It's an accepted bit of popular wisdom: we've become a nation of self-indulgent spendthrifts. We overconsume and don't invest enough for the future. We're digging our economic grave. Now come economists Irving Kravis of the University of Pennsylvania and Robert Lipsey of Queens College who say it isn't so. Americans invest about as much as people in other advanced nations.
Kravis and Lipsey are among a growing group of economists who argue that, like Mark Twain's death, reports of the U.S.' economic eclipse may be premature. Yes, they say, other countries have tended to catch up by adopting technologies and business practices available here. But U.S. living standards remain higher than those of most other countries. Nor is it clear that other nations can close the gap. Once they've exhausted the easy gains of the catch-up, their economic growth typically slows.
We should heed this message. Exaggerating our economic decline abets a siege mentality. It makes us want to withdraw and protect ourselves against threatening foreign economies. The real lesson is just the opposite. The advances of other nations have become increasingly critical to our own progress. No nation has a monopoly on creativity or good ideas. We now need to borrow good ideas and techniques from other countries, just as they've borrowed from us.
The lesson applies forcefully to the trade bills now before Congress. Limits on imports or foreign investment in the United States will ultimately hurt us. Trade and investment bring new products, technologies and management approaches. They generate pressures for change, even if change is sometimes disruptive. We cannot create a stronger economy by isolating ourselves. The temptation to do so reflects a distorted view of the United States in a state of irreversible economic descent.
It's true that many nations have lost their economic supremacy: most recently, Britain in the late 19th and early 20th centuries. Our day may come, but as Princeton economist William Baumol writes, there's no evidence that it's arrived yet. Other nations aren't inexorably gaining. Japan's economy grew about 10 percent annually from 1950 until the early 1970s. In 1986, it grew only 2.5 percent. Europe's growth has slackened, and we can realistically expect that other fast-growing economies -- Korea and Taiwan, for instance -- will slow once they've duplicated advances elsewhere.
Meanwhile, U.S. per-capita income -- that is, our total output divided by 240 million Americans -- remains well above levels in Japan and Europe. In 1986, U.S. per-capita income was $17,200, according to the Organization for Economic Cooperation and Development. By contrast, Sweden's was $13,200 (77 percent of the U.S. level), Germany's was $12,900 (75 percent), Japan's was $12,200 (71 percent) and Italy's was $9,900 (58 percent).
These comparisons -- used by the OECD and the United Nations -- estimate the actual purchasing power of incomes in different countries. Consider a simple example. Suppose people buy only shoes, and that per-capita incomes in the United States and France are, respectively, $1,000 and 1,000 francs. But Americans are more efficient in making shoes than the French. As a result, the average American's $1,000 buys 10 pairs of shoes, while the average Frenchman's 1,000 francs buys 7 pairs. French incomes would then be 70 percent of American.
Detailed price comparisons, involving dozens of similar items in different countries, confirm the U.S. income lead. Other comparisons that show U.S. incomes slipping reflect only exchange rate shifts and aren't accurate. Since early 1985, for example, the dollar has depreciated more than 40 percent against the yen. At today's exchange rates, Japanese yen incomes -- converted into dollars -- are slightly higher than U.S. incomes. But exchange rate fluctuations don't mirror peoples' actual living standards. The Japanese obviously haven't become 40 percent richer in two years, nor have we become 40 percent poorer.
Our ability to increase future living standards may depend on investment, but as Kravis and Lipsey point out, it's not clear that U.S. investment is too low. No one knows how much countries should invest. Saving and investing -- instead of consuming -- aren't automatically beneficial. They make sense only if they improve future living standards or quality of life. The belief that Americans invest too little stems from comparisons showing that our investment rate (investment as a proportion of gross national product) is 15 percent to 40 percent lower than that of many other nations.
But these estimates, Kravis and Lipsey argue, involve two flaws. First, the conventional definition of investment (housing and business investment) is too narrow. It excludes many things (education, research and development, long-lasting cars and appliances) that are also investments in the future. Second, machinery and other business investment goods are relatively cheaper in the United States than elsewhere. Our spending buys more. Adjusting for these defects brings U.S. investment levels close to those of most other nations, though a few (notably Japan) remain much higher.
We can take only small comfort from these findings. Our problems remain. As a society, we are having more trouble raising living standards than we did 20 years ago. Some companies have grown uncompetitive. In many technologies, we are no longer the world leader. Our schools are often inadequate. But we aren't the only country with problems. Improving living standards is tougher when it requires new advances -- not just exploiting what's available elsewhere. Only time will tell whether the United States can maintain its leadership.
It's unsettling to live in a world where we're threatened -- both psychologically and economically -- by others' advances. But we need to accept this new condition or risk losing the benefit of those advances. We have not declined so much as others have caught up. In an era of multinational companies, growing trade and improved communications, the process was inevitable. If we see it as our undoing, we may make it so.