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The U.S. Economy "Back on Top?:"

Economic Growth and the Rhetoric of National Power

J. Bradford De Long

handout for January 26, 1998 UCLA talk

"Is the U.S. economy today back on top?" The phrase comes from an issue of the Economist (1997): the image is a picture of the Magnificent Seven (from the movie of the same title) riding toward the camera.

I am going to give four different answers to this question. First, I am going to examine how modern economic growth-is progressing: the current and likely future pace of American growth, and the uneven and incomplete geographical spread of the Industrial Revolution [1] or the Great Transformation [2] across the globe.

Then at the end I am going to turn and question the question: on top of what, exactly? or on top of whom ? For I think that the formulation of the question leads the mind down pathways of thought that are more confusing then helpful--more likely to lead the world into danger than to further our limping and uneven progress that we hope is leading us closer to utopia.

The first answer that I am going to give is that the U.S. economy is doing fine. In its pace of growth it does not match that of the decades immediately after World War II, but those decades were a golden age. Certainly there is no sign of any long-term secular slowing of the pace of economic growth compared to any period earlier than the post-World War II economic growth miracle. However, such a secular slowing may well come, as Malthus's ghost [3] may not have been banished forever.

The second answer that I am going to give is that the world economy grows more unequal with every passing decade. In spite of the fact that the storehouse of industrial technology is a public good open to all--that if you are literate in English and can afford to hire an engineer, than you can adapt perhaps not leading-edge but certainly generation-old machine technologies--with each passing decade the world economy becomes, in relative terms, more unequal.

It is not that the poor countries are losing absolute ground: because of technology and medicine, life is surely better than it was a century ago. And it is not that the poor are being exploited by the rich--the worst fate of all is to be in a region that the world economy has passed by completely. Nevertheless, the story of the relative distribution of productivity across the globe over the past century is one of "divergence, bigtime" [4].

The relative edge of the United States over the rest of the OECD is smaller than it has been since the beginning of the century. But the relative edge of the industrialized countries of the world over the rest has never been larger. The U.S. as leader of the OECD dominates the world more completely than at any time during the past, in part because culture and politics in the rest of the OECD have never been as "American" as they are today, in part because economic growth in the core of the world economy has so far outstripped growth at the periphery, and in part because of the division of the world into nation-states.

The sources of growing relative income divergence across the globe remain in dispute. But it is hard to see how anyone can look at it with applause. I would rather that the U.S. were somewhere underneath and that Africa, Latin America, and South Asia had successfully industrialized over the past fifty years.

Thus the U.S. economy is what it has been since 1900: has been the largest, richest, and most productive nation-state economy in the world. Excepting the periods immediately after world wars during which reconstruction was underway, the edge of the United States in total GDP is at least as large today as at any time in this century. For the twentieth century, the United States has been (as Leon Trotsky observed) the furnace in which the future is being forged [5]. In the twenty-first century the furnace is likely to be somewhat larger: to include Canada and northwest Europe, perhaps Japan and some more of East Asia. But there are no signs of a process of "succession in economic leadership" like the replacement of Britain by a four-times-bigger United States in the early twentieth century or the replacement of Holland by a five-times-bigger Britain in the eighteenth century.

Third, I want to note that the distribution of economic growth in the United States over the past generation has been appallingly poor [6], and much of the progress toward a more egalitarian society made during America's very cautious approach to social democracy has been lost. But gains there have been in the material standards of living of even those slots in society far from the heights of wealth, and we can look forward to a generation in which the distribution of the fruits of economic growth will be much more equally distributed.

Fourth, I want to question the question: "Is the U.S. economy today back on top?" I hear it as an expansion of Chalmers Johnson's attempt at wit in the early 1980s: "The Cold War is over, and the Japanese won." I think that the habits of thought underlying this question are pernicious, destructive, and dangerous. They lead to bad policy and to bad history--as I try to demonstrate in a reading of Walter LaFeber's brand-new history of U.S.-Japanese relations, The Clash [7].

Such thoughts belong to the pre-history of humanity. And if they become dominant, then it becomes much more likely that the history of the third millennium will be like the unpleasant history of the second.

I. American Economic Growth

Standard Measures of Economic Growth

Pull Historical Statistics of the United States (1975) down off of the library shelf, perform a few calculations, discover that GDP per worker in the United States today is nearly $60,000 dollars per year--measured at today's prices--and that what Historical Statistics tells us of GDP per worker in the United States in the past is as plotted in the figure below: back in 1869 GDP per worker (at 1996's prices) was less than $8,000 a year.

Thus Historical Statistics seems to say that the average American worker today is more than 7.5 times as well off in a material wealth or an economic productivity sense as his or her counterpart in 1860. Adjusting for the declining length of the work-year over the past century, as the eight- or the seven-and-a-half hour day has become the norm and as vacations have grown, and find that the multiplication of measured wealth is more like tenfold.

This measure corresponds to a particular conceptual experiment: suppose we could take everything produced in some past year, stuff it into a time machine, move it forward to today, and sell it; how much would it be worth? That is what the "1997 prices" in the statement "GDP per worker in 1860 was less than $8,000 a year at 1997 prices" means. This is the procedure that Simon Kuznets recommended and endorsed when he began his project of measuring long-run economic growth [8].

New Goods and New Types of Goods

The set of calculations above--taking commodities that existed then and exist now and comparing their labor-standard prices--is conceptually flawed. It is flawed because there are many things we make today that were not made back in 1860. A lot of our wealth today is our ability to make a broader range of commodities than used to be possible. And that broader range is not factored into the calculations above anywhere.

Consider the turn of the last century utopian novel Looking Backward, by Edward Bellamy [9]. In it the narrator--thrown forward in time from 1895 to 2000--hears the question: "Would you like to hear some music?" He expects his host to play the piano--a social accomplishment of upper-class women around 1900. To listen to music "on demand," you had to have--in your house or nearby--an instrument, and someone trained to play it. It would have cost the average worker some 2400 hours, roughly a year at a 50-hour workweek, to earn the money to buy a high-quality piano, and then there would be the expense and the time committed to piano lessons.

But today, to listen to music-on-demand in your home, all you need is a CD or a tape player--or in a pinch, if you are willing to let others choose your music for you, a radio.

So when we calculate the increase in material wealth, do we count the 240-fold decrease in the real labor-time price of the capability of listening to piano music? The experiences of live and recorded music are different in kind. But are they different enough to put a serious dent in the fact that a household today can acquire the capability of listening to piano music for only 1/240 the labor time cost a a household of a century ago? And doesn't the Historical Statistics calculation omit this source of increased well-being completely?

My family's income today is roughly $110,000 a year--about twice average GDP per worker. Suppose that you stuffed me and my family into a time machine, sent us back a century to 1860, and then gave us an income equal to twenty times that of 1860 average GDP per worker--an income that would put us at the same place in the relative income distribution then as some $1,000,000 a year would today.

Would we be happy with the switch? Our power to purchase some commodities would be vastly increased: we would have at least three live-in servants, a fifteen-room house (plus a summer place), if we lived in Boston we would live on Beacon Hill, if we lived in New York we would live on Park or Fifth Avenue.

