Five—
Mirrors and Metaphors:
The United States and Its Trade Rivals

Fred Block

The Decline of American Competitiveness

In the winter of 1990, the Chrysler Corporation ran a television commercial that featured its chairman, Lee Iacocca, complaining about an American inferiority complex toward the Japanese. He was referring to the perception that Japanese manufactured goods, including automobiles, were generally of higher quality than those made in the United States. This unusual advertising strategy was symptomatic of a radical reversal that occurred over less than forty years. In the 1950s, the label "Made in Japan" was an object of derision; it was synonymous with cheap goods of poor quality. By the 1980s, Japan had established itself as the world's most successful exporter of highly sophisticated manufactured goods.

While Japan's shift is the most dramatic instance, it is symptomatic of a broader transformation of the United States' position in international trade. Immediately after World War II, the United States was the only industrialized country whose manufacturing base had actually been strengthened during the war. U.S. industrial capacity had expanded significantly, while the economies of England, France, Germany, and Japan were all severely damaged. The enormous international appetite for U.S. manufactured goods in the post–World War II years made it possible for the United States to export far more than it imported. The only constraint on this appetite was the difficulty that other nations had in obtaining the dollars with which to purchase U.S. goods. The United States tried to overcome this "dollar gap" through aid programs that were designed to hasten the reconstruction of the economies of Western Europe and Japan. By every possible indicator, the United States dominated the world economy from 1945 through 1965.^[1]

By the end of the 1960s, though, it was apparent that U.S. efforts to bolster the economies of its industrialized trading partners had been too

successful. The U.S. trade position went from surplus to deficit as Western Europe and Japan sold increasing volumes of manufactured goods to the United States (see table 5.1). During the 1970s, however, the inflows were largely of consumer goods; the United States still enjoyed a healthy surplus in the export of capital goods, such as computers, machine tools, and airplanes. But in the 1980s, this last remaining advantage weakened as the U.S. economy was overwhelmed both with high-tech manufactured imports from Japan and Western Europe and low-tech imports from Newly Industrializing Countries such as Taiwan and South Korea.^[2]

These dramatic shifts in the U.S. trade balance are linked to changes in national self-confidence. The trade surplus after 1945, combined with U.S. military superiority, encouraged talk of the "American Century"—a period of U.S. international dominance comparable to the Pax Britannica of the nineteenth century. However, it was to be a very short century; by the 1980s, the growing trade deficit catapulted Paul Kennedy's The Rise and Fall of the Great Powers onto the national best-seller list. Kennedy argued that the growing U.S. trade deficit meant that the United States was following a long-established pattern of imperial decline.

The United States' competitive decline has become a central issue in the country's politics. Debate focuses on the question of what can be done to improve our international trade position. The AFL-CIO and some of its allies in the Democratic party have consistently argued that the major problem is the unfair trading practices of some of our competitors, but this has been a minority position. Thus far, no clear majority position has emerged, but politicians in both parties increasingly argue that their pet proposals—from cuts in the capital gains tax to educational reform—are necessary to solve the trade problem.

Since 1980, it has been increasingly common for domestic commentators to compare the United States with its leading trade rivals to gain

perspective on what should be done. This use of other countries as a kind of mirror—to better assess one's own society—has been a common practice in the history of other countries. Russian history, for example, has been marked by episodes in which invidious comparisons with foreign nations have been used to stimulate domestic reform. The Gorbachev era is only the most recent example. Yet this type of comparative national introspection has been rare in modern U.S. history; for most of this century, national confidence has been so great that the only comparative question was why other nations had been so slow to adopt American institutions and practices.

But faced with trade deficits and a perception of competitive decline, U.S. analysts have increasingly looked to Japan and West Germany for insight into what is wrong in the United States. The intention, of course, is to spark national renewal by recognizing and eliminating those national characteristics that are holding the United States back. Unfortunately, the perceptions from these comparisons that have entered the public debate have been like the images in fun house mirrors. Some of the features of those societies that are most important in explaining their economic successes have been almost completely ignored, while others of marginal or questionable importance have loomed far too large as explanations for economic success. Most sadly, the comparisons—like distorted reflections—have served to obscure rather than to enlighten; they have made it more difficult for this society to understand how to handle its economic and social problems.

