Tales of a New America

by Robert B. Reich

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  The rest of this book will explore in detail how our reigning cultural mythology is disturbingly at odds with this context, assess the costs of this disjuncture, and speculate on how our parables might evolve to incorporate a new set of cultural challenges. First, it will reexamine the parable of the Mob at the Gates. The liberal ideal of magnanimous accommodation is an out-of-date and dangerously unbalanced guide to our dealings with the other peoples of the earth. The conservative story rightly perceives the Soviets’ readiness to exploit Third World instability. But as will be evident, the conservative parable is also perilously incomplete. Third World tensions are manifestations of the economic and social transformation of the globe. Their connection to the East-West rivalry is in most cases derivative and wholly secondary. Our national interests are undeniably affected by the ability and willingness of Latin American nations to pay off their debts; by the speed with which American and European workers shift out of basic mass production; by how global corporations allocate functions to different sets of workers around the world; by the oil cartel’s manipulation of petroleum prices; by the flow of deadly drugs into the United States, and of deadly weapons to all manner of semi-sovereign groups; by South Korea’s and Taiwan’s advances into high technology, by China’s convulsive drive toward modernization, and by violent contests between dictators and revolutionaries in the world’s tropics. But it requires lengthy training and a concerted effort of imagination to divine Soviet machinations behind all these events. Even where the Soviets attempt to intervene, there are many other, more powerful forces at work in most of these areas. To treat such occurrences as occasions for secondhand warfare between the United States and the Soviet Union leads to tragically myopic prescriptions. Yet the conservative mythology holds no other role for the impoverished majority of mankind than as a pawn in the East-West struggle.

  Subsequent chapters probe the parable of the Triumphant Individual. Surely conservative economists are correct in arguing that our economy must avoid the systemic fraud of inflation and ensure adequate incentives to save and to incur financial risk. Our inventors and managers undeniably merit encouragement as well as respect. Post-New Deal liberal tax rates and spending policies doubtless did undermine economic discipline, and unrestrained wage demands helped fuel inflation. But our economy has suffered less from either capital shortages or inflationary wage pressure than from a decay in our capacity to collaborate.

  For nearly two decades before 1970 the average working American had produced around 3 percent more goods and services by the end of each year than at the start. Then in the 1970s the annual increase in the rate of productivity fell dramatically. Not even the economic recovery that began in 1983 returned productivity to its former level of growth.4 It is difficult, although certainly not unknown, for an individual to become wealthier without producing more. It is impossible for a society to do so. Almost no growth of productivity in America has meant almost no increase in the real incomes of Americans. From the end of World War II until 1973, American families enjoyed steadily rising incomes. This trend stopped. In 1986, even after years of rousing growth in the gross national product, average family incomes were a bit lower than they had been a dozen years before.5

  The drop in productivity growth has been rooted in our difficulties adapting our economy as opportunities and constraints have changed. By the 1980s, 70 percent of the goods that Americans made were potentially exposed to foreign competition; our economic policies and habits of thought, formed in an era of autonomy, were unprepared for this transformation. Some of our companies simply moved along with the current, setting up their low-skilled operations in poorer areas of the globe, while relying on the Japanese for their high technologies. Others preferred to dress up their balance sheets by resorting to creative accounting, and through cosmetic mergers and acquisitions. Others made common cause with workers in demanding government protection from foreign competition. Still others sought refuge in defense contracting. Meanwhile, what we considered to be a “normal” rate of involuntary unemployment crept upward, from 4 percent in the 1960s to around 7 percent. This higher figure hinted at a pervasive mismatch between what many Americans can do and what they need to do to be part of the newly competitive world economy. It signaled a failure of adaptation.

  As a nation’s economic structure becomes more a matter of choice and strategy, economic growth has come to depend less on the gross level of investment, more on how investment is channeled into adaptation. Mass production of physical things—increasingly the province of low-wage competitors—has become far less important to America than the manipulation of ideas, embedded within bundles of goods and services that are continuously evolving. In advanced nations, wealth flows from the collective abilities of groups of people to piece things together in new ways, to conceive of new possibilities, and to make continual improvements in what has come before. A culture is economically successful to the extent it encourages such broad-based innovativeness. The lure of substantial wealth and the threat of severe poverty doubtless serve to inspire great feats of personal daring and ambition, as the conservative tale of the Triumphant Individual suggests. But the conservative parable casts entrepreneurialism as exceptional; a few Triumphant Individuals create safe, simple jobs for their less innovative neighbors. Yet in an era where such simple jobs are ever harder to retain, the capacity to innovate, adapt, and envisage the novel must be widely spread throughout the work force. The conservative story may be suited to a less sophisticated economy in which rare feats of individual audacity matter more than the continuous, collective habit of innovation. But it is out of sync with our own age.

  The third fable we will examine concerns the Benevolent Community. Here again, the new conservative interpretation is in important senses a plausible response to reality: Poverty has persisted in America in defiance of liberal good intentions and large welfare budgets. Many of our impoverished communities suffer from social breakdown and the decay of civic and family responsibility.

