Mr. Reagan has an imposing vision of the country that he is to lead. He sees an inherent America—an America which is white, and male, and industrial—and a project, of economic growth, by which this reality can be born again. He sees a “spirit” which is “still there, ready to blaze into life” if we “stimulate our economy, increase productivity, and put America back to work.”1 But his America no longer exists. The pursuit of his vision may lead to an economic crisis and a level of unemployment in comparison with which the events of 1975 and 1980 will appear as the merest disturbances of the compassionate state.

During the election, Mr. Reagan spoke frequently about the American economy, and his words served him well. They had resonance—such is the political charm of the president-to-be—on two quite different levels. First, in policies, projections, and legislative proposals. Second, and far more importantly, in the imagination and in a tableau of American resurgence, packed and repacked in the cardboard of the traveling theater, which journeyed with Mr. Reagan through his seemingly interminable electoral wanderings.

The first level of economic discourse can be dismissed fairly expeditiously. Mr. Reagan said that he would cut income tax by 30 percent by 1983, that he would reduce business taxes in order to stimulate investment, that he would increase military spending, that while he would eliminate waste in government he would not assault the “integrity” of Social Security, that he would in the meantime balance the federal budget, and that his policies would reduce inflation.

The unlikeliness of this enterprise is not hidden by the appointment of a Cabinet balanced between wild tax cutters and men who appear as pillars of fiscal responsibility. We need not doubt the new government’s resolution to kick the poor by eliminating social programs. The Republican policy equation depends, nonetheless, on the assumption of rapid economic growth. Only then would tax revenues be equal to Mr. Reagan’s extravagant schemes.

But such accelerated growth seems unlikely. The United States exports more than 10 percent of its gross national product, and the countries with which it trades are sickly. Industrial production turned down in the second quarter of 1980 in each of the five largest capitalist economies.2 The number of people looking for jobs in the European Community has increased by 20 percent in one year.3 The world economy may be moving, as Mr. Reagan takes office, toward the synchronous recession of 1981-1982.

The expectation of economic growth thus depends in turn on a further assumption: that some unknown Republican inspiration, some elixir of indigenous capitalist expansion, will intervene to make possible the American regeneration. It is here that Mr. Reagan’s imaginative tableau is of importance.

The scene is of an innate economy, an economy of industrial workers, male, white, neither young nor old, which is to “get working again.” It is the country of the man in the Republican television commercial, standing lonely but determined in a deserted factory that he hopes to bring to life. And it is the country of basic manufacturing values. In his main economic speech, Mr. Reagan mentioned only two industries. “Outdated depreciation schedules,” he said, “now prevent many industries, especially steel and auto, from modernizing their plants.”4 The image is related, in turn, to the idea of remilitarization. The resurgent America will be equipped with missiles and tanks and military transport planes. Mr. Reagan repeatedly joined his objectives, of reconstructing “a disintegrating economy, a weakened defense.”

It is on this vision that the Republican mission of restoring economic confidence relies. The new policies, Mr. Reagan’s adviser George Shultz says, will have “an electric effect on expectations.”5 Like other observers of capitalist behavior, including Keynes, the Reaganites believe in an investment “spirit.” The “strategy,” Reagan himself says, “is based on solid economic principles and basic experience in both the government and the marketplace. It has worked before and will work again.”6 And indeed his imagery corresponds to the reality of the postwar period. The two great surges in recent American economic growth, from 1950 to 1953, and from 1962 to 1966, were each accompanied by an even more rapid increase in manufacturing output; each was also a period of rapid expansion in the military economy.

The vision is not implausible. But it is false. For the structural changes that have taken place in the US economy in the 1970s are such that the old truths no longer hold. These changes—in the structure of employment and also in the structure of military expenditure—make Mr. Reagan’s regeneration, his Pittsburgh Redivivus, unlikely. They also hold out the possibility of a far more cruel economic crisis to come.

