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Unlike the War, There’s No Quick Fix for the Economy

DAVID M. GORDON <i> is professor of economics at the New School for Social Research in New York</i> .

In the United States, I gather, post-Gulf euphoria has been spilling over to expectations about the economy, leading many to believe that the United States has kicked not only the “Vietnam syndrome” but the “declining economy syndrome” as well.

Here in Europe, where I am spending the academic year, views are much more mixed.

Some observers think that the Gulf War will indeed help catapult the United States back to its earlier perch as the supreme global economic power. “Before Desert Storm, the view of Europeans of America was really that of a fading country, of a country on a downtrend,” one European investment counselor said last week. “Now they say it would be a mistake to sell America short, that it is the strongest economic and political power in the world.”

But others seem to feel that a simple shift in expectations--a celebratory ride to the summit of American self-esteem--is hardly enough even to address, much less to reverse, the fundamental sources of erosion of relative U.S. economic power.

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Which view is right? Can the United States’ triumph in the Gulf War help restore not only its political and military might but also its relative economic hegemony? Are we about to witness the run of another hit movie, “Pax Americana, Part II”?

I’m on the side of the skeptics. Given my understanding of the sources of persistent stagnation in the U.S. economy since the late 1960s and early 1970s, I think that the decisive U.S. victory in the Gulf, and the increased military and diplomatic power that it augurs, will ultimately have remarkably little impact on U.S. economic malaise. If anything, it may make matters worse.

We should be clear, first of all, that we are not talking just about the problem of the current (and somewhat unpredictable) recession. The issue is not how quickly the U.S. economy will climb out of the immediate recessionary doldrums, which it would have done sooner or later with or without a Gulf War. The issue, rather, is whether and how the U.S. economy might reverse the steady decline in its economic performance during the past two decades.

The basic statistical record helps highlight how serious that slide has been and how much of a reversal would be necessary:

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In the 1966-73 business cycle, at the end of the long postwar boom, fueled by the Vietnam War, average annual growth of real GNP was 3.1%, while average annual growth of the real capital stock--one useful measure of investment performance--was 4.4%. During the stagflationary 1973-79 business cycle, which everyone loved to kick around in the early 1980s, real GNP growth slumped to 2.5% a year and real capital growth dropped to 3.5%. During the 1979-89 business cycle, despite the long expansion after 1982, real GNP growth continued to stagnate, essentially remaining flat at 2.6% a year, while the same measure of investment performance fell even further, sinking to 2.6%.

Compared to other advanced economies, the United States continued to slump. During the 1980s, among the largest seven advanced capitalist economies, the United States ranked seventh--dead last--in measures of both investment performance and productivity growth. The conservative supply-siders promised a sleek, soaring turbine engine, but in the end they didn’t even manage to change the flat tires.

There are many sources of this longer-term decline in U.S. economic performance. Among them, declining productivity growth has clearly been central. And as Samuel Bowles, Thomas E. Weisskopf and I argue in our new book, “After the Waste Land,” sluggish productivity growth in the United States stemmed in large part from the huge costs of trying to run a modern economy with outmoded methods of labor discipline--building top-heavy supervisory bureaucracies, threatening workers with the iron fist of dismissal rather than involving them as cooperative partners in production.

So let’s take that source of decline as a test case: Will resurgent U.S. military and diplomatic power do anything to address and help reverse sluggish U.S. productivity growth?

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In the short term, post-Gulf euphoria may help reverse the slide of the dollar since 1985, pumping it back up at least to pre-1990 levels. And this may help keep foreign capital pouring into U.S. financial institutions. But will that help boost investment and productivity growth? The problem during the 1980s has not been a shortage of capital--witness all the mergers, junk bonds and real estate speculation--but weak incentives to invest that money productively. If many U.S. firms have been reluctant to modernize or train their workers or look beyond the bottom line of the next quarterly report, why will continuing infusions of foreign capital change their behavior?

Over a somewhat longer period, of course, renewed U.S. military vigor might help open up additional foreign markets--as, for instance, through an increasingly dominant U.S. role in various free-trade zones in North, Central and South America. But that would mostly have the effect, over the longer term, of allowing U.S. firms to continue to coast, reducing further the pressure to modernize. And so, as a result, U.S. workers would continue to face declining real wages, the pressure to work longer and harder hours, the continuing threat of job loss from low-wage foreign competition.

I could go on. But I hope the basic point has begun to crystallize. The United States enjoyed the first run of its global hegemony because after World War II it possessed unparalleled military and economic might, accounting in the late 1940s for close to half of global industrial production. The first run of Pax Americana led to relatively easy and sustained economic power because it began with such unrivaled economic power.

Those days cannot be retrieved. Europe and Japan and the newly industrializing countries cannot be pounded into economic submission. Reviving the U.S. economy will require long, careful and compassionate commitment to improved productive performance, better-trained workers, a continually modernizing infrastructure.

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Gulf War euphoria diverts us from those longer-term economic imperatives. The Gulf War, in many respects, reflects the superpower’s predilection for the quick fix, the easy victory, the thunderous knockout. The ease of our victory leads us to believe that our economic problems can somehow be fixed as quickly and as easily. No such luck.


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