The answer is surely that we would not be happy.

I would want, first, health insurance: the ability to go to the doctor and be treated with late-twentieth-century medicines. Franklin Delano Roosevelt was crippled by polio. Without antibiotic and adrenaline shots I would now be dead of childhood pneumonia. The second thing I would want would be utility hookups--electricity and gas, central heating, and consumer appliances. The third thing I want to buy is access to information--audio and video broadcasts, recorded music, computing power, and access to databases.

None of these were available at any price back in 1860.

I could substitute other purchases for some. I could not buy a washing machine, but I could (and would) hire a live-in laundress to do the household's washing. I could not buy airplane tickets; I could make sure that when I did travel by long distance train and boat I could do so first class, so that even though travel churned up enormous amounts of time it would be time spent relatively pleasantly. But I could do nothing for medical care. And I could do nothing for access to information, communications, and entertainment technology save to leave the children home with the servants and go to the opera and the theater every other week. How much are the central heating, electric lights, flouridated toothpaste, electric toaster ovens, clothes-washing machines, dishwashers, synthetic fiber-blend clothes, radios, intercontinental telephones, xerox machines, notebook computers, automobiles, and steel-framed skyscrapers that I have used so far today worth--and it is only 10 A.M.?

I would not be satisfied with my attempts to substitute using nineteenth century technology. First of all, I would be dead. Second a very large chunk of my-high-material standard of living is the broad range of commodities newly-invented over the course of the past century that I can choose to purchase, and that I do use because they give me capabilities that were simply not possible a century ago.

Whenever we hear a sentence like "average GDP per worker in 1860 was less than some $8,000 at today's prices," we cannot help but think that the material standard of living then was about what we could obtain now if we had $8,000 to spend. But it was not. The simple valuing of the past's production at the present's prices leaves out a very important part of the picture: the material standard of living then was about what we could obtain now if we had $8,000 to spend, but were required to spend it all on commodities that have been around for more than a century: no modern entertainment or communications or transportation technologies; no modern appliances; buildings, roads, bridges, and other infrastructure built using century-old technologies [10].

Return for a moment to Looking Backward. After answering "yes" to the question "would you like to hear some music?" Bellamy's narrator is surprised as his host "merely touche[s] one or two screws," and immediately the room is "filled with music; filled, not flooded, for, by some means, the volume of melody had been perfectly graduated to the size of the apartment. 'Grand!' [the narrator] cried. 'Bach must be at the keys of that organ; but where is the organ?'" He learns that his host has called the orchestra on the telephone--in Bellamy's utopia, you see, you can dial one of four orchestras, and then put it on your speakerphone.

Bellamy's narrator then says that: "'if we [in the nineteenth century] could have devised an arrangement for providing everybody with music in their homes, perfect in quality, unlimited in quantity, suited to every mood, and beginning and ceasing at will, we should have considered the limit of human felicity already attained...'"

Michael Boskin and his commission (1997) estimated that approximately one-third of labor productivity growth is missed in standard estimates of economic growth because of the inability of the national income accounts to capture what we economists call "unmeasured quality change"--the kind that brings Bellamy's narrator to the "summit of human felicity" by providing him with only a very pale shadow of what our recorded-entertainment industry provides us every day.

Taking Boskin et al.'s estimates seriously leads to an estimate that U.S. productivity today is some five times the point that it had reached on the eve of the Great Depression, and some fifty percent higher than at the beginning of the 1970s.

Do we believe these estimates implying extraordinary growth in material wealth? We can set up four comparisons:

There is no reason to believe that these four comparisons will produce the same number for overall increase in standards of living over the past century. There is no "essence" of growth that requires that all these comparisons produce the same growth index. And, indeed, in general they will not [11].

It seems likely that the first comparison would produce a near-infinite number for economic growth: as Deputy U.S. Treasury Secretary Lawrence Summers likes to put it, "What did J.P. Morgan have [in the way of useful articles and services to provide the necessities, conveniences, and luxuries of life] that I haven't got?" It seems likely that the second comparison would produce estimates as large as those implicit in the conclusions of the Boskin Commission (1997), of Nordhaus (1997), and of Bresnahan and Raff (1997).

It is harder to figure out what the results of the third and fourth comparison would be. How much of individual utility is derived from relative, not absolute income? Richard Easterlin (1997) believes that a very large share of subjective material welfare is comparative, not absolute. Paul Krugman (1997) echoes this with the statement that most of the fun of being rich is "making 'em jump" [12]. How much relative status is it worth sacrificing for modern medicine, entertainment, and transportation technologies--and for what Bank of England senior official Mervyn King has described as the three contributions of America to world civilization: "hot showers, central heating, and breakfast meetings"?

If the answer to the third and fourth comparisons were the same as the answer to the first two, then we are driven to the conclusion that homeless beggars sleeping in the shadows of U.C. Berkeley dorms today have higher levels of material welfare than did the young Abraham Lincoln. There is a sense--especially when one focuses on medicine--in which this is true. But there is also a sense in which it seems very false.

But the broader point--that growth has been faster, even if we have no single number as to how much faster--than official statistics maintain is certainly true. In the past generation we have been annoyed by the relatively slow aggregate economic growth of the 1970s, 1980s, and 1990s in comparison with that of the previous 1950s and 1960s. But it is important to grasp that even this relatively slow growth is still overwhelmingly fast by the standards of any previous century. At our current pace, productivity doubles roughly every thirty-five years. Back in the nineteenth century--the century of the industrial revolution proper--aggregate economy-wide productivity appears to have taken seventy to eighty years to double. And before 1750? Before 1750, ny doubling of median material living standards and productivity levels was the business of millennia.

Thus the U.S. economy is indeed "back on top" as far as economic growth is concerned. It never was away. Growth is slower than during the wonderful post-World War II decade, but as best we can guess each year sees the productivity of the average American worker some two percent higher than the year before. That is--by any standard of comparison--a remarkable and gladdening achievement.

II. Economic Distribution--Around the World

Yet U.S. economic growth relatively rapid inhistorical perspective is embedded in a world that is growing more unequal. In fact, the world today is a more unequal place than ever before. It is not that the poor regions of the world have been immiserized; it is that the wealthy regions have been astonishingly enwealthized--and that most of what we now see as the periphery has singularly failed not just to catch up but also to keep up.



Behind the Iron Curtain

A first big reason for the extraordinary degree of wealth inequality across nations can be found by looking at the snaky geographic line across Eurasia that used to be called the "Iron Curtain," a name not coined but popularized by Winston Churchill in a famous speech given in Missouri in 1947.

On one side were regimes that had owed their allegiance to Stalin, Mao, or others--such pleasant examples of twentieth-century political leaders as Enver Hoxha, Pol Pot, Kim Il Sung, Ho Chi Minh--who had been anointed as Marx's viceroys on earth. On the other side were regimes that claimed during the 1946-1989 Cold War between Communism and Liberalism to be of the "free world": an odd combination of good guys and less-bad guys.

