The Endangered American Dream: How to Stop the United States from Becoming a Third World Country and Win the Geo-Economic Struggle for Industrial Supremacy 
by Edward Luttwak.
Simon and Schuster, 365 pp., $24, October 1993, 0 671 86963 9
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Japan’s Capitalism: Creative Defeat and Beyond 
by Shigeto Tsuru.
Cambridge, 277 pp., £24.95, June 1993, 0 521 36058 7
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Even at the end of his new book, it’s not clear where Edward Luttwak is coming from, as they say in his country. He leaves no doubt, however, about where he dreads coming to. Instead of being smoothed through ‘the spotless elegance of Narita or Frankfurt or Amsterdam or Singapore’, the hapless international traveller who comes into New York’s Kennedy Airport will walk into one of the tatty terminals that near-bankrupt airlines no longer maintain, mildly surprised at the naked plywood and unfinished gypsum board. He will stand in line for an hour or two at passport control, perhaps more if several planes have arrived, as everyone knows they will, together. Already unhappy at his luggage having been thrown off the belt by angry handlers, he’ll have to present it to an unhelpful customs official. And if he’s not transferring to an internal flight, in which case he’ll have to suffer clerks tapping in his connection with one finger, more angry ground staff, and another broken walkway, he’ll emerge to be bounced over potholes, past decayed public housing and corners piled high with garbage, until his smoking bus or audibly unsafe taxi, ‘usually driven by an unkempt, loutish driver who resembles his counterparts in Kinshasa or Islamabad rather than London or Tokyo, where licensing requirements are strict and dress codes enforced’, drops him in front of the beggars outside his Manhattan hotel. Safe at last in the lobby, he will pause before choosing one of the tours that now offers a drive past the drug dealers on the streets of the South Bronx.

We’re in the new America, the land of capitalism, as Luttwak puts it, without capital. His researchers at his own directorate of Geo-Economics in the Centre for Strategic and International Studies in Washington have given him sheets of scary statistics to make the point. He’s a sophisticated man, and knows that one can’t take these neat. But he loves them, and hurls them at the reader throughout this compelling polemic. Consider the crudest. In 1970, the gross national product per person in the United States was twice as large as its Common Market equivalent and larger still than Japan’s. By 1980, America’s edge on the Community had been halved. By 1989, the inclusion of Greece, Portugal and Spain had slowed the increase in the EC, but what was then West Germany had caught up, and for Japan the figure was nearly half as large again. If the trend were to continue to 2000, the average income per head in Europe would be where it is in Japan now, and in Japan it would be twice as big. If it were to continue to 2020, per capita income in Japan would be fully five times as big as it is in the United States, a difference more or less exactly the same as the difference between the United States and Brazil in 1980. And since the ratio of the highest incomes to the lowest in Japan is only about 20 to 1 – more or less the same, Luttwak cannot bear to mention, as it was in the Soviet Union; all but incomparably narrower than in the United States now – the truly average American is not, by Northern standards, going to be very well off.

Not that he or she is secure now. By 1990, nearly a fifth of full-time, year-round workers weren’t earning enough to keep a family of four out of what the Federal Government itself defines as poverty. The number had doubled in a decade. Not all these people, of course, have the modal family. They include a quarter of a million women with children and no husband present. There are also husbands with working wives. Nonetheless, more than thirty million Americans now live below the official poverty line. Twelve million of them are under 18 – which, with the further four million under that age classed as ‘near poor’, adds up to a quarter of all young Americans. These people will be coming into the labour force in four or five years’ time with all the disadvantages of their early lives, including, as Luttwak emphasises, what is indisputably the poorest education now provided for any children anywhere in the industrialised world. And jobs for the less educated are in any event decreasing. No wonder, therefore, that crime is rising. ‘With its 248 million all-out individualists,’ Luttwak reasonably observes, ‘diverse and sometimes clashing races, and a long history of violence, America could never be compared to famously law-abiding Japan, cohesive Finland, strict Switzerland, or indeed any First World country at all. Of late, however, it cannot even be compared with itself: between 1980 and 1989 the number of inmates in federal and state prisons more than doubled, from 329,821 to 710,054’ and is still going up. In 1992, in the nation’s notorious capital, it was estimated that 42 per cent of all black males between 18 and 35 were in prison, on parole, or on probation awaiting trial. ‘Correction officer and jailer’ is now one of the two fastest-growing occupations.

