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Losing the Economic Race

Can America Compete?

by Robert Z. Lawrence
The Brookings Institution, 156 pp., $8.95 (paper)

The DRI Report on US Manufacturing Industries

by Otto Eckstein, by Christopher Caton, by Roger Brinner, by Peter Duprey
McGraw-Hill, 196 pp., $24.95

Americans have reason to worry about their competitiveness on world markets. The deficit in America’s balance of trade is running at an annual rate in excess of $120 billion. This represents the loss of three million American jobs, jobs that would exist if exports matched imports. To finance such a deficit America must borrow abroad, and at current rates America will, by mid-1985, become a debtor nation, having borrowed more from foreign countries than it has lent, for the first time since World War I. As with Mexico and Brazil, interest payments on foreign debts are eating up more and more of the resources that could otherwise be used by Americans.

While everyone is familiar with America’s competitive failures in its old smoke-stack industries at the tail end of the economy, the failures seem just as ubiquitous in high-tech industries that are supposed to be the most competitive and productive. In 1984 the Japanese expect to make twenty million home video recorders, generate billions of dollars of sales, and provide hundreds of thousands of jobs. How many home video recorders will be made in America? Precisely zero: 100 percent of them are imported.

At last count the United States had one-thirtheenth as many programmable robots, relative to the size of its labor force, as Sweden; with one exception, every American robot manufacturer lost money in 1983. Foreign competitors had such a head start in constructing industrial robots that American producers had to sell their products below cost to compete.

The US government not long ago opened to competitive bidding the contract for laying a glass-fiber optics telephone cable from New York to Washington. A foreign firm won the bidding by a substantial amount but its bid was rejected on the grounds of national security, despite the fact that the firm comes from one of our allies. Perhaps the problem of US competitiveness is best symbolized by the fact that ski outfits worn by the American ski team at the Winter Olympics were made abroad. Our world-class athletes represent something less than a world-class economy.

Observations such as these lead to a simple question: Can America compete in world markets? A superficial reading of Can America Compete? by Robert Lawrence would suggest that the answer is “yes.” “US manufacturers, aided only by changes in the exchange rate, were able to compete successfully in an environment characterized by emerging competition from developing countries and Japan and by growing government intervention and protection in Europe.” Since this view reflects the thinking of most of the economists at the Brookings Insititution, we may call it the Brookings line.

The DRI Report on US Manufacturing Industries, a collective effort led by the late Otto Eckstein of Data Resources, Inc., an economic forecasting firm, answers “no.” The “decline of position of manufacturing is a major historical development for this country,” the authors write on page one. “There are so few exceptions to the decline of the international positions of US manufacturing industries that one must seek more general causes that act on the entire economy. Without a strongly advancing manufacturing industry, the US economy is hardly likely to maintain its progress in the decades ahead.”

Which answer is correct? If we follow the DRI line, but the Brookings line is correct, we would rush to fix something that does not need fixing and may end up damaging what we have. If we follow the Brookings line, while the DRI line is correct, we end up with a standard of living that falls relative to the rest of the world. Having the correct answer makes a difference.

Before analyzing the arguments on both sides, however, one must clear away the underbrush of agreement. The DRI Report states, “No degree of cleverness on the part of management, no new-found co-operation between employers and workers, no industrial policies by the federal government can overcome the handicaps of an overvalued dollar and a domestic economy disrupted by credit crunches and recession every three or four years.” Virtually everyone agrees on this point. The disagreements come in the next sentence. “Better national economic and financial policies will not solve our industrial problems, but without them the more specific solutions cannot prove successful.” By contrast, the Brookings economists seem to be saying that better national economic and financial policies—“macroeconomics” in the jargon—will by themselves solve the problem of competition.

In view of this belief, it is not unfair to ask the Brookings economists to specify the “better” macroeconomic policies they have in mind, but apart from general references to tighter fiscal policies—cutting the budget—and looser monetary policies—lowering interest rates—Lawrence says little about this. Still, if we put aside the problem of specifying better macroeconomic policies, the question remains whether something else needs to be done.

As is usually the case when two sophisticated analysts differ on the facts, the problem is not really the “facts” but differences in the precise questions being posed. DRI and the Brookings authors seem to be raising identical questions, but they are actually quite different ones.

