Fixing It

Success and failure are easily measured in economics. Success occurs when most individuals enjoy rising real wages. Conversely, falling real wages equal failure. America is a rich country because most of its history is a history of success. That history led President John F. Kennedy to observe that "a rising tide lifts all boats." If he could engineer an economy that grew, it was assumed that most Americans would enjoy higher real standards of living. Starting in the mid-Seventies, however, that logic suffered a setback.

From 1973 to 1992 the American economy continued to grow and the per capita gross domestic product rose 25 percent after correcting for inflation. The U.S. Department of Labor, however, reports that real weekly wages for nonsupervisory workers (those who don't boss anyone else) fell 19 percent over the past 19 years. To some extent that number reflects the increased participation of lower-paid women, but the overwhelming fact remains: In the past two decades 20 percent of America's males have been on a steep up escalator, 20 percent have been holding their own and 60 percent have been on a down escalator.

If I could steal into President Bill Clinton's mind and engrave one prime domestic issue, it would be the following: According to U.S. Census reports, in 1979, 18 percent of young full-time male workers failed to earn $12,195 (in 1990 dollars). This was slightly below the poverty line for a family of four and slightly above it for a family of three. By 1990 that 18 percent had more than doubled to 40 percent.

Think of it. Almost half of all the young males in America are being told that they can find a job, work hard and still not be able to support a family. Anyone who tells the young males who rioted in South Central Los Angeles in 1992 that they have an economic future would be lying. Based on the trends of the past two decades, they have no economic future in America.

To preserve middle-class family incomes, the American female has come to the rescue. In the past two decades many more wives have gone to work and are working more hours per year. Greater female work effort has essentially held real family incomes constant for the middle 60 percent of the population. But the rescue effort is now foundering. Wives in these families are already working close to full time. If male wages continue to decline throughout the Nineties, then family incomes will start to decline with them.

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What changed in the Seventies?

American firms lost market share in autos, steel and machine tools--and with that loss went high-paying jobs for males. Every $45 billion in manufactured imports means the loss of I million U.S. manufacturing jobs. New technologies such as just-in-time inventories or statistical quality control required new skills--in these cases mathematical skills--and also converted what had been unskilled assembly-line jobs into jobs that required a lot more education and training. Service jobs expanded to hold unemployment constant, but service jobs tend to pay much lower wages and employ fewer males.

What economists know as factor-price equalization struck with a vengeance. In large part it's caused by the new global economy. If American workers do not work with more natural resources (they can't--because the world market for raw material grants everyone equal access), do not work with more capital (they can't--since in a global capital market everyone borrows in New York, London and Tokyo) and do not work with better technology (difficult--because reverse engineering means new-product technologies move around the world quickly), then at each skill level, Americans must work for wages commensurate with the pay found for that skill level in the rest of the world.

Effectively, each American's wages are now a reflection of his or her relative skill level. Those with few skills will work for low wages, even if they happen to live in the U.S. Prior to 1973 those with Third World skills got an American wage premium. As Americans they automatically worked with greater natural resources and enjoyed higher levels of capital equipment and better technology than workers in the rest of the world. But the premium has melted away.

America's choice is clear. Provide high skills or work for low wages. Half of the solution to falling real wages in the context of a rising GDP is to improve the quality of American education and build a training system for those who do not go on to college. During the election campaign, President Clinton talked about building a copy of the French postsecondary training system in the U.S. In France every firm must put some fraction of its revenue into an account. That fund becomes a tax taken by the government if the company fails to help train the labor force. The purpose is to make every firm train its work force.

In America the standard attitude is "you train them and we'll hire them." Each individual company may be acting smart, but collectively the results are stupid--no one gets skills training after secondary school.

Far harder is increasing the quality of education. The heart of the problem is found in locally elected school boards that produce a low-quality product relative to others in the industrial world. To put it bluntly, Thomas Jefferson got it wrong. Local government isn't always best. It can't compare to a powerful, centralized ministry of education willing to write tough high school exit examinations.

Education needs a four-part grand strategic bargain. First, boost average wages for teachers from $30,000 to $50,000 so that schools can demand high-quality teachers and get necessary teaching skills in math and science. In a capitalist society, no one gets a highquality work force by offering below average wages.

Second, require that more hours per year be worked in exchange for higher wages. While German and Japanese teachers are paid much more, they don't get their higher pay for part-time work. In the rest of the world students go to school an average of 220 days per year (not the 180 days common in the U.S.) and the high school day is much longer.

Third, reduce nonclassroom labor costs (school bureaucracy) to the levels found in the rest of the world. In many big cities fewer than half the paychecks written every month by the school board go to classroom teachers.

Fourth, write an exit examination for graduating students. The highwage business community in each region of the country can write an exam that covers what it would expect its high school--educated workers to know; it must then administer the exams to those who seek employment and announce results that indicate which schools produce graduates who pass and which schools do not.

Improved working skills are only half the problem. A better-skilled work force is no guarantee that the jobs which use those strong skills will automatically appear in the U.S. Something else has to be done.

Historically, government could do little to alter economic geography. Comparative advantage was determined by the availability of natural resources, capital and labor. At the dawn of the 21st century, however, that world has all but disappeared. Raw materials can be bought and moved to wherever they are needed. Capital can be borrowed and put to use anywhere on the globe.