Comparing the United States, Japan, and West Germany

In pursuing comparisons among the United States, Japan, and West Germany, it is important to distinguish between the scholarly literature—books and articles that are very rarely read outside of university settings—and the popular literature of newspapers and magazines read by millions of people. In scholarly literature, there are five important areas of contrast between Japan and West Germany and the United States, but in the popular arena, only one—or possibly two—of these factors are emphasized.

Before beginning the comparison, it is important to emphasize that neither Japan nor West Germany is an unequivocal economic success story. West Germany has gone through the 1980s with unemployment rates higher than those in the United States. Large parts of the Japanese economy, particularly the service sector, remain relatively underdeveloped. And both Japan and West Germany have provided far fewer economic opportunities for women than has the United States. Different economies have succeeded with certain parts of the puzzle of how to or-

ganize an advanced, postindustrial economy, but no single nation has been able to put the whole puzzle together. Hence, the main economic achievement in both Japan and West Germany has been quite specific—to reorganize manufacturing to produce high-quality goods that are particularly attractive in international trade. In a period in which a number of Newly Industrializing Countries have greatly increased their international market share for such simpler manufactured goods as apparel and steel, Japan and West Germany have run large surpluses in manufacturing trade by specializing in more complex goods, such as automobiles, machine tools, and consumer electronics.

Also, the West German and Japanese economies are very different from each other in their specific institutional arrangements. It is not a simple matter to create a single composite "successful competitor country" out of these quite different national experiences. Nevertheless, there are a number of dimensions on which these two countries are both similar to each other and different from the United States that might account for the variation in the three countries' recent experiences with sophisticated manufacturing. On some of these dimensions, the specific institutional arrangements through which a given set of ends are achieved might be quite different, but the ultimate outcome appears similar. All of these dimensions have been discussed in the scholarly literature, but only a few of them have played a part in more popular discussions.

Marginality of Military Production

One obvious point of comparison between West Germany and Japan is that both were defeated in World War II. As a consequence of that defeat, both nations were constrained to limit their military expenditures. The result has been that defense spending and military production have played far more marginal roles in their economies than in that of the United States.^[3] This has contributed substantially to Japan's and West Germany's successes in civilian manufacturing.^[4]

In the United States, a large percentage of scientists and engineers have been employed in defense and defense-related industries.^[5] Moreover, the proportion of "the best and the brightest" from these technical fields who end up working in the military rather than the civilian side of the economy is even greater. Firms doing military research and development are able to pass their costs along to the government, so they are able to pay higher wages than civilian firms. Also, the needs of the arms industry have profoundly shaped engineering education in the United States, so that the definition of what is exciting and interesting work has been shaped by military demands. The consequence is that the use of scientific and engineering talent in civilian manufacturing in America has been far more limited and far less effective than in Japan and West Germany.

The different use of technical labor is only part of a larger contrast. High levels of U.S. defense spending have fostered a business style that is particularly unsuited to success in highly competitive civilian markets. It is a style that involves mastery of the bureaucratic complexities of the procurement process, in which cost of production considerations are relatively unimportant, and where there are few rewards for high levels of flexibility in the production process. This style contrasts sharply with the sensitivity to consumer preferences, the sustained effort to reduce production costs, and the emphasis on flexibility that are characteristic of the firms that have been most successful in competitive civilian industries.^[6]

Cooperative Work Arrangements

In both Japan and West Germany, a relatively high level of trust exists between employees and managers in manufacturing. While there are significant differences in the industrial relations patterns of the two countries, with West German unions being far stronger than unions in Japan, both countries have been able to mobilize high levels of employee motivation and initiative. In particular, both countries have evolved practices that protect core employees from displacement as a result of technological change. The consequence has been greater employee receptivity to technological innovation and, thus, quicker and more effective utilization of new productive technologies.^[7]

Similar practices have evolved in some of the most important U.S. firms in the computer and electronic industries where no-layoff policies and commitments to retraining have created an openness to continual technological innovation.^[8] However, the industrial relations in most U.S. manufacturing firms continue to be characterized by low trust and continued worker fears of displacement resulting from technological innovation. While many Fortune 500 firms have experimented with quality-of-work-life and employee involvement programs in the hope of emulating foreign competitors' high-trust manufacturing environments, the results have been uneven.^[9] In many cases, U.S. firms have been unable or unwilling to provide the increased employee job security that is an indispensable part of a more cooperative system of industrial relations.

