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April 1986

Do We Need To Be No. 1?

by David M. Gordon

John Maynard Keynes recalled in 1933 that, like most Englishmen, he had been brought up "to respect free trade not only as an economic doctrine...but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage." And yet, Keynes went on, he was now firmly of another opinion on the matter. He had come to sympathize "with those who would minimize, rather than with those who would maximize, economic entanglement among nations." Britain should aim to be its own master. A policy of increased national self-sufficiency, he wrote, "is to be considered, not as an ideal in itself, but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued."

In the United States of the 1980s, with the foreign-trade issue moving to center stage, Keynes's words are worth bearing in mind. Political attention to foreign economic policy is warranted and probably overdue, because the global economy has been casting longer and more-threatening shadows across the United States for several years. The terms of the current debate, however, are fundamentally misleading. The political airwaves reverberate with the conflict between free trade and protectionism, but that is a false and outmoded choice. Another, more basic choice about foreign economic policy has been overlooked: Should the United States sponsor foreign-trade policies designed to restore U.S. global dominance? Or should we reduce our dependence on a capricious global economy, concentrating on putting our own house in order without seeking to be number one in world trade?

I shall argue that we should not seek and do not need to be number one. Strategies that pursue international primacy not only are economically unreliable but also pose a political threat to democracy at home and peace abroad. We should begin instead to work toward greater independence from the world economy, seeking self-sufficiency not so much for its own sake but, as Keynes concluded, in order to provide wider domestic room for political maneuver--opening the space for efforts to forge greater security, democracy, and equality at home.

But first, why are the current terms of debate--free trade versus protectionism--so wide of the mark?

Free trade remains the standard by which many policy proposals are judged, even though they often include interventionist elements. The rhetoric of free trade still appeals powerfully to President Reagan, despite his Administration's recent policy shifts from a strong free-trade emphasis to modest policy intervention seeking export promotion and dollar devaluation. Witness some representative presidential hyperbole from late 1985:

"Our trade policy rests firmly on the foundation of free and open markets, free trade. I, like you, recognize the inescapable conclusion that all of history has taught: the freer the flow of world trade, the stronger the tides for human progress and peace among nations."

The logic of the free-trade argument is straightforward: market exchange works best when markets are most open and competitive. Any barriers impeding the international movement of goods, services, capital, and workers--whether tariffs or quotas--will only undermine the effective discipline of market competition, reducing productive efficiency or raising prices or both. It is in everyone's interest, both domestically and internationally, to let the invisible hand of the market pull the strings no matter what the results--whether a Youngstown or a Singapore.

To generations schooled in neoclassical economics free trade sounds like an irresistible and probably irrefutable idea. (Who could possibly be against access to less expensive shoes?) But pure free-trade policies, which are still used as the intellectual benchmark of the debate, suffer from two critical flaws.

First, free trade is an idea whose time comes primarily whenever a single nation dominates the global political economy. As one expression of laissez-faire economics, free trade reached its first ideological apogee during the decades of Pax Britannica--the peak period of British dominance of the world economy, in the mid-nineteenth century. Britain, because no other nations could yet contest with it economically, richly benefited from the free circulation of goods within the Empire and beyond. In his magisterial survey of economic thought and ideology Joseph Schumpeter wrote:

"The superiority of England's industry in 1840 was unchallengeable for the calculable future. And this superiority had everything to gain from cheaper raw materials and foodstuffs. These were no delusions: so satisfied was the nation with what it took to be the results of this policy that criticism was almost silenced until the depression of the eighties."

Given the historical parallels between the respective periods of British and U.S. global dominance, it is little wonder that the rhetoric of free trade gained such a strong foothold in the United States following the Second World War. "Like Aequilibrium Britannicum before it," Michael Moffitt concluded in The World's Money, "Aequilibrium Americanum depended upon the political, economic and military power of the United States." Indeed, the U.S. share of global industrial production in 1950, according to the best available data, was higher than the British share in 1850. Whether under British or under American auspices, free-trade policies exploited the pliancy and economic subordination of colonies and junior trading partners, which were effectively forced to tolerate the open circulation of advantaged and highly attractive imperial goods.

