving living standards. The U.S. standard of living has risen little since the early 1970s. Moreover, improvement in the 1990s will require gains in productivity that may prove hard to achieve.

* Sharing the wealth. Despite America’s widespread affluence, its impoverished live as deprived a life as can be found in any advanced society.

* Saving for the future. Most advanced countries save a larger share of their income, making money available to modernize industry--a key advantage in global competition.

* Competing in leading-edge technologies. In the 1980s, the United States slipped sharply in relation to Japan in high-tech markets once considered unassailable, such as computers and microelectronics.

In hindsight, the U.S. economy was bound to lose some of its lead over the rest of the world. As Japan and Western Europe rebuilt their economies after World War II--with U.S. aid--it was only natural that their new, modern factories would generate wealth swiftly.

And in today’s climate, where information and technology spread with lightning speed, no nation can maintain a huge economic advantage as easily as America once did. What really matters for any national economy, experts say, is that its key industries keep up with foreign rivals and that its citizens enjoy a steadily improving standard of living.

“The U.S. is getting richer, but other countries are getting richer faster,” Makin maintained.

Indeed, the U.S. economy performed strongly in the 1980s, albeit a period of gaping deficits in trade and the federal budget. It grew briskly and generated millions of new jobs, while prices stayed under control. Of the world’s leading economies, only Japan’s 1984-88 growth rate of 4.5% outpaced the United States’ 4.3%.

America retains an intangible edge over other nations in a more fundamental sense: It remains a place where skilled, enterprising people can move upward, as the continuing wave of immigrants attests. Barriers of social class or even education do not limit opportunity as much as in other nations.

“If your father was a construction worker, the probability that you’re going to end up a lawyer is significantly higher in the U.S. than in other countries,” said Edward P. Lazear, a University of Chicago professor and head of domestic studies at Stanford University’s Hoover Institution. “I think that’s a big plus.”

Yet in other ways, America stands out in an unfavorable light. Its progress in living standards has failed to keep up with that of other advanced nations. Many countries now have literate, educated labor forces that are better prepared for the demands of a modern industrial economy than are U.S. workers.

Everyone knows of Japan’s competitive gains, abetted by a system in which government, banks and corporations act as a team, unlike America’s every-capitalist-for-himself approach. In the 1990s, Japanese banks--boosted by the strong yen and weak dollar--will play an increasingly influential role in global finance.

More than its capitalist rivals, America’s economic credo seems to be: Sink or swim. As the economy expands, opportunities endure for the able and strong. Western Europe--with broader social protections--suffers lower rates of poverty, homelessness and infant mortality than does America.

“The average American still enjoys a higher living standard than in other major countries, but the bottom 20% don’t do well here,” said Robert Z. Lawrence, an economist at the Brookings Institution in Washington.

Disappointing Growth

The reason America still has the top living standard is that U.S. industry remains the most productive of all major nations. The link between productivity and prosperity is crucial: As companies learn to make things more efficiently, the value of each worker rises and employers can afford to pay each worker higher wages.

In other words, rising productivity yields a rising standard of living.

And that very link is what a growing number of economists are fretting about. U.S. productivity growth, particularly in the service sector, has been disappointing much of the time since the 1970s. Typically, households have gained prosperity because more members are taking home a paycheck, not because wage rates have outpaced the cost of living.

The reasons are not clear. “People have been trying to figure this (productivity slump) out for so long,” said Kathleen B. Cooper, chief economist at Security Pacific National Bank in Los Angeles. “It is a frustrating issue.”

One factor: Gains in service productivity are hard to measure, and a growing number of Americans work in service industries. After all, it’s easier to count the number of auto parts gliding down an assembly line than to compute the benefit of adding an additional telephone operator at a commercial bank.

Whatever the causes, the productivity of workers in Japan and much of Europe seems to have grown faster between 1979 and 1988 than it did in the United States, according to the Paris-based Organization for Economic Cooperation and Development.