America is entering an era of manmade comparative advantage in which human strategies determine where economic activity takes place. Consider a list of the industries that are expected to provide most of the high-wage jobs in the decades ahead: microelectronics, biotechnology, materials science, telecommunications, civilian aircraft manufacturing, robots, computers, software. What is the common denominator? Basically, these are all brainpower industries. Geographically they could be anywhere. Where they will be depends on who organizes the brainpower to capture them.

Organizing brainpower means not just building a research-and-development system that will put a nation on the leading edge of technology but also organizing a top-to-bottom work force that can run the enterprise. In this world of man-made comparative advantage, government has an important role to play. Government both supplies well-educated workers and funds the R&D expenditures that make the industries of the future possible. It must do both because capitalism has an inherent weakness. Given any reasonable interest rate, the discounted value of a dollar ten years from now is too small to matter. As a consequence, capitalism never looks more than seven or eight years into the future.

Only government, with its much longer time horizon, is in a position to (continued on page 247)Fixing It(continued from page 192) organize the necessary investments. To be effective, of course, the R&D system must first know what is wanted. Simply telling researchers to do good things doesn't work. America has to decide where it wants to play the game. We can't lead everywhere.

America has little choice but to recognize that, in today's global game of manmade comparative advantage and brainpower industries, technology strategies are central. Others will force it on us with foreign strategies for conquering the key industries of tomorrow. Europe's Airbus Industries, a corporation chartered by the German, French, British and Spanish governments, is the best current example of this reality. Airbus is designed to break the American monopoly in civilian aircraft production (America's largest export industry and a generator of a lot of our remaining high-wage industrial jobs). Airbus has succeeded in gaining worldwide market share.

What is the U.S. answer to Airbus Industries? Whatever one's views on industrial policies, there has to be an answer. Despite arguments that claim to prove Europe has wasted too much taxpayer money in developing the Airbus, the planes exist and aren't going away. The strategy worked in aircraft manufacturing and similar efforts will be organized in other industries.

Even if Americans decide not to have offensive industrial policies, we will have to develop defensive policies to deal with situations where the rest of the world targets key American industries. But playing defense alone isn't a viable strategy. You can't win if you never play offense.

When historians come to look at the Seventies and Eighties, they will observe a major mystery. Americans seemed to care less about their own futures in these two decades than they ever had before. Personal savings rates declined from 7.8 percent of disposable income in the Seventies to 4.4 percent in the past five years. When it came to providing for its own future, the American family wasn't interested--saving far less than half the 14 percent saved in both Germany and Japan.

Corporations similarly reduced their investments in plant and equipment (a measure of their attitudes toward the future) from 13 percent in the recessionary years of 1981--1982 to ten percent in the comparable recessionary years of 1991--1992. As a result of such inadequate investment, there were seven times as many industrial robots in 1990 in Japan as there were in the U.S. The American corporation, like the American family, wasn't interested in its future.

No country can be successful investing far less than its competitors. The results of those individual, corporate and governmental decisions are well known: falling real wages for much of the population. In America the issue is not the division of spending between private and public but the division of spending between consumption and investment, between investing in the future and consuming in the present. Some of the consumption that must be held down is in the government sector and some is in the private sector. Similarly, some of the investment that must increase is in the government sector and some is in the private sector.

Health care is a good example. It is a consumption expenditure that is exploding in both the private and public sectors. Its growth drives out the long-term investments needed in both sectors. If the U.S. spends 14 percent of its GDP on health care and Japan spends six percent, Japan has more of its capital to invest in the future. If American firms must build that premium into the prices of the products they sell on world markets, they will be less competitive than foreign firms.

In an era of man-made comparative advantage, the economy requires planning. This means that the government must promote world-class investment in skills, infrastructure, R&D, and plant and equipment.

The necessary changes are not going to occur unless the president leads America in a benchmarking exercise. Americans cannot become Japanese or Germans, but they have to learn to match the quality and productivity standards of their best competitors. If they want high wages, they have no choice. America must find out where its standards are not the world's best, and then locate something in American history, tradition and culture to allow the U.S. to top those performances.

During the Cold War, Americans regularly measured our military forces against those in the U.S.S.R. With every weapons system, we wanted to know how we performed; and if we were not the best, we made the investments necessary to become the best. But we are out of that habit in the civilian economy. Our media reflect this reality. They give us hours and hours of Bosnian coverage but almost nothing about everyday economic life in the rest of the world. Unless Americans see the world as it is--and see themselves as the world sees Americans--they will never change what needs to be changed.

It is here that the president plays an important role. He essentially dominates the media. If he talks about something, we all talk about it. Vice President Dan Quayle got us talking about Murphy Brown. If the president will lead us in a benchmarking exercise, he can get us thinking about our future.

The 21st century will usher in a new economic game with different rules requiring new strategies. If Americans want to succeed, they will have to look outward to determine the needed standards of performance. External benchmarking must become a way of life. Our country will then have to be willing to make the commitment to become worldclass in all dimensions of economic performance. Anything less just won't be acceptable.