Comparing GDP per Capita Levels of Economies Behind the Iron Curtain with Those of Similarly Situated Economies that Escaped Communist Rule
East-Block Country GDP per Capita Matched West-Block Country GDP per Capita Relative Gap
North Korea 700 South Korea 7660 0.91
China 490 Taiwan 9550 0.95
Vietnam 170 Philippines 850 0.8
Cambodia 150 Thailand 2110 0.93
FSR Georgia 580 Turkey 2970 0.8
Russia 2340 Finland 19300 0.88
Bulgaria 1140
7390 0.85
Yugoslavia 3240 Italy 19840 0.84
Hungary 3350 Austria 23510 0.86
Czech Republic 2710 Germany 23560 0.88
Poland 2260 Sweden 24740 0.91
Cuba 460 Mexico 3610 0.88
Geometric Mean 930 Geometric Mean 8030 0.88

Source: Heston and Summers (1997).

Walk along this geographical line from Poland to Korea, looking first left at the level of material welfare inside and then right at the level of material welfare just outside the Iron Curtain. Before Stalin and Mao these regions had similar economies. Today the countries outside the Iron Curtain are far, far better off in terms of material welfare.

They were not necessarily, and not always, better off in education, or health care, or in the degree of income inequality: if you were in the poorer half of the population--and if you were not homosexual, if you kept your mouth shut, if you were not swept up in one of the anti-profiteer drives--you probably received a better education and had access to better medical care in Cuba than in Mexico (until the collapse of the Soviet Union, and the end of Soviet subsidies to Castro).

Nevertheless, depending on how you count, it looks like between two-thirds and seven-eighths of the potential material production and prosperity of a country was annihilated if it fell under Communist rule. This is the first major factor making for enormous disparities in the world's distribution of economic wealth across nations.


But even if you leave the Communist and ex-Communist countries aside, the world today is a more unequal place than it has ever been before.

One way to try to assess how unequal it is is to look at post-World War II growth for the set of national economies for which we can get reasonable data--or reasonable guesses at data--from the United Nations International Comparison Project (which excludes the former really-existing-socialist economies, save China) as extended by Heston and Summers (1997), and focus our attention on economies with populations of more than 15 million today. This gives us a sample of some thirty-four economies.

The chart below shows real GDP per capita levels--at purchasing power parities--in 1950 and 1992, for this set of selected economies.

Two things stand out from this graph. The first is that there are a number of economies--Japan, Italy, West Germany, France, the Netherlands, and Canada--that have drawn much closer in aggregate terms to the U.S. level of aggregate productivity (moreover, there are a few economies--Thailand, Indonesia, Turkey, Brazil, Malaysia, Spain, Mexico--that appear to be on a trajectory of "catching up"). The years when the United States stood in lonely eminence as by far the world's richest economy are over: there is now a group of rich economies-.

The second is that there are a lot of economies that have been stagnant in relative terms: growing no faster than the U.S. economy--or doing worse. The standard deviation of relative GDP per capita had been 23.9% of the U.S. level in 1950; it rose to 31.2% of the U.S. level by 1992. By this measure, the world economy today is some one-third more unequal than it was in 1950. The "first world" has drawn together--but the gap between it and the rest of the world's population has increased.

Why has the first world drawn together? I would argue that this is the result of the extraordinary success of the social-democratic mixed-economy as a system of social organization, as sketched out in DeLong and Eichengreen (1992). But pursuing that argument would lead to a different book, or series of books.

Why has so much of the non-Communist developing world fallen behind, or stayed stagnant? The principal answer seems to be that too many governments have been too little dominated by what one can only call the bourgeoisie: a class with a strong interest in economic growth. Instead, ruling classes have been interested in redistribution from the rest to the bureaucrats, the officers, and their clients. But that too is an argument for a different book, or series of books [13].

The Multiplication of Wealth

It is possible to read our current very unequal world in an optimistic fashion. It is possible to see the glass as half-full.

Consider the set of national economies for which we can get reasonable data--or reasonable guesses at data--from the United Nations International Comparison Project (which excludes the former really-existing-socialist economies, save China), and focus our attention on economies with populations of more than 25 million today. This gives us a sample of some thirty-four economies.

Note that, without adjustments for unmeasured quality changes, not one of these thirty-four is poorer in the 1990s--had a lower estimated real GDP per capita level in 1992--than in 1950. All had positive per capita economic growth. The arithmetic average was some 3.8 times as productive in 1992 as in 1950, spread out from Japan (with 1992 GDP per capita at 14 times its 1950 level) to Uganda (barely 20% above its 1950 level in 1992). Those countries that failed to double GDP per capita levels were a select club: out of the thirty-four only Venezuela, Peru, Ghana, and Uganda.

The argument that the course of the developing world should make us relatively optimistic is an argument that the average developing country is "only" some 70 years behind the United States at current average rates of economic growth. From an Olympian historical perspective that takes in the 10,000 years since the invention of agriculture or the 250 since the application of steam power, a 70-year lag does not seem overwhelmingly large. More than 4 billion people now appear to be on the escalator to modernity--and, barring Malthusian crisis in the form of global warming or other ecological disaster, their great-grandchildren will live as well as or better than those in the industrial core live today.

III. Economic Distribution--within the United States

Long-Run Trends in Distribution

America was not born free--it was born half free, and half slave: a house divided against itself. Nevertheless, the amount of inequality in the distribution of income and wealth between households at this country's founding was relatively low: the richest one percent of households then held roughly seventeen percent of the nation's wealth--less than half as large a share as today [14].

Between the Declaration of Independence and the end of America's Civil War in 1865 wealth concentration increased a little: the share of wealth held by the richest one percent of households grew by perhaps nine percentage points. On the one hand the slaves were freed (although their "freedom" was a transition from being chattel property to being a despised and oppressed minority). On the other hand agricultural land located close to major transportation routes became scarce. Land on which you could grow cash crops was no longer effectively free. America acquired landlords.

Between 1870 and 1900 the United States became an industrialized economy--the leading industrial nation in the world. And wealth became markedly more concentrated. We think that the share of national wealth held by the richest one percent of households peaked at around 45 percent sometime around 1900 [15].

After 1900 the concentration of wealth began a slow decline. Wars--and the higher taxes and inflation that accompanied them--took a heavy toll of the financial wealth of the rich. Stock market booms (like the 1920s and the 1960s) saw wealth concentration take a step upward; but prolonged bear markets (like the 1930s and the 1970s) eroded wealth concentration.

The coming of the social-democratic social insurance state eroded wealth concentration. Near-universal education boosted the productivity and wages of those near the bottom of the pyramid. Economists still argue over the extent to which the severe restrictions on immigration introduced in the 1920s diminished the supply of unskilled labor and so led to diminished wealth concentration. Progressive income and estate taxes trimmed some wealth off the top. Explicit government wage policy--minimum wages, restrictions on connections between finance and industry, and support for union-centered collective bargaining--shifted the distribution of income and wealth toward labor, without producing mammoth amounts of classical unemployment.

By the mid-1970s America appeared close to returning to its egalitarian roots. The concentration of wealth, at least, appeared within striking distance of the minimum that had been achieved at the country's founding.

