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Going for Broke

The Coming Boom: Economic, Political, and Social

by Herman Kahn
Simon and Schuster, 237 pp., $14.95

The Imperious Economy

by David P. Calleo
Harvard University Press, 265 pp., $17.50

Whatever Herman Kahn may have intended when he and his associates compiled these “seminar notes, papers, recorded briefings and assorted dictations,” the desire to make himself intelligible cannot have been much on his mind. For example, when he wants to say that prices are a function of supply and demand as well as of interest rates and inflationary expectations, he writes, “Thus, the value of money (or the price level) is related to the availability of GNP (goods and services) and the supply of money, the price of money (i.e., the interest rate is related to the supply and demand for credit), and the likelihood of changes in the value of money.”

Such syntactical chaos throughout this book suggests more than its author’s negligence. It also suggests a mind incapable of reflecting on its own effusions, like the mind of an infant or a fanatic, or that of a man for whom it has become second nature to befuddle lecture audiences with fancy inanities. Kahn blames the reluctance of businessmen to invest for the longer term on “the absence of genuine thirty-year bonds,” by which he means bonds that pay 2 or 3 percent interest and will ultimately be redeemed in constant dollars, as if the disappearance of such bonds and the widespread reluctance to invest for the long term were cause and effect and not two ways of saying the same thing.

Kahn’s assumption of a “coming boom” is similarly tautological, for his prediction rests largely on the idea that Ronald Reagan’s economic wisdom is self-evident. “To a much greater degree than most people realize,” Kahn writes, “the strength and depth of the coming boom is [sic] dependent on the man at the top…. And we believe he will do quite well—with a little help from his friends.” Thus Kahn simultaneously patronizes his “commander in chief” and offers him his services as well as those of his colleagues at the Hudson Institute, the think tank he runs and from which his “ideas” emanate. Throughout these pages, Kahn uses the first-person-plural pronoun to indicate the collegial source of his thoughts.

Kahn says that he and his associates “created” this book late in 1981 but most of it seems to have been written much earlier and revised by patchwork. Many of its ideas, Kahn admits, were presented to new members of Congress and their staffs in the last weeks of January 1981 and some chapters, for example those on energy and defense, may have been composed earlier still, before the decline in United States petroleum consumption could be determined for 1981 and when Kahn could still imagine, as he did in his galley proofs, a Soviet nuclear attack on the United States precipitated by “another East German revolt (trying to get some of the freedoms the Poles recently achieved),” a phrase which Kahn amends in the final version of his book to read “some of the freedoms recently sought by the Poles.”

Thus readers who want fresh evidence to support an optimistic view of the economy in these troubled times, or who are looking for clues to future economic trends will be disappointed by this book, if it is a book. Except for the usual anticipation of new technologies and a prediction that the baby-boom generation will soon settle into productive middle age, along with the fact that energy prices are more or less stable, Kahn has little to say that has not already been invalidated by events, including his warning that “if Reaganomics fails, there is likely to be a spectacular backlash against all the ideas associated with it, including those which had little or nothing to do with the failure.”

The current American mood, however, seems more perplexed than vengeful, while on Wall Street the mood has been manic, even though by midsummer Secretary of the Treasury Regan, usually a sanguine man, admitted that “the recession that started in July of 1981 has gone quite a lot deeper than most thought.” If Secretary Regan is right we may be in for a much different kind of “boom” from the one Kahn predicts. According to the economist Otto Eckstein, corporate profits were so poor for the second quarter of 1982 that if they don’t recover within three years, “the American economy [will] be devastated. This [deterioration of profits] had better be temporary.”

Kahn’s choice of a title for this random collection of papers on neoconservative preoccupations (defense policy, the New Class, the Reagan coalition, etc.) is arbitrary and opportunistic, but his optimism seems genuine. “Two hundred years ago…,” he writes, “human beings were almost everywhere comparatively few, poor, and at the mercy of the forces of nature.” But in the “next two centuries…human beings should be almost everywhere numerous, rich, and largely in control of the forces of nature.” Such an expectation, for which there can be no rational or empirical basis, is actually an assertion of faith, a religious sentiment affirming the American ideology of personal success and the belief that whatever inhibits one’s eventual happiness can be overcome. It is this faith that many Americans presumably still share with Kahn, for despite the repeated political, economic, and social failures of the past thirty years, the American experience remains a miraculous exception to the poverty that preceded and still largely surrounds it.

