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Business/Economics 1989-1990 [OA 8750]
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Mark Davis Subject Files
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This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
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Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Speechwriting, White House Office of
Series:
Davis, Mark, Files
Subseries:
Subject File, 1989-1991
OA/ID Number:
13869
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13869-001
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Business/Economics, 1989-1990
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19
2
6
2
SHIFTING GEARS: The Bureau of Labor
Statistics expects more auto owners to take
their vehicles to dealers for repairs because
CLERICAL WORKERS face a darker fu-
neighborhood repair shops can't attract
ture; they're supplanted by machines.
enough mechanics with the high-tech train-
ing needed for today's computerized cars.
Typewriters and file cabinets increas-
ingly are being replaced by computers that
UNIONS COMPLAIN that building
URNAL
can communicate
owners try to trim costs by bringing in out-
with other computers,
THE
side contractors to handle janitorial serv-
eliminating the inter-
vening jobs held by
SERVICE
ices. The switch leaves workers without job
stability and benefits, the unions assert.
several workers. In
all, some 19 million.
INDUSTRY
3/28/89
RETAIL WORKERS in small companies
p.Al
staffers, many of
them women, are in
A SPECIAL REPORT
change jobs more frequently than those in
large firms, often because they are part-
jobs threatened by office automation, the
WHITE OAK, MARYLAND
timers or feel a weaker need to work, says
National Commission on Employment Pol-
a White House small business report.
icy figures. Billing, filing and account main-
tenance are among jobs at risk.
THEY'RE SMARTER. Half of all service
Labor Letter
Capital Holding Corp., an insurance com-
employees have some college education,
pany, reduced its data-entry department
compared with fewer than 40% of manufac-
75% after introducing a computerized sys-
turing employees, the Census Bureau finds.
A Special News Report on People
tem to record and transmit claim informa-
In business services and medical services,
And Their Jobs in Offices,
tion. The Santa Fe Railroad expects its 200-
75% have at least a high school diploma;
person data-entry department in Topeka,
nearly 60% have some college years.
Fields and Factories
Kan., to be cut as much as 10% a year over
the next several years. Some clerical jobs
SERVICE WORKERS, too, bolster ex-
go overseas. "Satellite communication
ports with their wares.
DEMAND GROWS for managers and
makes it possible to do data processing off-
A Chicago lawyer advising a client in
specialists at service companies.
shore with just a 24-hour turnaround," says
France helps the U.S. trade balance in the
The problem: filling the jobs. "There's a
9 to 5, the working women's group.
same way as a company across town that
shortage of qualified people," contends Alan
sells a pharmaceutical to Brazil. So does the
Schonberg, president of Management Re-
JOB HAZARDS are a mounting threat
consulting engineer called in by a manufac-
cruiters International; "we end up taking
to service workers.
turer whose product eventually finds its way
people out of Company A and putting them
Workplace injuries and dangers-once
overseas. As does the Broadway actor
in Company B." Hot areas are health care,
considered the worry of only construction
whose performance draws foreign tourists.
data processing and financial services, ex-
sites and factories-spread to offices and
Case Western Reserve's Center for Regional
cept securities dealers.
stores. Wrist injuries triggered by repeated
Economic Issues estimates receipts from
Among retailers, one-third of the mer-
motions, the so-called carpal tunnel syn-
such service exports almost tripled over the
chants surveyed by Management Recruiters
drome, plague telephone and computer oper-
past decade, to $90.1 billion.
plans to add supervisors; only 6% will cut
ators. Supermarket checkout clerks using
Airlines, stock brokers, hotels and mo-
back. Regional banker National City Corp.
price scanners also fall prey; Kroger Co.
tion-picture producers are the top service-in-
will hire 125 professionals this year. Ann
tries to make its system easier on cashiers
dustry exporters. But the impact varies
Barry of consultant Handy Associates sees
after a complaint from the Occupational
from city to city. For hotel workers in New
demand from a wide variety of service com-
Safety and Health Administration about a
Haven, Conn., foreign guests represent less
panies for "anyone who can make one ma-
Dayton store.
than 1% of business. In Las Vegas, they ac-
chine talk to another."
Back injuries afflict hotel and motel
count for nearly 20% of the trade.
Qualified candidates can insist on top
workers and health-care workers who must
Service firms don't offset lost manu-
dollars and flexible benefits, Ms. Barry
constantly lift mattresses or patients. The
facturing exports but they're "contribut-
declares.
Bureau of Labor Statistics reports that the
ing more," Case Western says.
rate of injuries and illnesses for hotel and
motel workers reached 10.7 per 100 workers.
THE CHECKOFF: To cope with the
For nursing and personal-care home
shortage of nurses, ViewNet Inc. offers hos-
workers, the rate was 14.2. In the private-
pitals an interactive video system that al-
sector overall, the average was 8.3.
lows patients to order meals and sundries
Stress-related illnesses spiral among
without bothering the staff.
Students
at
social workers burdened with problems
Stonestreet Elementary School in Louisville
like child abuse and AIDS.
learn the service trade by running a Citizens
Fidelity Bank & Trust Co. branch in their
school cafeteria.
-CLARE ANSBERRY
Speechwriters
XX
OFFICE OF THE VICE PRESIDENT
WASHINGTON
February 8, 1990
NOTE TO: DAVE DEMAREST
ROGER PORTER
ANDY CARD
JIM CICCONI
FROM:
BILL KRISTOL WK
Here's a fact sheet on product liability reform that we're
distributing, as well as some draft paragraphs on the subject.
Both provide material that could be included in various
Presidential speeches on the legislative agenda, on
competitiveness, to business audiences, etc.
I think this issue is a good one for us, and we've been working
effectively with the Hill and the business community. The first
hearing in the Senate Commerce committe is February 22, so it
would be useful for the President to mention product liability
reform once or twice before then.
cc: Chriss Winston
OFFICE OF THE VICE PRESIDENT
WASHINGTON
FACT SHEET ON PRODUCT LIABILITY REFORM
"Product liability reform
it's time to act together."
President George Bush
State of the Union Address
January 31, 1990
"A legislative priority for our Administration will be the
reform of our costly product liability laws. The burden of our
present product liability system is excessive and adversely
affects our ability to compete abroad. In fifteen years, product
liability suits have increased over 1,000 percent -- representing
unnecessary litigation and extreme costs to American business and
consumers alike. This is unacceptable, and our Council on
Competitiveness, chaired by Vice President Quayle, has made
product liability reform a top competitiveness priority."
President George Bush
February 6, 1990
"our current product liability system of 50 different State
laws generates excessive litigation, inflates insurance costs,
and creates uncertainties for American businesses. This is a
self-imposed burden on our ability to compete. It also has a
chilling effect on innovation and the development of new
products. Ultimately, the costs of our inefficient product
liability system are borne by American workers and consumers." "
Vice President Dan Quayle
November 30, 1989
An Administration Priority.
Product liability reform is a top legislative priority for the
Administration. It is essential to business innovation, U.S.
international competitiveness, and consumer safety and welfare.
In his State of the Union address President Bush called upon
Congress to enact essential product liability reform
legislation.
On November 30, 1989 Vice President Quayle announced the
Administration's product liability reform initiative
developed by the Council on Competitiveness. The
Administration strongly supports S.1400 -- a bipartisan
reform bill co-sponsored by Senators Danforth, Inouye,
Kasten and Rockefeller and similar legislation in the House
of Representatives, and it will seek additional reform
provisions to strengthen the bill.
The Senate Commerce Sub-committee on the Consumer will hold
hearings on S. 1400 on February 22, 1990.
Restore Basic Principles of Fairness.
The Administration's reform initiative will restore basic
principles of fairness to America's product liability system:
First, protection of an innocent person's legal right to
fair compensation for medical expenses, lost wages, property
damage and other actual losses.
Second, payment for losses based on actual responsibility
for the harm -- fault based liability -- not ability to pay
-- "deep pocket" liability.
Third, cooperation and the prompt and fair settlement of
differences should be encouraged through alternatives to
costly and time consuming litigation, which only reduces the
compensation available to the injured party.
Strengthen U.S. Competitiveness.
Our product liability system --with its excessive litigation costs
-- is a self-inflicted burden on America's ability to compete.
U.S. product liability laws are more onerous than those of other
major industrial countries, such as Japan and European nations.
The estimated cost of product liability suits in the U.S. --
$80 billion per year -- equals the combined profits of the
nation's 200 largest corporations.
Total U.S. liability insurance costs are estimated to be 15
times higher than Japan's and on average 20 times higher than
the European nations'. These costs are reflected in higher
prices for U.S. goods and hamper our ability to compete with
foreign manufacturers.
Enhance Product Innovation.
Equally devastating is the chilling effect of the liability system
on product innovation. The fear of potential law suits deters
businesses, especially small and start-up businesses, from
introducing new and safer products.
O
Many products are no longer being produced for American
consumers -- single-engine aircraft, vaccines against deadly
Japanese encephalitis, and gymnastic equipment are a few
examples.
Many companies decide against introducing new products. For
example, Monsanto will not market an inexpensive, safe
asbestos substitute and Genentech declined to go forward with
a new hepatitis vaccine developed through biotechnology
because of liability risks.
36% of American businessmen in a recent survey stated that
they stopped some manufacturing as a result of product
liability risks. 15% laid off workers and 8% closed plants.
Reform Advances Consumer Welfare and Safety.
Safety and health considerations, the principle rationale -for
continuing the current system, are undermined by the current
product liability regime. Consumers are not always offered new,
safer products (like vaccines and the Monsanto asbestos
substitute). Also, the costs of excessive liability risks are
reflected in higher prices for goods and services.
A 1989 Rand Corporation study reveals that on average only
46% of total expenditures from tort law suits went to
compensate injured parties. Legal fees and expenses consume
on average of 37% of the amount spent -- in some product
liability cases this figure reaches 70% of the total amount.
The cost of DPT vaccines rose from $2.80 per dose to $11.40
per dose to cover liability insurance costs.
O
In a February, 1990 Consumer News article, Bonnie Guiton,
Special Advisor to the President for Consumer Affairs states
"These are among the ways in which America's current product
liability system works against consumers
Done properly,
however, product liability reform can benefit consumers
"
The Administration will work with the bi-partisan sponsors of
S.1400 and with groups from all sectors of the American public to
support U.S. product liability reform that achieves improved U.S.
international competitiveness for businesses and restoration of
basic principles of fairness for consumers.
For more information contact:
David McIntosh 456-2816
####
2/8/90
Suggested Speech Inserts on Product Liability Reform
Reform of our costly product liability laws is a top
legislative priority for our Administration. The burden of our
present product liability system is excessive and adversely
affects our ability to compete abroad. In 15 years, product
liability suits have increased over 1,000 percent -- representing
unnecessary litigation and extreme costs to American business and
consumers alike. This is unacceptable, and our Council on
Competitiveness, chaired by Vice President Quayle, has made
product liability reform a top competitiveness priority.
1
We must restore basic fairness to our product liability
system. A person who is injured by a product should be
compensated for his or her actual losses. Liability should be
based upon whether a person or company is at fault. Individuals
and organizations with "deep pockets" must not be made to pay for
losses that are not their fault.
You don't need a law degree to know that something is very
wrong with a system in which over 50% of the money spent never
gets to the injured person. Rather, it is used up in lawyers'
fees, court costs, and other legal expenses. That's why I
support product liability reform to encourage settlement out of
court through arbitration and alternative dispute resolution.
Ultimately, the American consumer pays for the excessive
cost of our inefficient litigation system. Companies abandon or
severely limit the development and manufacture of important
consumer products because of fear of protracted lawsuits and
unfair judgments. Product liability reform is needed to preserve
the health of Americans who will be worse off when they cannot
obtain -- or cannot afford -- vaccines against hepatitis and
other deadly diseases. Our kids will miss out on sports, if no
one is willing to sell equipment like football helmets and masks.
Mothers will not be able to buy car safety seats for their
children, if all the manufacturers are forced out of business
by skyrocketing insurance premiums. Our office buildings and
schools will not be able to replace asbestos with safer products,
if the fear of lawsuits prevents their introduction into our
economy.
We must act together now. I call for Congress to act
immediately to pass needed, bi-partisan product liability reform
legislation. We must work together to restore justice, preserve
our competitive edge, and promote consumer safety and welfare.
OFFICE OF THE VICE PRESIDENT
WASHINGTON
FACT SHEET ON PRODUCT LIABILITY REFORM
"Product liability reform
it's time to act together."
President George Bush
State of the Union Address
January 31, 1990
"A legislative priority for our Administration will be the
reform of our costly product liability laws. The burden of our
present product liability system is excessive and adversely
affects our ability to compete abroad. In fifteen years, product
liability suits have increased over 1,000 percent -- representing
unnecessary litigation and extreme costs to American business and
consumers alike. This is unacceptable, and our Council on
Competitiveness, chaired by Vice President Quayle, has made
product liability reform a top competitiveness priority."
President George Bush
February 6, 1990
"Our current product liability system of 50 different State
laws generates excessive litigation, inflates insurance costs,
and creates uncertainties for American businesses. This is a
self-imposed burden on our ability to compete. It also has a
chilling effect on innovation and the development of new
products. Ultimately, the costs of our inefficient product
liability system are borne by American workers and consumers."
Vice President Dan Quayle
November 30, 1989
An Administration Priority.
Product liability reform is a top legislative priority for the
Administration. It is essential to business innovation, U.S.
international competitiveness, and consumer safety and welfare.
o
In his State of the Union address President Bush called upon
Congress to enact essential product liability reform
legislation.
On November 30, 1989 Vice President Quayle announced the
Administration's product liability reform initiative
developed by the Council on Competitiveness. The
Administration strongly supports S.1400 -- a bipartisan
reform bill co-sponsored by Senators Danforth, Inouye,
Kasten and Rockefeller and similar legislation in the House
of Representatives, and it will seek additional reform
provisions to strengthen the bill.
The Senate Commerce Sub-committee on the Consumer will hold
hearings on S. 1400 on February 22, 1990.
Restore Basic Principles of Fairness.
The Administration's reform initiative will restore basic
principles of fairness to America's product liability system:
First, protection of an innocent person's legal right to
fair compensation for medical expenses, lost wages, property
damage and other actual losses.
Second, payment for losses based on actual responsibility
for the harm -- fault based liability -- not ability to pay
-- "deep pocket" liability.
Third, cooperation and the prompt and fair settlement of
differences should be encouraged through alternatives to
costly and time consuming litigation, which only reduces the
compensation available to the injured party.
Strengthen U.S. Competitiveness.
Our product liability system --with its excessive litigation costs
-- is a self-inflicted burden on America's ability to compete.
U.S. product liability laws are more onerous than those of other
major industrial countries, such as Japan and European nations.
The estimated cost of product liability suits in the U.S. --
$80 billion per year -- equals the combined profits of the
nation's 200 largest corporations.
Total U.S. liability insurance costs are estimated to be 15
times higher than Japan's and on average 20 times higher than
the European nations'. These costs are reflected in higher
prices for U.S. goods and hamper our ability to compete with
foreign manufacturers.
Enhance Product Innovation.
Equally devastating is the chilling effect of the liability system
on product innovation. The fear of potential law suits deters
businesses, especially small and start-up businesses, from
introducing new and safer products.
O
Many products are no longer being produced for American
consumers -- single-engine aircraft, vaccines against deadly
Japanese encephalitis, and gymnastic equipment are a few
examples.
o
Many companies decide against introducing new products. For
example, Monsanto will not market an inexpensive, safe
asbestos substitute and Genentech declined to go forward with
a new hepatitis vaccine developed through biotechnology
because of liability risks.
O
36% of American businessmen in a recent survey stated that
they stopped some manufacturing as a result of product
liability risks. 15% laid off workers and 8% closed plants.
Reform Advances Consumer Welfare and Safety.
Safety and health considerations, the principle rationale _for
continuing the current system, are undermined by the current
product liability regime. Consumers are not always offered new,
safer products (like vaccines and the Monsanto asbestos
substitute). Also, the costs of excessive liability risks are
reflected in higher prices for goods and services.
o
A 1989 Rand Corporation study reveals that on average only
46% of total expenditures from tort law suits went to
compensate injured parties. Legal fees and expenses consume
on average of 37% of the amount spent -- in some product
liability cases this figure reaches 70% of the total amount.
o
The cost of DPT vaccines rose from $2.80 per dose to $11.40
per dose to cover liability insurance costs.
o
In a February, 1990 Consumer News article, Bonnie Guiton,
Special Advisor to the President for Consumer Affairs states
"These are among the ways in which America's current product
liability system works against consumers
Done properly,
however, product liability reform can benefit consumers
"
The Administration will work with the bi-partisan sponsors of
S.1400 and with groups from all sectors of the American public to
support U.S. product liability reform that achieves improved U.S.
international competitiveness for businesses and restoration of
basic principles of fairness for consumers.
For more information contact:
David McIntosh 456-2816
2/8/90
Suggested Speech Inserts on Product Liability Reform
Reform of our costly product liability laws is a top
legislative priority for our Administration. The burden of our
present product liability system is excessive and adversely
affects our ability to compete abroad. In 15 years, product
liability suits have increased over 1,000 percent -- representing
unnecessary litigation and extreme costs to American business and
consumers alike. This is unacceptable, and our Council on
Competitiveness, chaired by Vice President Quayle, has made
product liability reform a top competitiveness priority.
We must restore basic fairness to our product liability
system. A person who is injured by a product should be
compensated for his or her actual losses. Liability should be
based upon whether a person or company is at fault. Individuals
and organizations with "deep pockets" must not be made to pay for
losses that are not their fault.
You don't need a law degree to know that something is very
wrong with a system in which over 50% of the money spent never
gets to the injured person. Rather, it is used up in lawyers'
fees, court costs, and other legal expenses. That's why I
support product liability reform to encourage settlement out of
court through arbitration and alternative dispute resolution.
Ultimately, the American consumer pays for the excessive
cost of our inefficient litigation system. Companies abandon or
severely limit the development and manufacture of important
consumer products because of fear of protracted lawsuits and
unfair judgments. Product liability reform is needed to preserve
the health of Americans who will be worse off when they cannot
obtain -- or cannot afford -- vaccines against hepatitis and
other deadly diseases. Our kids will miss out on sports, if no
one is willing to sell equipment like football helmets and masks.
Mothers will not be able to buy car safety seats for their
children, if all the manufacturers are forced out of business
by skyrocketing insurance premiums. Our office buildings and
schools will not be able to replace asbestos with safer products,
if the fear of lawsuits prevents their introduction into our
economy.
We must act together now. I call for Congress to act
immediately to pass needed, bi-partisan product liability reform
legislation. We must work together to restore justice, preserve
our competitive edge, and promote consumer safety and welfare.
LANGE
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
March 23, 1989
REMARKS BY THE PRESIDENT
TO THE NATIONAL ASSOCIATION OF MANUFACTURERS
The Mayflower Hotel
Washington, D.C.
1:23 P.M. EST
THE PRESIDENT: Thank you, Dick, and thank all of you.
Thank you very much for that warm welcome. Thank you for that warm
welcome back. And Dick, thank you, sir, for introducing me and for
what you're doing leading the NAM. I want to pay my respects to your
president, former secretary "Sandy" Trowbridge, who continues to do
an outstanding job. Harry Truman used to say "If you want a friend
in Washington, buy a dog." (Laughter and applause.) And I'm here to
disagree with him, because I feel in Dick, your chairman, and in
"Sandy, your president, and in the membership of this illustrious
organization, that our administration has a friend, not only in
Washington, but all across the country. And I am very grateful for
that and I normally would not dare to speak for our new illustrious
Secretary of Commerce, Bob Mosbacher, but in this regard I expect I'm
saying exactly what he feels. And I might say to you, the members of
the NAM, it is a wonderful thing to have him at my side, a successful
businessman, who knows what it means to take risks, knows what it
means to try to keep the costs down and knows what it means to add to
the productivity of this country. And Bob Mosbacher is already doing
a superb job. (Applause.)
After one tough football game, somebody asked Knute
Rockne why Notre Dame had lost. And he answered, "I won't know until
my barber tells me on Monday.' (Laughter.) Well, nobody is
second-guessing American manufacturing anymore. And clearly, you all
are playing a winning game.
And I'm here today to tell you that deindustrialization
that we read about is a myth. And manufacturing, as a share of our
national output, is as strong today as it has ever been. And I think
many people in this room deserve great credit for that. Thanks to
the hard work of you people, who are the brains and the muscle of
America's basic industries, were producing more products with a
smaller percentage of our population than ever before.
And that, my friends, is productivity. And that is why
since 1982, our manufacturing output has gone up twice as fast as
Western Europe and has kept pace with Japan. You're the producers
-- is somebody's heart beating very fast over there or what the heck
is going on? (Laughter and applause.) In the technological age in
which we're living I'm sure we can -- (laughter and applause).
No, but you are the producers who are building a better
America. And I think that your presence demonstrates that you are
fighting to win the international struggle for continued growth.
You've demonstrated that you can make America more competitive and
that you can keep America more competitive.
So I'm not saying you're going to have to do it alone.
There's a role for government. Sometimes political leadership is
needed -- for example, to keep international trade free and fair.
But I will tell you that this government will not confuse involvement
with interference.