That kind of international domination is now all but irretrievably lost. The modern world has nearly 200 nation-states. A number of countries, particularly those in northern Europe, now rival the United States in per capita income and are fast gaining on it in worker productivity. Several countries or blocs of nations, including Japan, the Soviet Union, and the Common Market, have begun to compete with the United States in absolute economic size and muscle. In the modern international political economy, barring a miraculous restoration of U.S. global hegemony (more on this possibility later) it is unrealistic to expect other nations to tolerate free circulation of U.S. exports if that does not advance their own economic interests.

Those seem, for better or worse, to be the prevailing political realities. The second flaw in pure free-trade policies is an economic one. The U.S. economy has been losing its advantaged position for decades, not just over the past several years of soaring dollar values. From 1950 to 1979, for example, the U.S. economy's share of total world trade declined from 17 percent to 11 percent, while the combined Japanese and Common Market shares doubled, rising from 17 to 34 percent. One of the most important reasons for this declining advantage has been lagging U.S. productivity growth. From 1960 to 1979, to focus on the period immediately preceding the rapid rise of the dollar, the ratio of U.S. manufacturing productivity to that of our leading competitors fell by 40 percent; in contrast, the same ratio for Japanese manufacturing increased by 150 percent. Pure free-trade policies would do nothing to reverse this erosion of comparative advantage--except foster the hope that the pressures of competition will somehow induce U.S. firms to try harder.

But there is little reason to believe that increasing market competition, by itself, will reverse the relative productivity decline of the U.S. economy. For example, the erosion of relative U.S. manufacturing productivity was just as rapid in the years from 1973 to 1979, when the institution of free exchange rates intensified international competitive pressures, as it had been in the previous period of fixed exchange rates, in the 1960s and early 1970s. Unfettered competition leads to great uncertainty about the future, leaving many firms reluctant to make long-term investments in their future productivity--as long as the future looks so unpredictable.

Furthermore, as exports continue to slump and the trade deficit widens, total demand for U.S. products lags. This leads to lower levels of exploitation of existing plants and equipment and, other things being equal, to even feebler productivity growth--since firms use less effectively what they already have in place. (This effect has been particularly sharp since 1979, as soaring dollar values have compounded our trade deficits.) Our productivity problems are amplified, not resolved.

In the meantime, while free-traders wait for the pressures of competition to spur U.S. business initiative, other governments are providing investment subsidies, aid in market promotion, selective protection from international competition, and support for research and development, and their industries are exploring new products and technologies. "As a result," a recent Business Week editorial observed, "many businessmen and members of Congress feel strongly that the U.S. is increasingly a free-trade patsy in a world of protectionist pickpockets."

In short, if government policy promotes nothing more than free trade and open markets, the U.S. economy is likely to experience continuing trade deficits, a loss of employment, and cyclical instability. If it responds simply with intermittent dollar devaluation, that will add substantially to inflationary pressures and make financing the federal deficit increasingly difficult. These arguments do not close the book on the free-trade approach, since it needs to be compared with its alternatives. But they do suggest that it has serious political and economic weaknesses. "Market principles and forces have to be used," Lester C. Thurow concluded in his recent book, The Zero-Sum Solution, "but 'leaving it to the market' is a recipe for failure." And while we wait, many voters will, not surprisingly, rebel against the harsh side-effects of free-trade medicine.

This likelihood, of course, makes the protectionist response politically salient. The strongest advocates of protectionism are those most politically sensitive to the plight of U.S. workers displaced by intensifying foreign competition. Whether through higher trade tariffs or actual quotas on foreign imports, pure protectionist policies are short-term efforts to cushion the blows of international economic combat.

The fundamental problem with protectionism, as many free-traders repeatedly insist, is that the harsh realities will not go away. If anything, they are likely to grow harsher as a result of protectionist initiatives.

This short-sightedness seems fairly obvious along the economic front. If U.S. industries are disabled because of increasing competitive disadvantage, protecting them from international competition without establishing other policy supports will very probably compound the disadvantages over time. Afflicted U.S. industries are likely to stand still while their foreign competitors race ahead. "In short," the Brookings economist Charles Schultze argues "we will be strongly encouraging these protected industries to become even more uncompetitive than they are now."

The political problems seem likewise self-evident. If we move toward more-restrictive trade policies, what is to prevent our chief competitors from copying us? What is to guarantee that our temporary trade-balance gains in reduced imports will not be swamped by our subsequent losses in exports? What is to prevent an increasingly generalized trade war from leading to sharp contractions in international trade and to an increasingly general economic slump?

