When they mention economics, both of this year’s candidates have concentrated, predictably, on prosperity: How successful has the Reagan administration been in creating jobs, boosting incomes, and containing inflation since the current business expansion began at the end of 1982? What can be done about those Americans who remain poor? Is a recession imminent? What is the risk of higher inflation?
These questions are important, but they miss the point. By fixing our attention on the details of today’s economy, we are allowing Vice-President Bush and Governor Dukakis to avoid addressing the difficult choices that the next president will have to make.
Those choices will be difficult because the prosperity about which the candidates are debating is a false prosperity, built on borrowing from the future. When President Reagan took office our federal debt (not counting what various government agencies owe each other) was $738 billion, or twenty-six cents for every dollar that the country produced and earned. The United States was also the world’s leading creditor nation, with the power and influence that so privileged a position has historically carried with it. But seven years of a radical new fiscal policy—all years of peacetime—have nearly tripled federal indebtedness, while the national income increased by only half. When either Mr. Bush or Mr. Dukakis takes office, therefore, the net federal debt will be approximately $2.1 trillion, or forty-three cents for every dollar of our income.
Worse yet, after seven years of reckless borrowing the United States is now the world’s largest debtor nation, dependent on the good will of the countries that lend the money to keep the party going. The nation is surrendering the ownership of its productive assets, not in exchange for assets it will own abroad, or to build new plants and other facilities at home, but merely to finance higher and higher personal consumption. Having stunted its investment at home and dissipated its assets abroad, the nation now faces difficult choices because, unless it acts quickly to reverse these forces, today’s voters and their children will pay the consequences in the form of a diminished standard of living and a far different role for America in world affairs.
In the meanwhile, jobs are plentiful and profits are high because Americans are spending amply. But more than ever before, they are spending both their own money and what they can borrow not to make the productive investments the economy needs—renovated equipment in basic industries like steel, expanded capacity for producing semiconductors and other high-tech devices, airports and ocean ports and highways that are not in disrepair—but merely to consume more. Prices have remained stable in part because business was depressed at the beginning of the decade, and also because, until recently, consumers could use overpriced dollars to buy foreign-made cars and clothes and computers at prices cheaper than what it cost to produce the same goods in America. After-tax incomes are rising because Americans are continuing to receive the usual variety of services and benefits from the government, but nobody is paying the taxes to cover the cost. In short, the sense of economic well-being that is so widespread today is an illusion, an illusion based on borrowed time and borrowed money.
President Reagan blames Congress for the deficits that have totaled more than $1.1 trillion during 1982–1987 (the 1981 budget was still Jimmy Carter’s). But the difference between the spending that Congress voted and what he proposed—including defense and nondefense programs—added up to only $90 billion for these six years. Even if Congress had adopted each of the Reagan budgets down to the last dollar item, the deficits and the economic corrosion that they have caused would have been only slightly smaller. The real cause of the deficits the government has run during these years was that Congress, in 1981, approved the deep, across-the-board Kemp-Roth tax cut, which Mr. Reagan strongly supported, without matching spending cuts that neither Congress nor the President was willing to propose.
Both candidates, when they discuss economics, limit themselves to meaningless generalities and unworkable promises such as balancing the budget through as-yet-unspecified spending cuts, or more efficient management of government programs, or better enforcement of the tax laws. Then, in other parts of their speeches, they appeal to moral values such as respect for family and the obligation to America’s children, as if economics and morality were unrelated. But at the deepest level, an economic policy that artificially boosts consumption at the expense of investment, dissipates assets, and runs up debt contradicts the essential moral values that underlie each generation’s sense of obligation to those that follow. We are enjoying what appears to be a higher and more stable standard of living by selling our and our children’s economic birthright. The interest on the sums the government is now borrowing will—without common agreement on the matter or even much public discussion—burden generations of Americans to come.
What ought to make these issues all the more important to the current campaign is that the decision to mortgage America’s economic future has not been a matter of personal choice by American families but one of legislated public policy. Popular talk of the “me generation” to the contrary, most Americans are working just as hard, and saving nearly as much, as their parents and grandparents did. What is different is economic policy. The tax and spending policies that the US government has pursued throughout Ronald Reagan’s presidency have, in effect, rendered every citizen a borrower, and every industry a liquidator of assets. The average American has enjoyed such a high standard of living lately because since January 1981 our government has simply borrowed more than $20,000 on behalf of each family of four.