If the question is simply “Can America compete in world markets?” the answer is of course “yes,” and the Brookings line is correct. Bangladesh and other very poor nations compete successfully on world markets with a surplus in their balance of payments. They do so by competing as low-wage countries with low standards of living. If their rates of growth in productivity lag behind those of the rest of the world, they simply accept a gradual fall in the value of their currency, their relative wages, and their relative standard of living.

If the relevant question is “Can America compete in world markets with wages and a standard of living second to none?” the answer is clearly “no.” The Brookings document does not disagree, for Lawrence proves that the US can compete successfully if it has a continual decline in the value of the dollar, in its relative wages, and in its relative standard of living. As Lawrence states, “Aided by several devaluations, US firms were able to compete from 1973 to 1980” (my italics). To be precise, Lawrence finds that American manufacturing could compete, but only with the help of a 13.5 percent decline in the price of US exports between 1973 and 1980.

In the longer period between 1965 and 1982 analyzed by DRI, the US, as a whole, could not successfully compete. Lawrence agrees. He finds that more than half of the jobs lost in US manufacturing from 1980 to 1982 could be traced to falling exports and rising imports. He writes, “In short, slowing productivity growth is a serious problem from the point of view of living standards. But it is not a cause of decreased competitiveness in international markets.” That is of course true. To fall behind in the race for growth in productivity is to have falling wages and standards of living relative to the countries winning the race.

But such a decline is precisely what Americans don’t want and it is precisely what they are worried about when they talk about competitiveness. They do not want to gradually become low-wage “haulers of water and hewers of wood.” They want to compete as a high-wage society with standards of living approximately equal to those of the world’s economic leaders.

Both books give the right answers to the questions they pose, but it is the DRI’s book that poses the right question.

Lawrence’s book is mainly interesting for the light that it sheds on how fast American wages and standards of living would have to fall for the US to remain competitive with the rest of the world. In attempting to show that the US competitive problem is explained solely by macroeconomic variables such as changes in the GNP, Lawrence uses econometric equations to explain historical movements in American exports and imports. These equations show that to regain an equal balance in our balance of trade the US would need a 28 percent decline in the value of the dollar, and once that is attained the dollar would have to fall forever by 0.4 percent per year to maintain the balance. A 28 percent decline in the value of the dollar will have visibly negative effects on American standards of living. While 0.4 percent per year may not seem like much, just such small persistent differences caused Great Britain to slip from being the country with the world’s highest per capita GNP at the turn of the century to a position near the bottom of industrial countries eighty years later.

Lawrence’s equations also give us some insight into recent slippages in the US competitive position. For both imports and exports Lawrence estimates two equations—one with data from 1964 to mid-1980 and one with data from 1964 to mid-1983. By comparing the two equations it is possible to isolate the structural deteriorations that have occurred in the American position during the last three years. Such a comparison reveals that during those years foreigners have bought fewer US exports when their own industrial production rose than they previously did. It also shows that they are more sensitive to the price of US exports, cutting their purchases back more than they previously did when American prices rose. So far as our own imports are concerned, a given increase in the American GNP now leads to a bigger rise in imports than it previously did. A fall in foreign prices also leads to a bigger rise in American imports than before. Such shifts are the mark of a country whose exports are becoming less distinctive, less competitive, and must, to an ever greater extent, be sold as simply cheaper, while foreign exports into the United States are becoming more distinctive and more competitive. Less and less do they have to be sold simply on a price basis.

When Lawrence adds the data from 1980 to mid-1983 to his equations, they show consistent movement toward a weaker American position. His analysis makes it clear that strong underlying adverse trends are running against the United States; and these will gradually increase the annual decline in the value of the dollar that would be necessary for the US to remain competitive.

In fact, there is reason to believe that Lawrence’s equations underestimate the magnitude of the shift against the United States. The extra three years of data were added during a period of rapid military build-up. Military spending is a captive market for American manufacturing. We don’t ask for competitive international bids on military equipment. If we did, all of our navy’s ships would be made in Japan. But this means total manufacturing looks much stronger than it would if civilian manufacturing were separated out.

In addition, the period has been one of protection. Lawrence quotes data showing that the percentage of US manufactured goods protected by non-tariff restrictions such as quotas and other import barriers has risen from 20 percent in 1980 to 35 percent in 1983. If such protection had not occurred, the adverse shift against the United States would have been much larger than was estimated by Lawrence.

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