The 1970s were a time of startlingly rapid expansion in employment in the American economy. In the period of the economic crisis alone, from 1973 to 1979, almost 13 million new nonagricultural jobs were created of which almost 11 million were in the private economy.7 This is as though the entire labor force of Canada had moved south and found employment in the United States. The US had by far the most rapid growth in total employment of any major industrial country: from 1973 to 1979, it was more than three times as fast as in Japan, while employment actually fell in West Germany, and was virtually unchanged in France and the United Kingdom.8


The new American jobs were concentrated, however, in two sectors of the private economy—services and retail trade—and, at least in the early 1970s, in one public sector, state and local government. By 1979, 43 percent of all Americans employed in the private nonagricultural economy worked in services and retail trade. The two sectors together provided more than 70 percent of all new private jobs created from 1973 to the summer of 1980.9

Even within these two vast sectors, the growth in employment was further concentrated. Three industries each provided more than a million new jobs during the 1973-1979 period: “eating and drinking places,” including fast food restaurants; “health services,” including private hospitals, nursing homes, and doctors’ and dentists’ offices; and “business services,” including personnel supply services, data processing services, reproduction and mailing, and the quaintly named “services to buildings.” These three industries together accounted for more than 40 percent of the new private jobs created between 1973 and the summer of 1980. In that period their employment increased almost three times as fast as total private employment, and sixteen times as fast as employment in the goods-producing or industrial sector of the economy.

The three “new” industries loom very large in total employment. Mr. Reagan’s fundamental manufacturing industries are insignificant by comparison. Thus the increase in employment in eating and drinking places since 1973 is greater than total employment in the automobile and steel industries combined.10 Total employment in the three industries is greater than total employment in an entire range of basic productive industries: construction, all machinery, all electric and electronic equipment, motor vehicles, aircraft, ship building, all chemicals and products, and all scientific and other instruments.

This transformation has profound consequences for the organization of society, and for the American economy. The new jobs are different in several respects from jobs in productive industry. In the first place, they provide employment for women. Women accounted for 41 percent of all employment in 1979, and 31 percent of all manufacturing employment; they accounted for 56 percent of all people employed in eating and drinking places, 43 percent of employment in business services (a sharp increase since the early 1970s), and 81 percent of employment in health services. Waiting on tables, defrosting frozen hamburgers, rendering “services to buildings,” looking after the old and the ill: “women’s work.”

Second, jobs in the big three industries of the 1970s offer short hours. People working in eating and drinking places work the shortest weekly hours of any industry: 26.4 hours in 1979, compared to an average of 35.7 for the entire private economy, and 40.2 in manufacturing. (“Services to buildings” and health services are also parsimonious in hours worked.) Third, hourly pay is very low. Eating and drinking places offer the lowest average hourly earnings (excluding tips) of any industry. Business services and health services are also among the low-paid industries. Employees in “nursing and personal care facilities,” for example—of whom 89 percent are women—earned an average of $3.87 per hour in 1979, compared to an average of $6.16 in the entire private economy, and $6.69 in manufacturing. And these pitiful earnings increase very slowly. Hourly earnings in services, measured in 1972 dollars, fell from $3.16 in 1973 to $3.08 in 1979; earnings in retail trade fell from $2.70 to $2.61. Over the same period real hourly earnings in manufacturing increased from $3.83 to $3.85, while earnings in the motor vehicle industry increased from $5.13 to $5.22.11

Fourth, the new positions are “dead-end jobs.” One measure of the prospects for change and promotion in an industry is the proportion of all jobs which are for production or nonsupervisory workers. The average for the private economy in 1979 was 82 percent; for manufacturing it was 72 percent, with such adventurous industries as chemicals requiring only 57 percent nonsupervisory workers, aircraft 54 percent, and guided missiles 32 percent. Business services, by comparison, employ 87 percent nonsupervisory workers, health services 89 percent, and eating and drinking places 92 percent. Fifth, the “new” industries, with their short hours, temporary and part-time employment, and their women workers, are less protected by union agreements and benefits than are older manufacturing industries: the motor vehicle industry, for example, with its unemployment compensation, health benefits, and increasing earnings.

The booming labor-intensive industries are, finally, distinct economically from older productive industries. Their “structure” in input/output terms, for example, is different from that of manufacturing industries. They buy inputs from a very few other industries, and most of these suppliers are similarly crowded into the service and trade sectors. Thus the business services industry does not buy as much as a penny’s worth of inputs, per dollar of its output, from any manufacturing industry; its major purchases consist of services from real estate and from itself. (Purchases of capital equipment are not covered in these statistics.) Medical services spend about three cents per dollar on food and drugs, and just over one cent on such suitably office-bound inputs as paper and printing; the important purchases are of business and other services. Eating and drinking places spend thirty-two cents per dollar of output on “food and kindred products,” one cent on paper and paper containers, and the rest of their substantial purchases in the transport, trade, and service sectors.


