LESTER THUROW can simplify complex economic data so that it is understandable to any intelligent
reader. The first part of this book, in which he explains very clearly the current problems facing the American economy, also leads the reader to expect that a clear "solution" will be forthcoming. This task is very much more difficult.
Thurow makes suggestions, but I wish he had taken more time to explore just how, given our ethnic and cultural differences, those suggestions can be given practical application. His book attempts to cover too much and he will be accused of simplistic solutions. We are left at the end, for example, witha final chapter which is simply an expression of hope: that through some unidentified new social organization the United States will regain its competitive edge.
Thurow states that his purpose in writing The Zero-Sum Solution is to show the Democratic Party how to regain its leadership role in solving the country's economic problems. His analysis of just what those problems are is very well explained. The main points are worth summarizing:
In 1985, the United States will pass Brazil as the world's largest debtor country.
The country is no longer functioning in an American economy, but as one of many participants in a world economy.
Production in the United States has been declining steadily. As employment increases in the service sector, which is very labor intensive, it declines overall. Other writers have pointed out that in the current second industrial revolution through which we are passing, 2.7 percent of our working population is now engaged in agriculture compared to 30 percent 50 years ago in Franklin D. Roosevelt's day; the surplus work force which left agriculture to go into manufacturing has now moved to the service sector which employs 70 percent of our work force. Thurow goes on to explain that 37 percent of our service-sector employment is in health care -- mostly in nursing homes to look after the elderly; legal workers have increased by 43 percent in the last five years; and accounting employment has risen by 41 percent.
The rate of savings in the United States is not increasing and in fact in 1985 reached an all time low of 5 percent, compared to 14 percent in West Germany and well over 20 percent in Japan. Despite the fact that we very much need to increase equity in our businesses, investment in plant and equipment is down relative to our competitors. Partly it is due to our low savings rate. But the Reagan administration's tax program as amended by Congress has also served not to increase investment but to stimulate consumer demand. This sad state of affairs is also due to the clear trend in U.S. management policy to focus on current earnings rather than long-term investment.
The huge technology edge Americans enjoyed in the 1950s has disappeared. As the U.S. economy has been absorbed into the world economy, few U.S. industries are now safe from international competition even in the United States itself. In machine tools, robots, fiber optics, telecommunications, nuclear energy, electronics, pharmaceuticals, even in wide-bodied aircraft where the European Airbus consortium now has over 50 percent of sales worldwide, we are rapidly losing market-share on products which we either invented or where we long held a preponderant market share.
It is obvious that our problem is a serious one. Rapid productivity growth is essential to the future of the United States if we wish to maintain our standard of living. Reducing the value of our currency will only mean, to quote Thurow, that we accept an economy that "competes on the basis of low wages and not higher productivity." As a new inflationary cycle takes hold we will face again what we did in 1980-81: a combination of high inflation and rising interest rates. Finally, in research and development we are also losing ground compared to other industrialized countries, particularly if we take into account the proportion of R&D which is directed at defense rather than the production of new commercial goods which can be exported.
We tend to think in the United States that other countries do not engage in the same rules of fair trade as we do. Yet protection has risen sharply in the United States since 1980. Today over 35 percent of the products we import are subject to some form of barriers against import. T
HUROW'S ANALYSIS of our problems is sound. He
is also correct in stating that further protectionism is
not the answer. We must put ourselves in a position
to compete in an international economic environment which is quite different from that which we faced only a few years ago. Finding appropriate solutions to the problem, however, is quite a different matter from analyzing the causes. Thurow makes some interesting suggestions: the Japanese, for instance, pay relatively low wages but have a bonus program which in good years may permit a worker to receive an amount equal to his salary in the form of a bonus. This system encourages workers to take an active interest in the results of the business, to work together rather than in confrontation with management, and to develop production methods which will reduce manufacturing costs. To encourage such a system here Thurow suggests eliminating payroll taxes from bonus payments.
He also suggests eliminating the corporate income tax and replacing these two taxes by a Value Added Tax system. The VAT method, now currently in use in Europe, is difficult to evade because each participant in the manufacturing process is responsible for obtaining reimbursement from the next producer in the manufacturing chain. It also strongly favors exports because the exporter pays no VAT. It is both a method of discouraging consumer purchases, i.e. encouraging savings, and a way of encouraging exports. It also takes away the importer's current advantage in this country because imports would be subject to the VAT.
Another interesting suggestion: encourage the formation of merchant banks as a means of increasing long-term equity investment in business, and reducing the cost of capital, which in the United States is three times as high as in Japan. He favors changes in education, increases in the rate of savings, a thorough revamping of bank regulation with preemption by the federal government and a Federal Reserve Board directly under the control of the administration, and a program to allow ease in monetary policy and a tight fiscal policy to reduce the deficit.
A few minor criticisms can be made of this study: Reduced prices for raw materials and semi-finished goods were not due to Reagan luck but to the necessity of Third World countries to export at any cost to meet their interest payments. Nowhere is it explained that 50 percent of our international trade was with the developing countries and that our exports have been severely affected by the understandable reluctance of U.S. banks to make additional loans to these countries even for the purpose of buying U.S. products. It is also not true that the inflow of foreign funds is due to high interest rates in the United States because rates have declined from 21 percent in 1981 to 9.5 percent (prime) in 1985. The inflow of funds has nevertheless continued. Also no mention is made of the almost total cessation of bank funds outflow since 1982.
This is an important book, all the more so because it is directed at changing the thinking of liberals in Congress, among whom are many who do not understand that protectionism is not the answer to the country's lack of industrial competitiveness. It is essential that the United States become competitive once again. The only question is what must we do through public understanding, changes in attitude on the part of management and labor, or through administrative or legislative action, to accomplish this change. If we don't take appropriate action, our standard of living will either decline appreciably or we will compensate through a return of inflation and sharply rising interest rates. We may disagree with his individual recommendations but Lester Thurow has rendered an excellent service in presenting in simple terms the foremost economic problem faced by our country at the present time.