We Already Lack Will; Soon We’ll Lack Means

During the 1980s, when the going seemed good, Americans went shopping. Consumers, corporations and the government itself adopted a live-for-today attitude that heavily discounted the future. Now, faced with recessionary conditions and hostilities in the Middle East, we find that the future is upon us and that the shortcomings of our shortsighted ways are becoming painfully obvious.

The U.S. economy is entering a recessionary period saddled with a problem that it did not have in earlier recessionary periods: a huge federal deficit. We frittered away the opportunity to increase taxes and curb spending when the economy was strong--when private spending could have taken up the slack created by cutbacks in public demand. Now we are forced to find solutions when the economy is weak, and when higher taxes and lower government spending promise to make a bad economic situation even worse.

Ideally, of course, skilled fine-tuning of monetary and fiscal policy would offer a possible way out of our dilemma. If our policy-makers were extremely clever--and extremely lucky--they might hit on exactly the right dose of fiscal austerity and monetary ease to reduce the deficit and stimulate private spending. Indeed, this is the prescription advocated by government and private economists. But are our policy-makers able to carry it off?

It was politically impossible to get agreement on a deficit-reduction package when the economy was performing well. What are the political odds of reaching such an agreement if the economy enters a full-scale recession and if taxes on gasoline and cuts in defense spending are ruled out by developments in the Middle East?

Likewise, it was difficult to get the Federal Reserve to relax monetary conditions even as private spending began to falter and key regions of the country were strangled by a credit squeeze. In fact, many economists believe that the Fed’s tight monetary policy, pursued in an effort to realize the goal of an inflation-free economy, is the major cause of the current slowdown. What are the odds that the same Fed will ease interest rates now, when there are growing fears about the inflationary effects of higher energy prices?

Even if the Fed becomes convinced that recessionary trends warrant easier monetary conditions, it may be unable to deliver them. The Japanese and European economies are booming, and higher energy prices will aggravate incipient inflationary pressures. Under these conditions, the most likely response will be tighter credit and higher interest rates abroad.

If the Fed does not follow suit, it risks sharp declines in the dollar’s value and in the inflow of foreign capital on which we still depend to finance a significant portion of our fiscal deficit. The sorry truth is that the Fed is in no position to run an independent monetary policy to stimulate the American economy. We sacrificed our policy discretion when we became a debtor nation to maintain our spendthrift ways.

Unfortunately, we did not use the inflow of foreign money to build a stronger economy. Real government spending on the inputs for a productive private economy--education, nonmilitary research and development, and the nation’s infrastructure--declined. Even in the military, where we spent big, we spent wastefully and foolishly. . We lost billions of dollars in military cost overruns and excess inventories of equipment. Many of the sophisticated weapons designed to counter the Soviet Union will prove useless in confrontations with more likely future adversaries.

Where we slashed spending, particularly for programs targeted at the most disadvantaged portions of our population, we laid the foundation for the social and economic problems that will haunt us well into the next century. We stand out among advanced countries for having the poorest achievement levels in elementary through high school education, the largest homeless population, the most pressing drug problem, the worst health-care crisis, the most murderous crime statistics and the largest incidence of poverty among children.

Our own history and the experience of these other countries, most of which have matched or surpassed our overall living standards, demonstrate that these problems are not the inevitable consequence of economic growth in a capitalist economy. Rather, they are our own creation--a product of our selfish shortsightedness. And they will prove much more difficult to address in a period of lower growth and budgetary austerity.

Like the public sector, the private sector also shortchanged the future during the 1980s. The net national investment rate in the 1980s was below that of the 1970s and the 1960s--three decades of a declining commitment of additions to the nation’s capital stock. American companies borrowed heavily, often not to finance investment in new machinery or even to buy new financial assets, but rather to buy up their own stock through such devices as leveraged buyouts.

As a result, debt increased, much of it built on excessively optimistic projections about future growth and cash flow. In a recession, many heavily indebted companies will face bankruptcy, making the economic slowdown even worse.

By the end of the 1980s, Japan, an economy half the size of ours, was out-investing us by $60 billion per year and spending nearly as much as we were on commercial research and development. And because its consumers, unlike ours, were saving substantial fractions of their incomes, Japan was able to finance its own investments while lending huge amounts to us and the rest of the world.

Given current trends, Japan will overtake the United States as the unparalleled leader in manufacturing productivity and industrial technology by the end of the 1990s. Indeed, this has already occurred in a number of critical industries. Perhaps most telling is that we no longer greet such projections with surprise.

Nowhere does American shortsightedness seem more dramatic than in the energy area. As world energy prices eased, we slashed public funding for development of alternative energy sources. The market, our government assured us, would solve any problems that might arise. Despite our growing revenue needs, we assiduously avoided increasing taxes on gasoline. By the end of the decade, our gasoline prices were as cheap as they had been in real terms before the first oil crisis and $1 to $2 lower per gallon than they were in the other advanced countries.

In the absence of a national energy policy, lower oil prices drove domestic producers out of the marketplace, leaving the United States increasingly reliant on imports. When concerns about the wisdom of this strategy were raised, it was defended as the product of market forces. But when three nations--Iraq, Kuwait and Saudi Arabia--situated in a single corner of the world and motivated by more than short-term profits, control 40% of the world’s oil reserves, is it sensible to base the nation’s energy choices on the fiction of a free market?

Again the contrast between the United States and Japan is instructive. Japan used a combination of high taxes on gasoline, strict energy consumption goals for automobile manufacturers and conscious efforts to shift resources to less energy-intensive activities to reduce its dependence on imported oil.

Japan gets nearly three times as much output from a barrel of oil as it did in 1973, and it is far more energy efficient than America in producing everything from textiles to steel and automobiles. The Japanese government also worked with the private sector to diversify the sources of its energy imports; in the United States the government and the private sector had their backs turned while “market forces” drove us toward greater dependence on imports from the Gulf states.

During the 1980s, we had the wealth but not the will to secure our economic future. During the 1990s, we may have neither.