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The American Prospect

America’s growing indebtedness, the frailty of its financial system, and its persistent deficits in trade and current accounts would also be relieved by increased productivity. Indebtedness occurs at various levels. Nationally, it results from the US government and Congress declining to pay the full cost of federal programs by additional taxes, a trend already evident in the 1960s, and perpetuated by both Democratic and Republican administrations; it was greatly accelerated by the Reagan government’s decision to decrease taxation and increase defense spending during the 1980s. In 1960 the federal deficit totaled $59.6 billion and the national debt $914.3 billion.18 In 1991, despite pledges by the White House and Congress to get spending “under control,” additional expenditures—cleaning up nuclear facilities, S&L and bank bailouts—pushed the deficit well over $300 billion, while the national debt itself approached $4 trillion, which does not include the federal government’s obligations of around $6 trillion under various programs (crop guarantees, loans to farmers and students, insurance programs).

Interest payments on the national debt are around $300 billion annually and represent 15 percent of government spending. As the economics editor of The Wall Street Journal has noted, interest payments now exceed “the combined amounts that government spends on health, science, space, agriculture, housing, the protection of the environment, and the administration of justice.” Not only are these charges likely to increase,19 at the expense of other government outlays, but a rising amount of those interest payments are to foreign owners of Treasury bonds, further reducing America’s wealth. Finally, if slow economic growth persists throughout the 1990s, the deficit may rise further, since federal receipts will not grow as fast as expenditures.20 Already the new Clinton administration, upset by fresh estimates that the annual federal deficit may rise, not fall, during the 1990s, is backing off its preelection pledge to cut the deficit in half during the coming four years.21

It was not only the national debt that soared during the 1980s, but every other form of debt. State and local governments began to experience deficits from 1986 onward—a trend exacerbated by cuts in federal grants. Consumer debt, fueled by “easy money” incentives, reached $4 trillion, while repayments diminished personal income. Corporate debt was even worse: “As the 1990s began, about 90 percent of the total after-tax income of US corporations went to pay interest on their debt.” Altogether, public and private debt equaled roughly 180 percent of GNP, a level not seen since the 1930s.22

Deficits in the balance of payments and current accounts represented a further change from the 1950s and 1960s, when America had large surpluses in merchandise trade and current accounts.23 Since 1971—when the United States recorded its first merchandise-trade deficit in over a century—it has consistently bought more than it has sold. By 1987 the trade deficit reached a staggering $171 billion and, although the decline in the value of the dollar brought the total down by the later 1980s, deficits of over $100 billion were still being recorded.

If the American economy were able to cover its “visible” trade deficit through earnings in “invisibles” such as services, investment income, and tourism, as Britain did before 1914, the situation would be less serious; but American invisible earnings are insufficient to close the gap. As a result, the US now pays its way by borrowing tens of billions of dollars from foreigners.’ (US borrowing from foreign countries in 1991 and 1992 was affected by international payments to the US for the Gulf War—the first profitable war in its history—but the debt was still between $50 and $70 billion.) Once the world’s largest creditor, the United States has by some measures become the world’s largest debtor nation within less than a decade. 24 The longer this continues, the more American assets—equities, land, industrial companies, Treasury bonds, media conglomerates, laboratories—are acquired by foreign investors.

The heart of the trade deficit problem lies in the long-term erosion of America’s relative manufacturing position, which may seem a curious fact when almost three quarters of the economy nowadays is in services. Yet, by their nature, many service activities (landscape gardening, catering, public transport) cannot be exported, and even where earnings from services are considerable (consultancy, legal work, patents, banking fees), the total doesn’t pay for the goods and services imported each year. For example, the total value of goods and services imported into the United States in 1987 was $550 billion, whereas the gross export of services was about $57 billion. Manufacturing is vital for other reasons: it accounts for virtually all of the research and development done by American industry, and a flourishing and competitive manufacturing base is still “fundamentally important to national security.”25

Any attempt to summarize the present condition and future prospects of American manufacturing, however, is confronted by its extraordinary diversity. Some of its largest companies are world leaders, and many smaller firms (in computer software, for example) are unequaled in what they do. Others, however, are reeling from foreign competition, and their plight is the subject of innumerable commissions, studies, working parties, and congressional hearings. An entire industry (alas, not very distinguished either in manufacturing productivity or in its contribution to the balance of payments) has now emerged, devoted to studying American “competitiveness.”26 The overall picture that emerges is of an industrial structure which, though it has many strengths, no longer occupies the unchallenged position it did in the first two postwar decades.