At the top, by contrast, things are dandy. In 1989, the richest 1 per cent of families owned 36.2 per cent of America’s private wealth, 5 per cent more than they did six years before. The next richest 9 per cent owned about the same. The remaining 89.9 per cent together owned nearly a trillion dollars, $1,000,000,000, less than the richest 1 per cent alone. Looked at another way, of course, the United States, like the other industrial countries, is still a society of middle-income families, earning somewhere between $18,576 and $74,304. But this isn’t a rising middle class. In the last six years of the Eighties, it shrank from 71 per cent of all families to 63 per cent. Looked at another way again, the wealth of all but the richest 1 per cent declined on average in these years by a percentage point a year. Real incomes also are falling. Except, again, at the top. Anthony O’Reilly, chairman, president and chief executive of H.J. Heinz, received $75,085,000 in 1991, about $300,000 every working day, $37,500 every working hour. He was, it’s true, the best rewarded of the ten executives who received more than $11 million that year. (If O’Reilly had been running something in Japan, Luttwak points out, he’d have probably been paid about $400,000 and received about as much again in fringe benefits.) But others are doing very well, including the lawyers who collected a fee every step of the way on the buy-outs they were encouraging in the Eighties. The twelve hundred directors of Wall Street firms earned about $1.1 million each in 1991, and that was after the takeover fever had faded.

Somewhat further down things have not been so good at all. Relatively, the change has been extraordinary. Between 1980 and 1991, the earnings of those chief executives whose pay is listed in Business Week had risen from being 42 times higher than that of factory workers to be 104 times higher. Absolutely, also, there has been a fall. When one takes inflation into account, average real earnings in the United States in 1990 were back where they’d been in 1965. In manufacturing, which is declining, the turnaround came in the early Eighties; in services, which are not, it came a few years before. The effect of this on families’ total incomes would have been even more dramatic if women hadn’t entered the labour force to try to counteract it. Now that they have, their pay, which is usually lower than men’s, is falling also, and what they’ve done to offset the trend is anyway done. The overall contrast with Western Europe and Japan is sharp, and if one remembers what poorer Americans have to buy that their counterparts elsewhere don’t, like health and personal security, it’s sharper still. (By 1991 it was only in Britain, among the OECD countries, that average pay and other benefits from work were lower.) The official American poverty line, $12,195 a year, may be adequate for keeping ‘a deer-hunting, bass-fishing, nutria-trapping, vegetable-gardening man’ and his wife and two children not unhappily alive by the Alabama River. But it’s no good in a city, and the average – which on Luttwak’s figures for all workers in all sectors, including their benefits, I make to be $37,000 or so: the same as Anthony O’Reilly gets every hour – is not nearly as good, in what it can buy, as it was.

The immediate explanation for all this is plain, Luttwak argues. It’s ‘over-consumption, which arithmetically results in undersaving, which almost arithmetically results in underinvestment, which absolutely results in the undercapitalisation of research and development, public infrastructures, and private plant and equipment’. The benchmark for some Americans still, that moment at the end of the Second World War when the economy of the United States contained half the world’s total value, no longer makes sense. But ‘neither our European competitors nor the Japanese can be blamed for the long list of self-inflicted wounds,’ insists Luttwak, ‘that are directly causing the Third-Worldisation of America. They had nothing to do with the most original invention of American statecraft since the Constitution: Representation Without Taxation by limitless deficits, so that savings already scant because of private overconsumption’ – savings that are proportionately as low as those in the very poorest countries – ‘are borrowed by the Treasury to pay for the Government’s own day-to-day spending, instead of being invested productively.’ ‘They did not arrange the wholesale deregulation and cultural changes that allowed the morality and urgencies of Las Vegas to infect Wall Street and corporate boardrooms across the land, making heroes out of those who can best sacrifice future growth for quick pay-offs.’ ‘They did not seize control of our classrooms, to discredit the discipline and absolute standards that are the prerequisites of all education.’ ‘They did not corrupt America’s most excellent legal principles into a grotesque legalism that now employs more than 700,000 lawyers.’ ‘Nor did foreigners devise our spectacularly anti-social “social” programmes, by now most nefariously entangled in both racial politics and the crudest racism.’ The issue is not, as so many of its own commentators have said, what an ungrateful world has done to America. It’s what, in greedy short sight and moral muddle, America has done to itself.