Supportive Financial Institutions

In both Japan and West Germany, banks have historically played a central role in providing finance for manufacturing firms; the sale of corporate stock to nonbank purchasers—the chief mechanism by which firms raise money in the United States—has played a distinctly secondary role. This greater role of banks in the manufacturing sector has several positive consequences. First, banks tend to have a longer-term time horizon than stock markets. When bankers invest heavily in a firm, the advice

that they give and the pressures they exert tend to be oriented to the long term. In contrast, corporate stock prices are heavily influenced by quarterly earnings reports, and concern about the stock price forces firms to emphasize profits in the next quarter over longer-term considerations. At the extreme, the emphasis on next quarter's bottom line can lead firms to sacrifice spending for preventive maintenance, research and development, and good employee relations—all factors that play a large role in the firm's long-term prospects.^[10]

Similarly, banks with substantial stakes in manufacturing firms can play an active role in coordinating relations across firms. They can facilitate joint ventures between firms that might have complementary strengths, and they can use their influence to dampen destructive competition in a particular industry. Perhaps, most significantly, neither Japanese nor West German manufacturing has seen anything like the takeover wars that the United States experienced in the 1980s. In those countries, the banks can use their influence to get rid of ineffective management teams without the huge costs that have been incurred in U.S. corporate takeovers.

Social Inclusion

Both West Germany and Japan have dramatically reduced poverty in their societies, although they have accomplished this through different means. In Japan, there has been a very strong political commitment to maintaining high levels of employment, so there are relatively few adult males who are marginal to the economy. Full employment combined with a reasonable minimum wage and a low divorce rate has made it possible to pull most people above the poverty level with comparatively low levels of social welfare spending. In West Germany, where unemployment has been relatively high, the elimination of poverty has required—in addition to a high minimum wage—fairly extensive state welfare spending in support of the unemployed and single-parent families. The results are that in West Germany only 4.9 percent of children live in poverty; in Japan, 8.1 percent of children aged ten to fourteen live in poverty; while in the United States, the comparable figure is 22.4 percent.^[11]

The contrast between a large population of poor children in the United States and much smaller populations in Japan and West Germany has direct implications for education. The reduction of poverty goes along with substantially higher levels of educational achievement by young people. There is considerable evidence that the average high school graduate in Japan has substantially higher levels of mathematics and science skills than the average American high school graduate, but the most striking contrast is in the percentage of students who complete high school.^[12] In the United States only 71.5 percent of students

graduate in contrast to 88 percent in Japan.^[13] In West Germany, rates of high school completion are lower, but most of those who leave school at age sixteen enter highly structured three-year apprenticeship programs that combine on-the-job training with formal learning.^[14]

The proportion of eighteen-year-olds in the United States who are unqualified for skilled employment is probably as high as 40 percent if one includes both dropouts and students who graduate from high school with only minimal skills. This puts U.S. firms at a distinct disadvantage compared to Japanese and West German firms, who have a much deeper pool of young people who can easily be trained for skilled employment. In some sectors of the economy, the United States can partially make up for this disadvantage by making greater use of female employees than do Japan and West Germany, but this compensating mechanism does not work for skilled manufacturing jobs, where women still only make up about 6 percent of the labor force. Hence policies of social inclusion that result in the general reduction of poverty contribute to Japanese and West German industrial competitiveness by raising the level of educational attainment of the bottom half of the population. This advantage over the United States in the quality of the human input into the production process makes it easier for Japan and West Germany to develop more cooperative employment relations and to place more emphasis on the improvements in worker skill that facilitate the use of advanced production technologies.

Higher Rates of Personal Savings

It is widely believed that in Japan and West Germany households save a much higher proportion of their income than do those in the United States. Official data show that Japanese and West German household savings rates were at least twice as high as those for the United States in the 1980s.^[15] This greater frugality means that there is a relatively larger pool of savings available for productive investment by firms at a lower interest rate. The lower interest rate means that firms can justify productive investments that could not be pursued if the cost of capital were higher.^[16]

It follows, in turn, that Japan and West Germany use this savings advantage to invest more heavily in manufacturing, with the consequence that their manufacturing productivity has grown substantially faster than that of the United States. The faster rate of productivity growth makes it possible for them to control costs and compete successfully against the United States in manufacturing markets.