This more or less hermetic behavior is in evident contrast with the more familiar input/output profile of, for example, the motor vehicles industry: for each dollar of output, it buys two cents worth of textiles, three cents worth of rubber, one cent of glass, eight cents of screws, seven cents of iron, one cent of engines, one cent of miscellaneous machinery, twenty-two cents from motor vehicles and equipment, and so forth….12 The new service industries are isolated from the coming and going of intermediate inputs, from the propensity, in Adam Smith’s phrase, to “truck, barter and exchange one thing for another.”

The United States, in sum, is moving toward a structure of employment ever more dominated by jobs that are badly paid, unchanging, and unproductive. This most industrial of societies, this bourgeois El Dorado has in fact gone further toward a service and retail economy than any other of the largest industrial countries. Two “activities” in international industrial classifications, “wholesale and retail trade including restaurants and hotels” and “community, social, and personal services,” together correspond approximately to American trade and services activities (although they also include public employees and wholesale trade). The United States has by far the highest proportion of its employed population in these activities of any of the five major industrial countries: 51 percent in 1978, compared to 44 percent in Japan and 37 percent in Germany. In the race toward services13 the United States—how shameful, how distant from Republican hopes—had surpassed even Sweden, which still had only 48 percent of its employment in trade and community services.

It is in this morose environment that Mr. Reagan’s industrial Geist must blaze into life. Is such resurrection likely? There are, it seems to me, two successive great dangers ahead. The first is that the policy will not work, that the spirit will fizzle. The second is that the doomed pursuit of the Republican resurrection may lead to a disintegration of the employment-intensive industries, and thus to tremendously increased levels of unemployment, particularly among the poorest and least protected workers. Eventually, as we will see, this may bring about a new “industrial” boom. But it would be one that in virtually no way resembles Mr. Reagan’s essential heavy industry. And the long term in question would be extended, and vicious beyond any part of the postwar economic experience.

In order to explore the first danger, we need to look more closely at the economic consequences of the changing employment structure. Here we see that the movement is from high to low productivity sectors of the economy. For retail trade and services have the lowest productivity, as measured by conventional economic indicators, in the entire nonagricultural economy. In both output per hours worked, and output per person employed, the two sectors are well below the national average.

(It is important to be clear that this low productivity is not a consequence of the proportion of women workers in retail and services. The industrial sector with the highest productivity—finance, insurance, and real estate—is also among the most feminized in its labor force. The sector where productivity is growing fastest, communication, also has a higher proportion of women workers than the national average. Within manufacturing, electric and electronic equipment—the source of much innovation for the entire economy—has a higher than average proportion of women workers. Nor is there a strong correlation between output per hour worked and hourly earnings. Workers in finance are among the lowest paid in the economy.)

We might think of the private American economy as being composed of two sectors, sector I and sector II, where sector II consists of the fast-growing retail and service industries, and sector I of all other industries. Employment in II, as we have seen, accounts for 43 percent of total employment in 1979, up from 38 percent in 1969, and its advantage has been accelerating. But it accounts for less than 26 percent of total output, and this proportion has scarcely changed since 1969.14

Output per employed person in sector II was $9,853 in 1979 (measured in 1972 dollars); in sector I it was $21,433. The consequences of the shift are yet more dire because productivity in II is not only low but also grows slowly, or not at all. Output per employee in II was lower in 1979 than in 1973; in sector I it increased 1 percent per year over the same period.

The shift to sector II is likely, thus, to have affected overall rates of growth of output per employee. Consider, for example, a different kind of economic growth: H-growth, or high-industrial growth. Suppose that, under conditions of H-growth, all of the 10.8 million new private jobs created in 1973-1979 had gone to workers in I. And suppose also that output per worker had still changed at its actual rate in the two sectors. By 1979H, the total product of the economy would have been $1,302 billion, instead of $1,223 billion. Output per worker would have been $17,622 instead of $16,552. Instead of essentially no growth in output per employed person (0.03 percent per year), there would have been an increase of 1 percent per year.

