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Blame the Foreigner

The Endangered American Dream: How to Stop the United States from Becoming a Third World Country and How to Win the Geo-Economic Struggle for Industrial Supremacy

by Edward N. Luttwak
Simon and Schuster, 365 pp., $24.00

The collapse of the Soviet Union and the dissolution of its empire are the source of all sorts of changes in the West. To take an important example, defense-related industries have lost a good chunk of their market, with further shrinkage to come. One sober estimate suggests that a million jobs have already disappeared in defense industries between 1987 and 1992 and another 1.5 to 2 million are likely to go by 1997. Firms that have led their lives in the military-industrial complex do not find it easy to convert to post–cold war activities. This is partly because the general economic environment is far from helpful right now, but also partly because they find it hard to shed old habits of management and production that worked well in the old circumstances but do not fit the new civilian market.

A similar problem, on a considerably smaller scale, faces the military-intellectual complex. Scholars, policy analysts, and writers who used to concentrate on issues of high military strategy or matters of geo-political diplomacy or on questions of arms control also find their market contracting. They too feel the need to convert to some form of post–cold war activity. They too need to change entrenched habits (of thought this time, not management). Intellectual capacity may be just as hard to transfer from one line of production to another as industrial capacity.

Mr. Luttwak is just such a case. For twenty-five years he has written serious books on such topics as the grand strategy of the Roman Empire (1976) and the Soviet Union (1983), and volumes of essays on military questions. He has been a consultant to the secretary of defense, the National Security Council, and the State Department. And he is the author of an interesting how-to-do-it book called Coup d’Etat, reviewed at length in these pages.* Any military electronics firm in an analogous position would find related products more promising than a shift to specialty foods or ladies’ ready-to-wear. In the same way Mr. Luttwak has chosen to cultivate a field he calls geo-economics.

The promises of geo-economics are made pretty clear in Luttwak’s book. He apparently wants to expand Clausewitz’s famous aphorism that war is the continuation of politics by other means to the sharper proposition that trade is the continuation of warfare by other means. He certainly allows little or no room for the possibility that trade between nations can sometimes be mutually beneficial, as is generally thought to have been the case in the quarter-century after the end of the World War II. The vocabulary of geo-economics could be described as alarmist and the tone is generally truculent. The subtitle of the book gives the right impression of the contents. Even that is just a warm-up. The last chapter of the book begins this way.

In geo-economics, as in war, offensive weapons dominate. Of these, research and development force-fed with government support and taxpayers’ money is the most important. Just as in war in which the artillery conquers by firepower territory which the infantry can then occupy, R & D can conquer the industrial territory of the future by achieving a decisive technological superiority. Japan’s new Real World computing program is only one of the many such efforts now underway in the central arena of geo-economics. The European Community and the United States both sponsor their own microelectronics and computing programs, as well as many other projects.

International trade is a battlefield and Mr. Luttwak is back in the familiar business of telling us how to inflict damage on the enemy and win the battle.

Unfortunately the argument leading to all this dogmatism rests almost entirely on anecdote, strong language, and self-confidence. The book opens by taking the reader on an imaginary trip to Kennedy Airport in New York, starting from Tokyo or Zurich or Frankfurt or Amsterdam or Singapore. All those other airports are gleaming and well-equipped, and all the people, from taxi drivers to porters to clerks to customs officials, are efficient, courteous, and helpful. Kennedy, in contrast, is dingy, dirty, and dilapidated, patched with plywood, and getting worse before one’s eyes. The “help” is ignorant, surly, demanding, and unskilled. Unfavorable comparisons with Kinshasa, New Delhi, and Lima nudge the reader into realizing that Kennedy Airport is already a bit of the third world serving as gateway to the United States.

It is a very effective overture, prefiguring several of the themes of the opera to follow. There is an uncomfortably large quota of truth in this unflattering comparison. But what does it have to do with Mr. Luttwak’s argument that the American Dream is now endangered? Kenneth Galbraith’s classic The Affluent Society was published in 1955. Its theme was that the American ideology and American political practice systematically skimp on even essential public expenditures in favor of even frivolous private consumption. Public spaces and public facilities in the United States tend to be grungy and undermaintained. Kennedy Airport is an example. Galbraith was already pointing this out forty years ago, at a time when the American economy was still dominant in the world, still the leader in designing new products and producing old ones efficiently, well before Europe and Japan had begun to catch up. The decay of Kennedy Airport is a disgrace, and it makes a good story, but it has no necessary connection with the endangerment of the American Dream—of which, according to Galbraith, it is a part—and surely no connection that Mr. Luttwak has demonstrated.