Japan’s productivity rose an average of 3.3% annually between 1983 and 1987; America’s rate was just 1.5%. If recent trends continue, Japan, France, Italy and South Korea will surpass the United States in overall productivity--and prosperity--by early in the next century, according to the American Productivity and Quality Center in Houston.

“To the extent that your productivity increases, so will your standard of living,” said Peter Perkins, an international economist with DRI/McGraw-Hill in Lexington, Mass.

The forces pressing America’s rank downward are not a total mystery, however. One of the surest ways to boost productivity, experts counsel, is to invest more in modern technology. But America’s priorities for spending and saving appear at odds with this goal.

At the individual level, American households might be graded a “D” for saving far less money than those in other wealthy countries.

U.S. households saved just 4.4% of disposable income in 1988, for example, devoting income to homes, autos, clothing and entertainment that otherwise could have been invested. That compared to household savings rates of 15.2% in Japan and 12.6% in West Germany, according to OECD. Free-spending U.S. households aren’t the only reason for the disparity.

In part, Americans are responding to government policies that encourage consumer spending, such as tax breaks for home purchases and home equity loans.

“We’re the only industrialized country that says, ‘We’ll subsidize your mortgage on a million-dollar home,’ ” said Bruce R. Scott, an economics professor at Harvard University.

Combined, the large federal budget deficit and low savings rate leave a smaller portion of America’s gross national product for investment in private industry than is the case for America’s economic rivals. Consider: U.S. private investment in industrial facilities and equipment totaled 10% of the overall economy in 1988, according to DRI. By contrast, Japan’s comparable investment was 17.4% and Germany’s was 12.2%.

The U.S. stake remains larger in absolute terms because its overall economy is larger. If such spending is considered as a national priority, however, America’s effort comes in third.

The stakes? Other nations are “enhancing their workers at a faster rate than the U.S. is, and that means they’re going to enhance their living standards accordingly,” Perkins said.

The United States also gets a “C” or worse in another important aspect of enhancing its workers: teaching young people the basic skills needed in a modern, technological economy. It may not be for lack of spending, however. By some measures, America spends as much or more on schooling its young than do most other countries.

Lackluster Students

The proper way to make accurate international comparisons of such spending remains at issue. But the lackluster attainment of U.S. schoolchildren does not. A 1989 federally financed study ranked U.S. 13-year-olds last in mathematical achievement when compared to students from South Korea, Great Britain, Ireland, Spain and four Canadian provinces.

In the study, some two-thirds of U.S. pupils described themselves as “good at mathematics.”

In contrast to America’s grade schools, U.S. universities are considered the world’s best. This asset alone, however, is not sufficient to ensure success in economic competition. Worldwide, U.S. market share in computers, microelectronics, telecommunications, scientific equipment and other products all declined in the 1980s, mostly to Japan, according to statistics published by the Central Intelligence Agency.

Will the 1990s offer a reprieve? Some believe that the situation will get even tougher.

One source of competition: An increasingly close-knit Western Europe, once derided for terminal economic sluggishness, looks more formidable than it has for decades.

“In consumer electronics, in automobiles, in instrumentation, their industries are every bit as good as ours, and some of them may be improving faster than ours are,” said Robert M. Solow, an economist at Massachusetts Institute of Technology and 1987 Nobel laureate.

For the majority of Americans who still enjoy a high standard of living, issues of the U.S. economy may seem a remote abstraction. But for the poor or near-poor, America’s economic limitations are immediate and painful.

Widening Gulf

A distinctively American feature, according to analysts, is the gulf separating rich and poor.

When economists in one international study divided the U.S. population by levels of wealth, they found that 24% were either poor (with income of less than half the national median) or nearly poor. By contrast, fewer than 13% of West Germans fell into these categories and just 10.5% of Swedes. Japanese data were not available.

In particular, researchers with the Luxembourg Income Study found, America had unusually high numbers of children living beneath the poverty line, based on 1980 statistics.

“We don’t do very well as far as the economic well-being of children is concerned, as far as we can tell,” said Timothy Smeeding, a Vanderbilt University professor who worked on the international study.