The choice between free trade and protectionism is hardly inviting. (This may explain why the critical arguments on both sides of the debate sound more persuasive than the constructive proposals.) In the end, both positions have an intrinsic flaw: they treat only the symptoms of America's troubles in the global economy. Both play a waiting game: free-traders ask us to wait for that promised moment when open markets and perfect international competition will finally whip us into competitive shape; protectionists ask us to wait, period.

Fortunately, these are not our only choices. Their superficiality has driven many people to consider more-basic solutions to our international economic problems. Two schools of thought have emerged that share a determination to change the nature of our economy's links to the global economy. One seeks to deepen our international involvement through aggressive efforts to restore U.S. power in the global economy, the other to reduce that involvement through increasing domestic independence and increasingly cooperative international economic relations. Each asks not how we can transform our needs to suit international economic pressures but rather how we can transform those international economic pressures to suit our needs.

The first of these two alternatives, which I shall call the Staying on Top strategy, after the book of that title by the conservative analyst Kevin Phillips, has begun to occupy a position at the center of the political spectrum. It proposes what Phillips calls a "strategy of industrial competitiveness."

The Staying on Top strategy relies heavily on export promotion and the promise of America's growing high-tech industries. (President Reagan, despite his disavowals, is moving toward this strategy and away from pure free-trade policies, with his recent promises of selective export supports.) Domestically the strategy would mean active government intervention to promote public planning and coordination which would foster large-scale capital investments, research and development, marketing, and export expansion. Internationally it would mean aggressive responses to other governments' protectionism and export subsidies, and attempts to out-hustle and outbid them for markets and favors. Preoccupied with Japanese success in world markets, the Staying on Top strategists would have us emulate Japan through intensive business-government cooperation. "In fact," Kevin Phillips observed, "fierce debate over and reaction to the Japanese challenge are probably a precondition of our economic mobilization." Whether expressed in old phrases or in the language of "new ideas," this general approach is attractive to younger politicians in both parties--the Gary Harts, Bill Bradleys, and Richard Gephardts among the Democrats, and proponents of the Conservative Opportunity Society among House Republicans.

There is a considerable range of emphases within this general approach--from sophisticated trade planning to pugnacious jingoism. But a common thread runs through almost all recent discussions within this camp: a determination to restore the United States as the dominant power in the global economy. The strategy presupposes that the interests of U.S. citizens are tied to the relative international strength of the U.S. economy. It takes for granted what the Business Week Team, writing in The Reindustrialization of America, termed a "fundamental correlation between the nation's strength as a trader in an increasingly interdependent world economy, its domestic prosperity, and the augmented political influence that a competitive economy will enable the United States to exert around the world." Aggressive images of competition permeate the discussion. Even an egalitarian like Lester Thurow can lapse into the language of the high school locker room or the war-room council table: "To be successful in the world market a country must organize itself to win," Thurow argued in The Zero-Sum Solution. "From now on Americans will have to learn how to invade foreign markets with exports from America." And Phillips called for the "emotional equivalent of war." He wrote:

"A genuine confrontation...may now be in the offing for the United States: the challenge of re-establishing our global economic primacy, and doing so in a world very greatly changed from the era of comfortable American trade and industrial leadership that obtained before Vietnam."

A second possible strategy would promote a transition away from domestic dependence on the global economy and toward international cooperation with our friends and allies abroad. Rather than aiming to beggar our neighbors, it would concentrate on tending our own front yard--so I call it the Front Yard strategy. To many readers the very idea may seem archaic, a relic of nineteenth-century visions of isolation and insulation from an unknown and threatening world, but that is not an accurate view. The Front Yard strategy does not propose mindless protectionism. It would pursue more-effective domestic production of necessities--such as energy clothing, and transportation--not indulgent succor of backward industries. And it would take full account of the technical achievements of the modern age. For, indeed, modern developments make economic self-sufficiency more plausible and attractive, not less so.

The initial, short-term steps dictated by the Front Yard strategy are these:

* Chart the sectors of the economy that are experiencing the most rapid increases in foreign imports, and explore concrete domestic alternatives to those imports--for example, federal subsidies for developing conservation and renewable-energy alternatives to imported oil.

* Negotiate trade agreements that not only aim at reductions in tariffs but also seek multilateral treaties allocating imports and exports for each nation participating. At the moment we have few such agreements, and those we have are largely obsolete. We need, in effect, to update the General Agreement on Tariffs and Trade (GATT), first negotiated nearly forty years ago, through either a new general treaty or a set of bilateral or multilateral agreements.