Of these five possible explanations for Japanese and West German economic success, it is clear that the fifth explanation—the difference in household savings rates—has completely overshadowed all of the others

in popular discussions. By 1989 concern about the low rate of personal savings in the United States had become such a national preoccupation that both major political parties advanced proposals designed to stimulate higher rates of savings. The popular press was filled with laments about the decline of personal savings. Peter Peterson, a former secretary of commerce, wrote a typical column in the New York Times (July 16, 1989), in which he reminisced lovingly about the frugality of his immigrant parents before he made this argument:

Up until about two decades ago, Americans would have considered it unthinkable that they could not save enough as a nation to afford a better future for their children, and that each generation would not "do better" and that the resources we invest into the beginning of life might be dwarfed by the resources we consume at the end of life. Yet, today the unthinkable is happening.

Our net national savings rate is now the lowest in the industrial world, forcing us to borrow abroad massively just to keep our economy functioning.

Later in this chapter I will show how Peterson's argument is based on problematic data and mistaken assumptions about how the economy works. The point to be emphasized here, however, is that of all of the important institutional contrasts between the United States and its major competitors, the difference in the savings rates of households has received disproportionate attention.

Some of the other contrasts have also been part of broader public discussions, but in each case, one element has been emphasized in a very telling fashion. For example, there has been considerable public concern about the shortcomings of U.S. public education, and a number of prominent corporate executives have argued that the failings of our schools have put them at a disadvantage relative to our major international competitors. George Bush promised to be the "Education President" precisely to address these problems. However, the problem of education in the United States is almost never related to the larger issue of social inclusion; it is rarely argued that the best way to improve our schools is to eliminate poverty. On the contrary, discussions of school failure tend to emphasize the personal shortcomings of those who drop out. This constant emphasis on individual characteristics helps give plausibility to the otherwise implausible arguments of those educational reformers who want to "get back to basics" and place renewed emphasis on discipline.

There has also been some broader discussion of the more cooperative employment relations that Japan and West Germany enjoy. Here again, the discussion moves quickly away from the specific institutional arrangements, such as strong unions or employment guarantees, that undergird

that cooperation. Instead, the focus shifts to the cultural values of individual workers. Japanese and West German workers are seen as embodying the values of the work ethic: they are disciplined and they take pride in their work, and they contrast sharply with American workers, who are depicted as selfish, lazy, or both.

In short, in the mirror that the United States has held up to itself, only differences in the characteristics of individuals are revealed; the Japanese and West Germans are seen to do better because they are more frugal, more hardworking, and their children are more disciplined. Differences in institutional arrangements disappear from view completely. This kind of selective reflection has important political implications. The focus on individual qualities assures that blame will always be distributed according to Pogo's famous phrase, "We have met the enemy, and he is us." Failures of the U.S. economy thus appear to result from the personal failings of ordinary Americans, above all the failure to save.

Economics and Metaphor

Why is it that in public debate and discussion about declining U.S. competitiveness, comparisons of the United States to its trading partners have focused almost exclusively on differences in personal savings practices? The other institutional contrasts certainly raise all kinds of interesting questions about what the United States is doing wrong as a nation and how it could do better, but these issues are never explored. In my view, the explanation for this strange selectivity lies in the importance of metaphors in economic thinking.

While economists make great claims about the scientific nature of their discipline, economic discourse is dominated by metaphors.^[17] From Adam Smith's "invisible hand" to recent discussions of economic "soft landings," economic activity is frequently understood in reference to something else. Even some of the most basic economic concepts, such as the ideas of inflation and deflation, rest on analogies to physical processes.

This is hardly surprising; metaphors are powerful and indispensable tools for understanding complex and abstract processes. Difficulties arise only when we forget that we are thinking metaphorically. A particular metaphor can be taken so much for granted in our intellectual framework that it structures our perception of reality in subtle and hidden ways. Such hidden metaphors can make our theories totally impervious to any kind of disconfirmation. No matter how much evidence a critic might amass, there is simply no way to persuade someone who has organized his or her thinking around one of these taken-for-granted metaphors.

There are three metaphors that loom particularly large in contemporary understandings of the economy in the United States. The first of these is so familiar that it is not worth discussing at length; it is the metaphor of government as spendthrift. The idea is simply that the public sector will invariably use its resources in ways that are inferior to their use by the private sector.^[18] The other two metaphors are more hidden, but they have a profound impact on both the thinking of economists and the more popular economics of journalists and politicians.

Capital as Blood

In one metaphor, the economy is seen as a hospital patient and money for capital investment is likened to the blood that runs through the veins of the endangered individual. When the supply of money capital diminishes, the patient's heartbeat slows and the vital signs deteriorate. But when the patient's supply of blood is replenished by an intravenous transfusion, there is virtually an instantaneous improvement. Not only does the patient look better, but he or she is suddenly able to move about and do things that were previously unthinkable.