We might consider a more likely alternative—N or normal growth, for an outcome in which the increase in employment from 1973-1979 was divided between sectors I and II in the same “normal” proportion as was the increase in employment from 1949 to 1969. Even under N-growth, output per worker in 1979N would be significantly higher, at $16,781, than the actual outcome. Real growth in output per employed person, over the period between 1973 and 1979N, would have been a modest but respectable 0.261 percent per year.15 These simple calculations are not, of course, comparable with studies of the effects of “structural shift” on productivity defined as output per hour worked. But they do suggest some economic consequences of the movement into sector II employment.16

The shift in employment is thus likely to be implicated in one of the most lamented problems of the recent American economy, namely the slow rate of growth of productivity. Output per hours worked in the private non-farm economy—to revert to the most widely used measure—which increased 2.2 percent per year from 1950 to 1973, increased only 0.5 percent per year from 1973 to 1979; the level of productivity was actually lower in 1979 than in 1978, and is lower in 1980 than in 1979.17

The tribulation of a slowing rate of productivity growth is not new. Mr. Reagan’s Republican predecessors were similarly preoccupied: compare Mr. Nixon’s “comprehensive national crusade” to increase productivity of 1972 with Mr. Reagan’s marginally less felicitous “great national crusade to make America great again.”18 But the United States is peculiarly afflicted in comparison with its international competitors. From 1973 to 1977, it had the lowest rate of growth of productivity of any of the five large industrial powers—lower than even Britain’s.19 Productivity growth rates have been decelerating in all the largest industrial countries; only in the United States has the level of productivity actually been falling.

The structural changes in employment and output also make it less likely that the strictly industrial part of the economy can bring about a new boom. For even within the sector we have called I, “industry”—defined as manufacturing, construction, and mining—is far from dominant. We might describe industry, in this sense, as sector IA, and a sector IB as being composed of all other I-sector activities: transportation, communication, utilities, wholesale trade and finance, insurance and real estate—what could be described as “industrial services.”

Sector IA, on this definition, accounts for only 48 percent of I-sector output (35 percent of total output in I and II) and 63 percent of I-sector employment. Sector IB has by far the highest output per employee of the three sectors: $30,400 in 1979. In sector IA output per employee is relatively low, at $16,300. Over the entire postwar period, productivity in this sector increased at about the same rate as productivity in IB. (Within IA, however, output per employee in manufacturing has increased 1.3 percent per year from 1973 to 1979, while output per employee in mining and construction fell substantially.)

Here again, international comparisons are interesting. Of the five major industrial countries the United States has the lowest proportion of its civilian employment (public and private) in the equivalent of sector IA; 30 percent in 1978, compared to 44 percent in West Germany, for example, or 38 percent in Britain. Once more, the United States is less industrial, in this sense, than Sweden. The positions are the same if we look at manufacturing alone: the United States has less than 23 percent of its total civilian employment in manufacturing, compared to 35 percent for Germany, 27 percent for France, and 25 percent for Sweden.20

How welcoming is this environment for Mr. Reagan’s economic policy, founded as it seems to be in the hopes of industry, of sector IA? The industrial sector is easily surpassed, in employment, by sector II; it is surpassed in total output and in output per employee in sector IB. Only the most prodigious expansion of industrial production, therefore, would suffice to invigorate the entire economy.

Consider, for example, the consequences of a more dynamic industrial performance in the 1970s. Let us double the 1973-1979 rate of growth of output per employee in sector IA—0.615 percent per year—keeping all else constant, and call this hypothetical dynamic economy D-growth. In this outcome, 1979D output per employee in IA would be $16,913 instead of the actual $16,275. But the total growth rate of output per employee would have increased only to 0.261 percent per year; just the same, in fact, as under our earlier hypothetical outcome (1979N) where employment in sector II grew at no more than its “normal” historic rate.

Or imagine the transformation that would have been required in IA in 1973-1979 to shift the private economy not to a paltry 0.2 percent annual growth rate in output per employed person but to its historic rate, for 1947-1973, of 2.055 percent per year. Such a shift, with conditions in the other two sectors held unchanged, would have required an increase in IA output per person employed to $22,297 in 1979S (outcome S for superdynamic). This would imply an annual growth rate of over 6 percent from 1973-1979S: more than twice the historic growth rate of output per employee in this sector, and ten times its actual growth rate.