* Establish programs during the transition to a Front Yard economy which are aimed at cushioning the costs of adjustment for U.S. workers in affected industries, emulating (for example) the Japanese program for "structurally depressed industries."

* Adopt specific proposals such as recently debated legislation for a domestic-content requirement for automobiles. Such measures are less protectionist than quotas, because they both encourage production in the United States--under domestic-content legislation foreign firms would be mandated to invest and produce in the United States--and expose U.S. enterprises to the best of foreign technical and managerial practice. (This proposal, despite widespread sponsorship in the House, has effectively been stalled by opposition in the Senate and by diffuse free-trade skepticism.)

* Institute plant-closing legislation that could to some degree protect workers against the sudden flight of capital abroad, by making advance notification and indemnification provisions for plant shutdowns and sudden shifts of investment abroad, and by removing current tax incentives for domestic firms to invest abroad.

These are only short-term steps. The Staying on Top and Front Yard strategies differ most profoundly in their long-term objectives for foreign economic policy.

The first difference concerns productivity growth. The two strategies agree that faster growth of domestic productivity is the best possible response to the international economic challenge, and both criticize free-traders and protectionists alike for failing to address the underlying sources of slow productivity growth in the U.S. economy. But the two strategies sharply diverge over how to speed up productivity growth.

The Front Yard strategy builds upon what my colleagues and I call "wage-led productivity growth," which would strengthen the whole economy by promoting fuller employment, wage growth, and wage equalization. This strategy would speed up productivity growth by creating more customers for business, by pressuring corporations to make more-efficient use of their increasingly costly labor force, and by giving workers more of a stake in the way their companies and the broader economy perform. These objectives could be pursued through the medium term by policies aimed at, for example, faster economic growth, the creation of a public-jobs program, labor-law reform to reduce barriers to unionization, a substantial increase in the minimum wage, and legislation to require equal pay for jobs of comparable worth.

Staying on Top strategists, in sharp contrast, can hardly be accused of advocating higher wages. When confronted with the prospect of U.S. workers' having to accept lower-wage employment, they respond with analytic diffidence, arguing that lower, more-flexible wages are good for the economy--if not for the workers who earn them. High-tech entrepreneurs are now some of the most passionate opponents of labor unions in the United States. A Business Week feature on the "new corporate elite" noted, "With the exception of corporate rejuvenators who have inherited unions, virtually everyone else in the service and high-tech areas will do anything to keep organized labor out."

This important difference between the strategies is not simply over the justice of higher or lower wages; much more critically, it is over the most effective strategy for increasing economic efficiency. Improving international competitiveness depends on changes in unit labor costs--which are a product of both wage costs and labor productivity--and not just on changes in relative wage levels. One can therefore seek to improve the competitive position of U.S. industries through efforts to reduce wage growth or to increase productivity growth. My colleagues Samuel Bowles and Thomas E. Weisskopf and I have argued not only that rapid productivity growth helps create room for continuing wage growth but also, more important, that rapid wage growth and wage equalization can help foster productivity growth and actually improve the competitive position of the United States. Since rapid wage growth and wage equalization would benefit the vast majority of Americans, wage-led productivity growth has great potential political appeal. But where would the money to finance both wage growth and more rapid investment come from? In our book, Beyond the Waste Land, we argue that both investment and wage growth could be financed by the dividends provided by a more stable high-growth economy.

In the current anti-union political climate these arguments may seem counterintuitive. But historical experience suggests that they are plausible. The example of a number of European countries in the postwar period, it can be argued, indicates that rapid wage growth can help stimulate rapid productivity growth, and therefore that rapid wage growth accompanied by rapid productivity growth is consistent with significant increases in an economy's shares of world production and trade. Even in the postwar United States there have been short periods when rapid wage growth has been consistent with improving international competitiveness. From 1960 to 1966, for example, real hourly earnings in U.S. manufacturing rose at an average annual rate of 3.1 percent a year--fructiferous growth compared with the actual decline in real hourly earnings from 1978 to 1984. Those rapid wage gains did not keep the relative competitiveness of U.S. manufacturing firms, measured by their relative unit labor costs, from improving over those same six years-- at an average annual rate of 2.6 percent. How was that possible? Productivity growth was more rapid than wage growth, AND the difference was greater for us than for our competitors.