This metaphor establishes money capital as the indispensable element for economic health. Nothing else—not the cooperation of labor nor the ways in which economic institutions are structured—can compare in importance to the availability of money capital. Moreover, virtually any economic problem can ultimately be traced back to an insufficient supply of money capital.

For relatively underdeveloped economies, this metaphor holds an indisputable element of truth; such economies suffer a chronic shortage of resources available for productive investment. However, for economies like those of the United States and its major trading partners, the metaphor is deeply misleading. For one thing, the relationship between the dollar amount of new investment and economic outcomes such as the rate of economic growth is unclear. Frequent attempts have been made to prove that lagging rates of U.S. productivity growth were caused by insufficient rates of new investment, but these attempts have failed. Even the White House Conference on Productivity, convened by Ronald Reagan in 1983, was unable to provide unequivocal evidence of inadequate rates of investment in the United States.^[19] The difficulty, of course, is that throwing money at any problem—whether it is lagging productivity or widespread drug abuse—never guarantees success. There are too many other variables that intervene to determine the effectiveness or ineffectiveness of particular expenditures. The picture has become even more clouded recently because computerization has created a pervasive process of capital savings in the economy; a million dollars of capital investment in 1990 bought capital goods that were far more powerful and

effective than what the equivalent dollars would have bought five or ten years before. Capital savings is most obvious with computers themselves; the costs of computing power have been falling by 15 to 20 percent a year. But a parallel albeit slower change is occurring with a whole range of other capital goods. This pattern of capital savings means that each year less money capital is necessary to buy the same amount of new plant and equipment.^[20]

There are also a number of other contenders for the most indispensable element for an advanced economy. First, it is increasingly obvious that even when there is enough money capital, it cannot be taken for granted that it will be used productively or effectively. When financiers and firms engage in "paper entrepreneurialism," they can spend vast sums of money in corporate raids and leveraged buy-outs that do nothing to enhance the society's productive capacity. Unlike the infusion of blood, there is nothing automatic about the effect of money capital on the economy. One could argue instead that institutional arrangements that effectively channel money capital to productive use are the most indispensable element for a modern economy.

Another crucial element is the flow of new ideas that results from research and development. Without the capacity to innovate effectively in both products and production processes, a modern economy will quickly fall behind competitors who are better at anticipating consumer needs or reducing the costs of production. Still another element to consider is the flow of educated employees who are capable of developing and implementing these innovations. This is not just a question of scientists and engineers, since there is mounting evidence that advanced production processes in both manufacturing and services require workers with significant intellectual skills to use computer-based technologies effectively.^[21]

It is, of course, a silly exercise to argue over which is the most indispensable element for a modern economy; one would expect a number of different factors to be extremely important. The point, however, is that the capital-as-blood metaphor is simply wrong in its insistence that one element of economic life can be elevated in importance over all of the others.

Redemption through Sacrifice

The second metaphor, redemption through sacrifice, is Christian rather than medical, but it also rests on the comparison of the economy to an individual. In this case, however, the economy is an individual who has succumbed to temptation. Instead of following the path of righteousness, hard work, and self-discipline, the individual has become either lazy or preoccupied with the pursuit of sensual pleasures. If the individual remains on this path, the future will bring complete moral decay

and probable impoverishment. The alternative is to seek redemption through sacrifice; this means not only rejecting all temptations, but even forgoing some of the innocent pleasures that the person previously enjoyed. Only a sustained period of asceticism will atone for past sin and allow the person to return to the path of righteousness.

Economic maladies such as inflation or deflation are seen as evidence that the economy has veered from the correct path, either as a result of insufficient effort or of excessive emphasis on consumption. The remedy is always a sustained period of austerity—of collective belt-tightening. Austerity simultaneously demonstrates that people have remembered the correct priorities and it frees resources for new investment to make the economy more productive. If sustained for an adequate length of time, the pursuit of austerity is almost guaranteed to restore the strength of the economy, no matter how serious the original transgression.