Like many other Americans, Kahn now seems to take this miracle for granted, as if prosperity were an American birthright and not the result of particular efforts and circumstances. Among those who may share Kahn’s complacency are the stock traders whose response to the recent drop in interest rates was to stage a historic mid-August, rally, even though interest rates had fallen not because the economy had recovered and was generating new capital but because it had deteriorated and the demand for loans had dwindled accordingly. Ergo, the great August rally was Wall Street’s quixotic response to the worsening economy. Similarly Kahn predicts a coming boom even though median family income in the United States had increased by only 6 percent between 1970 and 1979, after having risen by 33.9 percent and 37.6 percent in each of the previous two decades respectively, while by 1979 the United States had fallen to tenth, behind the Netherlands, in per capita GNP and was tenth, as well, in average annual productivity increase.1 Meanwhile the federal debt, according to various estimates, is growing at the rate of 10 to 15 percent a year.

One source of our recent setbacks, Kahn believes, is not economic in the ordinary sense at all. It is the defective ideology of those Americans who oppose the further pursuit of material success because they happen to be rich enough already. He means those “affluent young people [who] are instinctively aware of the deterioration in certain amenities which occurs as an economy becomes more highly developed and as all begin to share in the affluence. Beaches become more crowded, high-ways more clogged, domestic help more scarce, access to elite colleges more difficult.” These young mandarins, according to Kahn, “often turn away from the old-fashioned notion of progress and attempt to block further economic growth” to protect their own privileges. They remind him of the ruling classes that stifled economic development in ancient China, Greece, Rome, and India, “despite their technology of a relatively high order.” Most of these apostates belong to what Kahn calls “Atlantic-Protestant cultures,” cultures that are more “transcendental” than “evangelical” and that “look for inspiration and causes like environmentalism or nonproliferation of nuclear power.”

The way to outsmart these heretics and “one of the major components of the coming boom,” Kahn thinks, “is the creation of a more positive view of the future. A revised outlook is needed to reflect the more upbeat reality of changing policies, practices, and trends.” Though Kahn believes such an outlook is already “being nurtured by many both in and out of the administration” (though no longer by Secretary Regan), these high auspices may not be enough. Thus Kahn proposes a “moral revitalization in the United States [which] might begin with a more doctrinaire and systematic inculcation of ‘traditional’ American values,” presumably the pursuit of riches and the conquest of nature. “Many ‘mainstream’ children (and the country as well) would have much better prospects if they were educated more as some of our more doctrinaire/evangelical children are” and taught, Kahn seems to be saying, to pray for money and supernatural powers. Kahn boasts that his Faust is Goethe’s, not Marlowe’s.

Some readers will want a sensible account of a world in which 30 million workers in the Western countries have come to be unemployed, including 10 million in the United States; in which the Congressional Budget Office anticipates federal deficits of $140 to $160 billion over the next three years, and that next year’s GNP will fall by 1.3 percent. Such readers might turn to David Calleo’s brief, lucid, and thoughtful study of American economic and foreign policy during the Sixties and Seventies. What Calleo wants to show is “how America’s international power,” in this period, “underwrote its domestic maladjustment” or, less elegantly, how successive administrations imposed the cost of America’s recurring devaluations upon the rest of the world, principally Western Europe; how the cost of our declining industrial efficiency, combined with our full-employment policies and our global military and political ambitions, including the Vietnam War together with Nixon’s successive devaluations, became Europe’s enforced contribution to our domestic economic tranquillity, such as it was.

Calleo is especially good when he tells how America’s full-employment policies, along with high domestic wages and the low rates of productivity that resulted, encouraged American producers to shift work to countries whose workers could produce the same goods for less money, a shift further encouraged by America’s liberal trade policies. What Calleo doesn’t show, because it is not the subject of his book, is how business and labor, intent on short-term gains, neglected the long-term interests of the economy and of their own industries. Not only did they export jobs but, taking prosperity for granted, they failed to invest aggressively in new technologies and to exploit new markets, so that foreign competitors got the better of them in world markets for steel, tires, cars, shoes, watches, cameras, textile machinery, consumer electronics, and so on. As this was happening, an essentially passive government did nothing to caution them.

What Calleo does show, however, is how the government mitigated the impact of this neglect by allowing the dollar to decline relative to other currencies, which made inefficiently produced American goods relatively more competitive in international markets while making it harder for foreigners to sell their goods to us. Readers interested in a detailed account of how American industry was mismanaged in these years might consult Minding America’s Business by Ira Magaziner and Robert Reich,2 a useful and perhaps necessary companion to Calleo’s book, for Calleo has little to say about the decline of American industry in these years, though this decline is at the root of America’s “domestic maladjustment.”

  1. 1

    Ira Magaziner and Robert Reich, Minding America’s Business (Harcourt Brace Jovanovich, 1982), pp.3, 13, 36.

  2. 2

    Reviewed by Lester Thurow in The New York Review, April 1, 1982.

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