And there's a lot of talk about competitiveness going
MORE
- 2 -
competitiveness latest is more than just the latest trade figures, But or the
around these days, and in a way that's a very good thing.
election, for that matter.
quarterly earnings -- or the latest poll or the latest
Surely our success can be measured by better methods
horizon. than these. This is a good time for us to look towards a larger
And we stand at a special moment in our history. We're
prosperous. We are at peace. And at such a point, we've got to set
our sights higher. And we must look farther ahead. It's hard for
us to believe, but the 21st century is only 11 years from now.
Summit." Leadership is certainly found in those like you who keep
And you've called this conference "The New Leadership
building businesses and meeting needs, our nation's manufacturers
the great engines of American industry turning. In creating jobs and
have shown the qualities that will carry us into the future. And
make no mistake, the challenges we face will test your vision and
your capacity to define an agenda for action.
outlining my agenda for the next American Century.
So today, I'd like to address that very point by
To build a better America, one of the most important
priorities for this govenment will be to encourage savings and
long-term investment -- to get our fiscal house in order. And that
means (Applause.) priority, bringing down the federal budget deficit.
And last month, one of the very first things we did was
to submit a budget to Congress with a clear agenda to cut the federal
deficit and enhance business' ability to plan, expand, and build.
And next year, under current law -- there are no changes in the
revenue laws -- the economic growth we are currently enjoying will
increase federal revenues by more than $80 billion without increasing
the tax rates. And our plan will hold the line on spending, using
some of those new revenues to slash the deficit by more than 40
percent -- and meeting those Gramm-Rudman-Hollings targets.
To encourage long-range investment in businesses of all
sizes, it's time that we restored the capital gains differential. By
reducing the capital gains rate to 15 percent on long-held assets.
(Applause.) And this really is a case where less means more. More
revenue to the federal government. The Treasury now estimates that
my proposal would bring in $4.8 billion of new revenues in 1990.
That's the Treasury estimate. And the critics all say and have
climbed on us in saying "This is a tax cut for the rich." I say cut
the capital gains rate and you'll have more jobs for the poor and
others. And more growth and opportunity for the whole country.
Competitiveness, opportunity, saving and investing for the long-term
-- this is why we need a capital gains tax rate cut. And it's why we
need one now. And am going to keep on fighting to see that the
Congress gives the people that which they deserve -- more opportunity
and more jobs.
To spur investment in basic research, we've proposed a
permanent research and experimentaton tax credit. We've also
proposed a 13 percent increase for science and technology programs,
and intend to double the National Science Foundation's budget by 1993
to guarantee that America's technology is number one.
A strong economy needs a safe and secure banking system.
And that's why we proposed a comprehensive plan to solve the
difficulties of our savings and loan industry and I'm delighted that
our very able Secretary of the Treasury, Nick Brady, was over here
this morning talking to you about the broad principles of that plan.
Frankly, the plan has been pretty darn well-received on both sides of
the aisle on Capitol Hill and I've challenged -- in my speech to
the Congress I challenged the Congress to act within 45 days. This
is a matter of considerable national urgency.
We want to ease the pressures now building on the most
MORE
- 3 -
important organization in America, the family -- by promoting choice
on issues like child care. So last week I sent legislation to
Congress that puts money and options in the hands of parents, rather
than in the hands of the bureaucracies. And we are going to keep on
pushing for that concept. I do not want to have my administration
identified with one single initiative that diminishes parental choice
or in any way weakens the family. The government must do what it can
to strengthen family. (Applause.)
I'd say, though, that the most powerful key -- the most
powerful key to long-term competitiveness is education. A
strengthened education system is the essential ingredient for
America's prosperity into the next decade, into the next century.
But no one suggests that education is a minor matter on the national
agenda. It is vital to everything we are and can become. Make no
mistake about it, I understand the historic role of the communities
and of the states, and I understand the limited role that is properly
assigned the federal government. So I don't want you to feel that I
am moving towards centralizing control over our schools in
Washington, D.C.
There are no quick fixes in education. Like most of the
long-term issues on the national agenda, American education won't be
fixed with a bolt of lightning or a puff of smoke. It's going to
take collective effort at all levels, public and private, to get it
right. And those businesses that are involved with local schools --
developing the work force at its source -- are making fail-safe
investments. And they stand to reap the greatest rewards.
I wish Barbara were here to talk to you a little bit
about her interest in literacy and to salute as she does the business
community for its involvement. I think this -- I talk about a
thousand points of light. And if there's ever an example of that, it
is the wide array of business people and business interests that are
out there helping in the field of education. I didn't much like it
when I talked about a thousand points of light and some cynic around
here made some reference, what he really is talking about is a
thousand pints of Light. (Laughter.)
But I do salute you for your outreach. For those workers
that are already on the line, we must build new skills and
flexibility as jobs change, through training and retraining. The NAM
policy position that you adopted last year said that "investment in
human resources is at least as important as investment in equipment
and technology." And you're absolutely right on that one. Machinery
and technology alone don't improve productivity. People do.
Another issue where we plan to play for keeps -- we're
determined and we are going to keep working at this one -- to get the
drugs out of the workplace. (Applause.) Drug and alcohol abuse in
the workplace costs $60 billion every year, putting productivity and
lives at risk.
Drug abuse in America really must stop -- and we're off
to a fast start. Last month I talked to the Congress about four
decisive issues: education, treatment, interdiction, and
enforcement. And I asked for an increase of $1 billion in budget
outlays -- to nearly $6 billion in 1990 -- to escalate this effort.
policies in your businesses.
But we'll also be looking to you to set effective, well-reasoned drug
Employers can teach their people to recognize the signs
of substance abuse in their co-workers -- and understand how drug
abuse hurts the non-users on the line.
I've called for a drug-free workplace. And Tuesday's
Supreme Court decision, one that just came down the day before
yesterday, affirms drug testing. And that's going to give this
concept of a drug-free workplace a much better chance of success.
Any long-term agenda must also ask how we can leave the
Earth we've inherited a little better than when we found it. And I
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understand their they did a first-class job in addressing themselves, with I
was delighted to see Russ Train here, Bill Ruckelshaus here, and
background of experience, to this question.
We've got to devise answers to the problems of
with other nations to call for the elimination of CFCs and the
depletion and global warming and acid rain. We've already joined ozone
development of environmentally safe substitutes -- as well
do these things without stifling the economic growth that is
adopting a tough new policy on the export of hazardous waste. as We can
necessary, indeed, essential for our nation's economic health.
The time has come to set aside partisan approaches to
these and these other enormous environmental questions. We've got to
enjoyed. ensure that our grandchildren can fish on the same lakes we've
asked you to consider a broad vision; a vision that relies on the
And in this agenda for the new American Century, I've
dynamic spirit that is America. The spirit that says buildings
should not stand empty, while people lack shelter; jobs should not
unfilled, while young men and women stand idle on the street corners; go
Earth. no one should go hungry in the richest nation on the face of the
American can seize a share of this prosperity -- and help to create
And we must promote local efforts to assure that every
more of it -- whether through the constellation of local community
groups already at work, or through new ideas, like our program to
encourage our nation's youth to become involved in community service.
I'm absolutely convinced that with the proper leadership from the
White House and across the business community and elsewhere, we can
encourage those young people who are more fortunate than some of
their peers to pitch in and help those that are less fortunate.
We're going to rely less on the collective wallet -- we have to, to
do what I told you I want to do on the budget -- less on the
collective wallet and more on the collective will.
But this does not mean lowering our sights or our
expectations. Just exactly the opposite of that. In the era of
tight budgets, we're not going to simply "make do with less." We're
going to learn how to do more with less -- and do it better. In the
factory, you call it productivity. Across our country, I call it the
national spirit.
And, yes, we're a prosperous country and we are at peace.
But such quiet moments often become pivotal in the nation's history.
The choices we make now are going to determine whether the door to
the next American Century is closing or opening wide, for all who
dare to dream.
Thank you for your leadership. Thank you for the support
of our administration. And aren't we lucky to be living in 1989 in
the United States of America, the best, the freest, the greatest
country (Applause.) on the face of the Earth? Thank you all and God bless you.
END
1:40 P.M. EST
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
March 21, 1989
Barbara and I extend our sincere condolences to the family and
many friends of John Jay McCloy. We share your loss. The
American people join you in mourning the passing of one of the
giants and true heroes of this country.
John J. McCloy helped shape American policy and perspectives
during the past fifty years -- in public service and in private
life -- as few others have. He was a trusted adviser of
American Presidents from Franklin D. Roosevelt to Ronald Reagan.
I shall miss the privilege of his counsel. But he also never
flagged in pursuing the public good in the many private trusts he
held. His energy and interests were boundless. So were his
accomplishments.
Recalling his work as chairman of the Ford Foundation, of the
Council of Foreign Relations, of the Salk foundation, of the Fund
for Modern Courts in New York State, and of the American Council
on Germany -- to name but a few of his responsibilities -- one
cannot but stand in awe of this great man of humble origins. Not
only his talents and experience, but also his dedication and
sense of fair play, were rare indeed. We are poorer for his
passing. But we as a country are so much richer for having had
him with us for 93 years.
John J. McCloy was, not only a prominent American, but also a
citizen of the world. He served as President of the World Bank
at a crucial time in that institution's history. In later years
he became intensely involved with the United Nations Development
Corporation.
He was also a pioneer in the field of arms control. In addition
to being to being President Kennedy's chief disarmament adviser
and negotiator, John J. McCloy served for dozen years as Chairman
of the General Advisory Committee on Disarmament Agency. His aim
-- which now is the long-established position of the West as well
as part a of the declared "new thinking" in the East -- was to
establish security at lower levels of armament.
But perhaps John J. McCloy's greatest mark was left by his
service in Germany. I know he believed it was among the most
important of his assignments. As the United States Military
Governor and then High Commissioner from 1949 to 1953, John J.
McCloy helped rebuild the economic structure of a nation in
rubble, directly touching and assisting millions of Germans
living in a country devastated by war. In perhaps his most
lasting contribution, he helped establish the democratic
tradition of the Federal Republic of Germany and the unbreakable
bonds of friendship and solidarity between the German and
American peoples.
As Chancellor Helmut Kohl has written of John J. McCloy: "He
deserves much of the credit for the high quality of
German-American relations which we today take for granted, but
which at that time only a trusting friend of our people like John
McCloy could see as an objective worth pursuing."
Friend of Germany, friend of Europe, friend of peace, America's
friend to the world: John McCloy is a friend who will be missed.
/s/ George Bush
#
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
March 21, 1989
REMARKS BY THE PRESIDENT
AND SECRETARY RICHARD CHENEY
AT SWEARING-IN CEREMONY
The Pentagon
Washington, D.C.
2:16 P.M. EST
THE PRESIDENT: Mr. Vice President, Members of the
President's Cabinet, distinguished Members of Congress, the Joint
Chiefs. I am very pleased to participate in the administration of
the oath of office to our new Secretary of Defense, Dick Cheney.
This is a proud day for Dick's family -- his wife, Lynne,
who heads a vital effort of another sort, safeguarding our cultural
heritage at the National Endowment for the Humanities -- and their
daughters, Elizabeth and Mary. I also want to welcome Dick's mom and
dad, who are here from Wyoming; other family members as well who came
to join Dick on this very important day.
Let me outline some of the crucial responsibilities that
Secretary Cheney is taking on in his new assignment. Defense
strategy and management, procurement reform, the day-to-day
operations of our Armed Forces, and the long-range planning that will
keep us free and secure into the next century. In a building where
it can be a challenge getting from the A Ring to the E Ring without
getting lost, the challenges that you'll face, Mr. Secretary, are
truly enormous.
Confession time. Dick told me that he's already gotten
lost in the garage of this place. (Laughter.) But things can only
go up from there. (Laughter.)
The challenges may be enormous, but so, Mr. Secretary,
are the skills and talents that you bring to the job. Dick Cheney
knows his way around Washington, he knows how things work on Capitol
Hill and in the White House, and he'll draw on that wealth of
experience to help make things work right here at the Pentagon. Dick
and I worked together in the Ford administration on national security
issues -- he was White House Chief of Staff and I was Director of
Central Intelligence -- and teamwork that paid off then, and he was
the best at it.
And, Dick, you'll have help from the best Armed Forces in
the world and a civilian staff equally dedicated to our national
defense. I know they're ready to work with you and for you.
And I'm convinced the international scene today is
defined by opportunity -- a chance to advance America's interests and
ideals, and to strengthen the forces of freedom now gaining a
foothold in many places around the world. Dick shares my belief
that the chief national security lesson of this decade is simply this
-- strength secures peace. That fact remains true -- even in the
present time of transition in world affairs. Consider the key issue
of change in the Soviet Union. I take a very positive view of the
changes there, but there are still more questions than answers about
the ultimate outcome of those changes.
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And until these questions are answered, we should
continue our successful policy of flexibility, combined with strength
and firm resolve. We must be ready to seize favorable opportunities
to improve relations with the Soviet Union, but we must also remain
ready and able in any event to secure our national interests. And
let me say clearly, now is not the time for America and its allies to
make unilateral reductions to relax our defense efforts.
Everyone here knows that we're facing touch choices on
defense programs. We must move ahead with plans to modernize our
strategic and conventional forces. We must continue to turn the
nation's technological capabilities to our strategic advantage, in
SDI and other programs. But our need to deal with the deficit means
that we're working with limited resources. And, Dick, your task is
to sort out those priorities -- which programs should continue, which
we can't afford in the current fiscal climate. I'm convinced these
difficult choices can be made in a way that preserves our defense
capabilities.
Close cooperation with the Congress is absolutely
essential -- and Dick's high standing on Capitol Hill will be an
enormous plus.
Procurement reform is a case in point. Our aim should be
a more stable and streamlined acquisition system -- but procurement
reform can't be confined to the Pentagon alone. We will work with
the Congress, our partners in the process, to move forward with the
Packard Commission reforms, to adopt a two-year budget cycle, and to
expand multiyear procurement for major weapons systems.
And stability begins with a commitment to maintain a
steady, moderate, and affordable increase in defense spending -- an
increase we must have in order to maintain and continue to modernize
our forces. Following the freeze for 1990, that means growth -- one
percent -- '91,'92, rising to two in '93 -- two percent. For too
long, defense spending has ridden a roller coaster unpredictable
ups and downs, a recipe for waste and inefficiencies. Stable
spending makes it possible to plan for the long-term -- and that's
the basis of a more efficient and effective defense posture.
And that long-term view is the one we must take, with the
21st century only 11 years away.
I'm convinced that in the years ahead the United States
can take the lead in building a more peaceful international
environment -- in laying the foundations for a new American Century,
where freedom and democracy will flourish.
I am confident that Dick Cheney will play a pivotal part
in keeping America strong and secure, free and at peace.
Secretary Cheney, congratulations. You have my complete
confidence and my sincere best wishes as you undertake this
extraordinarily important task for the greatest country on the face
of the Earth. (Applause.)
(The oath is administered.)
SECRETARY CHENEY: Mr. President, distinguished guests,
men and women of America's Armed Forces, ladies and gentlemen. It is
a humbling experience to assume office as the nation's 17th Secretary
of Defense. Mr. President, I thank you for the confidence you've
placed in me. I will do my best to justify your trust.
This transition comes at a time of significant change
change that may portend a more peaceful and prosperous world in
years ahead. Nations whose political and economic systems, li
ours, are based on principles of freedom, democracy individy
liberty, and market economics are thriving. Those nations
derive their legitimacy from the authoritarian suppressic
human spirit are in retreat.
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It's become clear in the last few years that freedom
works. The Soviet Union is being forced to question its basic
assumptions in light of its obvious failure to produce a prosperous
economy at home or to enable it to compete abroad. Developing
nations no longer look to the Soviets or their allies for a model
upon which they can build successful economies.
And in place of a hostile Soviet Union seeking to expand
its empire by military means, we see an empire beset by difficulties
withdrawing from Afghanistan and talking about significant troop
reductions in Eastern Europe.
In part, this change is attributable to more realistic
leadership inside the Soviet Union. But it is also due in part to
the success of the strategy of the United States and our allies.
Containment has worked. Deterrence is held. Principle has paid off.
Still, dangers abound. There are those who want to declare the Cold
War ended. They perceive a significantly lessened threat, and want
to believe that we can reduce our level of vigilance accordingly.
But I believe caution is in order. However real the
reform rhetoric coming out of the Kremlin, Moscow's armaments compel
caution on our part. To date, there's been no reduction in the
strategic systems targeted against the United States. Until we see a
significantly lessened military capability on the part of the
Soviets, we cannot possibly justify major reductions in our own. We
must guard against gambling our nation's security on what may be a
temporary aberration in the behavior of our foremost adversary.
Mr. President, the military and civilian professionals of
the Department of Defense stand ready to do everything possible to
provide for the nation's security with the resources the American
people entrust to us. To that end, our strategy and policies must be
carefully calibrated to an ever-changing international landscape.
Our force is designed and equipped to meet the full range of likely
contingencies, and our needed munitions acquired as efficiently as
possible.
Today I would like to address myself to several key
groups. To the men and women of America's Armed Forces, I am honored
to serve with you in the defense of freedom. Every individual
soldier, sailor, airman, and Marine contributes to America's
strength, and I pledge to do my utmost to provide you the quality,
equipment, and support you must have to do the job we ask you to do
for all of us. You, our uniformed men and women, are my number one
priority. You and your families are the mind, body, and soul of
America's military might.
To America's friends and allies around the world, I look
forward to working with you in our common quest. Collective security
is the only strategy for our democracies. We, therefore, must deepen
our cooperation, especially to stretch scarce defense resources. And
where we have differences, we must deal with them in recognition that
cohesion is the most potent power and weapon of free nations.
To the United States Congress, fresh as I am from your
ranks, I appreciate your constitutional responsibility for America's
defense. I pledge my full cooperation as, together, we wrestle with
a shared challenge too many claims on too few dollars. I've got
to make the hard choices, and I seek your support so that these can
be the right choices.
To America's defense industry, U.S. national security is
vitally dependent on our defense industrial base. We must have
top-notch firms willing to compete for defense contracts and able to
fulfill those contracts with high quality work efficiently delivered.
Don Atwood and the rest of my staff are anxious to work with the
defense industry to improve productivity, reduce costs, and advance
new technologies. Defense acquisition is a partnership, and that
spirit must guide our actions.
Finally, to the American people. The first obligation of
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the federal government is the defense of the nation. You support
that aim with your tax dollars and the sacrifices of your sons and
daughters in uniform. We who are appointed to lead these defense
preparations owe you, the American people, a high return on your
investment and great care for the lives of your loved ones who serve.
I accept that responsibility. And with the support of my family, and
the President of the United States, and with many other dedicated
Americans sharing the solemn stewardship, I am ready and eager to
serve. (Applause.)
END
2:35 P.M. EST
The T Backgrounder
Herîtage Foundation
704
No.
The Heritage Foundation
214 Massachusetts Avenue N.E. Washington, D.C. 20002 (202)546-4400
The Thomas A. Roe Institute for Economic Policy Studies
May 2, 1989
CAPITAL GAINS TAXATION:
THE EVIDENCE CALLS FOR A REDUCTION IN RATES
By Ronald Utt
John M. Olin Fellow
INTRODUCTION
How to tax capital gains remains one of the most controversial issues
confronting economic policy makers. Though a number of countries, like the
Republic of Korea, do not tax capital gains at all, the United States approach
has been a roller coaster. In the mid-1970s, for example, capital gains were
taxed as high as 35 percent; this top rate was cut to 28 percent in 1978 and cut
further to 20 percent by the 1981 Reagan tax reduction. Then the pendulum
swung abruptly, and surprisingly, back in the comprehensive overhaul of the
tax code in 1986. As a result, capital gains today are taxed at the same rate as
ordinary income. This rightly alarms many economists because a high capital
gains tax discourages investment, savings, and entrepreneurial risk-taking.
Without these, the U.S. will become economically less competitive in the
world.
Bipartisan Support. The Bush Administration, too, is alarmed by the
economic disincentives spurred by today's high tax on capital gains. To
remedy this, George Bush is proposing to reduce the maximum tax on certain
capital gains from the current 33 percent to 15 percent. This call for a lower
rate on capital gains is echoed in Congress, where nearly a dozen capital
gains rate reduction bills have been introduced by Republicans and
Democrats. These proposals have bipartisan support. Yet the prospect of
capital gains rate reductions has generated intense opposition from a variety
of sources - notably organized labor.
Note: Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an
attempt to aid or hinder the passage of any bill before Congress.
Opponents of capital gains rate reductions attempt to build their case on
three arguments:
1) Equity and Fairness - Capital gains preferences, critics say, favor the
wealthy by providing a disproportionate share of the benefits to upper
income taxpayers.
2) Cost - A capital gains tax rate reduction is said to increase the federal
deficit because it will reduce tax revenues.
3) Effectiveness - A lower capital gains rate, critics argue, will have little
affect on the decisions of individuals to invest or engage in entrepreneurial
activity.
Each of these criticisms is challenged by supporters of capital gains tax
reductions. They marshall an extensive collection of facts and research to
demonstrate that the opponents' positions either are exaggerated or simply
untrue. In particular, the two capital gains tax rate increases and the two tax
decreases since 1969 provide solid evidence how individuals, businesses, and
markets respond to such changes. What the last two decades reveal is that
investors, businesses and venture capital markets are sensitive to changes in
the capital gains tax rate. The data show that when rates are raised, venture
funding slows or declines; conversely, when rates are cut, the venture capital
market spurts.
