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Insolvent America

Our response to the oil crises, of the 1970s was dangerously reminiscent of our behavior during the Vietnam war. In both cases, we were profligate. Waging the Vietnam war to contain communist expansion, we expended lives and treasure and spread destruction in a region that was hardly vital to our national interest. In refusing to curb our use of imported oil, we not only put ourselves in economic jeopardy through inflation but we made ourselves dependent on oil supplies far away from us, and controlled by unstable governments adjacent to Soviet forces whose geographical proximity gave them a clear tactical advantage.

Moreover, in becoming so dependent on imported oil we have dangerously extended the range of our vital interests to the point where the security of the Persian Gulf has become for us a matter of life or death. We have neither earned enough abroad to cover the ever higher oil bills for imported oil nor significantly reduced oil imports. Had we been determined to do so, we could have combined higher earnings from the exports of our goods and services with reduced consumption of imported oil through both conservation and substitution, and so counterbalanced the oil price increases.1

We did not do so. We did just the opposite. Our oil imports nearly doubled between 1972 and 1978. Inflation rose along with consumption. As inflation rose, so did the cost of imported oil as the oil-producing countries hiked their prices. These price rises worked as a kind of foreign tax on the United States. They simultaneously reduced our capital for domestic investment, thus slowing growth, while raising the cost of energy even higher and so contributing to higher inflation.2 No explanations will ever suffice to make future generations understand the timidity of politicians who refused to say that the game was over and that we had to conserve oil immediately, even if this meant imposing a stiff gas tax or the draconian solution of gas rationing. Not to do so was folly even less explicable than that of the Vietnam war.

Furthermore, our relations with our allies became gravely strained when we exhorted Germany and Japan in 1977 to stimulate their economies, even at the risk of inflation, in order to buy more US goods, although we had made little serious effort to reduce our own oil dependency. In their eyes we were seen as the worst energy wastrel of all, while, even with their best efforts, continental Europe and Japan will remain for some time to come truly dependent on Persian Gulf oil—Western Europe for about 60 percent of its oil imports and Japan for 70 percent. They are highly vulnerable to any oil cutoff. So are we—but we need not be if we take steps to reduce oil dependency in that part of the world.

The figures revealing our vulnerability to a cutoff of oil supply from the Persian Gulf present us with a fateful paradox: while we increase our reliance on potentially hostile oil producers, we are also in a position to remove this very dependence. At the end of the 1970s, for example, oil consumption was about 49 percent of total US domestic energy consumption. Imported crude oil came to about 45 percent of the oil we consumed. Since Persian Gulf oil made up about 31 percent of these imports, this meant that this oil, highly vulnerable to a cutoff, constituted about 14 percent of total US oil consumption,3 or nearly 7 percent of all the energy America consumes.4 Moreover, since Persian Gulf oil is a dominant portion of the world oil export market, any cutoff from the area affects the price and availability of imported oil anywhere in the world. An American energy program to reduce our dependence on imported oil—and, in particular, Persian Gulf oil—would allow the United States a new freedom of action in countering Soviet or any other threats to the stability of the Persian Gulf region.

Even if the supply of oil from the Gulf were not vital to the United States, it would be vital to our allies in Europe and, especially, to Japan. Thus the Gulf remains a serious geo-strategic US interest, no matter what domestic energy policies we pursue. Nonetheless, by reducing our dependence on imported oil, we ourselves would not be so vulnerable in the Gulf and therefore would be free to act in whatever way might serve our interests in protecting and promoting the oil flow to our allies. Moreover, by eliminating our dependence on Gulf oil, we could then put it to our allies to take the lead in developing policies to ensure their own supply of oil from the region, assuring them that America would back them up by whatever political, economic, and military measures we might deem necessary.

If both our allies and our adversaries—whoever they may be—realize that America is not dependent on Persian Gulf oil, not vulnerable to an oil cutoff, then they will appreciate that we have enormous freedom of maneuver to sustain our allies in their efforts to protect their continuing vital interests. For if it is clearly understood—and it should be—that the security of the European continent, Great Britain, and the western Pacific are vital to the security of the United States, then it must also be understood that we are willing and able to help our allies in the Gulf region if their interests there are truly threatened. This we can do most effectively if we ourselves are free from the constraints that dependence, vulnerability, and industrial weakness impose.

Is it possible for the US to have again a solvent economy? When we became increasingly less competitive in the 1970s—with declining productivity and growing inflation—we did nothing to meet that problem as we continued to finance the growth of factories outside America where labor was cheap, machinery was new, and productivity was rising.5 In this way, American investment abroad not only provided modern technology for other countries but also allowed us, for example, to make our television sets abroad with cheap labor and then sell them to ourselves for less than they would have cost if they were made at home. At the same time, we did not create conditions in the United States to encourage capital formation—from whatever source—that would have promoted investment in new industries and kept America in a high competitive position.