A “supply side” enthusiast might answer, to these considerations, that the recent emphasis on traditional industry is no more than political rhetoric; that the Republicans once in office will care not at all whether their economic recovery comes about in sector IB, sector IA, or sector LXXXIV. Supplysiders—like their opponents and mirror-images, the “demand-siders” or Keynesians—are unconcerned with the real industries and workers and technologies that constitute an economy. They prefer to live among the abstractions of economic theory and economic politics, whether of “supply” and “expectations” or of “effective demand.”

But the primacy of traditional industry, of IA, is not easily ignored. If the economy were to expand in sector IB, employment would be unlikely to increase fast. And the characteristic behavior of IB corporations—immense semi-public utilities, bus companies and truckers, financial corporations, AT&T—is hardly that of the sensitive, even skittish entrepreneurs, the investors in new factories and equipment to whom the Republican policy is addressed. Yet if growth of output and employment continues to expand in sector II, then the present problems of inflation and low productivity growth will be compounded.

There seems a very reasonable chance, in sum, that the Republican inspiration will not bring about rapid, noninflationary growth and increased productivity; that the spirit, fizzling rather than blazing, will not be equal to the constraints of domestic structure and international recession.

The Reagan program in these conditions is likely to be wildly inflationary. And the military spending to which the new government is committed will exacerbate such tendencies. The Republicans do not discuss the economic consequences of remilitarization; nor are they likely to, given their conviction of the priority of defense, which transcends the banal calculus of economic costs and benefits. But the military boom of 1981 is likely to bring all the problems of previous expansions with few of their benefits. The two periods of greatest military expansion were both times of rapidly accelerating inflation. Thus the Korean War boom began in 1950, when inflation was 1 percent; in 1951 inflation was over 8 percent. The Vietnam War-related military boom began in 1966, when inflation was less than 3 percent; since then, inflation has averaged 6 percent per year.21

At the same time, the employment effects of increased military spending will be dampened in the 1980s by the overall structural changes in the economy. The “defense products industries” are only a minor subdivision of our sector IA: together they employ fewer workers than they did in 1967, and only a third as many people as are employed in eating and drinking places. The Defense Department employs less than two thirds as many people, military and civilian, as it did in 1967, and its purview is unlikely to increase.22 Does Caspar Weinberger want more civilian bureaucrats? Does the Middle East Rapid Deployment Force want more quartermasters, or more missiles?

The proposed military expansion seems organized to maximize the economic costs of defense, and to minimize its economic benefits. It will favor nuclear missile “systems,” submarines, planes, and other “big ticket” items. But spending of this sort requires large numbers of scientists and engineers and construction workers; it requires relatively few manufacturing workers. The MX missile system, or a substitute costly project, would provide some employment, and inflation, in Cambridge, Massachusetts; it would also provide considerable inflation and employment for low productivity construction workers in Utah and Nevada. But it would not provide jobs for unemployed steel workers. MIRVed experimental missiles are not bolted together in assembly lines.

What will the Republicans do if their policies lead them into higher inflation and unbalanced budgets? Their most likely recourse will be to the conventional conservative remedy of recession. The old conservatism represented in the Reagan cabinet by Mr. Regan and Mr. Weinberger has its acrid but available medicines: control the money supply, increase taxes (or limit tax cuts), hack with ever greater frenzy at nonmilitary government spending. There is a recent precedent for the repression of neoconservative exuberance. Mrs. Thatcher came into office determined to cut taxes and inspire the “spirit” of British entrepreneurship, but has retreated to the purest policies of victory through recession.

Such conservative orthodoxy could bring about the second great danger of the Reagan economic policy, namely a collapse of employment throughout the economy. The 1970s seem to have confirmed the experience of the postwar period, that employment in sector II is immune to the vicissitudes of the business cycle. Employment in services and to a lesser extent in retail trade changes, on this view, according to a long-term growth path. And the recent dominance of sector II employment has indeed been countercyclical in just this sense. From 1974 to 1975, employment in sector I fell by 2.4 million jobs; employment in sector II increased by 0.5 million jobs. Similarly during the recession of 1980. From July 1979 to July 1980, employment in I fell by 1.3 million jobs, while employment in II increased by 0.8 million jobs.23

But there are reasons to doubt whether the resilience of retail and services employment will continue into the next one or two recessions of the 1980s. First, because services employment has not in the past been immune to cyclical declines, if the cycles in question are sufficiently great. Second, because there may be special characteristics of the new employment which make it particularly vulnerable to the special recessions which lie ahead.