Many opponents of the tax cut will concede that the cut will create
economically useful incentives, but they worry about the ostensible loss of tax
revenues. Studies reveal, however, that these concerns are unwarranted.
Detailed econometric studies of the record since World War II indicate that
capital gains tax rate cuts actually generate tax revenues by encouraging
individuals to invest in taxable assets, unlock realized and taxable gains and
redeploy capital efficiently - generating taxable income.
Evenly Spread Gains. The evidence also indicates that the fairness
concerns are misplaced. When income is properly measured, the data reveal
that capital gains realizations are spread rather evenly throughout different
income levels and do not accrue only to the rich. Indeed, households earning
less than $20,000 accounted for more than a quarter of all capital gains
reported by taxpayers in 1985.
Lawmakers considering legislation to reduce taxes on capital gains should
examine this evidence carefully. Critics of tax cut proposals will level charges
that a cut would be bad for the economy and the budget, and unfair to
moderate and low-income taxpayers. Yet the data refute them, suggesting
strongly that a cut would boost the economy while spreading tax benefits to
all major income groups.
WHY TAXING CAPITAL TROUBLES MANY ECONOMISTS
The debate over the wisdom of cutting taxes on capital gains begins with
the very idea of whether the realized appreciation of any capital asset should
2
be taxed. Many economists contend that such gains should not be taxed at all
because they reflect either inflation or the market's assessment that a
company's (or asset's) future earnings will be higher.
Inflation Penalty. If the gain is in part due to inflation, then a capital gains
tax serves to confiscate existing wealth accumulated from past income that
already has been taxed at least once. Moreover, the tax, or penalty for
inflation, is imposed only when the asset is converted from one form to
another, thereby discouraging capital mobility and the efficient allocation of
scarce resources.
This inflation penalty is not trivial. Under circumstances similar to those
occurring in the 1970s and early 1980s, it could lead to very high implicit tax
rates. For example, under current law, an investment providing a real return
of 5 percent in an economy with 8 percent inflation would be subject to 1 an
effective tax rate of 57.5 percent on real earnings if sold after five years.
Economic columnist Warren Brookes noted that a 1970 investment in stock
that was sold in 1988 would pay an effective tax rate of 339 percent on the net
real gain because the rate of inflation 2 over the period was almost as great as
the appreciation in the stock market.
Triple Taxation. When the gains reflect the market's reevaluation of the
company's future profit potential, then the taxation of such gains, when
realized, constitutes the triple taxation of income from capital: first when it is
earned by the corporation and paid in corporate income tax; next when paid
out as dividends and taxed at the shareholder's personal rate; and a third time
when the gains are realized through the sale of the shares.
The tax code in the past has attempted to compensate for market
reevaluation by providing special treatment for capital gains. For example:
residential housing, which represents the single biggest investment for most
households, is largely free of capital gains tax as long as the proceeds from
the sale are reinvested in another residence, or if they represent a one time
cashing out of the investment close to retirement. Similarly, professional
investors in income-producing real estate are able to avoid capital gains taxes
through a technique known as a "tax free exchange of property.'
Investments in financial assets, however, have never been permitted this
privilege, although the capital gains exclusion, which was an integral part of
the tax code until 1987, reflected an inadequate attempt to do so.
Absent appropriate tax exclusions, the gauntlet of taxation faced by
investors discriminates against capital income, discourages savings and
investment, and harms U.S. international competitiveness by raising the cost
of capital for Americans relative to that of foreign competitors, many of
1 James M. Poterba, "Venture Capital and Capital Gains Taxation," National Bureau of Economic Research
Working Paper No. 2832, January 1989, p. 17.
2 Warren Brookes, "Fairness, Envy and Capital Gains," The Washington Times, March 14, 1989.
3 This process allows certain investors to postpone the taxation of capital gains in real estate by immediately
reinvesting the proceeds of the sale in another income-producing property.
3
whom fully exempt capital gains from income taxes. In fact, Belgium, Italy,
Japan, The Netherlands, Hong Kong, Malaysia, Singapore, South Korea and
Taiwan exempt all capital gains from income taxation, while long-term (six
months) capital gains in Germany are exempt. Meanwhile, effective capital
tax rates in the U.S. have been increasing. The January 1989 Economic Report
of the President calculates that the effective tax rates on investment in
equipment due to the Tax Reform Act of 1986 quadrupled from 10 percent to
39.6 percent.
THE IMPACT OF CAPITAL TAXATION ON INVESTMENT DECISIONS
Advocates of a reduced tax rate or an exclusion for capital gains contend
that these changes would increase savings and investment by decreasing the
cost of capital to a firm and increasing the return on investment to the
investor. At present, the gauntlet of corporate income taxes, the taxation of
capital gains, and personal income taxes creates a large gap between what
business earns on an investment and what the individual shareholders
ultimately receive. This gap often is referred to as the "tax wedge." Reduced
tax rates would encourage individuals to acquire a financial asset by raising
the after tax rate of return on the asset. Such rate reductions would make
investments in new and growing firms relatively attractive because most
benefits of such investments would be in the form of capital appreciation
rather than income paid in taxable dividends.
For the firm, a lower capital gains rate would reduce the effective cost of
capital and encourage the acquisition of productive assets. For the new and
growing firm, with limited income but unlimited promise, a lower rate or
capital gains exclusion would encourage investors to take risks by offering the
opportunity for a potentially higher reward.
What the Data Reveal
Several studies and surveys on the affect of capital gains rates on the
willingness of investors to acquire shares in new firms support the view that
rate reductions have stimulated venture capital market growth. Although
some analysts challenge this, arguing that a substantial portion of venture
funding comes from non-taxed sources such as pension funds, the surveys and
studies do not support this and instead indicate that the individual investor is
an important participant in the venture capital market.
In a 1988 study by economists John Freear of the University of New
Hampshire and William Wetzel of Babson College, questionnaires were sent
to the chief executive officers of 1,073 technology-based ventures founded in
4
New England between 1975 and 1986. 4 The results from the 284 firms
responding indicate:
1) More new technology-based firms raise equity-type capital from private
individuals than from any other outside source, including venture capital
firms.
5
2) Private individuals are the primary source of outside equity-type capital
for new technology-based firms when total funds raised each time the firm
goes to the financial market is under $1 million.
3) Private individuals tend to invest earlier in the life of a new
technology-based firm than do other outside sources of equity type capital,
including venture-type⁶ funds. 7
Significantly, an analysis of the ebb and flow of venture capital over time
indicates that there is a close correlation between the availability of such
funds and changes in the capital gains tax rate. Table 1, which presents the
trend in Initial Public Offerings (IPOs) as one measure of venture capital
raised in organized securities markets, illustrates the sensitivity 8 of new
offerings by firms going public to the capital gains tax rate.
Soaring Capital. As the table indicates, when rates increased between 1969
and 1978, initial public offerings declined significantly, from an annual
average of nearly $2 billion between 1969 and 1972 to an average of just $225
million between 1975 and 1978. But following the major rate reductions in
1979 and again in 1982, the capital raised through IPOs soared, stalling at a
plateau beginning in 1986-1987 when the rate was raised from 20 percent to
28 percent under the 1986 Tax Reform Act. Since then the amount raised has
declined slightly and likely will continue this trend through 1989.
Table 2 illustrates the same connection between capital formation and
capital gains tax rates using figures from the venture capital market As in
the case of IPOs, the venture capital market has expanded when capital gains
tax rates are cut, and has declined or stagnated when rates are increased.
4 John Freear and William E. Wetzel, "Equity Financing for New Technology-Based Firms," paper prepared for
the Babson Entrepreneurship Research Conference, Calgary, Alberta, May 1988.
5 Equity-type investments are those that provide a share of the ownership to the investor and a right to
participate in the profits.
6 "Venture-type" funds are professional investment companies that specialize in investing in promising new
companies.
7 The authors' hypothesis that total equity type capital raised by these firms from private individuals exceeds
the total capital raised from other outside sources, including venture capital funds, was not validated by the
study. Indeed, the study found that the firms in the sample raised five times more capital from the funds than
they did from individuals. Although many of these funds are tax-exempt, many of their investors are not, and the
profits and gains of these funds are passed on to the investors who are taxed as individuals or corporations
according to whether the earnings were ordinary income or capital gain.
8 IPOs refer to new capital issued through initial public stock offerings of corporation. This capital flows largely
to relatively young rapidly growing companies.
9 Venture capital here refers to funds raised by companies that specialize in investing in the shares of new
businesses.
5
Opponents of capital gains tax relief argue that such correlations merely
are coincidence, not causation. They contend that the growth in the venture
capital market really reflects the development and commercialization of new
technologies, or the general improvement in equity markets that occurred
during the same period.
Table 1
New Capital Raised Through Initial Public Stock Offerings (IPOs)
Year
Capital Gains
Number of IPOs
Dollars Raised
Tax Rate
(billions)
1969
27.50%
1,026
$2.61
1970
28.91
358
0.78
1971
29.82
391
1.66
1972
30.50
568
2.72
1973
30.91
100
0.33
1974
31.55
15
0.05
1975
31.81
15
0.27
1976
33.49
34
0.23
1977
33.77
40
0.15
1978
34.13
45
0.25
1979
25.97
81
0.51
1980
26.67
237
1.40
1981
24.81
448
3.22
1982
20.00
222
1.45
1983
20.00
884
12.62
1984
20.00
354
3.9
1985
20.00
362
8.6
1986
20.00
719
22.4
1987
28.00
541
24.2
1988
28.00
280
23.4
Source: Going Public: The IPO Reporter (Philadelphia, Pennsylvania) and the U.S. Treasury.
Yet such alternative explanations of the correlation are not, of course,
necessarily independent of capital gains tax rates, because changes in the
capital gains tax rates have a direct influence on these other factors by
improving the incentives in the market and encouraging individuals to invest
in shares. Lower capital gains tax rates increase the incentive to invest, and
this increased demand for assets raises the price of financial assets, such as
common stocks. Similarly, when investor interest is increased in securities
offering capital gains potential, new and growing firms capable of providing
such potential will be encouraged to bring their shares to market.
Comparative observations by M.I.T. economist James Poterba in his recent
6
study for the National Bureau of Economic Research offer some support for
this view. According to Poterba:
In the decade between 1976 and 1986, the stock of
commitments to the U.S. venture capital industry rose at a
compound annual rate of 17.1%. Measured in constant
dollars, the pool of venture capital funds in 1986 was 4.85
times as large as the pool one decade earlier. In Canada, by
comparison, the annual growth rate of venture funds was
only 5.7%, so that in 1986 the pool of funds was 1.75 times
as large as in 1976. While international comparisons are
difficult because of problems in controlling for institutional
differences, the finding that venture capital investment
grew more rapidly in the United States, the country that
reduced its capital gains tax rate, is further supporting
evidence for a potential link between capital gains taxation
and venture capital. 10
Elsewhere in his study, Poterba presents additional information to
underscore this relationship.
Since the Tax Reform Act of 1986, which raised individual
capital gains tax rates from 20% to 28% (or in some cases
33%) venture funding has been stable. Total revenue
commitments increased six percent between 1986 and 1987,
and preliminary 1988 data suggest that this level has at least
been maintained through 1988. The recent growth of
venture capital investment in other nations, however,
suggests that the post-1986 U.S. performance may reflect a
negative effect of tax reform. In the U.K., the flow of
venture capital commitments nearly doubled between 1986
and 1987. In Canada, venture funding rose even more
dramatically, from $209 to $800 million. While the growth
of venture capital in Canada and Britain may in part reflect
the maturation of their venture capital industries, they
11
provide a useful contrast to the recent U.S. experience.
THE IMPACT OF CAPITAL GAINS TAXES ON TAX REVENUES
Although the evidence strongly indicates that lower capital gains rates
encourage individuals to fund risky ventures, many policy makers still
question whether the benefits are worth the potential losses in tax revenues
due to a lower tax rate on capital gains. Skeptics also believe that a lower rate
of taxation bestows disproportionately greater benefits on higher income
individuals than on moderate income Americans.
10 Poterba, op. cit., pp. 4-5.
11 Ibid., pp. 2-4.
7
Table 2
Supply of Venture Capital Financing, 1969-1987
Year
Net New Commitments to Venture
Maximum Personal Tax Rate
Capital Firms
on Capital Gains
(billions)
(percent)
1969
$ 505.7
27.50
1970
271.8
28.91
1971
251.8
29.82
1972
156.9
30.50
1973
133.2
30.91
1974
124.2
31.55
1975
19.8
31.81
1976
93.3
33.49
1977
68.2
33.77
1978
978.1
34.13
1979
449.2
25.97
1980
961.4
26.67
1981
1,627.8
24.81
1982
2,118.6
20.0
1983
5,097.7
20.0
1984
4,590.0
20.0
1985
3,502.3
20.0
1986
4,650.1-
20.0
1987
4,900.0
28.0
1988
28.0
Source: Column 1, Venture Economics, Venture Capital Yearbook 1988, p. 17. Entries as presented in 1987
dollars, deflated using the GNP deflator. Column 2, U.S. Treasury.
Proponents of a lower capital gains rate counter that, contrary to the
intuitively plausible proposition that rate cuts reduce revenues, experience
demonstrates just the opposite: every instance of a capital gains rate cut has
been followed immediately by a significant increase in capital gains
realizations (net capital gains proceeds received from the sale of assets and
reported to the Internal Revenue Service) and by higher taxes paid on those
gains. By lowering the tax cost of selling assets, and thereby increasing the
after-tax yield on such assets relative to other sources, lower capital gains tax
rates can lead to greater capital gains realizations and increased total tax
payments by the owners of those assets.
Stimulating Investment. Lower capital gains rates, experience shows, also
increase the attractiveness of such assets relative to other sources of income
or consumption. This encourages more purchases of such assets, which bids
up their prices, leading to higher realizations of capital gain when the assets
are sold - both because there are more investors now holding such assets and
because the increased demand raises their price and profits. Again, this rise
8
in value and volume can mean higher tax payments even at a lower tax rate.
And to the extent that such tax rate reductions stimulate more investment,
business formations and entrepreneurial activity, then general income tax
revenues also would rise.
What the Data Reveal
As Table 3 indicates, the rate cuts of both 1979 and 1982 were followed by
large increases in reported capital gains and by increases in capital gains tax
payments. Conversely, the tax rate increase enacted in 1969 was followed by
declining realizations and lower capital gains tax revenues. Indeed, the $5.9
billion of capital gains revenues received in 1968 was not exceeded until
1976.
Some opponents of a cut in capital gains tax do admit that a rate reduction
does boost immediate tax yields, but then they argue that the observed
increase merely reflects a change in the timing of realizations that would
ultimately occur at higher tax rates. Today's tax gains from a cut, they
contend, simply would be at the expense of higher tax payments in the future
under current rates.
Complex, Arcane Research. The primary focus of the debate over the
capital gains tax is the predicted effect on tax revenues. As the debate has
become more intense, the economic research on the subject has become
more extensive and systematic, but unfortunately also more complex and
arcane. Nonetheless, a review of the most recent studies suggests that the
weight of evidence is shifting in favor of those analysts who argue that
revenues will not decline if rates are cut.
A 1987 review of the academic literature by Harvard economist Lawrence
B. Lindsey concludes that it is extremely unlikely that the capital gains tax
increase 12 in the Tax Reform Act of 1986 will produce any additional tax
revenue.
Most likely, he says, it will produce less revenue than the much
lower tax rates of the old law.
Seeking the Best Rate. According to Lindsey, all but one of the academic
studies he reviewed predict 1987-1991 revenue losses in the range of $27 to
$105 billion when compared with what would have occurred under prior law.
Lindsey notes that these same academic studies imply that the capital gains
tax rate that would yield the most revenue lies in the range of 9 percent to 21
percent. This finding has led most of the sponsors of a rate cut to settle on a
15 percent rate.
12 Lawrence B. Lindsey, Capital Gains Taxes Under the Tax Reform Act of 1986: Revenue Estimates Under
Various Assumptions (Cambridge, Mass.: National Bureau of Economic Research, 1987.
9
Table 3
Capital Gains Realizations and Tax Revenues
1954-1985
Year
Capital Gains
Tax Revenue
Marginal Tax Rate
Realizations
(billions of $)
(percent)
(billions of $)
1954
7.157
1.010
25.00
1955
9.881
1.465
25.00
1956
9.683
1.402
25.00
1957
8.110
1.115
25.00
1958
9.440
1.309
25.00
1959
13.137
1.920
25.00
1960
11.747
1.687
25.00
1961
16.001
2.481
25.00
1962
13.451
1.954
25.00
1963
14.579
2.143
25.00
1964
17.431
2.482
25.00
1965
21.484
3.003
25.00
1966
21.348
2.905
25.00
1967
27.535
4.112
25.00
1968
35.607
5.943
26.87
1969
31.439
5.275
27.50
1970
20.848
3.161
28.91
1971
28.341
4.350
29.82
1972
35.869
5.708
30.50
1973
35.757
5.366
30.91
1974
30.217
4.253
31.55
1975
30.903
4.534
31.81
1976
39.492
6.621
33.49
1977
45.337
8.104
33.77
1978
50.526
9.104
34.13
1979
73.443
11.669
25.97
1980
74.582
12.459
26.67
1981
80.938
12.684
24.81
1982
90.153
12.900
20.00
1983
119.118
18.468
20.00
1984
138.658
21.534
20.00
1985
168.570
24.495
20.00
Source: U.S. Treasury.
10
A 1988 study by the Congressional Budget Office (CBO) disputes this
reasoning, however. 13 Although the study found changes in tax rates on
capital gains produce a significant change in the behavior of investors, it
would not be sufficient to generate higher revenues from lowering the tax
rate on capital gains to 15 percent. But the authors of the study note the
crucial caveat that their statistical estimates are sufficiently imprecise that a
conclusion that lower rates will raise revenues cannot be ruled out.
The revenue impact debate currently centers on an updated study recently
completed by the U.S. Treasury. 14 The original Treasury study, completed in
1985, concluded that:
The available statistical evidence shows that the reduction
in tax rates on capital gains in the 1978 Act caused a
substantial increase in revenue from capital gains taxes in
the first year after the tax cut, and in the long run either
increased or only slightly decreased 15 the annual Federal
revenue from capital gains taxes.
Source of Debate. The 1985 study came essentially to the same conclusion
regarding the 1981 capital gains tax rate cuts, but the reluctance of tax critics
to accept the broad conclusions of the 1985 study led the Treasury to update
its findings. The 1988 report concludes:
When we extend the original Treasury specifications
through 1985, the results imply that the 1978 act produced
large and continuing direct revenue gains. Extension of the
sample and correction of the flaw in the Treasury report's
measurement of inflationary GNP dramatically reduce the
estimated losses from the 1981 changes. Finally,
substitution of clearly superior regression specifications
taken from the 1988 CBO study yields the conclusion that
16
both acts were significantly revenue enhancing.
These results immediately were challenged by the opponents, and that
challenge was met just as quickly by the authors. 17 As Joseph Minarik, a critic
of the Treasury studies, observes in his most recent critique, "The battle over
capital gains taxation will probably last as long as we own our income tax.
,,18
And so the battle continues, but with the weight of evidence growing in favor
13 "How Capital Gains Rates Affect Revenues: The Historical Evidence." The Congressional Budget Office,
March 1988.
14 Michael R. Darby, Robert Gillingham, and John S. Greenlees, "The Direct Revenue Effects of Capital Gains
Taxation: A Reconsideration of the Time Series Evidence," U.S. Treasury, Research Paper No. 8801, May 1988.
15 "Report to Congress on the Capital Gains Tax Rate Reductions of 1978", U.S. Treasury Dept., September
1985.
16 Darby, et al., op. cit., pp. 2-3.
17 Joseph Minarik, "The New Treasury Capital Gains Study: What is in the Black Box?" Tax Notes, June 20,
1988; and Michael R. Darby, Robert Gillingham, and John S. Greenlees, "The Black Box Revealed: Reply to
Minarik," Tax Notes, July 25, 1988.
18 Minarik, op. cit., p. 1471.
11
of the proposition that a capital gains tax rate cut will not lose revenue, and
may even gain some.
TAX REVENUES AND FAIRNESS: WHO WINS?
Closely related to the issue of revenues is that of fairness - who would
receive the benefit of a rate reduction and how would this change their tax
obligations. Few myths are as enduring as the belief that reductions in the
capital gains tax rate shift the tax burden from the rich to the poor.
Opponents of capital gains rate cuts assert that the rich would receive a
disproportionate share of the capital gains realizations and most of the
benefits. By their definitions, the critics note that the wealthiest two percent
of the population receive more than a quarter of their annual income in the
form of capital gains and that nearly 75 percent of all capital gains
realizations are received by taxpayers with incomes over $100,000, while 45
percent of such gains go to those with incomes in excess of $500,000. One
such critic notes that Bush's proposal would "save" the richest taxpayers at
least $25,000 a year but save only $20 for most of those earning $60,000 or
19
less.