There is more than a simple coincidence of numbers in these experiences. When workers are faced with demands for wage concessions and threats of job loss, they commonly resist efforts at improving productivity through either technological change or work reorganization. But when offered job security and promises of stable wage growth in the proper management climate, they can actually take the initiative in spurring productivity growth. At the huge, reorganized auto-assembly plant in Fremont, California, for example, the new (joint) Toyota-General Motors management team has provided contractual guarantees of job security which are the strongest in the U.S. auto industry, substantial increases in fringe benefits, and advance consultation with workers on layoffs, production-schedule changes, and major investments (wages themselves are protected at prevailing U.S. industry-wide union scales). Workers have responded enthusiastically to the changes in the work climate, cooperating through work teams to try to improve the quality and the speed of output. The key is the workers' stake in the future of the enterprise. Bruce Lee, the union regional director, concludes, "We've ensured that the positive attitude and commitment [management] expects from our members is matched by respect for and attention to the needs and desires of the workers."

But aren't U.S. workers' wages too high in any case? Critics often point their fingers at the U.S. auto and steel industries, in which production workers' wages are arguably the highest in the world. Don't these two examples demonstrate the risks of rapid wage growth? In fact it appears that poor management strategy not excessive workers' wages, was the principal long-term cause of the erosion of those industries' international positions. Ira C. Magaziner and Robert B. Reich concluded in Minding America's Business that "the U.S. steel industry's underlying assumptions about the steel business prevented it from making the aggressive investments in modernization that were needed to match the pace of Japanese investment." Especially in recent years, lagging relative productivity, not rising relative wages, has been the chief problem in both industries. For example, U.S. auto workers' real average hourly wages declined by more than five percent from 1978 to 1984, while real earnings for their Japanese counterparts increased by nearly nine percent. Why did the cost advantages of Japanese cars improve so dramatically over this period? Japanese productivity continued to increase while U.S. productivity stagnated. And the rising value of the dollar relative to the yen added another 14 percent to the cost advantages of imported cars.

A second difference between the Staying on Top and Front Yard strategies involves plotting our trade targets. Staying on Top strategists argue in favor of accepting increasing international economic interdependence as a fact of modern life and of expanding exports to the rest of the world, while Front Yard strategists propose that we begin a slow transition toward greater economic self-sufficiency in those goods and services we need most.

Some statistics can help clarify how the strategies differ. In 1966 imports totaled 4.9 percent of the gross national product, exports 5.5 percent. By 1984 the import share had doubled to 9.8 percent while the export share was lagging at 8.9 percent, resulting in a net goods-and-services trade deficit, in 1984 dollars, of $64.2 billion. The Staying on Top strategy would have us close the widening gap between imports and exports through aggressive efforts to increase the rate of growth of exports while tolerating the continuing growth in imports. The Front Yard strategy in contrast, calls for reducing both the export and the import share over the long term, while reducing the import share by a somewhat wider margin. The former strategy would reinforce the trend toward increasing trade dependence; the latter would reverse it.

In one sense, the difference between the two approaches reflects little more than a difference in time horizon and orientation. Take the case of imported oil and the aftermath of the OPEC price hikes of 1973 and 1979. One response to the immediately higher costs of imports was to seek compensating increases in our exports--searching vigorously for commodities such as grain, arms, and computers for which we could find new markets abroad. Another approach could have placed a higher priority than the government did during the 1970s on reducing our dependence on imported oil--through invigorated energy-conservation programs and an emphasis on locally available and renewable sources of energy like solar and geothermal power. The former strategy might work over the short term but is likely to lose effectiveness over the longer term, because international markets and prices periodically shift. The latter strategy has clear promise for both the short and the long term, because it would more or less permanently lessen our demand for a substance that is a significant component of our import bill. The former would require that we continually adjust to unexpected shocks from beyond our borders. The latter would gradually reduce our exposure to such shocks.