The Rising Tide of Inequality

But then the tide turned. Whatever the causes, the period since the mid-1970s has seen wealth concentration in the United States increase more rapidly than ever before--more rapidly than even during the heyday of industrialization in the last decades of the nineteenth century. Aggregate measures of wealth concentration today are greater than at any time since the election of Franklin D. Roosevelt in the Great Depression, and are back within striking distance of the peak in wealth concentration reached during the Gilded Age.

The sharp rise in wealth concentration--the compression into two decades of a shift that economists had previously always thought took two generations and the enormous structural change of transformation from an agricultural to an industrial economy--is both alarming and puzzling. It is alarming, to me at least, because a country of technocrats-with-servants living in gated communities and manipulating a much poorer mass electorate through political attack advertisements is not the country that I wanted to spend my adulthood in. I wanted a social democratic utopia.

It is puzzling because there appears to be no structural change in the economy of sufficient magnitude to warrant such a very large shift in the distribution of income. Neither shifts in international trade patterns, nor changes in migration, nor faults in the educational system seem to be able to account for the shift in wealth inequality. So economists are driven back upon either a mysterious change in the character of technological progress, or upon sociology: the fact that the United States is not a social democracy, but did masquerade as one as long as the memory of the Great Depression remained strong.

Whatever the causes of the surge in income and wealth inequality, there is good reason to at least hope that the surge is at an end, and that the next generation will see middle-class and working-class incomes rise much more rapidly than the incomes of those slots at the top of the socio-economic pyramid of inequality. The material benefits to individuals from increased education are, today in the United States, absolutely enormous. There is reason to hope that--with increased access to higher education through modern technology--the next generation is likely to be much better for the American lower middle class than the last generation [16].

IV. National Power and Economic Prosperity

Now let me turn and question the question: "Is the U.S. economy today back on top?" For I think that the formulation of the question that I have been asked leads the mind down pathways of thought that are more confusing then helpful. Such pathways of thought are more likely to lead the world into danger than to further our limping and uneven progress that we hope is leading us closer to utopia.

Let me make this part of the argument highly specific: a critique of a part of a recent book by historian Walter LaFeber (1997): The Clash: U.S.-Japanese Relations Throughout History. His book does try to answre the question "is the U.S. economy today back on top?" And as best as I can tell, his answer is: "no". In order to keep the U.S. economy on top, "Americans... trust[ed] to the magic of the international marketplace--a marketplace that MITI and the keiretsu had long worked to fix" (p. 379). Thus "as Chalmers Johnson observed: 'The Cold War is over, the Japanese won" (p. 384).

I think his book is wrong. And I think that in large part it is wrong because it begins from the wrong question--the question of whose economy is "on top."

The Clash

Walter LaFeber argues that the facade of a partnership between the U.S. and Japan today is just that--a facade. Instead, the relationship is "a clash". At the root of this clash, according to LaFeber, has been an economic conflict: "a clash between two different forms of capitalism" (p. xviii) that has generated a "century-old rivalry to decide which system was to lead in developing Asian and especially Chinese markets" (p. 407).

Let me hasten to say that I do not criticize Walter LaFeber because he is a bad historian. I criticize him because he is a good one. Yet his vision of American-Japanese economic relations is warped, twisted, and fundamentally false. LaFeber sees conflict where in reality there is economic partnership and cooperation. LaFeber sees border tensions and adjustments in which governments jockey for local positions and small advantages. He magnifies the frictions naturally created by a growing and productive relationship.

The penultimate chapter of his book--"End of an Era"--covers 1973 to 1996. In this chapter seven points are repeatedly driven home, with a pile driver:

The conclusion? That "Americans... trust[ed] to the magic of the international marketplace--a marketplace that MITI and the keiretsu had long worked to fix" (p. 379); as "Chalmers Johnson observed: 'The Cold War is over, the Japanese won" (p. 384).

There is--occasionally, very occasionally--a contrarian voice: One of the few examples: "Secretary of State [George] Shultz... avoided a confrontation... if the Japanese 'wanted to pay astronomical prices for goods that are cheaper elsewhere, that is more their problem than ours... if we wanted to see our real problem we should look in the mirror (p. 380)."

If you read Walter LaFeber's chapter on U.S.-Japanese relations 1973-1996, and then tried to conjure up the picture of the end-state, you would conjure up a fearsome sight indeed. The American economy is devastated, (there is no mention of any recovery). Japanese-U.S. relations are thorough soured (they sweeten only once, in late 1982). The major industries of the U.S. have been oustripped by Japan, with only the computer industry managing to remain barely even. U.S. whose financial markets are shaken and crash at the whim of financiers in Tokyo. The incompetent U.S. government is repeatedly outmaneuvered by clever Japanese bureaucrats who do not play by the rules of the game, but unfairly steal Americans' jobs by nurturing exports and shutting-out imports and then steal America's patrimony by buying American assets at fire-sale prices.

You cannot avoid receiving such an impression. But this has little to do with reality.


Begin with the broadest measure of economic productivity-- gross domestic product per worker. Translate different currencies into each other at the exchange rate that gives the best indication of relative price levels in different countries--the so-called purchasing-power-parity exchange rate. After all, if (measured at current exchange rates) one country's national product was twice as large but if its internal prices were twice as high, you would not say that it had a higher productivity level, would you? (Calculations at current exchange rates show the Japanese economy as somewhat bigger--but current exchange rate calculations undercount the economic weight of the United States because the United States has powerful economic advantages in its enormous endowment of land and natural resources, and its extremely productive service-producing sector. These economic advantages in non-tradeables lead the U.S. to have a purchasing-power-parity exchange rate considerably higher than current market exchange rates).

The figure immediately below shows our best estimates of purchasing power parity-concept GDP per worker in the U.S. and Japan since 1930. The figure below that shows relative income levels--Japanese purchasing power parity-concept GDP per worker as a percentage of the United States. The first thing to note is that U.S. economic growth is, as noted above, not weak. Moreover, also as noted above, there is substantial reason to believe that our standard statistics understate the productivity growth of the average worker and the consumption growth of the average household by about one percent per year.


The thing to note from these figures is that in spite of all Japanese advantages--MITI and keiretsu and elite bureaucracy and not playing by the rules and public investment in research and development and its homogeneous population and its excellent secondary education system and all that--its GDP per worker is less than two-thirds that of the United States. The Japanese growth miracle of 1945 to 1990 was an amazing achievement, boosting Japanese productivity relative to American sevenfold. But it has been preceded by a disaster--World War II--that had cut Japanese productivity relative to American by two-thirds. It took until the very end of the 1960s for the Japanese economy to make up the relative ground that had been lost as a result of World War II.

The gap in productivity today remains large.

A diligent reader of LaFeber looking at these two figures would rub his or her eyes in disbelief. "How can this be?" he or she would ask. Japan has exploited the U.S. by not playing by free-trade rules; by provoking and winning clashes of increasing seriousness; by outmanoeuvering the incompetent American government; and by conquering foreign market after foreign market. U.S. industry after U.S. industry has succumbed to Japanese competition, as shown by the ever-rising U.S. trade deficit. And what Japanese exporters cannot win, Japanese financiers can: Americans now cut timber and catch fish for export to build houses and feed their Japanese bosses.