Supporters of the rate cut respond that such tax rate reductions actually
would increase tax payments from the wealthy because it would induce them
to shift their wealth from tax shelters to taxable investments and to "unlock"
gains that were not realized because of high taxes. The evidence supports this
view. Past rate cuts have led to substantial increases in capital gains
realizations and tax payments, and that an increased share of these tax
payments comes from upper-bracket taxpayers. Table 4 demonstrates this.
Table 4
Adjusted Gross
Taxes Paid on Capital Gains
Percentage Increase
Income
($ thousands)
1980
1984
1980-1984
$0-20,000
422,097
574,917
36
20,000-75,000
1,847,440
2,543,912
37
75,000-200,000
1,915,221
3,478,397
82
200,000-500,000
1,443,513
3,405,787
136
500,000+
2,363,446
9,598,114
306
Source: Estimated by the Office of Tax Policy, U.S. Chamber of Commerce using Statistics of Income, Internal
Revenue Service
As the table indicates, the tax payments by the richest segment increased
more than eight times that of the lowest income group. Critics may contend
that the rise in revenues merely reflects the improving stock market over the
period, and that the largest single source of capital gains realizations are from
the sales of common stock. But such a contention simply is not supported by
19 Robert S. McIntyre, Statement before the Senate Finance Committee, March 14, 1989.
12
the facts. Over the period covered in the table, the New York Stock Exchange
Composite Index rose by just 36 percent compared with the 306 percent
increase in tax payments by the richest income group. Revenue increases of
this magnitude reflect increased unlocking of gains, proportionately more
investment in taxable assets, and greater mobility of capital.
Table 4 also demonstrates that the cut in taxes actually shifted the tax
burden toward the richest groups, in contrast to the popular wisdom.
Between 1980 and 1984, the share of capital gains taxes paid by taxpayers
earning $20,000 or less declined from 5.3 percent to 2.9 percent, while the
share from taxpayers reporting incomes of $500,000 or more rose from 29.6
to 48.6 percent of all taxes paid on capital gains.
While Table 4 and analysis demonstrate the extent to which capital gains
rate reductions lead to proportionately greater tax payments by the higher
income households, such aggregate data as presented in Table 4, actually
overstate the extent to which capital gains realizations are experienced by the
wealthier households. In fact, capital gains realizations tend to be spread
rather evenly throughout the income distribution when the income
distribution is defined to include only "recurring" income - that is, reported
income less capital gains realizations.
Important Distinction. This distinction in the measurement of income is
important. For many individuals, capital gains realizations are infrequent
occurrences and reflect a unique one-time event that makes the taxpayer
appear rich by pushing him into the higher income brackets. Realized capital
gains tend often to be such non-recurring events as: the sale of a small
business upon retirement; an elderly widow liquidating her husband's
accumulated investments; the sale of stock to buy a house or pay for a child's
college tuition; or the liquidation of an investment portfolio in anticipation of
an economic downturn. When aggregated with other income, these give the
appearance of being received almost exclusively by the very rich.
Table 5 shows the relationship of capital gains realizations to levels of
income net of capital gains. With this correction, it can be seen that realized
capital gains actually are distributed rather evenly throughout the income
distribution. More than a quarter of realizations were experienced by
households earning $20,000 or less, and households earning less than $75,000
received more than half of realized capital gains. Thus, in stark contrast to the
claims of the critics, a capital gains rate reduction would provide significant
benefits to all income levels, not just to the affluent.
THE PROPOSALS BEFORE CONGRESS
Nearly a dozen proposals to reduce the rate have been introduced in this
Congress. The proposals differ widely in coverage, holding period, rate
reduction, complexity and economic impact. To evaluate rival measures,
lawmakers need to judge them against a set of base criteria. Among the most
important of these:
13
1) Tax Rates
Since a key goal of a tax cut must be to stimulate the greatest volume of
investment with the minimum revenue loss to the Treasury, preference
should be given to those proposals that cut the tax rate as deeply as possible
while still leaving it within Professor Lindsey's estimated revenue maximizing
range of 9 to 21 percent. With 15 percent as the mid-point of this range,
proposals which include rate cuts to 15 percent or less should be preferred.
Bush's proposal, with rates ranging between 0 and 15 percent, and H.R. 461
and H.R. 499, with flat rates of 15 percent, lead the list. S. 171 with its
implied top rate of 16.5 percent is close to this group of leading measures.
Table 5
Distribution of Capital Gains by Recurring Income: 1985
Income
Capital Gains
Percent of
Group
(billions of $))
All Gains
(thousands
of $)
Under $10
$35.30
20.79
10-20
8.90
5.24
20-30
10.70
6.30
30-40
10.10
5.95
40-50
11.10
6.54
50-75
17.50
10.31
75-100
12.50
7.36
100-150
13.10
7.71
150-200
8.70
5.12
Over 200
41.90
24.68
Total
169.80
100.00
Source: Internal Revenue Service, 1985 Individual Tax Model File, Public Use Sample.
2) Holding Period
In principle there should be no required holding period before an asset
becomes eligible for taxation as a capital gain instead of as ordinary income.
Required holding periods serve no useful economic purpose and probably
distort investment patterns in a counterproductive direction. In practice,
however, the tax code has made a distinction between short-term and
long-term capital gains, with the preferential rates being applied to the latter
as a disincentive to speculation. Qualifying periods have varied from a low of
three months to as long as a year. Currently the qualifying period is six
months.
Alleged Failing. A popular, though unverified, notion holds that many of
America's competitive problems stem from the "shortsightedness" of its
business managers. The lengthy holding periods in several of the proposals
represent a peculiar, though ineffective, way of curing this alleged failing. In
fact, few other industrialized countries, including the "far-sighted" Japanese,
make such a distinction.
14
The many capital gains proposals now under consideration contain
required holding periods ranging from none in H.R. 461, one year for H.R.
499 and S.171, and four years for S.348. Inasmuch as all of these proposals
seek to encourage entrepreneurial start-ups, the lengthy holding period could
discourage such investments. Even a one-year required holding period might
be too long. With the average postwar business cycle averaging five years, the
four and five year holding periods required by several of the proposals could
shift needed investment away from new firms in favor of mature companies.
3) Coverage
In an effort to target the tax incentive to preferred forms of economic
activity, each of the legislative proposals would limit the preference to certain
types of investments. For instance, S.171 covers only common stock, S.348
covers newly issued common stock in firms with less than $100 million paid in
capital, while the Bush plan covers all common stocks as well as bonds, land
and non-depreciable real property. S.551, H.R. 461 and H.R. 499 are the
most inclusive in coverage, with the latter two proposals including virtually all
assets. Excluded from many plans are "collectibles" and depreciable real
estate such as office building and apartment complexes. Owner-occupied
housing also is excluded, but existing preferences in the tax code serve
effectively to shelter realized capital gains on houses.
As with the holding period, the exclusion of certain types of assets distorts
investment decisions and leads to an inefficient allocation of capital
resources. Bonds are held by investors for their potential capital gain as well
as interest income. Precluding them from capital gains taxation could raise
bond interest rates relative to the return on equities and penalize those firms
dependent upon debt for capital. This interest rate burden would fall more
heavily upon the mature and troubled industries with limited access to equity
markets. It also could lead to immediate wealth losses for individuals and
institutions (such as pension funds) with bonds in their portfolios.
Favoring New Ventures. S. 348 would extend the capital gains tax
preference only to the newly issued shares of businesses with paid in capital
of less than $100 million, to target assistance to new and growing small
businesses. But although new ventures play a vital role in a dynamic
economy, there is no particularly good economic reason to assist them at the
expense of their larger competitors. Such discrimination could lead to serious
distortions, misallocating capital throughout the economy and encouraging
costly and unproductive corporate restructurings to take advantage of the tax
rate reduction on special classes of shares.
Proposals such as S. 348 also would create complexities among new and
existing shareholders of eligible companies and these complexities and
uncertainties could offset in whole or in part the benefits of the more
favorable capital gains treatment. Growing companies generally issue their
shares in increments over their first several years of existence as the need for
capital arises and as they become better established in the market. Because
newly issued shares would under S. 348 be sold with the one time capital
gains tax preference, existing shares - which now would sell without the
15
preference - would decline in value in secondary trading whenever a new
offering is announced. This added uncertainty, combined with the required
four year holding period and relatively high capital gains tax rate, suggest that
S. 348 would provide very limited incentives to investors, and thus would do
little to assist new firms in raising capital.
CONCLUSION
The evidence accumulated since World War II makes a powerful case in
favor of a substantial reduction in the capital gains tax rate. Whether the issue
is encouraging savings and investment, fairness, or revenues, the data and the
studies demonstrate that concerns expressed by critics of a cut are either
unwarranted or exaggerated.
Increasing Economic Well-Being. In response to this evidence, the White
House and many members of Congress from both political parties have
developed proposals and introduced legislation to rectify the mistakes made
in the treatment of capital gains by the Tax Reform Act of 1986. While some
of these proposals are better than others, collectively they represent a
growing appreciation by public officials that low tax rates make important
contributions to America's economic well-being. This trend should be
encouraged and Congress and the White House should work together to craft
legislation to apply a lower tax rate to a broad definition of financial and
tangible assets.
All Heritage Foundation papers are now available electronically to subscribers of the "NEXIS"
on-line data retrieval service. The Heritage Foundation's Reports (HFRPTS) can be found in the
OMNI, CURRNT, NWLTRS, and GVT group files of the NEXIS library and in the GOVT and
OMNI group files of the GOVNWS library.
16
Document No.
Apeedwriter
FYI
WHITE HOUSE STAFFING MEMORANDUM
DATE:
03/24/89
ACTION/CONCURRENCE/COMMENT DUE BY:
SUBJECT: FRIDAY ECONOMIC AND FINANCIAL REPORT (prepared by OMB)
ACTION FYI
ACTION FYI
VICE PRESIDENT
MCCLURE
SUNUNU
NEWMAN
SCOWCROFT
PORTER
DARMAN
STUDDERT
BATES
UNTERMEYER
BREEDEN
BOSKIN
CARD
CICCONI
DEMAREST
FITZWATER
GRAY
HAGIN
REMARKS:
The attached is for your information.
RESPONSE:
James W. Cicconi
Assistant to the President
and Deputy to the Chief of Staff
Ext. 2702
THE UNITED OFFICE a LEWER
EXECUTIVE OFFICE OF THE PRESIDENT
Interest Rates
OFFICE OF MANAGEMENT AND BUDGET
Q4 GNP
WASHINGTON, D.C. 20503
Housing Finance
Bean Counting
March 24, 1989
MEMORANDUM FOR THE DIRECTOR
FROM:
John C. Weicher
SUBJECT:
Friday Economic and Financial Report
Interest Rates Stabilize After Recent Jump
This week, interest rates stabilized and even fell slightly on
long maturities. That's a welcome change from the prior week's
increase of 20 basis points. February's Consumer Price Index,
released this week, was a bit better than the market expected,
with about a 5 percent annual rate rise overall and also exclud-
ing volatile food and energy items. Despite this good news, the
underlying rate of inflation this year has averaged 5.3 percent,
up about 1/2 percentage point from last year.
Consumer Price Index
(% change, annual rate)
December to December
Jan
Feb
1985
1986
1987
1988
1989
Total
3.8
1.1
4.4
4.4
7.2
5.1
Food
2.7
3.8
3.5
5.2
9.3
5.0
Energy
1.9
-19.5
8.2
0.5
9.8
6.9
Ex. Food & Energy
4.3
3.8
4.2
4.7
5.9
4.8
Fed Chairman Alan Greenspan and Vice-Chairman Manuel Johnson, in
separate remarks on Wednesday, made clear that the Fed has
stopped raising the federal funds rate for the time being while
they wait for the effects of their previous tightening moves to
appear. They stressed the long lags in monetary policy and their
desire to avoid overkill and reduce the possibility of a re-
cession. This is a clear sign that the FOMC, which meets next
week, is unlikely to change policy.
- 2 -
The bond market bounced up a bit after the Fed officials' re-
marks, but the stock market headed down. In the past week,
technology stocks have been hit on reports of lower earnings.
IBM and Digital Equipment dropped by over 8 percent. Weakness
at these major computer manufacturers is a signal of a slowdown
in investment spending.
Nominal interest rates are now about 1/2 percentage point higher
on long maturities and 1-1/4 percentage point higher on short
maturities than projected in the budget. While this increases
outlays and the deficit, the effects will be almost entirely
offset by higher-than-expected inflation. Tax receipts increase
proportionately to the rise in prices, while noninterest program
outlays are slower to adjust in the short run. Eventually,
outlays are likely to be adjusted for higher inflation, so that
receipts and outlays change about equally.
Of course, higher inflation is bad news for the economy and
threatens the continuation of the expansion, but it has a roughly
neutral effect on the deficit in the long run. What really
matters for the budget is real interest rates and real growth
rates. This year's rise in nominal interest rates has been
fairly closely matched by rising inflation, with little average
change in real rates. Real growth was slightly higher than the
Administration's projection for the fourth quarter of 1988. The
budget assumes a decline in real interest rates and healthy
growth over the next year and a half, a more favorable outcome
than most private sector forecasts. But so far, overall economic
performance is consistent with the economic projections that
matter most for the budget.
Fourth Quarter GNP
Now that all the data are in for the final quarter of last year,
it is clear that the economy was somewhat stronger than initially
reported. The Bureau of Economic Analysis places real GNP growth
at a 2.4 percent annual rate, up 0.4 percentage points from the
prior reading. A change of this magnitude is not exceptional, in
fact, it is equal to the average revision during the past dozen
years. Excluding the drought, which cut 1.1 percentage points
off the growth rate, real GNP rose at a 3.5 percent annual rate.
Over the four quarter of the year, GNP also rose 3.5 percent
excluding the drought's effects.
The fourth quarter inflation estimates were not revised. The GNP
implicit price deflator was up at a 5.3 percent annual rate and
the GNP fixed-weighted price index, which is based on a constant
composition of output, was up at a 4.2 percent rate. (See
attachment for details of fourth quarter GNP.)
The Administration has assumed that rising interest rates over
the past year will put a damper on nonfarm growth this year, but
not enough to cause unemployment to rise. The year is still
young, but there are signs that this is already happening. The
- 3 -
sectors that were at the forefront of the expansion last year are
moderating. Manufacturing production and employment slowed dur-
ing the first two months of this year. In part, this reflects
diminished competitiveness because of the dollar's appreciation.
On the domestic front, businesses' orders for new equipment have
not risen since the third quarter of last year, which will curb
capital spending in the coming months. Finally, consumer spend-
ing also waned in January and February as auto sales slumped. At
the same time, unemployment has actually fallen.
A slackening pace does not necessarily signal an end to the
expansion. In fact, the composite index of leading indicators
rose 0.7 percent in December and 0.6 percent in January, the most
recent months available. That's the best back-to-back showing
since last June and is consistent with the Administration's
forecast for continued growth in the nonfarm economy, albeit at a
slower pace than during 1988.
The Evolution of Home Finance: Part I
The problems of the Federal Savings and Loan Insurance Corpora-
tion have simultaneously focused public attention on the American
housing finance system and obscured the nature of the fundamental
changes that have occurred over the last decade. This story is
the first in a series on the housing finance system. It
describes the evolution of the system. Subsequent stories will
discuss the changes in the mortgage instrument itself, in origi-
nation and servicing, and in the sources of funds for mortgages.
A Flawed Foundation
The "traditional housing finance system," dating back to the
Depression, was in reality two essentially competing systems of
home finance, each with Federal support: the thrift industry,
and the separate system of FHA/VA insurance and secondary market
development designed to attract commercial banks, life insurance
companies, pension funds and other investors to mortgages.
O Federal support for thrifts was initiated by President
Hoover. The Federal Home Loan Bank System was created in
1932 to charter and regulate Federal savings and loan insti-
tutions, and to provide advances (loans) to all S&Ls. This
was supplemented in 1934 by the creation of the Federal
Savings and Loan Insurance Corporation to insure thrifts'
deposits. The thrifts originated, serviced, and held
mortgages in their own portfolios.
O
President Roosevelt started the Federal Housing Administra-
tion in 1934 to insure mortgages, hoping to encourage commer-
cial banks and other institutions to originate and hold them.
The Federal National Mortgage Association (Fannie Mae) was
established in 1938 to create a secondary market for FHA
insured mortgages. In the immediate postwar period, the
- 4 -
Veterans Administration joined the FHA as a mortgage insurer.
In this system, there was a split between origination and
investing: mortgage bankers typically originated and
serviced mortgages, but sold them directly or through Fannie
Mae to other institutions which were the ultimate investors.
The S&Ls were heavily regulated, in return for deposit insurance
and preferential access to capital markets, and the regulations
eventually hamstrung the system. S&Ls were required to hold most
of their assets in mortgages. They were permitted to originate
mortgages only within 50 miles of their home office. These
holdings were financed primarily by local savings deposits.
Restricting thrifts to mortgages, primarily local, ignored the
wisdom of portfolio diversification. Moreover, financing port-
folios of long-term, fixed-rate mortgages by short-term savings
deposits exposed thrifts to interest rate risk. So long as
interest rates were relatively stable, such lending was profit-
able. But when interest rates rose, shocked by inflation, this
term mismatch led to tremendous losses.
Accelerating Inflation
As inflation ratcheted upward in the mid-1960s, the early 1970s,
and again in the late 1970s, these flaws became evident. In
1966, Regulation Q, which restricted the interest rates that
commercial banks could pay on deposits, was extended to S&Ls in
the hope of holding down their cost of funds. Instead, it
resulted in disintermediation -- a reduction in the growth of
deposits available for mortgage lending. On the second ratchet
in the early 1970s, money market mutual funds were created; they
invested in relatively short-term, high-quality assets, and were
free of the restrictions on insured depository institutions. In
the third cycle, MMMFs skyrocketed from $3.5 billion in 1977 to
$180 billion in 1981; there was a net decline in thrift deposits.
The first effect of inflation was to limit and destabilize the
funds thrifts had available for home finance.
The second, closely related, effect was to reduce thrifts'
profits and the value of their portfolios. On a market value
basis, by 1980 the industry as a whole had a negative net worth
of about 12.5% of assets. Although this industry-wide figure
improved as interest rates came down in the 1980s, a substantial
and growing fraction of the industry was insolvent. In any other
industry, they would have gone out of business. But insolvent
depository institutions can only go out of business when the
Federal Government closes or merges them. Instead, the FSLIC
exercised forbearance. Many thrifts with little or no net worth
continued in business, competing for funds, increasing the volume
of originations, and seeking higher returns. Their decisions
were subject to moral hazard; they might profit, but with no
equity, they could lose no more.
- 5 -
The nature of the mortgage instrument was also affected by the
continuing inflation. As rising home prices and higher interest
rates reduced the affordability of homes, potential buyers sought
both lower down payment requirements and easier monthly terms.
On the lenders' side, high and variable inflation created a
desire for variable or adjustable rate mortgages, which would
shift some of the interest rate risk to the borrower.
Bundles and Packages
Another major force restructuring the mortgage market in the
1970s was the increasing power and diminishing cost of computers
and telecommunications. New information technology made it
possible to "unbundle" different mortgage services so that
different firms could handle origination, insurance, servicing,
and holding. It also made possible the securitization of mort-
gages. This financial innovation "packaged" the cash flows on a
pool of mortgages into a variety of securities. These
securities, with quite different characteristics than the
underlying mortgages, were designed to appeal to a variety of
investors. They were sold in the secondary market, and were more
liquid than the underlying mortgages. Securitization will be
discussed more fully in a forthcoming article in this series.
The establishment of the Government National Mortgage Association
(Ginnie Mae) in 1968 accelerated the development of the secondary
market. Ginnie Mae bought FHA and VA insured mortgages, and
created pass-through securities on which it guaranteed timely
payment of principal and interest. In 1970, the Federal National
Mortgage Corporation (Freddie Mac) was chartered and charged with
creating a secondary market in conventional (uninsured) mortgages
to increase the liquidity of thrifts, and Fannie Mae was permit-
ted to buy conventional loans as well. As a result, mortgage
qualifying and underwriting standards became more uniform to
facilitate sale to the secondary market.
The Culmination
By the end of the 1970s, these forces created massive pressures
for changes in the housing finance system. To permit thrifts to
compete for funds and smooth the flow of financing for mortgages,
the Depository Institutions Deregulation and Monetary Control Act
of 1980 set up a schedule for the elimination of deposit rate
ceilings and the Garn-St Germain Act of 1982 authorized a deposit
account similar to money market fund accounts. The DIDMCA also
permited thrifts to hold up to 20% of assets in consumer loans,
commercial paper, and long-term corporate debt; Garn-St Germain
permitted investment in corporate and government securities with
no geographic limitation and increased the allowable limit for
these non-mortgage investments to 40% by 1984. For mortgages,
geographic limits on origination had been widened in several
stages, and by 1983 were eliminated throughout the nation. And
in 1981, thrifts were permitted to originate and hold any kind of
adjustable rate mortgage.
- 6 -
The result of these changes is that the housing finance system of
1989 is much removed from the system of 1979, and vastly differ-
ent from that of 1969. Twenty years ago, nearly all mortgages
carried fixed rates for terms of 25 to 30 years; more than half
were originated by S&Ls, and more than half were held by them in
their own portfolios; few were sold in the secondary market; and
mortgage securities were unknown. Moreover, interest rates then
were much lower. Before the 1970s, S&Ls lived in a friendly
environment, one that enabled them to grow and prosper. High
inflation and new information technologies have changed all that:
today's environment is a hostile one for S&Ls. It is no wonder
that they have to struggle to survive.