While this is not a picture of unrelieved gloom, the rise of foreign competition in industry after industry has obviously increased the American merchandise-trade deficit. As the chart on this page reveals, out of eight key manufacturing sectors only chemicals and commercial aircraft were producing an export surplus by the late 1980s.


These deficits occurred across a range of industries, from low per capita value-added products like textiles to high-technology goods such as computer-controlled machine tools and luxury automobiles. This makes the position of American manufacturing during the 1990s especially critical. Is there a high-tech “revival” under way, as recently reported in The Wall Street Journal, that would restore American’s position?27 Or does that signify only a partial and temporary recovery within the saga of relatively long-term decline?

Unsurprisingly, the debate over “competitiveness” has not produced unanimity, as was evident in the election campaign and in. Clinton’s Little Rock economic “summit.” Appeals for protection from hard-hit industries are opposed by those who fear retaliation in export markets, and by laissez-faire economists. Attacks upon foreigners’ buying into America are countered by the argument that Japanese and European companies bring expertise, job opportunities, and much-needed capital. “Buy American” campaigns are resisted by those who feel that consumers should be free to purchase goods regardless of the nationality of their origin. Calls for an industrial policy are denounced by groups who feel that government-led actions to support specific industries would be inefficient and contrary to American traditions. Some claim that the relative economic decline has a single cause, whereas others offer many reasons, from poor management to low levels of investment, from insufficient technical skills to excessive government regulations. The debate echoes one that took place a century ago in Britain, when a “national efficiency” movement emerged in response to the growing evidence that Britain’s lead in manufacturing was being lost.28

The present concern about the condition of the United States’ economy is also fueled by a broader unease regarding the implications for national security, for American power, and for its position in world affairs. What if foreigners acquire a monopoly in industries that make strategic products for the Pentagon, or if an important military-related item is made only abroad? What if the country becomes ever more reliant upon foreign capital—will it one day pay a political price as well as a financial one for that dependency? What if its industrial base is further eroded, while it continues with defense expenditures six or ten times higher than those of other countries—will it, instead of “running the risk” of imperial overstretch, finally have reached that condition?29 Japan (hurt by a speculative “bubble” in land prices) and Germany (hurt by the cost of unification) may be facing economic difficulties. But what if a later recovery permits them to resume that advance upon America’s position which occurred in the 1970s and 1980s? Will not the productive power balances continue to shift, so that the United States will no longer be “Number One”? (See chart.)


These apprehensions may appear old-fashioned to certain economists—in their view, a sign of “residual thinking” in an age where the nation-state is no longer central, and the key issues concern the quality of life rather than rank in the global pecking-order30—but one suspects the apprehensions are serious ones, for all that.

What is one to make of this controversy? To the optimists, what has been happening is perfectly understandable. In the postwar decades the United States occupied an artificially high position in world affairs, because other powers had been damaged by the conflict; as they recovered, the American share of world product, manufacturing, high technologies, financial assets, even military capacity, was bound to fall. Yet the United States remains the most important nation in the world, in economic and military power, diplomatic influence, and political culture, though certain domestic reforms are needed.31 American industry was unprepared for the intensity of foreign competition—and paid a price for that—but since the 1980s it has become leaner and fitter, its productivity has shot up, and it is moving into new technologies and products with unequaled strengths, especially research personnel. The advantages of such competitors as Japan will not last for long. With the dollar’s reduced exchange rate, and continuous upgrading of American manufacturing, the economy will rebound into prolonged growth, turn the deficits into surpluses, and respond vigorously to what were merely temporary difficulties.32

To the pessimists, such reasoning is a sign that many Americans have failed to understand the seriousness of the problem. It is not the country’s relative economic decline in the two decades following 1945 that concerns them, since that was the “natural” result of the rebuilding of other economies; it is the evidence that the American position relative to other nations has continued to erode since the 1960s in new technologies and patents, key manufacturing industries, financial assets and current-account balances, and international purchasing power. Most pessimists would, no doubt, be delighted to be proven wrong, and dislike being called “defeatists” or “declinists.” But they remain skeptical of the vague argument that America’s “specialness” or “genius” or “capacity to respond to challenge” will somehow restore its position, seeing in such rhetoric the same ethnocentric pride that prevented earlier societies from admitting and responding to decline.33


While much of the controversy over American “decline and renewal” naturally focuses upon the economy, failures in the educational system, the social fabric, the people’s well-being, even their political culture, are also much debated…presumably for fear that the causes of noncompetitiveness may be more profound than, for example, an inadequate savings rate. Characteristic of this thinking is the assumption that somehow the American people have taken a wrong path; as the popular television commentator John Chancellor put it, anticipating Clinton and Perot’s electoral rhetoric:

  1. 18

    Kennedy, The Rise and Fall of the Great Powers, p. 527.