America also lags behind advanced nations in other quality-of-life gauges, according to the Economic Policy Institute, a liberal Washington think tank. When EPI researchers compared living conditions in the United States, Japan, West Germany and Sweden in the early 1980s, America ranked last in infant mortality, male life expectancy and equality of income distribution.

The United States led the way only in home ownership, living space per person and spending for medical care.

How could the same nation appear the most committed to health-care spending and still have the worst record for infant mortality? The answer may be that health-care benefits, like income in general, are parceled out less equally in America than in other affluent nations.

“We allow 33 million people, at least, to be uninsured for health,” notes Lawrence R. Mishel, research director at EPI, which conducted the study. Yet, even as America’s problems take a toll on its prestige, its economy still has a great deal of influence.

European workers may enjoy more generous unemployment benefits than do their U.S. counterparts, but they are forced to use them more often. Among large nations, only Japan has had a lower unemployment rate than the United States in recent years.

Thus Sweden--famous for its sweeping social protections--is cutting income tax rates to spur growth, a move taken by the United States in the early 1980s. Australia is deregulating its airline industry, years after the United States did.

And the U.S. emphasis on private enterprise has spilled over to governments that once proclaimed the benefits of state ownership of major industries. France has turned major banks over to private owners in recent years, and Japan has done the same with railroads.

“It begins to sound like the whole Reagan program is a characteristic” of Western Europe, observed an OECD economist.

In the 1990s, Americans may even start to mend their spendthrift ways, expanding the pool of investment for industry. A middle-aged baby boom generation will reach its peak earning years, a period when people traditionally step up their saving.

Nor is it decreed that America will fail to enhance its productivity, and more important, its standard of living. If the U.S. economic score card has been less distinguished of late, a turnaround is possible, economists say.

“Can we have standards of living that are the envy of the rest of the world? No, I don’t think we can. It’s not in the cards anymore,” said Frank Levy, a professor of public affairs at the University of Maryland.

“But can we have standards of living that are as good as the best countries? Can we continue to improve? Sure; that’s within our grasp if we want to do it. But it takes work.”

GROWTH AND PRODUCTIVITY Gross national product/Gross domestic product

Percent change from previous year

(Projection) Average Average Average 1988 1989 1990 1991 1960-73 1974-79 1980-82 United States 4.4 3.0 2.3 2.5 2.5 2.6 -0.3 Japan 5.7 4.8 4.5 4.3 6.3 3.6 3.7 OECD Europe 3.7 3.5 2.8 2.7 4.7 2.6 0.9 Total OECD* 4.4 3.6 2.9 2.9 4.8 2.9 1.0

Average Average 1983-87 1988-89 United States 4.0 3.7 Japan 4.0 5.2 OECD Europe 2.5 3.6 Total OECD* 3.4 4.0

Productivity

Percent change from previous year

(Projection) Average Average Average 1988 1989 1990 1991 1960-73 1974-79 1980-82 United States 2.1 1.0 1.2 1.1 0.7 0.0 -0.5 Japan 3.9 2.8 2.8 2.7 5.4 2.9 2.7 OECD Europe 2.4 2.3 1.9 2.1 4.3 2.2 1.4 Total OECD 2.5 1.8 1.8 1.8 3.7 1.6 0.9

Average Average 1983-87 1988-89 United States 1.5 1.5 Japan 3.1 3.3 OECD Europe 1.8 2.3 Total OECD 2.0 2.1

* OECD members are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, West Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

Source: Organization for Economic Cooperation and Development

WAGES AND PURCHASING POWER Los Labor costs in some other countries now exceed those in the United States. But U.S. workers’ paychecks are still believed to go farther than those of their counterparts in other advanced country. Figures are for 1988. UNITED STATES: $13.92* / $13.92** WEST GERMANY: $18.03* / $13.09** SWEDEN: $16.82* / $11.52** FRANCE: $12.96* / $10.48** UNITED KINGDOM: $10.49* / $9.80** JAPAN: $12.72* / $7.88** * Total hourly compensation in manufacturing wages ** Comparative purchasing power for manufacturing workers Source: Organization for Economic Cooperation and Development, Board of Labor Statistics