The two metaphors clearly intersect in that austerity is seen as a means to guarantee that the flow of money capital will once again be swift enough to restore the health of the economic patient. Health in one framework is the same as righteousness in the other. Moreover, it is also important that both metaphors equate the economy to an individual. The classic justification of the free market was that the pursuit of greed by individuals was transformed by the invisible hand into a benevolent outcome. However, the disjunction in that argument between individual and collective morality is troubling for those who see the world in purely individualistic terms. They experience some discomfort with the idea that individual greed should produce a positive outcome. These metaphors eliminate that discomfort by restoring the notion that individual virtue is necessary for the collective good and that collective failures can be traced to individual weaknesses. With these metaphors as guides, the path to a more prosperous economy is seen as being reached by persuading individuals to act virtuously.

In actual economies, however, the relationship between individual orientations and collective outcomes is far more uncertain. Nice guys often finish last, while those who lack all virtue might well live happily and prosperously ever after. Virtuous farmers can work diligently to produce a bumper crop that results in a disastrous fall in prices for their products. Similarly, an abstemious nation can find itself in the midst of severe depression when consumption fails to keep pace with production.

For this reason, austerity is often an imperfect route to economic improvement. The Great Depression of the 1930s was a classic illustration; individuals were promised that a period of belt-tightening would inevitably generate a spontaneous recovery. But what actually happened was that the restricted purchasing power of consumers meant that there was insufficient demand to justify new investments and the economy re-

mained stagnant until the government intervened to bolster demand. More recently, the theorists of supply-side economics promised that if people accepted a period of austerity as income was shifted to the rich, there would be a dramatic economic expansion that would raise everyone's standard of living. While the economy did expand in the Reagan years, the consequences were far more uneven than the supply-siders had promised. The rich prospered on an unprecedented scale, but the promised acceleration of productive investment did not occur, and large sectors of the population found themselves worse off than they had been before. Many of the defects of the expansion can be directly traced to the consequences of austerity, such as the cutbacks in nondefense federal spending and the weakness of consumer demand among households whose incomes are below the median.

Nevertheless, the belief in redemption through sacrifice taps deep cultural themes. Even beyond the obvious parallel with Christian notions of individual salvation, there is a close fit with the cultural anxieties of the middle class. Barbara Ehrenreich has written persuasively of the profound fear of affluence that haunts the American middle class.^[22] Those who have achieved a comfortable existence through their own efforts as doctors, lawyers, or corporate managers cannot usually guarantee their children a comparable existence unless the children enter a middle-class occupation. While the truly wealthy can usually find sinecures for untalented children or even provide for shiftless children through trust funds, those options are not available to the middle class. The danger for the middle class is that children who grow up in economic comfort will lack the drive and discipline to surmount the hurdles that block entry to middle-class occupations for most children of the poor and working classes. Hence, a periodic invocation of the virtues of austerity fits well with the middle class's own efforts to persuade their children of the necessity of self-discipline and hard work.

These two powerful metaphors act as filters through which the United States' perceptions of its major economic competitors have been refracted. While there are many significant differences between the U.S. economy and those of Japan and West Germany, the preoccupation with differences in personal savings can now be understood. The idea that people in the United States do not save enough fits perfectly with both of these hidden metaphors.

The Savings Mythology

Is it really true that people in the United States are far less frugal than people in Japan and West Germany? Discovering the answer requires examining the way in which Commerce Department economists measure

personal savings. The problem is that personal savings is not an item that government statisticians find out directly; there is no question on the IRS form that asks "how much have you put aside this year for savings?" Some of the most important economic measures are derived by asking people; for example, the monthly unemployment figure is based on a survey in which thousands of people are questioned about their work experience in the previous month. However, there is no regular large-scale survey in which people are asked about their savings behavior. The government economists are forced to calculate personal savings indirectly; the frequently cited figures on personal savings are derived by subtracting all consumer purchases from the total disposable income that individuals have. In short, personal savings is simply what is left over from income after individuals have paid taxes and purchased all of their consumption items. Here are the formulas:

1. Personal income – Taxes = Disposable personal income

2. Disposable personal income – Personal consumption expenditures = Personal savings

3. Personal savings rate = Personal savings divided by Disposable personal income

This makes sense because individuals can only save income that they have not spent on other items. However, the accuracy of the personal savings figure rests entirely on the accuracy of the estimates of personal income and personal consumption expenditures. But there are three problems here. First, since the personal savings figure is derived by subtracting one very large number from another very large number, it is extremely sensitive to small changes in those large numbers. For example, if the personal income figure for 1987 were 5 percent higher than the official data indicated, the personal savings figure would increase by 54 percent. Second, there are items where data are highly problematic. In calculating personal income, for example, the government economists make use of a fairly solid source—reports by firms of how much they have paid their employees. But this has to be supplemented with data on the income of self-employed individuals, which is based on their own self-reports to the Internal Revenue Service. Such reports are obviously problematic because individuals have an interest in understating their income to save on taxes.^[23]