More generally, the two strategies reflect quite different evaluations of the characteristics of world trade and world markets. Staying on Top strategists tout the benefits of international trade and often, though they are hardly pure free-traders, argue the comparative advantages of adjusting to world prices and supplies. But we should not necessarily allow our lives to be dictated by prices and supplies elsewhere--as if they were some magic measure of productive efficiency. The unit labor costs of imported goods may sometimes be lower because of more efficient production practices (as is now true of some Japanese goods) or because of lower standards of living. But they may also be lower because those goods are produced or extracted under authoritarian regimes where workers have few or no rights. Should U.S. citizens unequivocally embrace the lower-cost goods produced in South Korea, where trade unions are reduced to chattel organizations? We need to discriminate carefully among the sources of low-cost imports. When imported goods are less expensive because of more effective production techniques, as with many Japanese goods, we should respond by improving our domestic production. But when imported goods are less expensive because of limits on workers' wages and bargaining rights, we should think carefully about the appropriate response.

Trade decisions are intrinsically political. If we practice free trade by allowing perfect access to goods produced anywhere, then we run the risk of corroding our own democratic institutions by exposing U.S. workers to the lowest common denominator of foreign competition. Pressures can grow to reduce workers' access to trade unions, to narrow unions' and workers' rights to influence workplace conditions, to expose workers to hazardous working conditions. U.S. workers already have fewer rights than unionized workers in northern Europe (which has outcompeted us for years). Indiscriminate responses to import competition, such as blanket reductions in wages and benefits, can only make matters worse.

The proper response is not to exclude every commodity produced under distasteful conditions but to plan foreign-trade needs and opportunities. We must constantly weigh the trade-offs between access to inexpensive commodities and the political and social implications of that access. Where the trade-off is most unfavorable to our democratic institutions and our standard of living, we should seek to reduce our dependence on those foreign commodities--not simply by excluding them but by improving the quality or reducing the costs of substitutes produced at home. We should not allow politics or poverty abroad to dictate our politics at home.

But doesn't economic logic require that each country specialize in the production of commodities in which it has a special comparative advantage? Up to this point I have argued that such advantages are contingent, subject to continual re-evaluation and, if necessary for political reasons, alteration. But an additional point is pertinent here: One of the chief implications of rapid technological change is that it continually narrows the "rooted" geographic variations among nations in their potential productivity. Climatic differences can often be transcended. The increasing potential of renewable energy sources reduces the importance of fixed deposits of minerals. Computer technology can help to diffuse the potential for advanced technological production. More and more of what matters in labor productivity can be reproduced almost anywhere.

What counts, again, is unit labor cost. If we apply our vast economic wealth to continual productive investments, providing our workers with the most advanced equipment possible, we can improve the relative productivity of American manufacturing without increasing the costs of our goods to U.S. consumers. And through careful strategic planning we can gradually increase the percentage of consumed goods and services that we produce domestically, reducing our exposure to insidious political and economic pressures, transmitted through international markets, from oppressive regimes and poor countries. A staff report of the Committee on Energy and Commerce of the U.S. House of Representatives recently concluded,

"The final major goal of international economic policy involves the question of national sovereignty....While realism requires flexibility in the face of international competition, the U.S. cannot agree to abandon its standard of living or its traditional commitment to restrain exploitation of child labor, preserve the health of its work-force, protect its environment, provide retired, unemployed, or handicapped citizens with an adequate level income....If we permit ourselves to become locked into the competitive "race to the bottom" we will inevitably lose control over the most basic social and political aspects of our national life."

The third principal difference between the Staying on Top and Front Yard strategies involves our priorities in relationships with other nations and people abroad. History should have taught us by now that the aggressive pursuit of foreign economic advantage can easily compromise the pursuit of international peace. Keynes put it delicately when he wrote, in the 1930s,

"It does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country's economic structure by the resources and the influence of foreign capitalists and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary."

The imperatives of neither experience nor foresight have changed since the 1930s. The neo-conservative thinker Irving Kristol was candid about the connections between economic and military policy in a 1979 article:

"The 1980s will see a disintegrating international order in which economic growth is going to be extraordinarily difficult to achieve....It will therefore have to be an overriding goal of American foreign policy to help shape this world....What will be relevant is an American foreign policy in which power, and the readiness to use it boldly, will play a far more central role than has ever before been the case in our history...Our economic growth will henceforth be as dependent on our foreign policy as on our economic policy....Today it is military rearmament that is the first priority, economic as well as political."