It is this lack of any analytical (or even historical) bony structure that makes the book sound more like a burst of personal prejudice than like a reasoned argument about the performance of the US economy. Even when Mr. Luttwak is right about general diagnosis and remedy, he can be wrong about particular causes and particular implications. And he is surely right on some things. Where he is wrong, it is often because he is unconscious of the research of others, or unwilling to believe that anyone can think systematically, carefully, and skeptically about the world economy, or unaware that one needs to do those things.

Before I go any further, a semipersonal digression is in order. On eight or ten occasions in the course of his argument, Mr. Luttwak defends a point not by offering evidence or deduction from some more obvious point, but by remarking that “economics textbooks” or “academic economists” think the opposite, in complete defiance of obvious truth. This habit requires some comment from me. Although I have never written an economics textbook, I am indubitably a standard, ordinary, academic economist. If I were to ignore this ploy, I would perhaps seem to disqualify myself as a critic.

The truth is that Mr. Luttwak is almost entirely ignorant of modern academic economics. It is not his trade, after all. Possibly he has read an elementary textbook; but elementary textbooks are meant to teach simple cases to beginning students. They all tend to start with perfectly competitive markets, for instance, in which no single firm can affect the price at which it sells, or do anything but choose how much to produce and then produce it at the lowest achievable cost. The better textbooks point out later that the set of assumptions needed to create a perfectly competitive market is long and improbable. The better textbooks later introduce the student to markets where there is monopoly power, though also in an oversimplified way. More to the point: academic economists are not, with very few exceptions, taken in by the simple special cases.

Something similar can be said about free trade, but with a twist. Academic economists tend to emphasize the advantages of free trade because they are not obvious. For three-hundred years or so, simple mercantilist notions have seemed plausible, although a world of unchecked protectionism could be worse for everyone than a world of unfettered free trade. In actual fact, we have neither. For a decade or more, the action in the theory of international trade has been on the side of working out the nature and consequences of international trade in a world in which firms are at different technological levels, some are larger than others, and governments intervene in different ways. A good deal of the emphasis has been on forces that cause initial trade advantages to widen. The policy implications are as complicated as the analysis and do not lend themselves to simple slogans.

At least eight or nine of the past ten winners of the Clark Medal (a biennial award bestowed by the American Economic Association on a forty-year-old star) can safely be said to have made a mark precisely by going beyond the simple competitive model, usually by analyzing what happens if some of that model’s very restrictive assumptions are dropped in favor of market power, strategic behavior, and unequal access to information. This sort of intellectual innovation also undermines the idea of laissez faire. That is what “academic economists” value.

The American economy has serious problems. Some of them are short-run in nature, like the weakness and incompleteness of the current recovery from the recession of 1990–1991. Payroll employment is just about back to its 1990 peak. Other problems are longer-run and therefore more deeply rooted, like the slow rate of productivity growth, the accompanying near-stagnation of family income, and the fact that inequality in income is widening, not only between educated and uneducated workers but even within the educated group. Nothing could be more important than to get the diagnosis of these problems straight and to do what we can to fix whatever is broken.

For Mr. Luttwak’s bellicose frame of mind to make sense, however, more than mere problems is required. Truly terrible things must be on the verge of happening, and They must be doing them to Us. Mr. Luttwak’s way of arousing a sense of urgency is to insist that many Americans are “sliding toward Third World conditions.” He points out that in 1990 18 percent of all Americans earned less than the $6.10 an hour that would push them above the poverty line even with two thousand hours of work yearly. Things are now worse, not better. I wish, with him, that more of us thought facts like these to be scandalous in a rich country. But the comparison with the third world is so false that it can only weaken his case. The national income per person of Peru in 1990 was less than one sixth that in the US. Incomes tend to be less equally distributed in poor countries than in rich. It is a fair guess that the Peruvian equivalent of $6.10 an hour was well under a dollar. No one should take pride in being ahead of Peru. But neither is gross exaggeration a good foundation for policy.

In another example of the same sort of overkill, Luttwak remarks that the American underclass, some 15 million citizens, “would have been better off morally if not materially if they had been born in Nepal or Thailand.” I cannot speak for moral comparisons. Materially, however, it can be said that national income per person in Thailand was about $2879 and in Nepal about $729 in 1988 compared with $18,339 in the US measured in equivalent prices. The average Thai is far below the US poverty line. It is no wonder that the flow of migration tends to be one-way. A military thinker should pay more attention to credibility.

  1. *

    See the review by E.J. Hobsbawm, The New York Review, August 21, 1969.

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