Sweet Forecast Worth Hill of Beans
OMB is widely regarded as having the best bean counters in the
world, and the Office of Economic Policy has the best of the
best. This week, OEP's Jim Simpson won the NEOB cafeteria's
jellybean counting contest. His estimate of 539 beans was
closest to the actual count of 535, an error of less than 1
percent. The next closest was 619 beans. According to an
informed source, most estimates were in the low thousands, which
reinforces the view that OMBers believe in rosey scenarios. But
not OMB's economists: Jim has provided proof positive that
realism prevails in this office! "Forecasting is not an exact
science", but this forecast was right on the bean, er-- beam.
HAPPY EASTER!
FOURTH QUARTER GNP
The economy grew at a revised annual rate of 2.4 percent in the fourth quarter, up
0.4 percentage points from the previous estimate. Excluding the drought, fourth
quarter GNP was 1.1 percentage points higher. Inflation, as measured by both the
implicit price deflator and the fixed-weighted index, remained unchanged; therefore
all of the increase in nominal GNP was attributable to higher real growth.
1988
Q1
02
Q3
Q4
Q4
Prelim.
Final
(% change, saar)
Real GNP
3.4
3.0
2.5
2.0
2.4
Excluding Drought
3.4
3.9
3.0
3.1
3.5
GNP Price Deflator
1.7
5.5
4.7
5.3
5.3
GNP Fixed-Weighted Price Index
3.5
5.0
5.3
4.2
4.2
Nominal GNP
5.4
8.7
7.3
7.2
7.6
The boost to fourth quarter GNP came mostly from business fixed investment, which was
down less than initially measured, and from higher federal spending. Most of the
higher federal nondefense revision was due to transactions of the Commodity Credit
Corporation (CCC). Growth of consumption and residential investment was unchanged.
The upward revisions more than offset a deterioration in the net export balance.
Business Fixed Investment
7.6
15.0
4.0
-4.6
-2.9
Personal Consumption
4.5
3.0
3.9
3.5
3.5
Residential Investment
6.5
0.2
4.3
10.9
10.9
Federal Government
-21.0
4.7
-13.2
16.8
20.7
Defense
-5.3
-1.5
-10.5
7.5
9.9
Nondefense
-60.1
33.2
-22.5
60.5
71.5
Nondefense Excluding CCC
-1.9
1.5
-12.9
8.0
10.9
State and Local
3.5
3.2
1.1
5.1
6.0
The real net export deficit widened, mostly due to a downward revision in exports.
Imports were revised up slightly. Inventories remained essentially unchanged.
($82 billions)
Net Exports
-109.0
-92.6
-93.9
-103.3
-105.4
Exports
486.2
496.9
514.0
523.6
522.1
Imports
595.1
589.5
607.9
626.8
627.4
Inventory Change
66.0
35.3
39.5
29.3
29.1
Nonfarm
51.9
30.1
40.4
37.7
37.6
Farm
14.1
5.3
-0.8
-8.3
-8.5
Nominal and real disposable income were revised downward as a result of smaller gains
in wages, proprietors' income and interest income. Corporate profits in the fourth
quarter increased sharply. The quarterly pattern of profits last year was quite
volatile, but overall they rose 7.5 percent.
(% change, saar)
Nominal Disposable Income
7.4
5.6
10.4
9.4
8.8
Real Disposable Income
5.0
0.0
5.6
4.8
Saving Rate (%)
4.1
4.4
3.7
4.2
4.5
4.3
Corporate Profits
0.1
13.7
4.4
NA
12.6
RECENT ECONOMIC INDICATORS MARCH 24, 1989
(S.A. OR AS INDICATED)
Feb-88
Mar-88
Apr-88
May-88
Jun-88
Jul-88
Aug-88
Sep-88
Oct-88
Nov-88
Dec-88
Jan-89
Feb-89
GNP (QUARTERLY SERIES, % A.R.)
NOMINAL GNP
5.4
8.7
7.3
7.6
REAL GNP
3.4
3.0
2.5
2.4
IMPLICIT PRICE DEFLATOR
1.7
5.5
4.7
5.3
FIXED-WEIGHT PRICE INDEX
3.5
5.0
5.3
4.2
REAL DISP. PERS. INC.
5.0
0.0
5.6
4.1
OPERATING PROFITS
0.1
13.7
4.4
12.6
LEADING AND COINCIDENT INDICATORS
LEADING INDEX
140.3
140.8
141.5
141.5
143.9
142.7
144.1
143.7
143.9
143.9
144.9
145.7
NA
PERCENT
1.2
0.4
0.5
0.0
1.7
-0.8
1.0
-0.3
0.1
0.0
0.7
0.6
NA
COINCIDENT INDEX
126.5
127.3
127.3
127.6
128.5
128.9
129.3
129.3
130.6
130.7
131.6
132.9
NA
PERCENT
0.7
0.6
0.0
0.2
0.7
0.3
0.3
0.0
1.0
0.1
0.7
1.0
NA
INDUSTRIAL PRODUCTION
134.4
134.7
135.4
136.1
136.5
138.0
138.5
138.6
139.4
139.9
140.5
141.1
141.1
PERCENT
0.0
0.2
0.5
0.5
0.3
1.1
0.4
0.1
0.6
0.4
0.4
0.4
0.0
CAPACITY UTIL. MFG.
82.6
82.7
82.9
83.3
83.3
84.0
84.0
84.0
84.3
84.4
84.5
84.8
84.6
EMPLOYMENT INDICATORS
CIVILIAN EMPLOYMENT, MIL.
114.3
114.1
114.7
114.4
115.0
115.0
115.2
115.4
115.6
115.9
116.0
116.7
116.9
CIV. UNEMPLOYMENT RATE, PERCENT
5.7
5.6
5.5
5.6
5.4
5.4
5.6
5.4
5.3
5.4
5.3
5.4
5.1
NONFARM PAYROLL EMPLOYMENT, MIL.
104.7
105.0
105.3
105.5
106.1
106.3
106.4
106.7
107.0
107.4
107.6
108.1
108.3
AVG. WEEKLY HOURS, MFG.
41.0
40.9
41.2
41.0
41.1
41.1
41.0
41.2
41.2
41.2
40.8
41.0
41.0
INITIAL CLAIMS UNEMP. INS., THOUS.
321.6
308.0
304.5
310.8
304.1
325.4
305.1
292.8
295.4
300.5
309.0
292.5
308.8
CONSUMER SECTOR
RETAIL SALES, BIL. $
131.9
133.7
133.2
134.1
135.0
136.7
136.1
135.8
137.8
139.5
139.2
140.1
139.5
PERCENT
1.2
1.3
-0.3
0.7
0.7
1.2
-0.4
-0.2
1.5
1.2
-0.2
0.7
-0.4
TOTAL AUTO SALES, MIL. UNITS, A.R.
11.1
10.6
10.5
10.4
11.0
10.7
10.6
10.6
9.8
10.2
11.5
9.8
9.9
DOMESTIC
7.9
7.5
7.2
7.3
7.8
7.8
7.4
7.6
6.8
7.2
8.4
7.0
7.1
IMPORTED
3.2
3.1
3.3
3.0
3.1
3.0
3.2
3.1
3.0
2.9
3.1
2.7
2.8
PERSONAL INCOME, BIL. $, A.R.
3946.7
3985.9
4001.0
4021.4
4044.9
4075.3
4091.8
4114.7
4175.5
4165.2
4200.8
4272.9
4315.3
PERCENT
0.6
1.0
0.4
0.5
0.6
0.8
0.4
0.6
1.5
-0.2
0.9
1.7
1.0
DISP. PERS. INC., BIL. $, A.R.
3376.7
3406.4
3357.6
3441.5
3465.3
3491.1
3505.9
3525.5
3580.0
3567.9
3599.5
3659.9
3699.7
PERCENT
1.0
0.9
-1.4
2.5
0.7
0.7
0.4
0.6
1.5
-0.3
0.9
1.7
1.1
REAL DISP. PERS. INC., BIL. $, A.R.
2768.0
2779.2
2721.5
2776.5
2788.4
2797.0
2802.2
2802.0
2832.5
2818.5
2834.3
2863.4
2889.6
PERCENT
1.0
0.4
-2.1
2.0
0.4
0.3
0.2
0.0
1.1
-0.5
0.6
1.0
0.9
PERS. CONSUMP. EXP., BIL. $, A.R.
3125.4
3149.0
3161.3
3190.9
3231.5
3241.7
3271.7
3270.2
3307.7
3325.4
3346.0
3357.9
3375.7
PERCENT
0.5
0.8
0.4
0.9
1.3
0.3
0.9
0.0
1.1
0.5
0.6
0.4
0.5
REAL PERS. CONSUMP. EXP., BIL. $, A.R.
2562.0
2569.2
2562.5
2574.3
2600.3
2597.3
2615.0
2599.1
2617.1
2626.9
2634.6
2627.2
2636.6
PERCENT
0.5
0.3
-0.3
0.5
1.0
-0.1
0.7
-0.6
0.7
0.4
0.3
-0.3
0.4
HOUSING SECTOR
HOUSING STARTS, THOU. UNITS, A.R.
1511.0
1528.0
1576.0
1392.0
1463.0
1478.0
1459.0
1463.0
1532.0
1567.0
1577.0
1690.0
1498.0
SINGLE-FAMILY
1095.0
1169.0
1087.0
1001.0
1088.0
1067.0
1076.0
1039.0
1136.0
1138.0
1141.0
1202.0
1045.0
HOUSING PERMITS, THOU. UNITS, A.R.
1429.0
1476.0
1449.0
1436.0
1493.0
1420.0
1464.0
1394.0
1516.0
1516.0
1566.0
1507.0
1404.0
Feb-88
Mar-88
Apr-88
May-88
Jun-88
Jul-88
Aug-88
Sep-88
Oct-88
Nov-88
Dec-88
Jan-89
Feb-89
BUSINESS SECTOR
MFG. ORDERS, DUR. GOODS, BIL. $
114.2
113.1
116.8
115.4
125.4
116.1
122.8
119.3
122.8
123.0
132.1
128.3
123.7
PERCENT
1.0
-1.0
3.3
-1.3
8.7
-7.4
5.8
-2.8
2.9
0.2
7.4
-2.9
-3.6
NONDEF. CAP. GOODS ORDERS, BIL. $
33.8
31.9
33.7
31.5
35.5
36.2
38.8
34.9
34.6
35.8
39.4
40.3
36.7
PERCENT
-0.1
-5.6
5.7
-6.6
12.5
2.1
7.2
-10.2
-0.7
3.5
10.1
2.2
-8.9
NONRES. CONST. PUT IN PLACE BIL., $
125.7
128.7
126.5
129.8
129.6
130.4
131.4
130.2
130.7
131.5
134.1
137.7
NA
INVENTORY CHANGE BK. VAL., BIL. $, A.R.
44.6
30.0
45.2
57.8
67.8
52.9
95.5
76.9
3.9
37.9
82.1
67.5
NA
INVENTORY/SALES RATIO, TOTAL BUSINESS
1.52
1.50
1.51
1.51
1.50
1.50
1.50
1.51
1.50
1.50
1.49
1.49
NA
INFLATION INDICATORS
CPI (PERCENT)
0.2
0.3
0.4
0.4
0.3
0.4
0.3
0.4
0.4
0.3
0.3
0.6
0.4
PPI FIN. GOODS (PERCENT)
0.0
0.4
0.3
0.3
0.2
0.6
0.3
0.6
0.1
0.2
0.5
1.0
1.0
HRLY. EARNGS., PR. NONFARM (PERCENT)
0.1
0.2
0.6
0.4
-0.1
0.4
0.1
0.4
0.7
-0.1
0.2
0.6
0.1
GOLD, $ PER OZ. (N.S.A.)
442.0
443.6
451.7
451.1
451.3
437.6
431.3
413.5
406.8
420.2
419.1
403.9
387.5
FOREIGN TRADE BIL. $, (S.A.A.R)
EXPORTS
294.2
322.5
312.3
329.7
315.4
318.2
329.9
335.9
333.8
330.5
348.7
333.6
NA
IMPORTS (CUSTOMS)
452.7
439.7
417.9
428.8
455.4
414.4
457.7
446.1
439.2
458.4
480.6
447.5
NA
DEFICIT
-158.5
-117.2
-105.6
-99.0
-140.0
-96.2
-127.8
-110.3
-105.4
-127.9
-131.9
-113.9
NA
U.S. EXCHANGE RATE (N.S.A)
MULTILATERAL
91.1
89.7
89.0
89.7
92.6
96.5
98.3
97.9
95.1
91.9
91.9
95.1
PERCENT
95.8
2.0
-1.5
-0.9
0.9
3.2
4.3
1.8
-0.4
-2.9
-3.4
0.0
3.5
0.7
CAN.$/$
1.27
1.25
1.24
1.24
1.22
1.21
1.22
1.23
1.21
1.22
1.20
1.19
YEN/$
1.19
129.2
127.1
124.9
124.8
127.5
133.0
133.8
134.3
128.7
123.2
123.6
127.4
127.7
DM/$
1.70
1.68
1.67
1.69
1.76
1.85
1.89
1.87
1.82
1.75
1.76
1.84
$/POUND
1.85
1.76
1.83
1.88
1.87
1.78
1.71
1.70
1.68
1.74
1.81
1.83
1.77
1.75
MONEY AND CREDIT
M1, BIL. $
760.1
763.8
771.2
771.1
776.5
782.5
782.4
783.7
785.4
786.6
790.2
786.2
787.4
PERCENT, A.R.
2.7
6.0
12.3
-0.2
8.7
9.7
-0.2
2.0
2.6
1.8
5.6
M2, BIL. $
-5.9
1.8
2950.8
2969.3
2990.3
2999.8
3013.1
3023.9
3029.7
3035.0
3042.2
3059.1
3069.4
3066.0
PERCENT, A.R.
3070.3
8.6
7.8
8.8
3.9
5.5
4.4
2.3
2.1
2.9
6.9
4.1
-1.3
TOTAL RESERVES, BIL. $
1.7
59.6
59.8
60.4
60.4
60.6
61.2
61.1
61.0
61.0
61.1
61.0
60.5
PERCENT, A.R.
60.5
2.3
3.8
13.1
-0.2
5.5
12.6
-2.9
-1.9
-0.8
2.0
-1.5
-8.2
-1.1
NONBORROWED RESERVES, BIL. $
59.2
58.0
57.4
57.8
57.6
57.8
57.8
58.2
58.7
58.2
59.3
58.9
59.0
PERCENT, A.R.
17.8
-21.3
-12.3
8.9
-4.7
5.2
1.1
6.6
10.8
-9.1
24.4
-7.4
2.4
C&I LNS. + COMM. PAPER, BIL. $ (N.S.A.)
375.8
382.1
387.0
392.9
393.1
390.8
389.2
388.1
394.3
397.5
402.0
406.8
418.8
PERCENT, A.R.
17.3
21.9
16.7
19.9
0.5
-6.7
-4.8
-3.4
21.1
10.1
14.6
22.3
33.5
INTEREST RATES (N.S.A.)
FED FUNDS RATE
6.6
6.6
6.9
7.1
7.5
7.8
8.0
8.2
8.3
8.4
8.8
9.1
T-BILL, 3-MO.
9.4
5.7
5.7
5.9
6.3
6.5
6.7
7.1
7.2
7.4
7.8
8.1
T-BOND, 10 YR.
8.3
8.5
8.2
8.4
8.7
9.1
8.9
9.1
9.3
9.0
8.8
9.0
9.1
T-BOND, 30 YR.
9.1
9.2
8.4
8.6
9.0
9.2
9.0
9.1
9.3
9.1
8.9
9.0
9.0
CORPORATE AAA BONDS
8.9
9.0
9.4
9.4
9.7
9.9
9.9
10.0
10.1
9.8
9.5
9.5
9.6
9.6
MORTGAGE COMMITMENT RATE
9.6
9.9
9.9
10.2
10.5
10.5
10.4
10.6
10.5
10.3
10.3
10.6
10.7
10.7
STOCK MARKET
DOW JONES 30 INDUSTRIALS
1980.7
2044.3
2036.1
1988.9
2104.9
2104.2
2051.3
2080.1
2144.3
2099.0
2148.6
2234.7
STANDARD & POOR'S 500
2304.3
258.1
265.7
262.6
256.1
270.7
269.1
263.7
268.0
277.4
271.0
276.5
285.4
294.0
of
property 300
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Adog and
A14
REVIEW & OUTLOOK
The Quality of Investment
The morality play isn't going ac-
Indeed, economist Alan Reynolds
cording to script. The greedy Eighties
points out that while depreciation is
are supposed to be an era of free-
deducted to get net investment, it's
thy
spending hedonism. The current pros-
not deducted from gross national
boox
perity, the liturgy goes, is based on a
product; this leaves the percent of
ing
consumption binge slighting invest-
GNP comparison suspect. And :of
Urb
ment for the future. Soon the party
course, if policies succeed and GNP
the
will be over and the piper will have to
grows, the same investment will be a
sca
be paid. There will be much gnashing
lower percentage. Also, in the 1980s
of teeth, rending of garments and
the
there has been almost no inflation in
GO
hocking of BMWs.
the costs of capital goods; in the case
ano
This jeremiad has been in fashion
of computers, prices have declined.
gre
for several years now despite the in-
But consumer goods have inflated
era
convenience of sustained prosperity in
each year, SO nominal comparisons
pro
general and the current investment
create a phony appearance of a capi-
Wh
boom in particular. The standard
tal slump and consumption binge.
the
Commerce Department Survey finds
mit
With all of these problems measur-
that businesses plan to increase capi-
ton
ing the quantity of investment, it
on
tal investment this year by 9.9%, after
might be worth thinking a bit about
wa:
a 10.3% boost in 1988. And of course,
the quality of investment, which in
vea
we still have no signs of capacity bot-
fact is more important to the future.
pan
tlenecks while well into the sixth year
Economists John Rutledge and Debo-
of a business expansion. Somehow in-
rah Allen point out that in the 1970s in-
Ma
vestment has been enough to keep out-
flation and high tax rates distorted in-
"W
put growing for a record number of
ant
vestment, inducing people not to re-
years.
firi
place. aging factories but to hedge
Re
So it might be a good idea to take
against inflation and take advantage
of
another look at the statistic behind the
of tax shelters bý building hotels, con-
act
notion of an investment dearth. In the
dominiums and shopping centers.
res
National Income Accounts, net pri-
That. spending was measured as in-
vate domestic investment as a per-
vestment, as of course were all wells
cent of GNP comes out lower in the
drilled in search of $50-a-barrel oil.
1980s than in the 1970s. Therefore, the
The 1970s investments turned out not
argument goes, we must cut consump-
to be today's seed corn, but today's
tion and leave more savings to flow
problem loans.
into investment. And we must in-
A factory allowed to decay into ob-
ad
crease taxes to close the deficit SO
solescence, Mr. Rutledge and Ms. Al-
cl
money borrowed by the government
len point out, is the rough equivalent
tv
can flow into investment. And particu-
of a factory bombed out of existence.
b:
larly, we must stop borrowing from
So the United States at the end of the
abroad to pay for imports, leaving for-
to
1970s resembled Japan and Germany
eign debts for future generations.
he
at the end of World War II. In the
Now of course, productive invest-
he
early Eighties inflation was quashed
32
ment is essential to future growth and
and taxes were recast to encourage
el
prosperity. But the National Income
productive investment. The result re-
vi
Accounts were established in a Keyne-
sembled a reverse Marshall Plan,
W
sian era to answer Keynesian ques-
with spending to replace depleted cap-
tions; "investment" is not what pro-:
ital, a rebounding manufacturing cen-
Wi
duces in the future, but what uses up
ter and high foreign investment.
co
savings to prevent a shortage in total
bu
Photo Copy Preservation
When it comes to imports, indeed,
demand. Keynes, remember, said dig-
pr
Americans were not blowing their
ph
ging holes and filling them would be
money on CD doodads and big-screen
$3
fine with him.
TVs, but spending on the sorts of
in;
Predictably, then, the classification
things John Calvin would approve of.
of investment is somewhat slapdash.
A third of the worsening trade balance
of
Octopus Industry's fifty-first Lear Jet
in the 1980s was due to American pur-
re
is investment, but your son's engi-
bu
chases of foreign capital equipment.
neering education is consumption. A
dli
Another quarter of the deficit was due
personal auto is consumption, even if
W
to purchases of industrial supplies and
m
it lasts five years, indeed even if it's
materials. If Americans went on a
sit
used in business. The same auto pur-
global buying binge in the Eighties,
75
chased by Hertz is investment. The
more than half the money was spent
tv
same with personal computers.
enlarging U.S. productive capacity.
Then there is the problem of depre-
What this means is that human na-
go
ciation. Net investment is gross in-
ture did not change during the 1980s.
b)
vestment less depreciation, someone's
a
As usual, people took advantage of
guess about how fast the existing capi;
good times to buy things they wanted
II
tal stock is wearing out. Gross invest
or needed. As usual people planned
(1
ment actually has been quite strong
for the future by investing as best
for the past five years, but bigger de-
they could. And as usual, doom and
to
preciation allowances keep net invest-
gloom oracles got the whole situation
un
ment relatively low.
flummoxed up
se
Rd
Assn. State Colls. and Univs. (chairperson), Regional Plan Assn. (bd. dirs.