Moreover, we owe nearly half of this new debt to foreign lenders. At the beginning of the 1980s, the balance of what foreigners owed Americans beyond what Americans owed foreigners amounted to some $2,500 per family. Today the balance against us amounts to more than $7,000 per family, and it is continuing to grow rapidly. Foreigners have already begun to settle these debts by acquiring office buildings in American cities, houses in American suburbs, farmland in the heartland, and even whole companies. We are selling off America, and living on the proceeds.
The unprecedented splurge of consumption financed by borrowing in the 1980s is eroding America’s future prospects in two ways, each of which carries deep implications not just for our standard of living but for the character of our society more generally. The more straightforward cost of our current economic policy is no more, and no less, than what any society pays for eating its seed corn rather than planting it. The federal deficit has averaged 4.2 percent of US national income since the beginning of the decade. This amount is nearly three-fourths of the 5.7 percent of national income that individuals and businesses together manage to save after spending for consumption and for replacing physical assets (such as houses or machines) that wear out.
As a result, US investment in new business plant and equipment has fallen to a smaller share of national income than in any previous sustained period since World War II. So has investment in roads, bridges, airports, harbors, and other kinds of government-owned infrastructure. So has investment in education (even including spending by state and local governments), despite the urgent need to train a work force whose opportunities will more than ever before arise in technologically advanced industries.
With so little investment in the basic structure of a strong economy, it is not surprising that America’s ability to produce goods and services has been disappointing in the 1980s. Worse still, US productivity has flagged despite the fact that some of the other forces that typically affect business performance have improved. Today workers, on average, are older and more experienced than they were in the 1970s. Business has spent more on research and development. Most of the investment needed to meet environmental regulations is already in place, and energy prices have fallen.
But the weakness of business investment has overwhelmed these favorable developments. There has been no significant increase during the 1980s in the amount of capital at the disposal of the average American worker. Since 1979, the last year of full employment before the two business recessions that began this decade, our overall growth in productivity has therefore averaged only 1.1 percent per year. (In July the Commerce Department reported that US business productivity declined in the most recent quarter.) If productivity continues to grow at this pace, America will, at best, be able to do no more than pay the interest on its mounting foreign debt, leaving no margin to provide for increases in the standard of living. The further need to devote some 3 percent of national income merely to balance US export-import accounts will therefore have to come out of incomes that are already stagnating.
The spreading awareness that our current prosperity is hollow, and that we will have to accept a lower standard of living in the future than what we otherwise could have expected, is probably one cause of heightened fears of recession. But while a recession is certainly one way for an economy to adjust to a lower standard of living, it is not the only way. A decline in economic well-being can also take place more gradually, and, in a relative sense, that is what has already begun to happen. The current business expansion is the first since the 1930s in which the average working American has not enjoyed a sustained increase in earnings, after taking account of inflation. In 1983, the average worker in American business earned $281 a week. The average weekly paycheck this year, in 1983 dollars, is just $276. Nations can lose economic ground abruptly, as happens in a recession, but they can also decline over much longer periods of time merely by achieving less growth than they might otherwise have achieved. For this reason, the current intense concern with a possible recession in 1989 is misplaced.
Indeed, the political campaign would be far more likely to address the real issues at stake if an impending economic cataclysm really did seem likely. The American political system has always been best at responding to crises. During the weeks when it looked as if last October’s stock market crash might be just such a crisis, prospects that the government might actually do something about the policies promoting systematic over-consumption temporarily brightened—only to fade as the fears themselves faded. Defenders of these policies have argued that overconsumption in the US has had no serious implications, and will have none in the future, precisely on the grounds that there are no tangible, readily visible, adverse consequences to which one can point.
This argument is wrong, because it ignores the devastation of our agricultural sector and the failure of many of our key manufacturing industries—autos, steel, electric machinery—to compete internationally in the years when the US government’s borrowing drove interest rates here above those abroad, and therefore made dollar investments so attractive that the dollar became heavily overvalued. It also ignores the continuing loss of sales by other US industries to countries whose production costs are low. But in fact the more important costs of our current policy are not dramatic and obvious, but subtle and gradually corrosive.