By the end of the decade, our manufactured goods had become less desirable even though many of them had become cheaper to buy. Because we had not invested enough in modernizing our plants, the quality of our durable manufactured goods deteriorated and they were no longer preferred, as they once had been, either abroad or even at home. According to polls, in 1980 nearly 50 percent of Detroit’s engineers believed that the Japanese produced the best cars in the world.6

Our response to losing markets for our goods has been to protect ailing domestic industries, such as the steel and auto industries, by restricting imports through tariffs and quotas and relying on markets at home or within our own sphere of influence that are receptive to our goods. In the long term these policies will produce a world of competing national states or groupings, each of which will impose its own trade barriers, and these barriers will in turn lead to a further deterioration of our domestic industries, freed from the need to confront foreign competition.

In the steel and auto industries, it is not a question of competing with cheap foreign labor for by 1978 the US average earnings were only 6 percent higher than in Germany and Japan.7 It is a matter of efficiency, of worker productivity, of antiquated plants, of poor management committed to quick profits rather than long-term investment, and a government that held gasoline costs at an artificially low level, encouraging automakers to build fuel-inefficient cars. Of the seven major economies in the non-communist world since the mid-1960s—Japan, Germany, France, Italy, Canada, the United Kingdom, and the United States—the American economy has had the lowest annual growth in real gross national product per employed worker, a telling index of American productivity. For example, Japan heads the list with 3.4 percent growth per worker from 1973 to 1979, whereas the United States is at the bottom, with only 0.1 percent, the weakest of the lot in its ability to deliver gains in productivity.8 With declining productivity come higher unit labor costs, since business cannot offset higher payroll costs with increased production per worker. The result is more inflation in retail prices of manufactured goods.

Today the average US plant is twenty years old, compared to the average in Germany of twelve years and in Japan of ten years. One way we can improve our rusting industrial plant and provide employment for workers who otherwise may have to be laid off is to encourage foreign investment in specific sectors—such as the automotive assembly factories that Volkswagen has built in Pennsylvania and Honda is planning in Ohio.9 But encouraging foreigners to restore American productivity is inadequate if we are to improve our competitiveness in the world market. We must be able to compete with products from other industrialized societies; otherwise we will find that our own industrial base will stagnate further.

We still depend on sales of high technology products for many of our export dollars—about 40 percent of our exported manufactured goods at the end of the 1970s.10 Yet though the proportion of US resources devoted to research and development is higher than anywhere else, it is becoming a declining fraction of our gross national product, while it has been rising in Germany, Japan, and France, our main competitors.11 These countries, moreover, have devoted far smaller proportions of R and D to defense than the US and have instead concentrated on research that applies to civilian production—a pattern that helps to explain the relative decline in productivity and competitiveness of the US.12

In these circumstances, a rational strategy for competition among advanced industrial societies would be to look ahead to determine which industries are likely to grow stronger and encourage them. This is what Japan tries to do, whereas the United States moves to protect its weaker ones. When Japan’s annual economic survey indicates where the imports of certain goods are rising, the ministry of trade and industry concludes that such goods made in Japan represent a dying industry. For example, over the past few years the Japanese have come to believe that their transistor radios are a dying industry. When an industry like this appears on the endangered list, the bankers refuse to extend increasing credit to manufacturers of transistors, since they may not get their money back. Particularly if the economy is growing too fast—with resulting inflation—and banks see the need to cut lending, they will stop lending first to endangered companies like the ones that make transistor radios.

  1. 1

    David P. Calleo, “Ford’s Recovery,” a draft chapter presented at the Lehrman Institute, January 30, 1980, pp. 7-8, from his forthcoming book The Imperious Economy: U.S. Policy at Home and Abroad, 1960-1980.

  2. 2

    See The Washington Post, January 22, 1980; see also Robert Stobaugh and Daniel Yergin, “Energy: An Emergency Telescoped,” Foreign Affairs, “America and the World 1979.”

  3. 3

    Monthly Energy Review, US Department of Energy, February 1980.

  4. 4

    According to John Sawhill, Testimony before the Senate Foreign Relations Committee, February 20, 1980, 31 percent of total US petroleum imports came from the Persian Gulf.

  5. 5

    Growth in productivity has gone down from an average rate per year of about 3 percent for the thirty years after World War I to about half that rate in the late 1970s. Inflation has risen from just under 1 percent in 1960 to just over 12 percent in 1980.

  6. 6

    The Wall Street Journal, March 30, 1980, p. 31.

  7. 7

    The Federa Reserve Bank of New York’s Quarterly Review, Winter 1979/1980, p. 24.

  8. 8

    Economic Report of the President, January 1980, p. 85, OECD data; in The Wall Street Journal, February 29, 1980.

  9. 9

    Federal Reserve Bank of New York, op. cit., p. 28.

  10. 10

    John Volpe, “Technological Change as a Determinant of US Competitiveness,” Assessing US Competitiveness in World Markets (Washington: International Division, Chamber of Commerce of the United States, 1979), p. 8.

  11. 11

    Ibid., p. 11.

  12. 12

    See Science and Technology: Promises and Dangers in the Eighties. President’s Commission for a National Agenda for the Eighties. Report of the Panel on Science and Technology, Promises and Dangers (US Government Printing Office, 1980), pp. 22-27.

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