CA 92339 Office: Los Angeles Times Times Mirror Square Los Angeles CA
Inc., Louisville, 1965-81; sr. v.p. J.J.B. Hilliard
1987), Lotos, Phi Beta Kappa. Office: Office of Pres SUNY New Paltz NY
90053
1965-85. Trustee emeritus, past alumni dir. Cen
12561
warden, sr. warden and treas. Calvary
9,
1945;
CHANDLER, ELISABETH GORDON (MRS. LACI DE GERENDAY),
Recipient Disting. Alumni award Centre Coll.,
child,
ARTHUR BLEAKLEY, pathologist, educator; b. Augusta,
sculptor, harpist; b. St. Louis, June 10, 1913; d. Henry Brace and Sara Ellen
Wars (trustee), Delta Kappa Epsilon. Repub
1968;
Ga., Sept. 1926; S. Clemmons Quillian and Mary Isabella (Bleakley) C.;
(Sallee) Gordon; m. Robert Kirkland Chandler, May 27, 1946 (dec.); m. Laci
Pendennis (Louisville); Seagate Beach, Gulfstrea
ptnr.,
1982-
Jane Stoughton Downing, Sept. 2, 1953; Bleakley, John
de Gerenday, May 12, 1979. Grad., Lenox Sch., 1931; pvt. study sculpture
Beach, Fla.). Home: 6209 Wolf Pen Branch R
dir.
legal
Downing. Student, Ga., M.D., Med. Coll. Ga., Augusta, 1948.
and harp. Mem. Mildred Dilling Harp Ensemble, 1934-45; instr. portrait
Other: 1028 Vista del Mar Delray Beach FL 33
Yacht
Diplomate: Am. Bd. Pathology. Intern Baylor U. Hosp., Dallas, 1948-49;
sculpture Lyme Acad. Fine Arts, 1976-; dir. Abbott Coin Counter Co.,
Wayne
PA
resident in pathology, trainee in cancer, dept. pathology Med. Coll. Ga.,
Inc., 1941-55. Exhibited sculpture NAD, Nat. Sculpture Soc., Allied Artists
CHANDLER, JOHN, JR., retired education
1949-51, asst. in pathology, 1949-50, mem. faculty, prof. pathology,
Am., Nat. Arts Club, Pen and Brush, Lyme Art Assn., Mattatuck Mus.,
Mass., Oct. 18, 1920; S. John and Katherine (F
chmn. dept., attending physician Augusta VA Hosp.,
Catherine Lorillard Wolfe Art Club, Am. Artists Profl. League, Hudson
Sept. 21, 1942; children: Darthea Marentette.
Chgo.,
July
cons. Eisenhower Army Med. Center, Augusta, mem. coms.
Valley Art Assn., USIA, 1976-78, Lyme Art Ctr., 1979, retrospective exhbn.
Cuthbert, John III, William C. Grad., Groton
Herbert;
Nat. Heart, Lung and Blood Inst., 1969-85. Author papers in field, chpts. in
Lyme Acad. Fine Arts, 1987, Madison Gallery, 1987; represented permanent
M.A., 1949. Asst. dean Yale, 1946-49; headmas
Laura,
books; mem. editorial bd.: Haemostasis, 1975-83, Pathology Research and
collections, Aircraft Carrier USS Forrestal, Gov. Dummer Acad., James
Sch., 1949-63; ednl. cons. Boston, 1964-66;
Sun-Times;
Practice, Trustee Young Mens Library Assn. Fund, 1962-72, His-
Forrestal Research Ctr. of Princeton U., Lenox Sch., James L. Collins
Boston, 1966-81. Bd. dirs. Chewonki Found., W
U.S.,
1953-
toric Augusta, 1966-69; Trustee Augusta-Richmond County Mus.,
Parochial Sch., Tex., Storm King Art Ctr., Columbia U., Forrestal Meml.
USNR, 1942-46, ETO. Mem. Headmasters
1960-61,
Dan Printup Meml. Trust, trustee Acad. Richmond County,
Medal, Timoschenko Medal for Applied Mechanics, Benjamin Franklin
Headmasters Assn. Clubs: Union Boat (Boston)
TV
Served as officer M.C. AUS, 1951-53. Commonwealth Fund fellow
Medal, Albert A. Michelson Medal, Jonathan Edwards Medal, Shafto
Yacht (Maine). Home: 6 Brookmere Way Bruns
Wash-
Norway, 1963-64. Mem. Internat. Acad. Pathology, Internat. Soc.
Broadcasting Award Medal, Woodrow Wilson Sch. of Princeton U., Ga.
NBC
Thrombosis and Haemostasis; mem. Am. Assn. History Medicine, Coll. Am.
Pacific Bldg., Atlanta, Messiah Coll., Grantham, Pa., Adlai E. Stevenson
CHANDLER, JOHN HERRICK, college presio
care
Pathologists, Am. Assn. Pathologists, Am. Soc. Hematology, Am. Heart
High Sch., III., Queen Anne's County, Md., Pace U., White Plains, N.Y.,
1928; Ralph William and Gwen Thornt
Assn. (fellow council arteriosclerosis, chmn. council on thrombosis, chmn.
pvt. collections. Chmn. Associated Taxpayers Old Lyme, 1969-72; trustee
Gordon Phillips, Dec. 10, 1955; children: John,
1979-80, chmn. com. coronary lesions and myocardial infarctions 1980-
The Lenox Sch., 1953-55; with mus. therapy div. Am. Theatre Wing, 1942-
82), Ga. Assn. Pathologists (pres. 1984-85), AMA, Ga. Heart Assn., Med.
Los Angeles, 1952; B.D. (Danforth fellow), U.
educator;
45. Recipient 1st prize Bklyn. War Meml. competition, 1945; 1st prize
1963. Instr. English Dartmouth Coll., 1961-6
Assn. Ga., Richmond County Med. Soc. (trustee 1984, sec. 1987, v.p.
sculpture Catherine Lorillard Wolfe Art Club, 1951, 58, 63, Gold medal,
C.;
1988), Alpha Omega Alpha. Episcopalian. Home: 803 Milledge Rd
Angeles, 1963-64; asso. prof., dean spl. progr:
B.S.
1969; Founders prize Pen & Brush, 1954, 76, 78, Gold medal, 1957, 61, 63,
in
Danforth Found., St. Louis, 1967-71; pres. Saler
Engring.,
Augusta GA 30904 Office: Dept Pathology Med Coll Ga Augusta GA 30912
69, 74, 76, Am. Heritage award, 1968, Solo Show award, 1961, 69, 75;
Salem, N.C., 1971-76, Scripps Coll., Claremont
Calif.
Prof.
Thomas R. Proctor prize NAD, 1956, Dessie Geer prize, 1960, 79, 85;
ministry Episcopal Ch., 1960. Trustee Newton
engring.
CHANDLER, educator, superintendent schools; b. Bluffton, Ark., July
Sculpture prize Nat. Arts Club, 1959, 60, 62, Gold medal, 1971; Gold medal
Thacher Sch., 1977-85; bd. dirs. Clayton (M
23, 1921; S. J.V. and Edna (McCreight) C.; m. E. Ursula Bieder, 1978;
Am. Artists Profl. League, 1960, 69, 73, 75, prize, 1981, Anna Hyatt Hunt-
Agrl.
Theater Group, 1985- Clubs: University
planters,
children: Brenda (Mrs. Thomas Dexter Barbour), Robert W., Cynthia (Mrs.
ington prize, 1970, 76, Harriet Mayer Meml. prize, 1961; Gold medal
Bohemian. Office: Scripps Coll 10th & Colum
Fellow
Am.
Patrick Bost), Maria, Michael, Bobby Joe. B.A., U. Tex., 1948, M.Ed.,
Hudson Valley Art Assn., 1956, 69, 74, Mrs. John Newington award, 1976,
Pres Claremont CA 91711
Automotive
1949; Ed.D., Columbia, 1951. Asst. prof. edn. Va., Charlottesville, 1951-
78; Lindsey Morris Meml. prize Allied Artists Am., 1973, Gold medal, 1982;
CA
95616
54; asso. prof. Va., 1954-56; asso. prof. edn. Northwestern U., 1956-59,
sculpture prize Acad. Artists, 1974; Sydney Taylor Meml. prize Knick-
erbocker Artists, 1975; New Netherlands DAR Bicentennial medal, 1976;
CHANDLER, JOHN WESLEY, association
prof. edn., 1959-78; dean Northwestern (Sch. Edn.), 1963-78, dean emer-
itus, supt. schs. Dardanelle, Ark., ednl. cons. State Farm
Tallix Foundry award, 1979; named Citizen of Yr., Town of Old Lyme,
Sept. 5, 1923; Baxter Harrison and Mamie
Apr.
Ins. Cos., 1953-70; cons. Nat. Bd. Med. Examiners, 1978-79, Nat. Sch. Bds.
Conn., 1985. Fellow Nat. Sculpture Soc. (council 1976-85, John Spring
Gordon, Aug. 25, 1948; children: Alison, John
Mitravich,
Assn., 1978-80; Co-chmn. Gov's. Com. Literacy and Learning, 1963-67;
Founder's award 1986), Am. Artists Profl. League, Internat. Inst. Arts and
Mars Hill Coll., 1941-43; A.B., Wake Forest
M.B.A.,
Letters; mem. Nat. Arts Club, Allied Artists Am., Pen and Brush, Catherine
B.D., Duke U., 1952. 1954; Hami
cons. River City Ednl. Program, Chgo.; Chmn. adv. council, trustee Aeros-
Airlines,
pace Edn. Found., 1964-69; mem. adv. council Kellogg Found., 1963-65;
Lorillard Wolf Art Club, Lyme Art Assn. (pres. 1973-75), Council Am.
1968, Williams Coll., 1973, Amherst Coll., 1974
Inc.,
Wash-
Internat.
mem. Gov.'s Task Force on Edn., 1965-67; pres. III. Council on Econ. Edn.,
Artists Socs. (dir. 1970-73), Am. Artists Profl. League (dir. 1970-73), NAD,
Adams State Coll., 1983; L.H.D., Wake Forest
1969-73;
chmn.
III.
Task
Force
on
Tchr.
Inc.,
Edn.;
mem.
III.
Tchr.
Lyme Acad. Fine Arts (trustee 1976-). Home and Studio: Mill Pond Ln
Middlebury Coll., 1983, Bates Coll., 1983, Bea
Certification
Los
Bd.; Bd. dirs. Films, Inc., Law in Am. Soc. Found., 1971-78, Citizens Sch.
Old Lyme CT 06371
Wake Forest Coll., 1948-51, asst. prof., 1954-55
v.p.,
Coll., 1955-60, assoc. prof., chmn. dept., 1960-6
Recipient
Com. Chgo.; mem. Carter-Mondale Task Force on Edn., 1976; trustee Chgo.
Grad.
Sch.
Y Community Coll., Evanston Roycemore Sch., North Shore Country Day
68, acting provost, 1965-66, dean faculty, 196
CHANDLER, GEORGE ALFRED, manufacturing executive; b. Cleve.,
Clinton, 1968-73, Williams Coll., William
Sch.; mem. adv. com. Ark. Ednl. Reform Study, 1985- Author: Education
Aug. 15, 1929; S. George Alfred and Doris Beatrice (Datson) C.; m. Sally
and the Teacher, 1961, (with Lindley J. Stiles and John I. Kitsuse) Education
dir. Assn. Am. Colls., Washington, 1985- C
Jane Topping, Apr. 10, 1954; children: Nancy, David, James,
in Urban Society, 1962, (with Paul V. Petty) Personnel Management in
Elizabeth. B.A., Princeton U., 1951; M.B.A., Harvard U., 1956. With brass
American Religion, 1963, Masterpieces of Reli
Wil-
School Administration. 1955, (with Daniel Powell and William Hazard)
jour. articles and revs. Trustee Williams Coll.
div. Olin Corp., East Alton, III., 1956-67; v.p., gen. mgr. Aluminum Group
Education and the New Teacher, 1971; Gen. editor: Introduction to
Forest Coll., 1971-77, 79-87 bd. dirs. Williams
Olin Corp., Stamford, Conn., 1967-71; pres. Winchester Group Olin Corp.,
AB.
Teaching, vols, 1969-78, Free Press Series; mem. editorial adv. bd.: Edn.
New Haven. 1971-77; pres. Am. Productivity Ctr., Houston, 1978, Indsl.
85, Sterling and Francine Clark Art Inst., 197
1963-
Schs. and Colls., 1977-78, Assn. Ind. Colls. and
and Urban Society; cons. editor: Standard Edn. Almanac, 1980-81, Acad.
Products group Amstar Corp., 1978-82; pres., chief exec. officer Am.
Cir.,
1976-
Media, 1980-83; Contbr. articles to profl. jours. Served with USAAF, 1942-
Ship Bldg. Co., Tampa, Fla., 1983-85; pres., chief exec. officer Aqua-Chem,
New Eng. Colls. Fund. 1978; trustee Duke
Box
11330
44. Fulbright-Hays sr. scholar Rumania, 1975-76; Fulbright-Hays sr.
Woman's Coll., Fulbright fellow India
Inc., Milw., 1985-, also chmn. bd. dirs.; dir. The Allen Group, Melville,
scholar Moscow, spring 1979. Mem. Nat. Cath. Edn. Assn. (dir. 1972),
L.I., Peabody Internat. Corp., Stamford, Advanced Aluminum Products,
Am. Acad. Religion, Soc. for Sci. Study Religi
Internat. Council of Scholars (chmn. adv. com. 1979-82). Home: Route 2
United Ch. of Christ. Clubs: Williams, Centu
Hammond, Ind., Aqua-Chem, Inc. Mem. Alton Bd. Edn., III., 1963-67;
b.
Dardanelle AR 72834
(Washington). Office: Assn Am Colls 1818
mem. Darien Bd. Edn., Conn., 1969-72. Served to 1st lt. arty. U.S. Army,
Mildred
1951-53, Korea. Republican. Episcopalian. Home: 8335 N Range Line Rd
Mil-
CHANDLER, C(HARLES) Q(UARLES), bank executive; b. Wichita,
River Hills WI 53209 Office: Aqua-Chem Inc 210 W Capitol Dr Milwaukee
CHANDLER, KENNETH A., editor; b. Westcl
Tran-
Kans., Sept. 1, 1926; and Alice (Cromwell) C.; m. Georgia Johnson,
WI 53209
2, 1947; came to U.S., 1974; S. Leonard
Aug. 22, 1948; children: Jeannette Colleen Chandler Randle, C. Q. IV,
(McKenzie) C.; m. Linda Kathleen, Mar. 2.
1922-24;
Robert Paul. B.S., B.A., Kans. State 1949; postgrad. Wis. Sch. Banking,
CHANDLER, HARRY EDGAR, author; b. Springfield, III., May 11, 1920;
Benjamin, Kathryn. Mng. editor N.Y. Post.
Circuit
Ct.,
Madison, 1958. With First Nat. Bank in Wichita. 1950-, exec. v.p., 1958-
Herald, 1986- Office: Boston Herald Herald
1929;
Harry Edgar and Theresa Augusta (Fromm) C.; m. Mary Louise Becker,
It.
71, pres., 1971-75, pres., chmn. bd., 1975-83, chmn. bd., v.p., dir.
June 6, 1946; children: Susan Becker Ballard, Jay Michael, Teresa Ann,
senator
First Bank of Newton. (Kans.); dir K.G. & Wichita, Fidelity State Bank
Stephen Ross, Julia Elizabeth. A.B. in Sci, Evansville, 1942; A.M. in
CHANDLER, KENT, JR., lawyer; b. Chgo.,
1940.
to
fill
& Trust, Topeka. Pres. Kans. Soc. Crippled Children, Wichita; chmn.
Journalism, Ind. U., 1949, 1949. Courthouse reporter, asst. editor
Grace Emeret (Tuttle) C.; m. Frances Robe
commr.
Wesley Found.: trustee Kans. State Found., Manhattan; trustee Wichita
Peru (Ind.) Daily Tribune, 1949-52; tech. editor, writer Armour Research
dren-Gail, Robertson Kent. B.A., Yale U., 194
commr.
State U. Endowment Assn. Mem. Kans. Bankers Assn. (bd. dirs.), Am.
Baseball
Found., Chgo., 1952-53; asso. editor Steel Mag., Cleve., 1953-54; copy editor
III. 1949, U.S. Dist. Ct. (no. dist.) III. 1949,
Bankers Assn. (exec. com. comml. lending div.). Republican. Clubs: Wichita
Life
Steel Mag., 1954-67; editor Materials Today (monthly materials mag. Am.
Appeals (7th cir.) 1955. Assoc. Wilson & Mcll
States
(bd. dirs.), Wichita Country. Office: First Nat Bank in Wichita Box One
Soc. for Metals), Metals Park, Ohio, 1967-68; mng. editor Metal Progress,
dir. First Nat. Bank Lake Forest, 1969
an
or-
Wichita KS 67201
U.
1968-72, editor, asst. dir. periodical publs., 1968-85; Lectr. bus. mag.
City Lake Forest (III.), 1953-63, chmn., 1963-67
com.
69, chmn., 1969-70, pres. bd. local improvement
Exec.
journalism and article writing Western Res. U., 1963-65; cons. and speaker
chmn.
bd.
CHANDLER,
COLBY
H.,
photographic
equipment
and
materials
bus. mag. pubs., pub. relations agys. Author: The How to Write What
mayor, 1970-73, mem. bd. fire and police comm
Army,
manufacturing executive. married. B.S., Maine, 1950; postgrad., MIT.
Book, Technical Writers Handbook, 1983, So You Want To Be Consultant,
Served to maj. USMCR, 1941-46. Mem. ABA.
U.S.
Ky.
Press
With Eastman Kodak Co., Rochester, N.Y., 1950 mem. sales estimating
1984; columnist Metals Internat. Contbr. articles to profl. jours. Served to
Bar Assn., Lake County Bar Assn., Legal Club
council, then corp. asst. v.p. Eastman Kodak Co., until 1972, exec.
capt. USMCR, 1942-46.
can. Presbyterian. Clubs: Comml. of Chgo., Uni
Alumnus
1972-77, pres., 1977-83, chmn. chief exec. officer, also dir.; exec. dir.
Forest), Old Elm (Fort Sheridan, III.). Office:
of
Lincoln 1st Bank, Rochester.; dir. Continental Group, Inc., Ford Motor Co.,
Chicago IL 60603
recipient
CHANDLER, HUBERT THOMAS, former army officer; b. Charleston,
1959;
J.C. Penney Co. Bd. dirs. Indsl. Mgmt. Council Rochester: bd. dirs. Congl.
Dec. 8, 1933; S. Hubert Paris and Eleanor Lee (Gay) C.; m. Mary
1959;
Award Com.; Bd. dirs. United Way of Greater Rochester; bd. dirs.
Frances Ritter, June 4, 1955; son, Thomas Ritter. Student. Morris Harvey
CHANDLER, (ROBERT) LEWIS, lawyer; b.
Hall
County Conv. and Visitors Bur., Nat. Orgn. on Dis-
Coll., Charleston, 1951-52, Louisville, 1952-53; Balt. Coll. Dental
LeRoy Wallace and Edna (Lewis) C.; m. Judy
Jewish
ability; exec. dir. Rochester Civic Music Assn.; trustee Rochester Inst. Tech.,
Surgery, 1957; grad., Army War Coll., 1974. Diplomate: Am. Bd. Pros-
children by previous marriage: Jerry
Legion,
40
Colgate Rochester Div. Sch., U. Rochester, Nat. 4-H Council, Internat. Mus.
thodontics. Commd. Dental Corps U.S. Army, 1957, advanced through
Elizabeth. Student. Rice Inst., 1938-39; J.D.,
K.T.,
Photography at George Eastman House: mem. MIT Corp. Mem. Soc. Sloan
grades to maj. gen., dep. to chief Dental Corps, 1975-78, dep. comdr. Med.
Atty. reviewer govt. agy. 1946-50; partner firm
Country
Fellows (bd. govs. 1964, pres. 1966-68), Tau Beta Pi, Sigma Pi Sigma, Phi
Command; dental surgeon U.S. Army, Europe, 1979-82; asst. surgeon gen.,
and predecessors, Dallas; pres. RLC Oil Corp.:
visit
world
Kappa Phi, Beta Gama Sigma. Office: Eastman Kodak Co 343 State St
chief Dental Corps U.S. Army, 1982-86, dir. personnel Med. Dept., 1983-85,
Gas Inc.; pres. Silverhorn Operating Corp.
flight
ever
Rochester NY 14650
ret. Exec. com. Transatlantic council Boy Scouts Am., 1980-82; chmn. trust
Mem. Dallas. Tex., Am. bar assns. Episcopali:
Versailles
fund Girl Scouts Europe, 1981-82; pres. European Assn. Rod and Gun
Home: 6606 Northport Dallas TX 75230 Office
CHANDLER, DAVID, scientist, educator: b. Bklyn., Oct. 15, 1944. S.B.,
Clubs, 1981-82, Am. German Friendship Club, Heidelberg, W. Ger., 1981-
TX 75201
MIT, 1966: Ph.D., Harvard U., 1969. Research assoc. U. Calif., San Diego,
Decorated D.S.M., Bronze Star, Meritorious Service medal, Army
b.