The third problem is that these estimates of personal income and personal consumption expenditures are made within an elaborate accounting framework that was structured to provide a coherent picture of the economy as a whole. This accounting framework involves a series of detailed decisions about how certain kinds of income flows or expenditures

will be handled, and quite often, these decisions are not made to improve the accuracy of the personal savings figure but for the sake of consistency or to improve some other part of the accounts. However, these detailed accounting conventions can have a very significant impact on the estimates of personal income and personal consumption expenditures and indirectly on personal savings.

One of these accounting conventions concerns the treatment of public pension funds. There are public pension funds that work in exactly the same way as private pension funds. Both employers and employees put money aside in a trust fund whose earnings are used to pay pension benefits. However, in the national income accounts, it is assumed that all public pension funds pay benefits directly out of state revenues. One recent study showed that when funded public pension funds are treated in the same way as private pension funds, the personal savings figure for 1985 increased by 37.3 percent.^[24]

Another convention that is important concerns the treatment of owner-occupied housing. In figuring out personal consumption expenditures, government statisticians use a strange procedure. They treat people who own their own housing as though they are renters paying rent to themselves. Hence, one of the largest items in personal consumption expenditure is the estimate of the total amount of rent that owner-occupiers pay. While this procedure makes sense for other parts of the accounts, it wreaks havoc on the personal savings figure since the estimate of owner-occupied rent might be quite different from the actual current expenditures that home owners incur. In fact, one consequence of this convention is that the personal savings figure largely excludes one of the main forms of household savings in the United States—the accumulation of equity in homes.

These detailed conventions are particularly important in international comparisons of savings rates. While the basic accounting framework used in Japan and West Germany is quite similar to the American system, there are numerous differences in the detailed conventions and the way that specific estimates are constructed. For example, one recent study of the Japanese savings rate noted differences in the ways capital transfers and depreciation are treated in the two countries. When adjustments are made for these differences for 1984, the Japanese savings rate declines from 16.2 percent to 13.7 percent.^[25]

Another important part of the discrepancy between Japanese and U.S. savings rates is related not to accounting conventions, but to geography. The high population density in Japan makes land extremely valuable in that country; in 1987, land constituted two-thirds of all Japanese wealth, but only 25 percent of U.S. wealth.^[26] This means that the acquisition of land is a much larger component of total personal savings in

Japan than in the United States. However, the money that is being put aside for acquiring land for owner-occupied homes is not money that is available for investment by the business sector.^[27] Hence, a significant part of the discrepancy between U.S. and Japanese savings rates is irrelevant to the question of international competitiveness.

In short, it is necessary to be extremely skeptical of cross-national comparisons of savings rates because the accounting conventions and the economic institutions differ. Moreover, the differences in institutions can magnify the importance of relatively minor differences in accounting conventions. Instead of pursuing these international comparisons of savings rates further, it is more useful to look at another data source that provides information on personal savings in the United States. The statistical offices of the Federal Reserve Board have developed a number of measures of savings as part of their effort to develop a comprehensive accounting of financial flows in the economy. This data source includes estimates of the annual changes in holdings of financial assets and liabilities (debts) of households. These estimates are based in part on very solid data, such as official reports by pension funds and insurance companies of their holdings, and some less solid data that depend on the indirect calculations of the holdings of households. (See figure 5.1.)

According to the Federal Reserve data, personal savings was quite strong in the United States in the 1980s, and the savings rate actually increased. Since the mid-1970s, the two different government series on personal savings have moved in the opposite direction. While the Commerce Department's figures have slid down, the Federal Reserve figures have gone up. Commerce Department analysts have argued that their data are more accurate because the Federal Reserve figures have been thrown off by unrecorded flows of foreign capital into the United States. However, the Federal Reserve figures are actually more reliable because they are based on an analysis of actual financial flows rather than the indirect methodology of the Commerce Department.