The greed and the muddle come together in the insistence on ‘the freedom of the market’. To Luttwak, they come together most acutely in the pervasive American insistence on free international trade. Just like the British – who have had more need to be committed to such a policy – Americans have been happy through the Eighties to let their own corporations go down and those from elsewhere prosper. Not only have they not done anything to match the restrictions that are placed on their own exports; they have also been happy to allow foreign investment to displace their own firms and take care of what remains of the working class or, if they’ve been in a position to do so, to make fortunes buying themselves out and disemploying thousands. Even the steadier and seemingly more secure of the large corporations, like Ford, have thrown away a real advantage by putting ceilings on research and development and investing instead in what foolish business-school professors told them, before 1987, were the reliable rewards of financial services, and in Ford’s case also, as the Cold War was coming to its end, in military aerospace. For Ford itself, the outcome in the Nineties has been increasingly outdated vehicles that only the most unthinkingly loyal would buy. (And when the company turned back to cars, its corporate idiocy extended to spending $2.6 million to acquire Jaguar, of all things, for which it received ‘a badly outdated factory, a cadre of designers still living in the Thirties, and Jaguar’s famously retrograde engineers, who could not even cope with basic electricity until the late Eighties’.) What virtually no capitalist in America has done, it’s Luttwak’s most insistent criticism, is to exhibit any patience.

His contrast is with Japan. There, the Government has encouraged Japanese corporations to invest in one line rather than another, and when they have done so, it has helped them succeed. The crucial institution in this, as everyone acknowledges, has been the Ministry of International Trade and Industry. And the crucial fact in the assistance has been time. Even where the investment has failed, as it did for years in producing computers, the Japanese administration has kept firms at it. In his gentle, elegant and illuminating account of how this was done, Shigeto Tsuru, one of the most distinguished of the now-retired generation of Japanese economists and a principled advocate of a properly institutional approach to the subject, explains the driving images of this ‘administrative guidance’. At the start, there was mugi-fumi, ‘treading on wheat nurseries’, strengthening young plants by massaging their roots. Thus stimulated, firms were promised yamagoya, ‘mountain shelters’: if they over-reached themselves and got into difficulties, there’d be relief. No one actually forced anyone to do anything, and where there were laws, as there eventually were on prices, these were almost always ‘undrawn swords’ whose mere existence made the guidance ‘cut better’. The officials at MITI would sometimes take the initiative, sometimes not. Always, however, they’d provide the best available information on markets, bring all the potential participants together, and rely on the like-minded ‘window guidance’ of the Bank of Japan and other lenders who would explain to potential borrowers when they came to the window that they could certainly have loans at low interest for this, but not for that. MITI would also arrange tax breaks, licences to import foreign technology, protection from foreign competition, and other desirables. It was a practice that depended on trust. It favoured the already known, who were at first the descendants of the revived old family zaibatsu, like Mitsubishi, over the new. (When a parvenu maker of motorcycles, Mr Honda, wanted to join discussions on promoting the manufacture of cars, he was politely refused.) Its effect, nevertheless, was decisive: in so far as any producers can, the Japanese firms knew where they were going, and without being given the self-defeating guarantees that a socialist state might have offered, knew that the risks would be shared. In forty years, Japan’s GNP increased 152 times. It was indeed, in the phrase of Kenneth Boulding’s that gives Tsuru his title, one of the most creative of reactions to defeat.

As Tsuru explains (and Luttwak does not) this period is now past. The successful Japanese corporations have generated enough money of their own to repay their debts, further increase their spending on research and development, invest abroad, use their oligopolistic positions to diversify, and speculate in securities and land. American companies have not had the same debts. Nor have they had the same profits. But above all, they’ve been more impatient. The result is that they’ve not bothered so much with research and development, tried to keep their profits up by transferring their existing technologies to cheaper places – which the Japanese have also done, but in order to renew their lead with new investment at home – speculated, and in the dementia of what Luttwak calls their Acquired Calvinist Deficiency Syndrome, paid their executives handsomely for what they believe to be their commercial intelligence, or stripped themselves in profitable re-acquisitions, or let themselves be stripped by others. Defeat, as they say, from the jaws of victory.