1969-70; from asst. prof. to prof. U. III., Urbana, 1970-83; prof. U.Pa.,
Commendation medal. Fellow Am. Coll. Prosthodontists: mem. ADA, Am.
CHANDLER. MARGARET KUEFFNER, bu
C.:
Phila., 1983-85, U. Calif., Berkeley, 1986-; vis. prof. Columbia U.,
Assn. Mil. Surgeons, Fedn. Dentaire Internat., Fedn. Prosthodontic Orgns.
Sept. 30, 1922; d. Otto Carl and Marie (Sch
Bird,
Mary
1977-78; vis. scientist IBM Corp., Yorktown Heights, 1978, Oak Ridge
Address: 1714 Besley Rd Vienna VA 22180
Chandler, Apr. 8, 1943. B.A. in Polit. Sci, U.
Harvard
Nat. Lab., 1979; cons. Los Alamos Nat. Labs., 1986- Contbr. articles to
1944, in Sociology, 1948. Mem. faculty
1976,
profl.
jours.;
author
book
in
field;
editor
Chem.
Physics;
mem.
editorial
bd.
CHANDLER, JAMES E., banker; b. Keene, N.H., July 2, 1924; Harold
asso. prof. sociology and indsl. relations, 1954
(hon.),
Jour. Phys. Chemistry, Molecular Physics. Recipient Bourke medal Faraday
and Blanche C.: m. Christine L. Wilder, Feb. 25, 1945; children: Carolyn,
III. at Chgo., 1962-63, prof., 1963-65; prof. bus
from
instr.
Div. Royal Chem. Soc., Eng., 1985; fellow Alfred P. Sloan Found., 1972-74,
Harold I. B.S., Wharton Sch. of Pa., 1945; grad., Stonier Grad. Sch.
pres.'s arbitration panel, Fulbright
1966-
Guggenheim Found., Fellow AAAS, Am. Phys. Soc.; mem. Am.
Banking, Rutgers 1954. With Keene Nat. Bank, 1945, Phila. Nat. Bank,
Tokyo, Japan, 1963-64; lectr. Rutgers U., 1958.
prof.
bus.
Chem. Soc. (chmn. div. theoretical chemistry). Avocations: tennis; piano
1945, First Nat. Bank Phila., 1953; with Indian Head Nat. Bank. Nashua,
1966, Columbia, 1962; Labor arbitrator nat.
Oxford
U.,
playing. Office: U Calif Dept Chemistry Berkeley CA 94720
N.H., exec. v.p. Indian Head Nat. Bank, 1956-58, pres., 1958-75,
Assn., 1965-, mem. collective bargaining me
1979;
chmn. bd., chmn. I.H. Banks Inc.; bd. dirs. Asso. Grocers of New
asso. mem. Center Advanced Study, III. Gr
CHANDLER, DOROTHY BUFFUM, civic worker; b. Lafayette, III.; d.
Eng.;
chmn.
Indsl.
Devel.
Authority.
Chmn.
bd.
Crotched
Mountain
Found.
Program Mng. Complex Techs., 1967-; mem.
Council
on
Charles Abel and Fern (Smith) Buffum: m. Norman Chandler, Aug. 30,
Mem. Stonier Grad. Sch. Banking Alumni Assn., Gen. Alumni Assn. U.
affirmative action Commn. Columbia, 1976-;
(renamed
1922; children: Camilla (Mrs. F. Daniel Frost), Otis. Student, Stanford U.,
Pa., Newcomen Soc. Clubs: Kataska (Que., Can.); Nashua Country,
lective Bargaining in Higher Edn., 1975-;
and
1919-22; LHD (hon.), U. Calif., U. Judaism, U. Redlands. Hebrew Union
Manchester Country. Home: 6 Town Crier Rd Amherst NH 03031 Office:
Dispute Resolution. arbitrator, fact-fir
1964,
The
Coll.; LLD (hon.), Occidental Coll., Mt. St. Mary's Coll., So. Calif.: DFA
One Indian Head Plaza Nashua NH 03060
Relations Commn., adminstrv. bd. Bu
The
Visible
(hon.), U. Portland, Pepperdine Coll., Loyola Marymount U.; D of Arts
mem. spl. panel interest arbitrators, Sta
Daems)
(hon.), Art Inst. Los Angeles County. Hon. life chmn. Los Angeles
adv. com. Nat. Center Study of Collective
Coming
of
Philharmonic Assn.; chmn. bd. govs. Performing Arts Council, Music Ctr.
CHANDLER, JAMES JOHN, surgeon; b. Dayton, Ohio, Nov. 13, 1932;
mem. state adv. council Inst. Mgmt.
James Kapp and Margaret Bertha (Paulson) C.; m. Fleur Elizabeth Varney,
mem. Nat. Task Force Teachin
Angeles County; chmn. The Amazing Blue Ribbon of Music Ctr., Music
1950-53.
Ctr. Found.; former regent U. Calif.: hon. life trustee Occidental Coll., Calif.
July 23, 1955; child, Jennifer Hauge. A.B., Dartmouth Coll., 1954,
Methods in Law and Bus. Schs., 1985-
trustee
Inst. Tech. Recipient Herbert Hoover medal Stanford Alumni Assn.,
diploma in medicine, 1955; M.D. cum laude, U. Mich., 1957. Diplomate:
Relations in Illini City, vols. and 2, 1953,
Johns
Humanitarian award Variety Clubs Internat., 1974. Address: care Los
Am. Bd. Surgery. Intern Harvard Surg. Service, Boston City Hosp., 1957-
Union Interests, 1964 (McKinsey Found. bo
to
It.
Angeles Philharm Assn Grand AveBlvd Los Angeles CA 90012
58, jr. asst. resident, 1958; resident, chief resident in surgery, clin. fellow Am.
Large Systems, 1971 (McKinsey Found. book
Gug-
Cancer Soc. U. Oreg. Hosps., Portland. 1961-64; instr. surgery U. Oreg.
Columbia Jour. World Business, 1972-; Con
Hosps., 1964; attending staff, chmn. surgery Med. Center at Princeton, N.J.,
Econ.
CHANDLER, E(DWIN) RUSSELL, journalist; b. Los Angeles, Calif., Sept.
profl. lit. Postdoctoral fellow statistics Yale,
(exec.
1972-; clin. prof. surgery Coll. Medicine and Dentistry N.J.-Robert Wood
research fellow social sci. and bus. U. Chgo.,
Am.
Hist.
9, 1932; Edwin Russell Sr. and Mary Elizabeth (Smith) C.; m. Sandra
Johnson Med. Sch., Piscataway, 1975 cons. in surgery Princeton U.
Fulbright prof. Central U. Planning an
(council
Lynn Swisher, Aug. 24, 1957 (div. 1977); Holly, Timothy
Contbr. chpt. to book, articles to profl. jours. Bd. dirs. Trinity Counseling
1974; Recipient Recognition award III. Nurse
Scis.,
Am.
John: m. Marjorie Lee Moore. Dec. 21, 1978; stepchildren. Student,
Service, 1968-82, chmn., 1968-72, pres. Princeton Day Sch. PTA, 1976-
Sociol. Assn., Soc. Applied Anthropology; me
Nan-
Stanford U., 1950-52; B.S. in Bus. Adminstrn., UCLA, 1952-55; postgrad.,
78, trustee. 1976-81; active All Saints Episcopal Ch., Princeton, 1965
Econ. Assn., Indsl. Relations Research Assn.
So. Calif. Grad. Sch. Religion, 1955, New Coll., Edinburgh, Scotland.
mem. alumni council Dartmouth Med. Sch., 1981-86; mem. alumni council
Office: Uris Hall Grad Sch Business Columbia
1955-56; M.Div.,, Princeton Theol. Sem., 1958; grad., Washington
Darmouth Coll., 1983-86. Served to lt. USN, 1958-60; to It. comdr. USNR,
Journalism Ctr., 1967. Ordained to ministry Presbyterian Ch., 1958. Asst.
1960-61. Fellow A.C.S. (pres. N.J. chpt. 1976-77, gov. 1981-87), Soc.
May
29.
pastor 1st Presbyn. Ch., Concord. Calif., 1958-61; Pastor Escalon Presbyn.
Surgery Alimentary Tract, Am. Coll. Chest Physicians; mem. Am. Soc. Clin.
CHANDLER, MARGUERITE NELLA, real
June
10,
Calif., 1961-66; reporter Modesto Bee, Calif., 1966-67; religion editor
Oncology, Soc. Surgeons N.J., Med. Soc. N.J. (sec., chmn. surgery sect.
New Brunswick, N.J., May 16, 1943; d.
Columbia
Washington Star, 1968-69; news editor Christianity Today, Washington,
1967-69), Mercer County Med. Soc., Collegium Internationale Chirurgiae
(Moore) C.; m. Ronald Wilson. May 30, 1964
Coll.,
Digestivae, Soc. Surg. Oncology, Oncology Soc. N.J., Acad. Medicine N.J.,
Mark, Adam: m. Richmond Shreve, Nov. 22.
reporter Sonora Daily Union Democrat, Calif., 1972-73; religion
writer Los Angeles Times, 1974 Author: The Kennedy Explosion, 1972,
Soc. Internat. Surgery, Alpha Omega Alpha. Home: 95 Russell Rd
Acctg., Syracuse U., 1964; postgrad., Grad. Sch
1976-79.
Budgets, Bedrooms and Boredom. 1976; co-author: Your Family-Frenzy or
Princeton NJ 08540 Office: 281 Witherspoon St Princeton NJ 08542
acct. Peat Marwick Mitchell. Providence, 1964:
Revson
Fun?, 1977, The Overcomers, 1978; contbr. articles to profl. jours. Recipient
dept. Brown U., Providence, 1965; intern in dev
1968,
Arthur West award United Methodist Communications Council, 1978; co-
75; prin., tng. cons. M. Chandler Assocs.,
of
recipient Silver Angel award. Religion in Media, 1985. Mem. Religion
CHANDLER, JAMES WILLIAMS, retired securities company executive;
Corp., Bound Brook, N.J., 1976-78, pres., chief
to
James.
Newswriters Assn. (James O. Supple Meml. award. 1976, 1984, 86, John M.
b. Adairville, Ky., Feb. 4, 1904; James Avery and Mary Nell (Williams)
Corps vol., 1966-68; established Food Bank N
1985.
Templeton Reporter of Yr. award 1984, pres. 1982-84), Phi Delta Theta.
C.; m. Lelia Elizabeth Roemele, June 29, 1932. A.B., Centre Coll., Danville,
1982, Worldworks, 1983; founder PeopleCare
Mem.
Am.
Republican. Avocations: tennis; beekeeping. Home: PO Box 44 Forest Falls
Ky., 1925. With Stein Bros. & Boyce. Louisville, 1926-48, 1948-49;
dirs. N.J. Council for Arts. 1986-87; treas.
ptnr. W.L. Lyons & Co., 1950-65; partner J.J.B. Hilliard, W.L. Lyons & Co.,
Group, 1986-87; pres. bd. trustees N.J. Council
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PAGE
1
LEVEL 3 - - 1 OF 19 STORIES
PR Newswire
February 21, 1989, Tuesday
DISTRIBUTION: TO BUSINESS DESK
LENGTH: 540 words
HEADLINE: TO AVOID 'TRADING PLACES, U.S. MUST GROW THROUGH
DATELINE: NEW YORK, Feb. 21
KEYWORD: EASTMAN KODAK CEO ADDRESSES ABNY
BODY:
NEW YORK, Feb. 21 /PRN/ - The U.S. faces the choice of
"trading goods or trading places," with countries whose standards of
living are less than our own, according to Colby H. Chandler, chairman
and chief executive officer of Eastman Kodak Company (NYSE: EK).
Speaking to a breakfast meeting of the Association for a Better New
York (ABNY), Chandler said that in order for the country to continue to
be a world leader, it will have "to put its economic house in order."
Chandler noted that while reducing the federal deficit must be an
economic priority, the nation's agenda can be put in the simpler terms
of preserving and enhancing a manufacturing base. "We need to ask
ourselves: Do WE want to manufacture quality goods here and have
increased economic growth, or do we want to accept status as a low-cost,
cheap labor country," Chandler said.
Chandler admitted that many Americans may have become "anesthesized"
to dire warnings on the consequences of the budget and trade deficits.
"We are no longer paying attention," he said.
"While we are all aware that America has a trade deficit, it seems
very abstract to most of us," Chandler said. "And few of us have
stopped to think what it actually means to us in practical terms.
"What it means is that the debate over whether the U.S. is
deindustrializing is essentially irrelevant. The fact is America cannot
do away with its manufacturing base."
In order just to keep its foreign debt from growing, the United
States must begin running a trade surplus of $50 billion a year,
according to Chandler. That would be a $200 billion turnaround from
the current $150 billion trade deficit.
Chandler offered three major recommendations for bringing "some
vibrancy" to the economy and "managing a successful adjustment."
-- First, the United States must pursue sound economic policies that
will foster a substantial increase in savings to finance investment.
- Second, there must be improved access to foreign markets.
-- Third, foreign markets must grow in order to accommodate
increased U.S. exports.
On the economic policy front, Chandler noted that the budget
deficit has continued to rise despite attempts by Congress and past
administrations to attack it. "The problem will not grow away or go
away," he said. "America must work towards a balanced budget with
spending cuts and revenue increases sharing in the pain."
Chandler said that any new taxes should reward savings and
investment rather than consumption and debt. He pointed out that a
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PAGE 2
PR Newswire, February 21, 1989
5 percent value-added tax, even with exemptions on food, health and
housing costs, could raise $80 billion a year toward deficit reduction.
"Failure by our political leaders to act today means a tomorrow
with: higher interest rates (which are already too high), less
investment (which is already too low), and probably an overvalued dollar
(when a lower one is needed to encourage exports)," Chandler said.
"In other words, failure to produce deficit reduction will make it
difficult for American manufacturers to produce.
CONTACT -- Paul C. Allen of Eastman Kodak, 716-724-5802
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PAGE 3
LEVEL 3 - - 2 OF 19 STORIES
Proprietary to the United Press International 1989
February 8, 1989, Wednesday, BC cycle
SECTION: Regional News
DISTRIBUTION: New York
LENGTH: 326 words
HEADLINE: Kodak announces record profits and sales in 1988
BYLINE: By CHARLES F. PORCARI
DATELINE: ROCHESTER, N.Y.
KEYWORD: Earn-Kodak
BODY:
Buoyed by a strong fourth quarter, Eastman Kodak Company Wednesday announced
record sales and earnings for 1988, although rumors of white-collar job cuts
remain.
The Rochester-based photo giant reported year-end net earnings of $1.40
billion, or $4.31 a share, an increase of 19 percent over the 1987 figures of
$1.18 billion, or $3.52 per share.
Sales for 1988 totaled $17.03 billion, a jump of 28 percent from the 1987
total of $13.31 billion, Kodak reported.
The results included figures from Sterling Drug Company, aquired by Kodak
last February, but company officials said sales and earnings would have reached
record proportions anyway.
Fourth quarter net earnings were $312 million, or $.96 a share, up 29 percent
from fourth quarter 1987 per share earnings of $.75.
''I think the fourth quarter was the key, performance was better than
anticipated as sales picked up considerably near the end,'' said Eugene Glazer,
a vice president at Dean Whitter Reynolds, who follows Kodak.
Glazer said Kodak's core business of cameras and film remained strong in
1988, allowing the company to digest the absorption of Sterling Drug.
''It'll be five years or so before we can tell if Sterling was digested
completely, but numbers like that help,' Glazer said.
Kodak officials declined to comment about rumors of selected white-collar
layoffs in some of the firm's operating divisions, although Kodak Chairman and
Chief Executive Officer Colby Chandler was expected to make an announcement
to employees Thursday.
''Administrative type positions are always looked at when costs need to be
cut, In 1989 I think you'll see some pearing,'' Glazer said.
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PAGE 4
Proprietary to the United Press International, February 8, 1989
In a prepared statement, Chandler said the company would not be resting on
its laurels in 1989.
' 'With the organizational components of our long-term strategy now in place,
we our focusing our efforts and our investments on value-adding aspects of our
principal business sectors,' Chandler said.
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PAGE 5
LEVEL 3 - 3 OF 19 STORIES
PR Newswire
November 30, 1988, Wednesday
DISTRIBUTION: TO BUSINESS DESK
LENGTH: 332 words
HEADLINE: KODAK SALES TO REACH $1 BILLION IN JAPAN IN 1989, CHANDLER SAYS
DATELINE: HARTFORD, Conn., Nov. 30
KEYWORD: EASTMAN KODAK PREDICTS JAPAN SALES
BODY:
HARTFORD, Conn., Nov. 30 /PRN/ - Kodak's total sales in
Japan next year are expected to reach $1 billion, more than four times
the 1985 sales in that country, Colby H. Chandler, chairman and chief
executive officer of Eastman Kodak Company (NYSE: EK), told the Hartford
Society of Financial Analysts today.
Chandler said the company's increased thrust in the Japanese market
is paying dividends with revenues up more than 25 percent this year.
"It is interesting to note that Kodak sales in the U.S. reached the
billion dollar milestone 26 years ago," Chandler said. "In Japan today
- as was true of Kodak in this country in 1962 -- we have only just
begun."
As evidence of Kodak's "aggressive effort" to significantly increase
Kodak's share of the Japanese imaging market, the world's second largest
market for such products, Chandler cited the opening of the new Kodak
Research and Development Center in Japan last month.
The center, which currently employs 100 scientists and engineers,
will help Kodak match products specifically to unique Japanese needs,
Chandler said. It also will let the company enter the Japanese
scientific network and link Japan to the Kodak network of international
research and development labs.
Other recent thrusts in Japan included the forming of a
photofinishing joint venture with Imagica Corporation, the forming of
K. K. Kodak Information Systems to market micrographic and business
imaging systems, and the opening of a technical center in Tokyo to
assist customers with photofinishing, consumer and professional products
and services and to test new Kodak products for suitability in the
Japanese market.
The company also announced its first manufacturing operation in
Japan for the finishing (cutting and packaging) of selected graphic arts
films for that market. It will be operational by the end of this year.
CONTACT - Henry J. Kaska of Eastman Kodak, 716-724-4642
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LEVEL 3 - - 4 OF 19 STORIES
Copyright @ 1988 Reuters
November 30, 1988, Wednesday, BC cycle
SECTION: Financial Report.
LENGTH: 133 words
HEADLINE: KODAK SEES ONE BILLION DLR 1989 SALES IN JAPAN
DATELINE: HARTFORD, CONN., NOV 30, REUTER
BODY:
Eastman Kodak Co <EK> said it expects its total sales in Japan next year to
reach one billion dlrs, more than four times 1985 sales in that country.
Colby Chandler, chairman and chief executive officer, told analysts that
the company's thrust in the Japanese market has resulted in a 25 pct increase in
revenues from that country this year.
Chandler also said that the introduction of a new family of superior films
for 35-mm photographers was one of several factors supporting the company's
expectations of continuing record performance by the company in 1989.
Chandler said the new Ektar family of films is experiencing "extremely
positive" customer and dealer reaction in Europe and Japan, where the film is
now being marketed. United States introduction is scheduled for early 1989.
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PAGE
7
LEVEL 3 - - 5 OF 19 STORIES
Copyright 8 1988 Chicago Tribune Company;
Chicago Tribune
November 21, 1988, Monday, NORTH SPORTS FINAL
SECTION: BUSINESS; Pg. 5; C
LENGTH: 794 words
HEADLINE: A student of business, Kodak chief stresses manufacturing
BYLINE: Associated Press
DATELINE: ROCHESTER, N.Y.
BODY:
Colby Chandler, chairman and chief executive of Eastman Kodak Co., has
spent 38 years learning the lessons of business, the theories of economics and
the inside-out story of the world's largest photography company.
Now, after five years at the helm of Kodak, Chandler is ready to take his
message on the future of manufacturing to the masses.
So move over, Lee Iacocca, because here comes Colby "America won't make it
without manufacturing" Chandler.
At 63, the low-key engineer is learning how to become a standup spokesman for
corporate America.
"Watching the swing toward a service-intensive society and listening to some
parties say that's good is scary," said Chandler in an interview at Kodak's
headquarters in Rochester. "I have no intention of talking to the walls on this
subject."
Kodak's chief has been out preaching the manufacturing gospel to business
groups, college students, politicians and anybody else who will listen. The
company also commissioned a study by three leading economists on the importance
of manufacturing, and it started its first public affairs advertising campaign
on the issue.
Chandler also is using his last few weeks as chairman of President Reagan's
Export Council, the chief advisory group to the Department of Commerce, to drum
up support.
"The importance of manufacturing to the economy has been something that's
been 50 obvious to me, and I'm sure to others like me, that it might not have
ever occurred to us that it wasn't obvious to everyone else," he said.
Though leaders of service industries might disagree, Chandler claims that one
job making a car, or a copier, or a computer, is 10 times more valuable to the
economy than a job selling insurance or waiting on customers in a bank or making
airline reservations.