How can the U.S. have so much more productive an economy?

The answer can only come from a more detailed picture. In 1993 the McKinsey Global Institute--a research organization affiliated with the McKinsey consulting group--published a study of manufacturing productivity by sector for nine selected sectors of industry in the U.S., German, and Japan. They found that in five of the sectors that they surveyed--steelmaking, auto parts manufacture, metalworking, auto assembly, and consumer electronics--that together accounted for 49 percent of surveyed employment that the average Japanese firm was more productive, in some cases by a large magnitude: the average Japanese steel manufacturer was nearly half again as productive as the average American.. They found that in four of the sectors--computer manufacture, soap and detergent, beer, and food processing--that together accounted for 51 percent of surveyed employment the average U.S. firm was more productive: in food processing the average Japanese firm was only one-third as productive as the average American firm.

The average of the surveyed sectors gave Japan an estimated average manufacturing productivity of only 83 percent of the U.S. Japan's edge in steelmaking, auto assembly, and consumer electronics was more than outweighed by the U.S. edge in food processing

Why this peculiar economic structure, in which Japanese productivity is world-class in some sectors, and far below first-world standards in others? Why this extraordinary lack of economic productivity in manufactures like food processing? And food processing is not unique. In other, non-manufacturing sectors--transportation and distribution, services, and agriculture--Japanese productivity is even further below the first-world standard.

Japan's extraordinarily low productivity in branches of economic activity outside of export-oriented manufacuturing is in large part due to its political order: the Liberal Democratic Party that has ruled Japan, and the elite bureaucrats that are so-often praised as the public-sector stewards of Japan's economic growth have striven mightily to keep Japanese agriculture, distribution, services, and non-export manufacturing unproductive. Prohibitions against the importation of rice boosted Japanese rice prices to seven times world levels. Thus large chunks of Japan's economic resources are devoted to growing rice on small, inefficient plots; a saner economic policy would have been to encourage faster migration out of agriculture, and to pay for rice imports by additional exports of manufactures--raising Japan's national income. Government bureaucrats believe that they have a mandate to protect existing stores against competition-- especially efficient competition from large-scale enterprises that would handle distribution more efficiently.

If the Ministry of International Trade and Industry has been diligently and successfully working to enrich Japan by boosting productivity in the export-oriented manufacturing sector, the rest of the Japanese governmental bureaucracy has been equally diligently and successfully working to make sure that the Japanese distribution sector and that Japanese agriculture remain inefficient and unproductive.

But wait--there's more. At the end of the 1980s the Japanese stock market and real estate markets fell by about fifty percent. As a result of these asset price declines, a lot of financial institutions were under water: the value of the assets they held and the collateral for the loans that they had issued were worth much less than the value of the deposits they had taken and their other liabilities. When large chunks of a financial sector find themselves in severe trouble--possibly insolvent--they hunker down: they call in what loans they can, they refuse to make new loans, they try to avoid extending credit to existing customers, and so on. For most of the past decade Japan's Ministry of Finance has refused to deal with the financial-sector problems created by the Japanese stock and real estate market declines. It has repeatedly vetoed serious attempts at Keynesian-style stimulative policies. It has taken no steps to recapitalize that banking sector so that the flow of financial capital can start up again.

The result has been a quiet depression: an economy that was growing at more than 4 percent per year in the 1980s has grown by less than 1 percent per year in the 1990s.

Thus is hard to take a look at the Japanese state as a whole--MOF as well as MITI, bureaucrats who control agriculture and forbid the opening of competitive stores as well as bureaucrats who channel research and development subsidies--and conclude that the Japanese government has been a net plus for the economic welfare of Japan. To the extent that Japanese government policies have been effective, they have pushed agricultural productivity and productivity in the distribution sector down by more than they have pushed export-oriented manufacturing productivity up. And their lack of response to the current quiet depression has robbed the Japanese people of as much as a quarter of their potential economic production.

Some (James Fallows (1995), for example) admit that Japanese economic policies have been extraordinarily destructive of Japanese economic welfare. But, they go on to say, Japan's economic policy makers do not care about utility or consumer welfare or the national standard of living--it is a producer rather than a consumer economy, aimed at creating economic hegemony rather than enhancing human welfare. The key point to grasp, they say, Japan's economic policies have harmed us as well. The U.S.-Japanese economic relationship as it has been conducted--by Japan's producer-oriented, consumer-ignoring developmental state and the U.S.'s incompetent government--has been a lose-lose relationship.

Has it?

In 1996 the United States exported some $70 billion worth of goods and services to Japan. Had trade with Japan been eliminated, and had those products been sold on the U.S. market--or, more likely, had the firms and workers who made them had to scramble to find jobs producing other commodities for which their would have been demand on the world market--those exported goods would have been worth perhaps $50 billion: a $20 billion gain in 1996 to U.S. real productivity from the availability of the Japanese export market.

In 1996 the United States imported some $115 billion worth of goods and services. Had we had to produce those goods and services here at home, we would have had to divert firms and workers who made perhaps $150 billion worth of other products: $35 billion gain in 1996 to U.S. real productivity from the availability of Japanese suppliers of imports.

Have Japanese imports crowded U.S. producers out of profitable industries? Have they kept U.S. firms from learning how to become more efficient producers by hindering their ability to learn how to use new technologies? Perhaps to some small extent. But there are more linkages going the other way: America's microprocessor and software industries benefit enormously from cheap computer parts from Japan that greatly boost total world demand for the products of America's leading economic sector.

But doesn't the U.S. government run a trade deficit with Japan? Doesn't the trade deficit destroy U.S. jobs? In a word, no. The level of employment in the United States is set in Washington DC, by the Federal Reserve Open Market Committee's decisions as it tries to balance the goals of full employment and low inflation. A large trade deficit can at times make the Federal Reserve's task a little harder, but at times it can make the Federal Reserve's task a little easier too. The view that a high level of U.S. employment depends on avoiding a trade deficit is false.

What, then, is the economic impact of the trade deficit? Of the approximately $45 billion trade deficit with Japan in 1996, about $15 billion was then transfered by Japan to other countries, that then used those $15 billion in dollars to buy U.S. exports--producing another $5 billion gain in 1996 to U.S. real productivity by boosting demand for exports and allowing us to employmore labor and capital in high-wage high-productivity export industries. The remaining $30 billion was invested in the United States: used to finance, directly and indirectly, the construction of buildings and the installation of machinery and equipment to boost productivity. The ability to make these extra $30 billion of investments was valuable and profitable to the U.S.: the capital put in place boosted productivity by perhaps $10 billion more than the cost of financing it.

Add all of these various gains-from-trade up, and discover that the existence of the Japanese market boosted American real productivity in 1996 by some $70 billion--by one percent. The country would have been a full one percent poorer in 1996 if not for the existence of Japan as a supplier and a customer.