  2. 19

    These totals will also be exacerbated by the coming Social Security deficits, discussed on p. 50 below.

  3. 20

    For these figures, see A. L. Malabre, Jr., Within Our Means: The Struggle for Economic Recovery After a Reckless Decade (Random House, 1990), pp. xix–xx; and D. P. Calleo, The Bankrupting of America: How the Federal Budget is Impoverishing the Nation (Morrow, 1992).

  4. 21

    R. Pear, “Clinton Backs Off His Pledge to Cut Deficit in Half,” The New York Times, January 7, 1993, pp. A1, A20.

  5. 22

    The quotations and statistics are from Malabre, Within Our Means, pp. 3–5, 11–12. See also B. Friedman, Day of Reckoning (Random House, 1988); but note “Defining the debt bomb” in The Economist, November 3, 1990, p. 75, for a more reassuring picture of corporate indebtedness.

  6. 23

    See the breakdown on pp. 562–563 of Martin Feldstein, editor, The United States in the World Economy (University of Chicago Press, 1988), together with the analysis by J. A. Frankel, p. 560ff.

  7. 24

    H. Stout, “US Foreign Debt Widened Last Year,” The Wall Street Journal, July 1990, p. 42. The status of being the “world’s largest debtor” may be a nominal one at the moment, since American purchases of overseas assets several decades ago ought to yield a far higher value than the actual purchasing price—although it is the latter which is recorded in the totals.

  8. 25

    M. L. Dertouzos et al., editors, Made in America: Regaining the Productive Edge (MIT Press, 1989), pp. 40–41. See also S. S. Cohen and J. Zysman, Manufacturing Matters (Basic Books, 1987), for the larger argument.

  9. 26

    For samples, see the many releases and publications of the Office of Technology Assessment (US Congress) and the Council on Competitiveness; Dertouzos et al., Made in America; M. G. Borrus, Competing For Control (Ballinger, 1988); J. S. Yudken and M. Black, “Targeting National Needs: A New Direction for Science and Technology Policy,” World Policy Journal (Spring 1990), pp. 251–288; G. N. Hatsopoulos et al., “US Competitiveness: Beyond the Trade Deficit,” Science, Vol. 241 (July 15, 1988), pp. 299–307; and P. Krugman, The Age of Diminished Expectations (MIT Press, 1990), passim.

  10. 27

    G. P. Zachary, “Coming Back: US High-Tech Firms Have Begun Staging Little-Noticed Revival,” The Wall Street Journal, December 14, 1992, pp. A1, A5.

  11. 28

    See G. R. Searle, The Quest for National Efficiency: A Study in British Politics and Political Thought, 1899–1914, second edition (The Ash-field Press, 1990), passim; F. Crouzet, The Victorian Economy (London: Methuen, 1982), p. 371ff; E. J. Hobsbawm, Industry and the Empire (Harmondsworth: Penguin, 1969), p. 136–153, 172–185.

  12. 29

    Kennedy, The Rise and Fall of the Great Powers, p.515.

  13. 30

    See H. Stein, “Who’s Number One? Who Cares?” The Wall Street Journal (op-ed), March 1, 1990; K. Ohmae, The Borderless World (Harper Business, 1990), passim; and R.B. Reich, The Work of Nations (Knopf, 1990), chapter 13 and passim.

  14. 31

    See especially Nye, Bound to Lead, passim.

  15. 32

    For examples, W. Hummer, “A Contrarian View: A Short, Mild Recession,” The Wall Street Journal, January 7, 1990; the important series of articles by K. House in The Wall Street Journal in early 1989, especially January 27, 1989; C. R. Morris, “The Coming Global Boom,” The Atlantic, October 1989, pp. 51–64.

  16. 33

    P. Kennedy, “Fin-de-siècle America,” The New York Review, June 28, 1990, pp. 31–40; Lewis, “When Decline Hurts,” passim; H. Allen, “Red, White, and Truly Blue,” The Washington Post, November 24, 1990, pp. Bl, B4; R. Bernstein, “Euphoria Gives Way to Fractured Feelings of Gloom,” The New York Times, December 23, 1990, p. E3; H. Carter, “US Could Well Snatch Defeat From the Jaws of Victory,” The Wall Street Journal, March 29, 1990, p. A13.

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