  But as I will seek to show, the conservative story fails utterly to take account of the larger setting in which American poverty has persisted. Poverty at the lowest rungs of the society is in large part a function of economic stagnation above. A rising tide lifts all boats, the saying goes; similarly, an ebb tide lowers all boats, and strands some. The entrenchment of poverty coincided with the collapse of growth in productivity and earnings, and the erosion of the manufacturing industries that had in the past offered access to the middle class. Women and baby boomers streamed into the workplace—some 19 million of them during the 1970s, and millions more since then. But many of these new entrants were driven by the need to prop up declining family incomes. Young workers, in particular, fell behind. Many could no longer afford to buy their own houses nor aspire to the standard of living enjoyed by their parents.

  As upward mobility faltered, some Americans remained stuck at the bottom. America’s poverty rate—the fraction of the population officially listed as controlling too little cash to tend to their minimal needs—stopped declining in 1973 and then slowly began edging up again. Conservatives are quite right when they charge that liberalism has failed to solve the poverty problem; they are quite wrong to say that liberalism caused the problem. As to the burgeoning social-welfare burden on the federal budget, it has surprisingly little to do with liberal efforts to aid the poor.6 Most “welfare” has gone to the middle class, not to the poor, through programs like Medicare and Social Security. By 1980, the aggregate of these benefits was more than three times that for programs based on need. As a result, America’s elderly were becoming more secure while large numbers of its children were sinking deeper into poverty.

  The final chapters will consider the parable of the Rot at the Top. The conservative version sees corruption and unaccountability principally in the public sector. It deserves a degree of respectful attention. Few would argue that public programs are immune from incompetence or irresponsibility. Spending for defens
e, Social Security, and Medicare together comprise almost 60 percent of the federal budget, and are the fastest-growing categories of expenditure. Each could stand careful pruning, even more extreme reductions—though it is worth noting that none of these programs has been typically the object of conservative concern. Government regulators have also shown a disrespect, willful ignorance, or even hostility toward the private sector they are charged with overseeing.

  But once again the reigning version of this American story is grossly incomplete. Posing the issue as a struggle between free enterprise and stifling government control, the conservative parable has obscured the central issue of how we organize and maintain that set of rules and constraints which we call the market. The conservative’s idyllic “free market,” unencumbered by government meddling, is a logical impossibility. The important question—left unaddressed by the conservative story and irrelevant to government’s size—is whether these “rules of the game” ease and encourage economic change, or forestall it.

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  The conservative mythology is understandably comforting to an America confronted by a suddenly intractable world—mostly poor, mostly nonwhite—in which the United States is no longer preeminent. It summons us to defy the wholly natural erosion of an unnatural postwar economic and political supremacy, and to reject our new interdependence. It lets us blame our troubles on indulgence and naïve generosity, and promises renewal if only we forswear the flabby principles of altruism and conciliation. It charges us to bolster our power and exercise it boldly to reclaim our rightful hegemony.

  But the conservative parable holds no place for the fundamental transformation of the world economy and society. It overlooks the key relationships between these changes and political instability around the globe, Soviet opportunism, the stagnation of the American economy, domestic poverty, and the relationship between American business and government. Its message of discipline and pugnacity, in other words, does not so much seek preeminence as presume it. This is an invigorating but reckless vision.

  Modern liberalism, as we have seen, offers no real alternative. Rather than assert ourselves, the liberal story teaches that we should be charitable and conciliatory. But the objects of our conciliation remain the same as in the conservative story. “They” are the Soviets, the Japanese, Third Worlders, organized workers, and the poor.

  The ongoing debate between liberals and conservatives in America assumes that the only pertinent issue is how much we should concede to “them.” Yet in the new reality in which America finds itself, the real choice is not along the single dimension of conciliation versus assertion. The shrinking and rapidly evolving world we now inhabit offers unprecedented opportunity for mutual gain, but also ample incentive for the opportunism, exploitation, and betrayal that poison collaboration and derail progress. As coming chapters will seek to establish, our fundamental challenge is to define jointly promising endeavors and to forge durable ties of mutual obligation and responsibility. To a greater extent and for subtler reasons than either modern conservatism or modern liberalism appreciate, life on this planet has become less a set of contests in which one party can be victorious, and more an intricate set of relationships which either succeed or fail—we win or we lose together.

  CHAPTER 4

  THE BOOMERANG PRINCIPLE

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  In the glory days of liberalism, the Mob at the Gates was a simple form of evil embodied in the likes of a Hitler or a Tojo. Today the hostile forces that inhabit the new American demonology are more complex: an aggressive Soviet Union, an equally aggressive Japan, European states that are unreliable allies and unfair competitors, Latin American debtors, communist insurgents throughout the world, Third World puppets of the Soviets, drug traffickers, terrorists, illegal immigrants. The world “out there” has grown more dangerous as it has got nearer.