Now one percent of national product is not an overwhelmingly large number by the standards of the U.S. economy as a whole. To put it in perspective, the standard estimates of the cost to the U.S. economy of running the large budget deficits of the 1980s and early 1990s range from two to six percent of GDP-- roughly four times as large as all of our gains-from-trade with Japan. But it is a noticeable quantity: the U.S.-Japan trading relationship is an important national asset.

Could it be more valuable? Are Japanese governmental policies reducing the value of the trading relationship? Yes, they are. Japanese barriers to imports cause significant reductions in the value of U.S.-Japan trade, and in the benefits that both countries derive from it. But the fact that we wish the benefits from the relationship were larger, and are annoyed at the Japanese governments for pursuing policies that reduce the value of the relationship to us--and even more to them--does not mean that it is not a valuable relationship, or one whose most important aspect is some "clash" between two different and incompatible varieties of modern capitalism.

Why Does LaFeber Go So Far Wrong?

So why does LaFeber paint so different a picture from the one that I do?

The answer is not that he is a stupid man or a bad historian--although a number of his major sources are mendacious, or bought.

The answer is that he trusts the wrong sources, and reads the wrong documents. Government archives--and news reports--are full of threats of retaliatory duties, disputes over subsidies to export industries, and declarations from those whose economic position is harmed by rising imports that allowing such imports is not in the national interest. That is the knowledge base he uses to write his book.

Appearing nowhere in the files of governments, or in the reports of news organizations, or in white papers produced by think-tanks funded by import-fearing textile barons is the satisfaction of a U.S. consumer who has just bought a SONY walkman, the happiness of a processed-foods exporter who has just landed a large contract from a Japanese importer, the extra cheapness with which a building can be constructed using Komatsu earth-moving equipment, or the lower taxes allowed by the reduced interest on the national debt because some of it is held by Japanese investors. So LaFeber does not write about the gains from imports for American consumers, or the benefits from exports, or the benefits from Japanese investments in the United States.

Given Walter LaFeber's sources, he is like a man trying to reconstruct a redwood tree from detailed chemical analyses of its leaves. He not only cannot see the forest for the trees, he is unaware that there might ever be such a thing as a forest.

Moreover, even were LaFeber to look up from his sources in FRUS, it is entirely possible that he would not see forest because his own intellectual training would refuse to admit the possibility of a forest.

He writes a 500-page book about U.S.-Japanese relations, focusing largely on international trade. His book has index entries for Angola, Benjamin Franklin, Frank Capra, Elijah Muhammed, the Kishinev Pogrom of 1903, George Orwell, J. Edgar Hoover, Herman Melville, Orson Welles, and many other people and events of... doubtful relevance to U.S.-Japanese relations. But it has no index entry for Okawa Kazushi, Henry Rosovsky, David Ricardo, Adam Smith, Paul Samuelson (or any other economist--Japan development specialist, international trade expert, or not--save John Kenneth Galbraith, cited in a context far removed from that of international trade; John Maynard Keynes, cited not for his ideas but as a possible influence on the economic policies of Takahashi Korekiyo's in Japan between 1931 and 1936; and George Shultz, cited for his views as Secretary of State).

Now LaFeber could have done a better job. David Ricardo's doctrine of comparative advantage has to be a key part of the toolkit of anyone writing about international economic relations, as should the Stolper-Samuelson analysis of how expanding international trade affects the domestic distribution of income. People who have happily purchased Japanese products, been employed at better-paying jobs because of export demand from Japan, or had their wages boosted because their productivity was multiplied by Japan-financed investment are not hard to find at all.

But he didn't. And the key reason that he didn't is that he comes out of a tradition focuses on dominance on leadership, on power understood as relative to other actors. There is an opposed tradition: one in which power is seen as the ability to get things done rather than as the ability to dominate others. The difference between the two is the difference between reporting only the winners of the race and reporting the times of the different contestants. To start, as Walter LaFeber does, with the relative power question--"who is on top?"--is to take a step on a path that can lead you far, far away from what is truly interesting and important.

Thus it is not surprising that his book is a book about "the clash."

Perception and Reality

At the start of my discussion of LaFeber's book, I claimed that it had reality and illusion inverted: what it took to be illusion--the mutually-beneficial economic partnership between the U.S. and Japan--was the reality; what it took to be reality--"the clash"--was just illusion, constructed by ignoring the forest and gazing not even at the trees but at the chemical composition of mashed-up evergreen needles.

I lied.

In the world of history and politics, perceptions are never "just illusion." Perceptions can have a frightening solidity as they shape people's beliefs and people act on them. During 1941 the Japanese armed forces and foreign relations establishment perceived a United States intent on destroying Japanese power; by their actions in December 1941 they created the United States that they had feared (see Akira Iriye (????).

The reality of U.S.-Japanese relations today is a reality of mutually-beneficial economic partnership. We buy goods in which they have a comparative advantage. They buy goods in which we have a comparative advantage (not as much of them as they should in an ideal world--but the losses accrue largely to Japanese consumers). Japanese capital helps fund investment in the U.S. that boosts productivity by more than the cost of the hired resources.

The belief that the core of U.S.-Japanese relations today is a clash between incompatible forms of capitalism is an illusion.

But if enough people believe in it--if Walter LaFeber and others have their way--than this illusion will acquire substance. Because journalists, officials, and others believe that there is a clash, there will be a clash. And the mutual benefits from the economic relationship may be sacrificed, especially if those who try hard to prserve the gains from trade are denounced as "suckers waiting to be manipulated from the word go" (p. 392).

V. Conclusion

I have given four different answers to this question: "Is the U.S. economy back on top?"

The first answer is that the U.S. economy is indeed "on top"--but there is no "back." In its pace of growth today the U.S. economy does not match that of the decades immediately after World War II, but those decades were a golden age, in which the source of growth more rapid than either before or after is not well understood. There are no signs of any secular slowing of the pace of economic growth over any time span larger than the comparison of 1940-1970 to 1970-2000. But such a secular slowing may come: has Malthus's Ghost been banished forever? We do not know.

The second answer is that the U.S. and the other nations of the industrial core are more "on top" than ever, for the world economy grows more unequal with every passing generation. In spite of the fact that the storehouse of industrial technology is a public good open to all--that if you are literate in English and can afford to hire an engineer, than you can adapt perhaps not leading-edge but certainly generation-old machine technologies--with each passing decade the world economy becomes, in relative terms, more unequal.

It is not that the poor countries are losing absolute ground: because of technology and medicine, life is surely better than it was a century ago. It is not that the poor are being exploited by the rich--the worst fate of all is to be in a region that the world economy has passed by completely..

Thus even though relative edge of the United States over the rest of the OECD is smaller than it has been since the beginning of the century, the relative edge of the U.S. an dthe industrialized core over the rest has never been larger.

The third answer is that the distribution of economic growth in the United States over the past generation has been appallingly poor, and much of the progress toward a more egalitarian society made during America's very cautious approach to social democracy has been lost. As a social mechanism for generating human well-being as opposed to a mechanism for generating highly-valued commodities, the American economy's performance since 1973 has been worse than in any generation since at least the end of the Civil War. As a model of how to move toward Utopia, the United States economy may well be less attractive today than a generation ago.