Those who have its measure, like Luttwak, are desperate men. Not for them a reassertion of the American Way, a call to arms of the kind that Samuel Huntington made in the journal Foreign Affairs last summer, in which he described the new world disorder as ‘a clash of cultures’ and suggested that the West was going to have to go on the offensive to defend its own against the Rest. Unless they were to declare war on Japan, the leaders of the United States may not now be able to take the people with them. As Luttwak said recently in this paper (7 April), the new economic insecurities might lead voters there (and in Europe also) to abandon the liberal pieties for a ‘product-improved’ Fascism that sets itself against the ravages of global capital. Ross Perot was one warning, Zhirinovsky is another. But there is some hope. Unlike Britain, Luttwak rather implausibly claims, and perhaps unlike the rest of Europe too, ‘the United States has a fully proven capacity to recast its culture when called for, not least because Americans are far more ready to learn from the immigrants that reach their shores. Perhaps... this time around it will be the Confucian instincts of Chinese, Japanese and Korean immigrants that will refuel the engine of American progress.’ In the madder school districts of the Union, as he inadvertently shows, a version of this message has already gone home. ACDS is so advanced that the history of the West is being replaced by histories of the Rest, and in one or two places – he cites a school in Atlanta – children are being taught to count in what’s thought to be ancient Egyptian and Swahili (Civilisation = Ancient Greece = Egypt = Africa). This isn’t as new as he thinks – it was being done in posh high schools in Boston in the Sixties – but it’s not going to improve anything now, except the occupational chances of those who have arrived in America too late to be subjected to it. Luttwak believes that the Federal Government should act to revive the training of teachers to teach the basics, and reward them accordingly. ‘Confucian instinct’ is learnt in cultures that value learning above all else.

The issue is cultural. It is also, and more practically, economic. Luttwak has two suggestions. The first is to change taxes. To raise them on incomes which are already falling would not be fair, and in the Land of the Free, as he sees it, barely feasible. To lower them on corporations, however, would be consistent with the pattern in Japan – although, as Tsuru explains, it has its origins there in the indebtedness of Japanese corporations – and might just produce some similar incentives. The shortfall, not good news for the poor, would have to be made up from something like VAT. Luttwak’s second and more far-reaching suggestion is for an industrial policy. As he says, America does already have one, but it’s not very useful. It’s been run by the Pentagon, and consists in the promiscuous financing of otherwise unsaleable goods for generals and admirals. More promising is the clear success of the Reagan Administration’s forceful ‘administrative guidance’ of the semi-conductor producers, which defeated Japanese dominance. To extend this in a ‘monstrous parody of MITI’, Luttwak agrees, would merely cause further chaos in the already congested and congenitally entrenched departments of state. Better just to use the President’s National Economic Council, but only if it had a budget with which to bludgeon the rest.

If it were possible to imagine an international trade agreement that prohibited all subsidies, all forms of state-supported technical development and export promotion, and all the barriers to the imports of goods and of financial, insurance and professional services, none of this would be necessary. We’d have what Luttwak calls ‘sweeping geo-economic disarmament’ of all protection, a ‘super-Gatt’. Writing before the conclusion of the recent round of the actual Gatt, he is gloomy. In fact, the new agreement is a considerable advance. Countries will still be able to increase protection when an industry is in trouble or the country itself is in difficulties over its balance of payments. But trade in agriculture, services and intellectual property are now included in the agreement, and there are rules also against subsidies for export, obstacles to shipment (which the Japanese in particular have been masters at devising), rules forcing foreign investors to use local suppliers, and rules restricting tenders for government contracts. Dumping, the selling of goods abroad for less than at home, and voluntary export restraints are more difficult to control, but even there, the new World Trade Organisation’s ‘competition rules’ may have some effect. The more optimistic certainly believe that the inclusion of agriculture and services will serve to restrain the greatest unilateral offender of all since it refused to sign the first Gatt, the United States itself. America’s ideology on the matter, Luttwak does not make as clear as he might, has long disguised its practice.

What remains to be seen is just how far the new rules can be enforced. In so far as they can’t be, or won’t be, Luttwak himself wants ‘a geo-economic arms race’. Or so, at least, it seems. For in the final few pages of his book, he quite uncharacteristically fades. He offers the arguments against such a race – the sort of arguments that persuaded those who met at Bretton Woods in July 1944 that what had happened in the Thirties mustn’t happen again – sets them against his ideal ‘super-Gatt’, says this has to be the choice, and stops. But sense lies in between. Some support is wise. Even economists in America, as Tsuru notices, have argued for it. What was done for the failing semi-conductor industry there in the Eighties was to the country’s benefit, and since a good lawyer could have said that it increased competition, the new WTO would probably not have stopped it. At the same time, as the Mexicans acknowledged in signing the North American Free Trade Agreement last year, those countries which are short of finance – or that can’t use what they have wisely – will have to pay the social price of opening themselves to others.

Only on capitalism’s new front line might it be possible to do what Tsuru would like, which is to agree that a more thoroughly mixed and humane economy is once again possible. If innovation and efficiency are not to be suppressed by the new oligopolies, some of their enormous new surpluses will have to be extracted for new investments in new sorts of enterprise, for more constructive overseas assistance, and for that social reconstruction and redistribution at home which was everywhere, even in Tokyo, so neglected in the Eighties.

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