  Two centuries ago America was insulated by a broad expanse of sea to the east and by primitive civilizations to the west and south. George Washington could warn realistically about the dangers of aligning with any major power; Jefferson could give thanks that the nation was “separated by nature and a wide ocean from the exterminating havoc” of Europe.1 Even in the first two decades following World War II the celebration of self-reliance could continue; America’s increasing integration into the world was masked by its overwhelming dominance of it. Henry Luce spoke to the coming generation when, in 1941, he urged America to “exert upon the world the full impact of our influence, for such purposes as we see fit and by such means as we see fit.”2 The international organizations and agreements that we created at the end of the war—the United Nations, the General Agreement on Tariffs and Trade, and sq on—were means by which to exercise this influence; these were no “entanglements,” because we absolutely controlled them. We drew boundaries to delineate the nations of “the free world,” who presumably had no other ambition than to become more like us, and set about “containing” Soviet influence in the benighted remainder of the globe.

  It is a precept, governing the growth of families as well as nations: Nobody appears as invulnerable as one on whom others are totally dependent; nobody is as stunned by his subsequent dependency as one who once felt invulnerable. As the world evolved in the late 1960s and early 1970s, we clung to our older images. We could not subjugate Vietnam; Arab sheiks were threatening our energy supplies; the Japanese were thwarting our steel and automobile industries. There seemed to be only two possible responses to these new vulnerabilities, both drawn from our history. One was to withdraw—repudiating military responsibilities abroad, seeking “independence” from foreign suppliers of energy and anything else that mattered, and protecting our steel makers and other industries from cheap foreign competition. The other response was redoubled assertion: involving ourselves aggressively in every global conflict where we suspected a Soviet hand, guaranteeing supplies of critical raw materials by supporting friendly regimes who controlled valuable real estate abroad, and browbeating our trading partners into playing “fair.” By and large, liberals and Democrats opted for withdrawal; conservatives and Republicans preferred assertion.3

  Neither approach, however, is practicable today. A determined hermit may manage to isolate himself; a nation cannot. Our way of life is shaped and nurtured by a $50 trillion annual flow of global capital, a $2 trillion current of trade and investment in goods and services, a vast sea of information and technology, and a swirl of political forces emanating from every region on earth. There is no way to hide out without accepting a radically diminished national existence. Nor is it possible to unilaterally assert our will: We are now matched by several nations who are at least as productive as we are, at least as competitive in world markets, or at least as deadly. We are enmeshed in a global system that knows no neat boundaries. Our actions reverberate through this system and then, often disconcertingly, bounce back again.

  In seeking either to intimidate or to wall ourselves off from the Mob at the Gates, we run the risk of frustrating global adjustment and thus, ironically, exacerbating the problems of Soviet adventurism, our economic stagnation, and domestic poverty. Let me label this dynamic the Boomerang Principle. As principles go, this one is pretty simple.4 It takes effect whenever one actor in an interdependent system attempts to act unilaterally, in ignorance or defiance of the other actors. At first, typically, the actor meets with resistance; his initiative throws the rest of the system out of balance, and the system fights back. Either the other actors retaliate and the conflict escalates, or else they concede in unanticipated ways. Sometimes the system adjusts and endures; the initial actor may even gain from his assertion, though seldom precisely as he had intended. Often he loses. Sometimes the system collapses.

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  The Boomerang Principle applies to the complex and evolving world system in which America now finds itself. Perhaps the best illustration comes from following a single trajectory of national policy as it curves its way through the global political economy. Let us begin with the milit
ary buildup that commenced late in the Carter administration and continued with a vengeance under Ronald Reagan. Between 1981 and 1986, defense expenditures rose over 40 percent in real terms. Military spending, along with the 1981 tax cut, pulled the American economy out of recession. They also yielded an awkwardly large budget deficit, of course. But with money now moving so easily around the globe, America was able to finance its capital gap, and thus its arms buildup, by attracting money from abroad. All we needed to do was to keep our interest rates high enough to lure these funds.

  Money faithfully follows the law of supply and demand: As foreigners bought more and more American securities, the price of the dollar climbed. Yet T-bills are not the only commodities priced in dollars; so are Chevrolets and Kansas wheat. The dollar’s rise made American goods more expensive in world markets, and foreign goods cheaper to American consumers.

  Tracing the path reveals further consequences of this “military Keynesianism,” some of them welcome ones. The deficitled American recovery helped to revive the rest of the world economy. With foreign goods so cheap, Americans obligingly went on a foreign-spending spree. In 1983 the increase in U.S. imports accounted for half the net growth in global trade. For Japan, much of Western Europe, and most of Latin America, exports to the United States made up the largest single component of their national earnings. Half of Brazil’s $12 billion trade surplus that year was due to sales in the United States, as was virtually all of Mexico’s export growth.5 At the same time, the surge of bargains from overseas kept the lid on inflation at home; no American producer wanted to price himself completely out of the market.