Kuttner talks insistently of American "industrial decline," for example.  But manufacturing as a share of GNP has remained remarkably constant since World War II.  Meanwhile, manufacturing exports as a share of the OECD total are actually higher now than they were ten years ago, suggesting that it is our trading partners who are suffering from "industrial decline," not the United States.  In the 1980s, according to Commerce Department data that became available this spring, U.S. manufacturing productivity rose at its fastest rate since World War II--nearly twice the rate of the 1970s.  It would appear that the American economy still has considerable capacity to right itself if given the chance.

True, the number of people who work in manufacturing (as defined by largely outmoded Labor Department statistics) has declined sharply.  But millions of other jobs have been created, and for the most part they are very good ones.  While there has been some increase in the wage gap between very rich and very poor, which is cause for concern, the big story of the 1980s is that a large chunk of the middle class "vanished" upward into income classes formerly reserved for the "rich," as Warren T. Brookes and others have noted.  America may not yet be the land of the "fortunate four-fifths" and the "unfortunate fifth," but it is still headed in the right direction to achieve that result.

Meanwhile, the stunning successes of American arms in the Gulf War, from the M-1 tank to the Patriot missile, suggest that America has not become a high-tech backwater just yet.  While Japan has seized much of the semiconductor business, America remains predominant in the higher-value-added software business, precisely because of the dynamism and creativity of our economy.

The rise of Japan, and to a lesser extent West Germany, is viewed with alarm by Kuttner and others.  While MITI, group loyalty, and mercantilism may explain some of Japan's success, they do not explain it all.  It is quite likely that such phenomena are swamped by more prosaic factors.  For example, in seeking to explain differentials in economic growth and productivity, it is incredible that neither Kuttner nor Reich raises taxes as a possible factor in the Japanese and German "miracles."  Although marginal income taxes in Germany and Japan are in fact higher than in America (50 percent in Japan and 56 percent in Germany compared with America's top rate of 31 percent), their taxes are riddled with deductions that sharply reduce the effective rates and favor savings and investment.  Equally important, both countries have cut the tax on capital gains and savings to practically zero.  Indeed, both may have over-biased their systems toward savings (one reason the Japanese aren't buying as much from us as we are from them).  Neither Kuttner nor Reich deals with other conventional explanations for Japanese and German success--low inflation, which encourages the willingness to invest for the long term, or the way that the Japanese government allowed industry to effectively break the power of major labor unions in the 1950s.  And while MITI may have attempted to micro-manage the Japanese industrial miracle, the results have been mixed.  The government lost huge sums subsidizing ship-building, for example.  And Japanese auto-makers turned a cold shoulder in the 1950s to government demands that they "rationalize" production through mergers.  The result was a highly competitive internal auto market of nine producers who were forced by circumstance to keep costs under tight control and fight for every customer.  It is not surprising that they soon became very competitive globally.

Much of what we hear about Japan these days has a familiar ring, as Reich himself points out.  He quotes from Jean-Jacques Servan-Schreiber's 1967 polemic, The American Challenge:

"American industry spills out across the world primarily because of the energy released by the American corporation."  That energy, in turn, derived from America's "highly organized economic system based on large units, financed and guided by national government....One by one, U.S. corporations capture those sectors of the economy...with the highest growth rates."

The American trade deficit is generally taken as evidence that America is not as competitive as it once was.  But the trade deficit may be the flip side of America's attractiveness as a place to invest, a reflection of faith in America's future rather than a sign of weakness.  The money sent to America by eager investors must eventually flow back out in the form of import purchases.  The question is whether those imports help build productive potential for the future or simply represent wasteful consumption.  The rising productivity figures suggest that the former may be the case.

In a 1989 study, Productivity and American Leadership: The Long View, Princeton economist William Baumol and two colleagues concluded that "[T]he data offer no clear basis for a conclusion that the long-run growth rate of productivity in the United States has fallen below its historical level, or that it is about to do so."  Baumol confesses surprise, since he had long shared the conventional view that things were going to hell in a handbasket.  "This book is perhaps most easily summed up as a compendium of evidence demonstrating the error of our previous ways," the authors begin with refreshing candor.

In the end, it is government, not business, that both Reich and Kuttner appear most concerned about protecting.  Kuttner is, perhaps unwittingly, fairly explicit on the point.  The hallmark of the postwar economy, he claims, was a series of barriers to the free flow of capital.  This "enabled center-left parties to broker and defend social contracts that benefit their constituencies.  Social democratic and labor parties had been the natural custodians of these social contracts, and the voters reciprocated by returning them to office."  The globalization of trade and capital brings great pressure to bear on the welfare state that was ushered in by Franklin Roosevelt and brought to a high point under Lyndon Johnson.

Reich at least recognizes that the world economy is developing in ways that make the old politics difficult to sustain, but he is no more successful than Kuttner at constructing a rationale for an updated version of the "social contracts" that Kuttner talks about.  The world is moving away from economic nationalism and toward markets, in part because technology is driving them in that direction but also because of the stunning successes of the market model.  The interest of the United States, this reviewer would argue, lies in broadening and deepening this trend, particularly here at home.  It would be dispiriting in the extreme to political and economic reformers elsewhere, particularly in Eastern Europe, if the world's largest single marketplace, the United States, turned its back on markets just as their success is being vindicated.  Progressively freer trade and the openness of the American market were major factors in the remarkable recoveries of Western Europe and Japan after World War II, which in turn helped to drive American prosperity to heights unparalleled in human history, and ultimately helped contain the Soviet threat.  Rarely has an array of policies worked so brilliantly.

Likewise, access to Western markets will be indispensable for progress in Eastern Europe and the Third World.  Readers are not likely to be persuaded by Kuttner's notion that government can "manage" world trade, as many Americans have come to doubt whether government can manage its own budget.  American economic policy abroad must reflect America's economic policy at home in emphasizing growth over redistribution and incentives over government-directed mercantilism.  If George Bush's New World Order is to have any meaning, it must spring from an understanding that if America allows markets to do their work, tempered only where necessary and then very carefully, the rest of the world will have little choice but to follow in America's train.

Thomas J. Bray is editorial page editor of the Detroit News.

Essay Types: Book Review