The ominous precedent is 1929-1932. The 1920s were a period of rapid expansion in the equivalent of sector II: trade and services together accounted for 77 percent of all new private employment from 1920 to 1929. But many of these jobs were lost after October 1929. From 1929 to 1932, employment in retail trade declined almost as much as did employment in the entire economy, and employment in services also declined substantially. In some services—particularly frivolous ones, like hotels and “amusements”—employment declined even more than it did in the economy as a whole.24

It is also plausible to suppose that sector II employment will be particularly vulnerable even to milder recessions in the 1980s. This is so, above all, to the extent that the next recessions will be accompanied by cuts in civilian government spending. One apparently “recession-proof” sector, state and local government, has already been affected. This sector accounted for over 40 percent of all new public and private employment in 1973-1976 and less than 10 percent from 1976-1979. And other retail and service activities may be affected directly and indirectly by spending cuts. Each of the “Big Three” employment-intensive industries of the 1970s could be vulnerable to a combination of recession and government cut-backs.

The expansion of employment in eating and drinking places seems to be closely linked to long-term trends: more people live alone (and are far more likely to eat out than are “multi-person households”); more women work (and families with working wives spend more money on eating out). But output in eating and drinking places is also sensitive to changes in real per capita income; it stagnated in 1959-1961, for example, and also in 1973-1974.25 In the next recession, this sector might behave like the “frivolous” services of the early 1930s. People might treat eating out, even eating hamburgers, as an amusement and not a necessity. There could also be an adverse multiplier effect having to do with the long-term demographic trends. If a recession in the 1980s led to lay-offs of women workers in such “feminine” activities as local government, health services (and eating places themselves), then the demand for meals might contract further.

There might also be tendencies within the eating and drinking industry which will affect employment. Productivity growth in eating places was much less rapid in the 1970s than in the 1960s, but might increase again. Large chains—notably in fast food—are particularly adept at labor-saving innovations: the pre-frozen portions, automatic frying baskets, and continuous flow broilers which transform cooks into unskilled materials handlers. A recession could lead to the bankruptcy of small restaurants (and even small fast-food chains), and a concentration of employment in more efficient operations. Will the deserted Burger King (or Milkshake Queen) be as common in the 1980s as the closed-down gasoline station of the 1970s?

The boom in business services is also a consequence of persistent trends. Corporations now contract out jobs such as copying, data processing, mailing, cleaning. This is to some extent a function of technological change and the onward march of the division of labor: business uses more data processing, for example, and specialized companies are efficient providers of computer services. But it is also related to social trends. Large corporations may find it easier to send out copying and bring in cleaners; their suppliers are obliged to manage part-time and temporary workers, many of them women.

Business services depend none the less on the overall business environment. In a recession, corporations could retrench, compelling their own employees to do more photocopying, and cutting back on temporary help. Here again, there are small and perhaps vulnerable companies, and many vulnerable short-time employees. There could also be a further multiplier effect, in, for example, the “personnel supply” establishments which provide temporary workers for other business services.

Medical services seem the most inexorable of the three big industries. Americans are getting older and they show few signs of wanting less health care; they are not less sick in a recession. Private health services (which employed some 400,000 people in 1929 compared to five million now) were scarcely affected by the collapse in employment in the 1930s.26 But medical services are also among the private industries which will be most hurt by reductions in civilian government spending.

Senator Richard Schweiker (R-Pa), the Secretary-Designate of Health and Human Services, has announced an assault on “abuse” in Medicaid, and has said that Medicare could save money if more people were looked after at home. His colleague Senator Pete Domenici (R-NM), the incoming chairman of the Senate Budget Committee, agrees that “nothing’s immune—indexed programs, entitlements, the whole works.” 27 Such budget cutting could affect employment in all the private activities which have grown up around the semi-private health care system: for example in the million-employee “nursing and personal care facilities” business. Here too, as in other services, there are small companies which might go bankrupt. And there are four million women workers, who unemployed might return to unpaid cooking, cleaning, and nursing: the reverse multiplier once more.