On the other hand, gains there have been in the material standards of living of even those slots in society far from the heights of wealth, and we can look forward to a generation in which the distribution of the fruits of economic growth will be much more equally distributed.

The fourth answer is that the authority of the question should be denied. The question, "is the U.S. economy today back on top?" is an expansion of Chalmers Johnson's attempt at wit in the early 1980s: "The Cold War is over, and the Japanese won." The habits of thought underlying this question are pernicious, destructive, and dangerous. They lead to bad history, and they lead to bad policy. Back before World War I Norman Angell wrote that The Great Illusion was the belief that a nation-state could receive any benefit from a genreal war. But the habits of thought and visions of the world that Arno Mayer has expertly laid out in his The Persistence of the Old Regime swept such warnings aside, plunged Europe into the Great War, and started down the road that turned the twentieth century for so many people into Hell on Earth.

To ask "is the U.S. economy back on top?" is indeed to participate in a truly bizarre Persistence of the Old Regime, a modern-dress replay of patterns of international relations derived from the days in which the most important thing to rulers and their high aristocratic servants was indeed the relative power of the Habsburg, Bourbon, Hohenzollern, and Stuart or Hanoverian dynasties. Those days should be gone. But if we let diplomatic historians transfer those habits of thought to the realms of economic policy and economic history, we risk making it more likely that they will come again.

[1] Pride of place in first recognizing the magnitude and power of the Industrial Revolution is claimed by Karl Marx and Friedrich Engels (1848), Manifesto of the Communist Party , in Robert Tucker, ed., The Marx-Engels Reader (New York: Norton, 1978); and by Andrew Ure (1836), The Philosophy of Manufactures (London: Lenox Hill). For an account of the technological and economic changes wrought by the industrial revolution, the best is still David S. Landes, The Unbound Prometheus (); for an account of the industrial revolution in America, see David Hounshell, From the American System to Mass Production ().

[2] As Karl Polanyi called it. See Karl Polanyi (1944), The Great Transformation (Boston: Beacon Press).

[3] See Thomas Robert Malthus (1796), An Essay on the Principle of Population (New York: Penguin). Herman Kahn thought that the pace of economic growth would eventually slow to another epoch of near-stagnation like that before the Industrial Revolution. See Herman Kahn (1976), The Next Two Hundred Years (New York: William Morrow). Kahn argued (in the mid 1970s!) that the twin dangers of ozone depletion and global warming would be the most serious environmental challenges posed by the Industrial Revolution.

[4] Lant Pritchett (1997), "Divergence, Bigtime," Journal of Economic Perspectives.

[5] Leon Trotsky (1929), My Life ().

[6] See Edward Wolff (1996), Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It (New York: New Press).

[7] See Walter LaFeber (1997), The Clash: U.S.-Japanese Relations Throughout History (New York: W.W. Norton). LaFeber is worth criticizing because he is a good historian--yet when his book ventures into modern economics, it becomes a very bad book. I would note, however, that his account of the origins of World War II in the Pacific seems seriously awry, and vastly inferior to Akira Iriye (1987), Origins of the Second World War in Asia and the Pacific (London: Longman).

[8] Simon Kuznets (1963), "The Meaning and Measurement of Economic Growth," in Barry Supple, ed., The Experience of Economic Growth (New York: Random House), pp. 52-67.

[9] Edward Bellamy (1895), Looking Backward (New York: Penguin).

[10] For more detailed, quantitative explorations of these issues, see Michael Boskin et al. (1997), Report of the Commission on the Consumer Price Index (Washington, DC: GPO); William Nordhaus (1997), "Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not," in Timothy Bresnahan and Robert Gordon, eds., The Economics of New Goods (Chicago: Unversity of Chicago), pp.29-70; Timothy Bresnahan and Daniel Raff (1997), "???" in Timothy Bresnahan and Robert Gordon, eds., The Economics of New Goods (Chicago: Unversity of Chicago, 1997), pp.29-70)

[11] Irving Fisher (), The Making of Index Numbers ().

[12] See Richard Easterlin (1997), The Twenty-First Century in Historical Perspective (); also see Paul Krugman (1997), Slate.

[13] Nevertheless, see (for example), Robert Bates (), Markets and States in Tropical Africa (); Wole Soyinka (), The Open Sore of a Continent (); Carlos Diaz-Alejandro (1970), Essays on the Economic History of the Argentine Republic (); Charles Jones (1993), "???" Journal of Monetary Economics. Note that the restriction of the sample gives these numbers an optimistic bias: places that have truly done badly are unlikely to have even middle-quality national accounts.

[14] Sources on U.S. income distribution over time; Alice Hanson Jones; Lampmann; et cetera, et cetera. Footnote on the limitations of our knowledge.

[15] Lindert and Williamson, Three Centuries of American Inequality. History of the Kuznets curve as a concept.

[16] See David Wessel and ???, ???? (forthcoming).

[17] Japan plays the U.S. for a sucker by refusing to play by the free-trade rules of the game. This theme starts the very beginning of the chapter, and continues throughout. Time magazine declares "Japan does not follow the gentlemanly rules" on international trade (p. 359); "U.S. officials shoutened and threatened, but... Tokyo's unelected administrators stayed true to course, and why not?" (p. 384); "Clinton stumbled... his administration feared any breakdown of trade talks with Japan--a fear Japanese bureaucrats fully exploited" (p. 392); "Hashimoto succeeded in getting an agreement in which Japan gave little away... as for Clinton's mini-industrial policy... the U.S.... had no comprehensive long-term goals or sense of priorities" (p. 393).

[18] The seriousness of the clash between Japan and the U.S. is always increasing. At the start of the chapter the U.S. and Japan head for "a series of clashes that marked the 1971-74 era as a turning point in the partnership" (p. 359); then the traumas of the oil crisis and Watergate "sharpened the American-Japanese conflict" (p. 361); the "U.S.-Japan relationship... [already] souring in 1971 grew even more bitter (p. 361); "intensifying U.S.-Japan clashes seemed predictable" (p. 363); "[Even though the] U.S. ambassador to Japan... emphasize[d] that 'the U.S.-Japanese relationship is the most important bilateral relationship in the world... [and] one million Japanese tourists arrived annually... because of the language barrier and group traveling, few new bridges resulted to link the two cultures" (p. 363); "Carter's confusion quickly afflicted U.S.-Japan relations.... [The U.S.] troops remained [in Korea]. But doubts had been sown" (p. 364); "the 1980s opened and closed with crises in U.S.-Japan relations" (p. 370); "the relationship showed signs of improving... {Prime Minister] Nakosone "quickly moved to a 'Ron-Yasu' relationship with Reagan... [however] technology... mostly moved one-way: westward" (pp. 371-3); by "1987 [Japan's] foreign minister... lamented that the U.S.-Japan trade relationship 'is at its worst since the war'" (p. 380); "Japan's coming to terms with its new international role did not mean it was coming to terms with the United States. The clash with the Americans instead intensified" (p. 389); "did the post-1945 U.S.-Japan relationship already exist on a life-support system?" (p. 395).