The Federal Reserve data include the annual increase in the assets of pension funds and life insurance reserves. This is a figure that is reported directly and involves a minimum of guesswork. It also represents a form of personal savings that is extremely important because it is directly available for productive investment in other parts of the economy. In 1988, the increase in pension fund and insurance reserves (exclusive of capital gains) was $224.4 billion. This is an enormous sum; it was 50 percent higher than the Commerce Department estimate of all personal savings—$144.7 billion. It was also enough to finance by itself 94.8 percent of all net private domestic investment—in capital goods, plants, and housing—in that year. Of course, increases in pension and insurance re-

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5.1
Measures of Personal Savings.
SOURCES:  Economic Report of the President  (Washington, D.C.: U.S.
Government Printing Office, 1990), table C-29, 327. The Alternative Personal
Savings is calculated from the table "Savings by Individuals." Net increases
in debt, exclusive of mortgage debt, are subtracted from increases in
financial assets. Some additional adjustments are made for 1986–90 to
compensate for the substitution of home equity loans for other forms of
consumer credit. For a fuller description of data and methods, see Fred Block,
"Bad Data Drive Out Good: The Decline of Personal Savings Reexamined,"
Journal of Post   Keynesian Economics , 13 (1) (Fall 1990): 3–19.

serves do not exhaust the supply of personal savings; there are also substantial accumulations of assets in bank accounts, stocks, and bonds.

The Federal Reserve data also make intuitive sense. It is well known that rich people are responsible for the bulk of household savings because they have far more discretionary income than everybody else. It is also known that the Reagan administration's policies significantly increased the percentage of income going to the richest families. For the Commerce Department figures to be true, the rich would have had to consume their increased income on a scale even more lavish than Leona Helmsley's home remodeling and the late Malcolm Forbes's famous Moroccan birthday party.^[28]

Furthermore, personal savings as measured with the Federal Reserve data exceeded net private investment in the economy in every year of the 1980s, sometimes by more than $100 billion. When one adds undistributed corporate profits that are also available to finance invest-

ment, the surfeit is even greater. Michael Milken—the convicted junk bond king—was fond of saying, "The common perception is that capital is scarce . . . but in fact capital is abundant; it is vision that is scarce."^[29] An examination of the data on personal savings indicates that Milken is correct; the United States does not suffer from a chronic inability to save.

Finally, it is important to emphasize that all of this preoccupation with personal frugality ignores the single most important way in which individuals contribute to economic prosperity—through what can be called "productive consumption."^[30] When individuals or the society spends to educate young people or to retrain or deepen the skills of adults, that is productive consumption because it enhances the capacity of people to produce efficiently. Similarly, spending to rehabilitate drug addicts or to improve the physical and mental health of the population is also productive consumption. It is now widely recognized that the development of the capacities of the labor force is an extremely important determinant of a society's wealth.

Yet all of the standard calculations of savings ignore spending on productive consumption. The results are bizarre; a family that deprives its child of a college education in order to put more money in the stock market is seen as contributing to national savings, while the family that does the opposite could appear recklessly spendthrift. This backwards logic makes it harder to identify types of spending and social policies—such as the policies of social inclusion in Japan and West Germany—that could have an important impact on U.S. competitiveness in manufacturing.

Conclusion

The metaphors of "capital as blood" and "redemption through sacrifice" have dominated economic thinking in the United States. The international trade successes of Japan and West Germany have been refracted through these metaphors with the result that people in the United States have learned nothing from the comparisons. On the contrary, the comparisons combined with problematic data have served only to reinforce traditional—but now largely irrelevant—concerns with the quantity of available capital for investment. In the process, institutional issues have been totally forgotten, so that few serious reform proposals have emerged.

And yet, if we return to the neglected institutional dimensions on which Japan and West Germany are similar to each other and different from the United States—the marginality of military production, cooperative work arrangements, supportive financial institutions, and social inclusion—we already have the main elements of a serious program

of national economic renewal. Moreover, the passing of the Cold War creates a unique historical opportunity for such a program, since for the first time in forty years a significant reduction in defense spending and a shift of resources to civilian purposes are imaginable.

But this is not the place to flesh out such a program of reform.^[31] The point is rather that comparisons with other countries can be the source of real insight into the weaknesses of our own institutions, provided that people are not blinded by obsolete and irrelevant metaphors. As I write this, it is far too early to tell whether the United States will have its own experience of perestroika —the restructuring of economic institutions—in the 1990s. However, several points seem clear. Without an American perestroika , the U.S. economy will continue to weaken and our domestic social problems will only deepen. Furthermore, the most important precondition for a period of domestic reform is what Gorbachev has termed "new thinking"—a willingness to discard outdated metaphors and ideological preconceptions and to examine the world as it actually is.