The Reaganites are probably right to be preoccupied with an economic “spirit.” Marx conveyed the theatrical and irrational character of capitalist inspiration. The Cambridge economist Nicholas Kaldor once criticized Schumpeter’s tendency to explain economic growth by recourse to a “stage army of entrepreneurs”; he too conceded the importance of what Keynes called the “animal spirits” of investors.

But the conservatives are dangerously wrong when they invoke an old spirit—“the spirit…still there”—and old American industries. For changes in the structure of the American economy have brought equivalent changes in expectations, in the structure of entrepreneurial spirits.

The growth of employment in what we called sector II corresponds to persistent social and economic tendencies. At a superficial level, we can see that the economic booms of the 1970s were related to the multiple “crises” of American society: eating places and the crisis in the family; business services and the crisis of the corporation. But the expansion of sector II also has deeper origins.

Two of the essential institutions of modern capitalist growth are intimately concerned: the system of reproduction of the labor force, and the corporation. The family, it seems, is increasingly incompetent to sustain the reproduction of educated, healthy workers. Women’s work is multiplied by the isolation of small families; women themselves join the commercial labor force; many work for the small fly-by-night companies of sector II. These problems are exacerbated by the demographic tendency toward an aging population. In 1968, 9.6 percent of the American population was over 65; in 1978 the proportion had increased to 11 percent.28 And most elderly Americans—unlike Donald Regan (sixty-two), Caspar Weinberger (sixty-five), William French Smith (sixty-two), Ronald Reagan (sixty-nine)—are not chosen for well-paid and respected jobs; many are consigned to the ignominy of “personal care facilities” and the declining family.

At the same time, the corporation is faced with two different assaults. On the one hand, it is ill suited to fulfilling the new needs of the labor force for familial and other services. On the other hand, the sector I monolith of Alfred Sloan’s imagination is equally unsuited to employing part-time and temporary workers, young people, old people, and women.

These problems are by no means unique to the United States. Sector II-type employment is increasing throughout the advanced industrial world, although different countries have arrived at different patterns—for replacing the extended family with public or private employment, with the welfare state, or with nursing homes and fast-food restaurants. Mr. Reagan’s conservative nostalgia for an old industrial spirit is itself not new: he echoes the hopes of (ill-fated) conservatives in two other sector II countries—Thatcher in Britain and Falldin in Sweden.

The capitalist solution, in the long term, will be a new entrepreneurship to “industrialize” sector II. Certain service activities will become far more mechanized; others will be detached from the retail and service sector and reattached to sector IA. We can see the outlines of this process in the electrostatic frying baskets of the fast-food industry, or in the instant meals, the panglandular biscuits of Brave New World. In medical services, there will be more institutions like the Swedish hospital for long-term care, with a swimming pool and comfortable cafeteria, but where the patients were sent to bed early because there were too few staff to keep the facilities open.

The industrialized service economy may be dismal. It will evoke capitalist spirits of a different sort: vicious feminine entrepreneurs, Frederick Winslow Taylors of the kitchen and the hospital. The transition to a humane post-sector II economy is in some respects the most profound political problem for progressive governments in Europe or, some day, in the United States.

But in Mr. Reagan’s America, the transition may be cruel in another sense. For it may require the convulsive decline in employment to which we pointed earlier: the disintegration of the existing sector II. The employment boom of the 1970s in the United States was extremely odd. The US is historically far more brutal, in its “normal” levels of unemployment, than are its main competitors. In the 1960s, average unemployment was over three times as high in the US as in Japan, West Germany, or France. In the 1970s, however, unemployment rates increased far less in the US than in these other countries (except Japan). By 1981, unemployment rates in France, West Germany, and Britain will be five times their 1960s levels, but less than twice their 1960s level in the United States.29

Mr. Reagan’s initial economic policies are unlikely to bring the high productivity, noninflationary growth he seeks. His next set of policies—his next economic emergency, not for Inauguration week but for a recession months or years from now—may lead back to even higher levels of unemployment than were previously accepted. The employment expansion of the 1970s, of the Carter years, was bizarre: compassionate, androgynous, not characteristically American. There may be far worse to come.

This Issue

February 5, 1981