[19] The American government is incompetent, while the Japanese government is very, very competent. In America the response to the oil crisis was "badly managed" (p. 361); in Japan although policies to deal with the oil crisis "seemed quite out of step with some western views... the 'mix' produced a continuing [economic] 'miracle'" (pp. 362-3); "a fragmented U.S. political system could not pull itself together" (p. 379); "the problem was not quantitative trade figures, but qualitative policies: the keiretsu and the bureaucracy had created a very different system from the American" (p. 373); Tokyo's "administrators' long-term policies... seemed to be putting Japan into an excellent position for competition in the twenty-first century" (p. 384); "Japan.. had created one of the most powerful, well-financed lobbies in Washington [but]... a pro-American lobby had no chance of operating successfully in Tokyo" (p. 394).

[20] The U.S. "loses" foreign market after market to ferocious Japanese competitors. "Japanese banks and their keiretsu (networks) in big industry were mounting an all-out assault on Southeast Asian and Chinese markets" (p. 365); "the Japanese moved to control the burgeoning Southeast Asian and Chinese markets" (p. 366); "the concentrated firepower of the keidenren's banking-industrial complex made Japan (to use Orwell's phrase) more than equal [in the race for the China market]" (p. 368); Japan was "quietly replacing the U.S. as the key partner in the development of East Asia" (p. 390).

[21] Domestic industry after industry falls to the tide of Japanese imports--which devastate the American economy. "Carter trumpeted a three-year plan to save Detroit's auto industry... but... Chrysler nearly went bankrupt... the entire U.S. auto industry stumbled through the 1980s while Japanese models controlled 30 percetn of the America market" (p. 366); "when Japan seemed to be falling behind in the semiconductor industry, pivotal in the onrushing computerization of the globe, the government ensured tax breaks and subsidies for a Research Association.... [which] pooled research efforts between 1976 and 1979 to develop patents that brought Japan up with the U.S. computer industry, [meanwhile] Americans were meanwhile left knocking on Japan's door, their technology either coopted or excluded" (p. 365); "North Americans... were to provide raw materials for Japan's machines.... the 'question is whether we want to become a banana republic' a California electronics manufacturer declared in 1978" (p. 369); "anti-Japanese feelings rose among workers in lumber, fisheries, and electronics" (p. 369); "the American economy was devastated by a deadly inflation and 18 percent interest rates" (p. 371); "most of the U.S. research went into the military (50.8 percent compared with 4.9 percent in Japan) [while] the Japanese put 60 percent into industry, agriculture, energy, and infrastructure" (p. 374); the U.S. "pressured Japan to slash its exports... in cotton textiles, steel, televisions, automobiles, semiconductors, and machine tools" (p. 374); "the U.S. economy stagnated... millions of Americans found their jobs endangered by reduced defense budgets--and rising tides of Japanese products" (p. 381);

[22] America's economic decline is clearly visible in the rising trade deficit. In the 1980s, America's "trade deficit with Japan soared toward $50 billion" (p. 371); American and Japanese "economic systems were moving not toward cooperation but full-throated competition" (p. 373); "the strong dollar drove up the prices of U.S. exports, thus creating a historic trade deficit... [and leading] Tokyo and Washington... [to] search for a quick fix.... [But] accepted economic theory seemed irrelevant to the realities of Japanese trade policies... Despite the Plaza agreement [to lower the value of the dollar], U.S. exports to Japanese markets rose only 5.5 percent, but Japan's exports to Americans jumped 21 percent... Reagan and Baker had been blindsided by Japan" (pp. 375-6);

[23] When the Japanese cannot conquer by trade, they conquer by purchase. "Japanese firms had invested $25 billion in the United States, one-third of it in the West where they exploited forests and fisheries for exports back to Japan" (p.369); "the Japanese found themselves in a win-win situation... as the yen ballooned in value, Japanese investors gobbled up prize manufacturing and real estate assets at seemingly bargain-basement prices" (p. 367); "a most awesome display of Japan's power occurred in October 1987... [the 1987] 'crash... started and stopped in Tokyo'" (p. 378); "Japanese invested an incredible $650 billion abroad, with nearly half going to the United States... Tokyo investors bought such jewels as... Rockefeller Center... leading Hollywood studios... Pebble Beach, perhaps the nation's most beautiful golf course" (p. 378); "of the world's ten biggest banks, nine--perhaps ten--were Japanese (p. 378);


Comment on this page...

Do you have a perspective to offer? Please contribute it. If the web does change the world, it will do so only by increasing the bandwidth of communication--by automatically combining the intelligent thoughts of many people. Eric Raymond has claimed that as far as writing software is concerned, "with enough eyeballs, all bugs are shallow." It may be true for the rest of human endeavor as well...

A good point. A very good point. China and, in the past decade, India. Shows the dangers of being a macroeconomist thinking of countries as data points.

There seems to be no doubt that the world Gini coefficient has fallen in the past quarter century for the first time since the start of the industrial revolution...

Sincerely yours,

Brad DeLong

Contributed by Brad DeLong <> on January 24, 2001.

Brad -

While looking up recent references (on the Web) to "economic growth" and
"inequality", I came across your fascinating and entertaining article on
the "clash" between the U.S. and Japan. Needless to say, I agree with
your critique of that hypothesis, but I found much else to enjoy in your

However, I'm not sure about your assertion that world economic
inequality is growing. When I looked into this question about five
years ago using the Summers-Heston data, it looked to me as though the
direction of world inequality depended crucially on how one treats
China. Since 1980, per capita income in China has grown with
exceptional speed. China was a very poor country in 1960 and 1980. It
also contains more people than sub-Saharan Africa & Haiti, the parts of
the world that have progressed miserably since 1980 (to which we should
now add the USSR since 1990). At any rate, rapid growth in China (and
moderate growth in India) makes it doubtful that incomes of people in
the lower half of the world income distribution have fallen relative to
those of the folks in the top half.

I wouldn't quarrel with the claim that incomes in the bottom one-fifth
have fallen relative to those in the top one-fifth, but the relative
income improvements of people in the second fifth might offsett the
losses of the bottom one-fifth using some inequality measures.

Just before reaching your article, I came across this piece by T. Paul
Schultz who reached a conclusion similar to mine (but evidently devoting
a lot more care to his analysis!). You can find a summary of his work

I think his study has subsequently been published.

Anyway, your piece was splendid.

Best wishes,

Gary Burtless

P.S., Here is Schultz's abstract:

The variance in the logarithms of per capita GDP in
purchasing-power-parity prices increased prices increased in the world
from 1960 to 1968 and decreased since
the mid 1970s. In the later period the convergence in intercountry
more than offset any increase in within country inequality.
two-thirds of this measure of world inequality is intercountry,
interhousehold within country inequality, and one-twentieth between
differences in education. If China is excluded from the world sample,
the decline in world inequality after 1975 is not evident. Measuring
confidently trends in household and gender inequality will require much
improved data.

Contributed by Gary Burtless <> on January 4, 2001.

Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax


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