Obviously, considering the historical experience of the twentieth century, reduced dependence on foreign trade would promote peaceful international relations better than would an aggressive pursuit of foreign markets and favored trading relations. These conclusions will remain mere pieties, however, unless they are coupled with policies that will alter the calculus of foreign-trade advantage. If we value the quest for peace, then we should also reduce the economic interests--yours and mine and our neighbors'--that are vested in taking advantage of lower costs and attractive resources around the globe. Do some Americans lust for the restoration of privileged access to bounteous Middle Eastern oil fields? Then we should intensify our efforts to conserve domestic energy and develop renewable-energy alternatives. Without such efforts international peace remains vulnerable to potential conflicts in the oil-rich Persian Gulf, which the Carter Doctrine commits us to defend.

The staying on top and front yard strategies can both be distinguished from free-trade strategies, because both favor government intervention to shape our links to international markets. Neither is purely protectionist, because each would improve the relative economic attractiveness of U.S.-manufactured goods and not merely protect endangered species. Neither is more ambitious or more practical than the other, for both propose major transformations in the shape of our foreign economic policy. Of the two, the Front Yard strategy seems preferable, for the three reasons I have argued.

And yet many people have become so accustomed to the language if not the logic of free trade or export promotion that the arguments in favor of the Front Yard strategy may seem beside the point. What about the U.S. consumer? Won't any interference with the market raise the costs to the U.S. consumer? Won't reduced trade dependence ruin him? Won't somebody have to pay the price of transition to the Front Yard economy?

First, the Front Yard strategy, like the Staying on Top strategy but unlike simple protectionism, aims primarily to reduce the cost attractiveness of foreign imports by improving the competitiveness of domestically produced goods, not to prevent U.S. consumers from buying them. Unless one believes that there is no way public policy can help improve the productivity of U.S. enterprise--a notion that would amuse the Japanese--the most important choice we face is not between consumers' costs and workers' jobs or wages, since more-rapid productivity growth would help both, but how best to strengthen our domestic economic foundations.

Second, free-traders' repeated alarms about consumer choice often suggest that U.S. workers and consumers are somehow two entirely different groups, with sharply conflicting interests. But mostly they are the same people. Suppose that import competition lowers the average cost of living to consumers by two percent. But suppose further that we respond to it by forcing or tolerating a decline in the average worker's earnings by two percent. The average worker is no better off than before. (From 1979 to 1984, while the shift to imports helped bring down the rate of inflation, private nonfarm nonsupervisory employees, who make up five sixths of all U.S. private nonfarm employees, witnessed a DECLINE in the real purchasing power of their earnings of 2.7 percent.) The only people who are better off are those consumers whose earnings are not sensitive to import competition.

But--and this raises a third point--how long can even the most insulated earners and consumers continue to prosper while other workers join the unemployment lines? It is worth recalling a legendary exchange between a Ford Motor Company plant manager and Walter Reuther, the longtime president of the United Auto Workers. The manager was boasting about his newly automated plant: "Well, Reuther, how are you going to collect dues from these machines?" Reminding the manager of his firm's dependence on consumer purchasing power, Reuther retorted, "How are you going to sell your cars to these machines?"

The story's moral still applies. In what economists call a closed economy--neglecting the impact of foreign trade for a moment--firms benefit from both lower prevailing wages, through lower costs, and higher prevailing wages, through expanding consumer demand. Some balance between the two is needed. Rising productivity growth can help create wider margins within which to find the proper balance.

In an open economy--taking international effects into account--the need for balance remains. If domestic workers suffer real declines in their purchasing power, protected earners must assume that foreign buyers will make up the difference in total demand for U.S. goods and services, buying enough of them to support those who benefit from lower import prices. But that depends, in turn, on U.S. buyers' having the purchasing power to buy foreign goods--which depends in the end on the levels of U.S. workers' earnings. Other countries cannot tolerate continuing trade deficits any more than we can.

The point, then, is that free-traders' repeated reminders about "consumers" are one-sided: they fail to heed some basic economic principles about balance at home and in the world economy. Both the Staying on Top and the Front Yard strategy are concerned with improving the terms of that balance over time.

But there the similarities end. The Staying on Top strategy could lead toward increasing pressure on workers' rights in the United States and greater international tension. The Front Yard strategy would concentrate instead on nurturing our economic welfare and democratic rights at home and would eschew the temptation to take advantage of others' vulnerability or weakness. The choice is not easy, but it is ours.

Copyright © 1986 by David M. Gordon. All rights reserved.
The Atlantic Monthly; April 1986; Do We Need To Be No. 1?; Volume 257, No. 4; pages 100-108.

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