The percentage of workers employed in manufacturing in America - 20 percent -
is lower than at any time this century, according to the Kodak-commissioned
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PAGE
8
@ 1988 Chicago Tribune, November 21, 1988
study "The Case For Manufacturing in America's Future."
What that means, Chandler said, is that the large "multiplier effect" that
manufacturing has on stimulating the economy - through higher wages, buying
supplies and raw materials and creating new and improved products - is drying
up.
"It's a very critical
edge that we walk," Chandler said. "We're not the
country with leading productivity gains. That's a sign. When we reach the real
crisis, WE will have gone 50 far that bringing it back is going to take decades
and decades."
The best way to help manufacturing in the immediate future would be to
eliminate the federal deficit, Chandler said. But for the long term, he
suggested:
- Urging the government to make education and other people-oriented benefits
a priority.
- Using spending and tax policies to encourage investment in new technology
and research.
- Implementing an incremental investment tax credit that would provide
incentives for companies to expand a plant or buy new equipment.
- Altering the nation's tax structure to put a higher emphasis on taxing
consumption rather than the current system of taxing investment and saving.
Chandler has always had a reputation on Wall Street as "Mr. Long Term," even
before he took over as chairman of Kodak.
He came to the company in 1950 after graduating from the University of Maine
with a physics degree. He worked as a quality control engineer and held various
management positions.
He received a master's degree in management from Massachusetts Institute of
Technology in 1964 and directed the development of Kodak's Ektaprint copiers and
duplicators in 1973. He was named president of the company in 1977 and chairman
in 1983.
As chairman, Chandler has sent Kodak charging into Japan and given
assembly-line workers almost complete control over products they make.
And he's added aspirins, batteries and household cleaners to the list of
Co. products Kodak sells through new ventures and the acquisition of Sterling Drug
"He never seemed as concerned with the nuts-and-bolts stuff of today or
tomorrow. What interested him was Kodak 3, 5, 10, 20 years from now," said Brian
Fernandez, stock analyst with Brean Murray, Foster Securities.
When Chandler began restructuring Kodak's several years ago to cut out layers
of management and give each employee more responsibility, he said he
restructured his job to include a more active role in outside affairs that
affect the company.
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@ 1988 Chicago Tribune, November 21, 1988
But it appears that no one, especially the politicians, seems to care about
the eroding manufacturing base of the country, Chandler said.
He said he's learning how to handle himself in the political world, where
"almost everything that is said has little substance," and in the media, where
words have to be carefully chosen.
GRAPHIC: PHOTO: Colby Chandler.
TERMS: EXECUTIVE; INTERVIEW; BIOGRAPHY
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PAGE 10
LEVEL 3 - - 6 OF 19 STORIES
The Associated Press
The materials in the AP file were compiled by The Associated Press. These
materials may not be republished without the express written consent of The
Associated Press.
November 17, 1988, Thursday, AM cycle
SECTION: Business News
LENGTH: 903 words
HEADLINE: Kodak Chairman Trying To Spread the Manufacturing Gospel
BYLINE: By RANDOLPH PICHT, AP Business Writer
DATELINE: ROCHESTER, N.Y.
KEYWORD: Personal File-Chandler
BODY:
Colby Chandler, chairman and chief executive officer of Eastman Kodak
Co., has spent 38 years learning the lessons of business, the theories of
economics and the inside-out story of the world's largest photography company.
Now, after five years at the helm of Kodak, Chandler is ready to take his
message on the future of manufacturing to the masses.
So, move over Lee lacocca because here comes Colby "America won't make it
without manufacturing" Chandler.
At 63, the low-key engineer, who grew up and still lives on a farm, is
learning how to become a stand-up spokesman for corporate America. If it sounds
political, it is.
"Watching the swing toward a service-intensive society and listening to some
parties say that's good is scary," said Chandler in an interview at Kodak's
headquarters in Rochester.
"I have no intention of talking to the walls on this subject," Chandler said.
Kodak's chief has been out preaching the manufacturing gospel to business
groups, college students, politicians and anybody else who will listen. The
company also commissioned a study by three leading economists on the importance
of manufacturing and started its first-ever public affairs advertising campaign
on the issue.
Chandler also is using his last few weeks as chairman of President Reagan's
Export Council, the chief advisory group to the Department of Commerce, to drum
up support.
"The importance of manufacturing to the economy has been something that's
been so obvious to me, and I'm sure to others like me, that it might not have
ever occurred to us that it wasn't obvious to everyone else," he said.
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PAGE 11
The Associated Press, November 17, 1988
Although leaders of service industries might disagree, Chandler claims that
one job making a car, or a copier, or a computer, is 10 times more valuable to
the economy than a job selling insurance, or waiting on customers in a bank, or
making airline reservations.
The percentage of workers employed in manufacturing in America - 20 percent
of the work force - is lower than at any time this century, according to the
Kodak-commissioned study "The Case For Manufacturing in America's Future."
What that means, Chandler said, is that the large "multiplier effect"
manufacturing has in stimulating the economy through higher wages, buying
supplies and raw materials, and creating new and improved products is drying up.
"It's a very critical edge that we walk," Chandler said. "We're not the
country with leading productivity gains. That's a sign. When we reach the real
crisis, WE will have gone SO far that bringing it back is going to take decades
and decades."
The best way to help manufacturing in the immediate future would be to
eliminate the federal deficit, Chandler said. But for the long-term, he
suggested:
-Urging the government to make education and other people-oriented benefits a
priority.
-Using spending and tax policies to encourage investment in new technology
and research.
-Implementing an incremental investment tax credit that would provide
incentives for companies to expand a plant or buy new equipment.
-Altering the nation's tax structure to put a higher emphasis on taxing
consumption rather than the current system of taxing investment and saving.
Chandler has always had a reputation on Wall Street as "Mr. Long Term," even
before he took over as chairman of Kodak.
He came to the company in 1950 after graduating from the University of Maine
with a physics degree. His worked as a quality control engineer and then held
various management positions.
He received a master's degree in management from Massachusetts Institute of
Technology in 1964 and directed the development of Kodak's Ektaprint copiers and
duplicators in 1973. He was named president of the company in 1977 and chairman
in 1983.
As chairman, Chandler has sent the yellow Kodak banner charging into Japan
and given assembly-line workers almost complete control over film and other
products they make.
And he's added aspirins, batteries and household cleaners to the list of
products Kodak sells through new ventures and the acquisition of Sterling Drug
Co.
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The Associated Press, November 17, 1988
"He never seemed as concerned with the nuts and bolts stuff of today or
tomorrow. What interested him was Kodak three, five, 10, 20 years from now,"
said Brian Fernandez, a stock analyst with Brean Murray, Foster Securities.
When Chandler started Kodak's restructuring effort several years ago to cut
out layers of management and give each employee more responsibility, Chandler
said he restructured his job to include a more active role in outside affairs
that affect the company.
Unfortunately, it appears that no one seems to care about the eroding
manufacturing base of the country, especially the politicians, Chandler said.
He's learning how to handle himself in the political world where "almost
everything that is said has very little substance" and in the media, where words
have to be carefully chosen.
It's basic public relations, Chandler admits, but it's something he's only
starting to understand.
If government officials were doing their jobs correctly, he said he wouldn't
have to worry about developing an expertise in communications.
"They're patching up problems and they're responding to special interests and
there's very little sitting back in a statesmanlike way saying where do we want
to lead this country," Chandler said.
"You perhaps could make an observation that they can't. My feeling is they
must."
GRAPHIC: LaserPhoto ROC1 of Nov. 15
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PAGE 13
LEVEL 3 - - 7 OF 19 STORIES
The Associated Press
The materials in the AP file were compiled by The Associated Press. These
materials may not be republished without the express written consent of The
Associated Press.
November 16, 1988, Wednesday, BC cycle
ADVANCED-DATE: November 18, 1988, Friday, BC cycle
SECTION: Business News
LENGTH: 903 words
HEADLINE: Kodak Chairman Trying to Spread the Manufacturing Gospel
BYLINE: By RANDOLPH PICHT, AP Business Writer
DATELINE: ROCHESTER, N.Y.
KEYWORD: Personal File-Chandler
BODY:
Colby Chandler, chairman and chief executive officer of Eastman Kodak
Co., has spent 38 years learning the lessons of business, the theories of
economics and the inside-out story of the world's largest photography company.
Now, after five years at the helm of Kodak, Chandler is ready to take his
message on the future of manufacturing to the masses.
So, move over Lee Iacocca because here comes Colby "America won't make it
without manufacturing" Chandler.
At 63, the low-key engineer, who grew up and still lives on a farm, is
learning how to become a stand-up spokesman for corporate America. If it sounds
political, it is.
"Watching the swing toward a service-intensive society and listening to some
parties say that's good is scary," said Chandler in an interview at Kodak's
headquarters in Rochester.
"I have no intention of talking to the walls on this subject," Chandler said.
Kodak's chief has been out preaching the manufacturing gospel to business
groups, college students, politicians and anybody else who will listen. The
company also commissioned a study by three leading economists on the importance
of manufacturing and started its first-ever public affairs advertising campaign
on the issue.
Chandler also is using his last few weeks as chairman of President Reagan's
Export Council, the chief advisory group to the Department of Commerce, to drum
up support.
"The importance of manufacturing to the economy has been something that's
been so obvious to me, and I'm sure to others like me, that it might not have
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PAGE 14
The Associated Press, November 16, 1988
ever occurred to us that it wasn't obvious to everyone else," he said.
Although leaders of service industries might disagree, Chandler claims that
one job making a car, or a copier, or a computer, 15 10 times more valuable to
the economy than a job selling insurance, or waiting on customers in a bank, or
making airline reservations.
The percentage of workers employed in manufacturing in America - - 20 percent
of the work force - is lower than at any time this century, according to the
Kodak-commissioned study "The Case For Manufacturing in America's Future."
What that means, Chandler said, is that the large "multiplier effect"
manufacturing has in stimulating the economy through higher wages, buying
supplies and raw materials, and creating new and improved products is drying up.
"It's a very critical ... edge that we walk," Chandler said. "We're not the
country with leading productivity gains. That's a sign. When we reach the real
crisis, WE will have gone 50 far that bringing it back is going to take decades
and decades."
The best way to help manufacturing in the immediate future would be to
eliminate the federal deficit, Chandler said. But for the long-term, he
suggested:
-Urging the government to make education and other people-oriented benefits a
priority.
-Using spending and tax policies to encourage investment in new technology
and research.
-Implementing an incremental investment tax credit that would provide
incentives for companies to expand a plant or buy new equipment.
-Altering the nation's tax structure to put a higher emphasis on taxing
consumption rather than the current system of taxing investment and saving.
Chandler has always had a reputation on Wall Street as "Mr. Long Term," even
before he took over as chairman of Kodak.
He came to the company in 1950 after graduating from the University of Maine
with a physics degree. His worked as a quality control engineer and then held
various management positions.
He received a master's degree in management from Massachusetts Institute of
Technology in 1964 and directed the development of Kodak's Ektaprint copiers and
duplicators in 1973. He was named president of the company in 1977 and chairman
in 1983.
As chairman, Chandler has sent the yellow Kodak banner charging into Japan
and given assembly-line workers almost complete control over film and other
products they make.
And he's added aspirins, batteries and household cleaners to the list of
products Kodak sells through new ventures and the acquisition of Sterling Drug
Co.
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PAGE 15
The Associated Press, November 16, 1988
"He never seemed as concerned with the nuts and bolts stuff of today or
tomorrow. What interested him was Kodak three, five, 10, 20 years from now,"
said Brian Fernandez, a stock analyst with Brean Murray, Foster Securities.
When Chandler started Kodak's restructuring effort several years ago to cut
out layers of management and give each employee more responsibility, Chandler
said he restructured his job to include a more active role in outside affairs
that affect the company.
Unfortunately, it appears that no one seems to care about the eroding
manufacturing base of the country, especially the politicians, Chandler said.
He's learning how to handle himself in the political world where "almost
everything that is said has very little substance" and in the media, where words
have to be carefully chosen.
It's basic public relations, Chandler admits, but it's something he's only
starting to understand.
If government officials were doing their jobs correctly, he said he wouldn't
have to worry about developing an expertise in communications.
"They're patching up problems and they're responding to special interests and
there's very little sitting back in a statesmanlike way saying where do we want
to lead this country," Chandler said.
"You perhaps could make an observation that they can't. My feeling is they
must."
GRAPHIC: LaserPhoto ROC1 of Nov. 15
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LEVEL 3 - - 8 OF 19 STORIES
PR Newswire
October 20, 1988, Thursday
DISTRIBUTION: TO NATIONAL AND BUSINESS DESK
LENGTH: 425 words
HEADLINE: "AMERICA: ARE WE RESPONSIBLE FOR IT?"
DATELINE: ITHACA, N.Y., Oct. 20
KEYWORD: KODAK'S CHANDLER
BODY:
ITHACA, N.Y., Oct. 20 /PRN/ America's ability to live
up to its promise depends on putting an end to adversarial posturing
and making the tough-but-ethical choices together, says Colby H.
Chandler, chairman and chief executive officer of Eastman Kodak
company (NYSE: EK).
Honored as the 1988 Robert S. Hatfield Fellow at Cornell
University, Chandler told his audience: "In our slide from being
'undisputed number one,' WE (America) lost more than our technology,
our positive trade balance, and jobs. We lost something basically
American --- our national character. We lost our national resolve to
make the tough choices, together."
"In reviewing this loss of ethical leadership, Chandler indicated
that America has lost its public and private heroes. "Our heroes
bring us back to the basic values: values like our ethical behavior,
our faith in fairness, our moral responsibilities to our fellow
citizens."
Chandler made several recommendations for reviving this country's
sense of team play and our responsibilities, citizen-to-citizen.
He asked each American to think through the consequences of their
actions, and, in doing so, to keep the rights and considerations of
others in mind. He also encouraged Americans to "bring their hearts"
into their debates, saying "the heart is a terrible thing to ignore."
His third hope aimed at the young Americans who will be the
shapers of this country's future -- is that everyone will get
involved "actively and regularly in the business of America." Our
national resolve must come, he said, from every American.
Chandler encouraged Americans to bring back their heroes,
especially private ones. "In many ways, our private heroes are the
great connectors bringing our lives together. They encourage us
to strive for common goals with uncommon efforts."
"A final recommendation by Chandler was the need for our citizens
to reintroduce a good old-fashioned American trait common sense.
Too often, he said, America keeps taking the easy way out --- instead
of trying "some common sense
* * *
for the common good."
The Kodak executive concluded his address to Cornell faculty,
students, and friends, by issuing a challenge: "If the question is:
who is responsible for restoring the ethical and moral fabric of
America? I hope all of us find the collective courage and character
to answer: Now ... it is our turn
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PR Newswire, October 20, 1988
CONTACT -- Darlene J. Aiken of Eastman Kodak Company,
716-724-4726
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LEVEL 3 - - 9 OF 19 STORIES
Copyright @ 1988 Reuters;
The Reuter Business Report
October 14, 1988, Friday, BC cycle
LENGTH: 344 words
HEADLINE: EASTMAN KODAK SEES HIGHER 1988 NET PROFIT
BYLINE: By Richard Walker
DATELINE: CHICAGO
KEYWORD: KODAK
BODY:
Eastman Kodak Co. should outperform the 1988 estimates of Wall Street
analysts as they have overestimated how the company's purchase of Sterling Drug
Inc. will affect its earnings, chairman Colby Chandler said Friday.
The photography giant is having another banner year, Chandler said, after
posting $13.3 billion in 1987 sales. The company acquired New-York based
Sterling for $5.1 billion in February.
Analysts had said the purchase would hurt Kodak's 1988 per-share earnings,
and had estimated them as ranging between $4.25 to $4.35. But Chandler said
Wall Street had been too pessimistic on how the Sterling buy would hurt the
earnings.
Chandler told Reuters he was "bullish" on the company's 1988 outlook, but
declined to discuss the outlook for its third or fourth quarter earnings.
Chandler said Kodak was on track with its business plan, 50 that the Sterling
acquisition should dilute earnings by about 15 cents to 25 cents a share, in
line with previous estimates.
Kodak's friendly takeover of Sterling was hailed by analysts as its first
major diversification move. Although the company had made small forays into
office products, batteries and computers in recent years, Sterling would give
Kodak a strong foothold in the $110 billion world pharmaceuticals market, they
said.
And Chandler was confident that Kodak would prosper well all around. "This is
going to be another record year, and I would be able to say that even without
Sterling," he said.
"I think we have some surprises left on the upside," he added, as Kodak's
unit product volume is up 9 percent from last year, not counting its new drug
company.
By 1989, he said Sterling's negative earnings impact should decrease, and the
drug company should start helping cash flow. Sterling should contribute to both
cash flow and earnings by 1990, he added.
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@ 1988 Reuters, October 14, 1988
Eastman Kodak predicts that a sharp increase in health-sector business in the
next decade will outstrip growth in its photography and other business lines,
Chandler added.
Shares of Kodak rose 62.5 cents Friday, closing at $48.
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LEVEL 3 - - 10 OF 19 STORIES
PR Newswire
October 5, 1988, Wednesday
DISTRIBUTION: TO BUSINESS DESK
LENGTH: 296 words
HEADLINE: KODAK'S CHANDLER STRESSES NEED FOR QUALITY IMPROVEMENTS
DATELINE: NEW YORK, Oct. 5
KEYWORD: EASTMAN KODAK ADDRESSES QUALITY FORUM
BODY:
NEW YORK, Oct. 5 /PRN/ If our country is to compete
effectively in the global marketplace, we must build quality into
every step of the process of creating services and products that
satisfy customer needs, says Colby I. Chandler, chairman and chief
executive officer of Eastman Kodak Company (NYSE: EK) and national
chairman of Quality Month '88.
Delivering the keynote address at the National Quality Forum at
the Vista International Hotel here, Chandler said, "The need for
improved quality is critical. It is, without question, a matter of
survival for American service and manufacturing companies."
Chandler pointed out that this year's theme "Quality: Beyond
Customer Satisfaction To Customer Delight" refers to the delivery
of products and services that exceed expectations. This means,
"Anything you can do for your customer --- whether internal or
external to have him or her say, 'I am absolutely delighted.'
"Swiftly changing technology and innovative new products allow
any given number of competitors in a marketplace the ability to
satisfy a customer. But going beyond satisfaction to delight a
customer will provide a distinct advantage to the company that does
it first and consistently well," he said.
He also noted that as a result of various quality improvement
tools and approaches, Kodak productivity advanced last year by more
than 14 percent over 1986. This was an increase of more than four
times the U.S. average.
Chandler stated that quality improvements are an imperative for
the U.S. "They are a priority that must be promoted and fully
understood by both the business community and the general public.
CONTACT : Darlene J. Aiken of Eastman Kodak, 716-724-4726
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LEVEL 3- - 11 OF 19 STORIES
Proprietary to the United Press International 1988
August 12, 1988, Friday, BC cycle
SECTION: Regional News
DISTRIBUTION: New York
LENGTH: 193 words
HEADLINE: Kodak increases dividend by 11 percent
DATELINE: ROCHESTER, N.Y.
KEYWORD: Kodak-Divident
BODY:
The board of directors of Eastman Kodak voted Friday to increase the
company's quarterly cash dividend by 5 cents from 45 cents to 50 cents, a
spokesman said.
The dividend, an 11 percent increase, will be paid Oct. 3 to shareholders of
record Sept. 1, spokesman Henry Kaska said.
Colby Chandler, chairman and chief executive officer of the
Rochester-based photographic products giant, said the higher dividend reflected
confidence in Kodak's performance ''not only for 1988 but for the long term as
well.
'We are seeing positive returns from the significant steps we have taken in
the past few years,' Chandler said. ''Not the least of these were the
restructuring of the company into business units and our continuing drive for
productivity improvement and cost control, all of which are making Kodak a more
aggressive, more competititive company.'
In a prepared statement, Chandler also said the dividend increase showed
the merger of Kodak and the Sterling Drug Co. is working smoothly.
The dividend increase is the second this year for Kodak. Kaska said on Jan.
4, 1988, the company boosted its dividend from 42 cents to 45 cents a share.
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LEVEL 3 - - 12 OF 19 STORIES
PR Newswire
May 11, 1988, Wednesday
DISTRIBUTION: TO BUSINESS DESK
LENGTH: 839 words
HEADLINE: CHANDLER FORESEES VIGOROUS GROWTH
DATELINE: TORONTO, May 11
KEYWORD: EASTMAN KODAK ANNUAL MEETING
BODY:
TORONTO, May 11 /PRN/ --- By continually seeking new
approaches to doing business, Eastman Kodak Company (NYSE: EK) will
reach new levels of performance, Colby H. Chandler, Kodak chairman
and chief executive officer, said in remarks prepared for delivery
here today.
Speaking at the company's annual meeting at Ryerson Polytechnic
Institute the first Kodak annual meeting ever held outside the
United States - Chandler predicted that 1988 would be another year
of "vigorous" growth.
"In fact," Chandler said, "I believe WE will exceed $17 billion in
revenue, compared with $13.3 billion in 1987." He added that Kodak
earnings in 1988 would meet or exceed current analyst estimates, real
unit growth would continue at a multiple of worldwide real GNP, and
"volume will continue to be the key driver in this improving
performance."
Chandler estimated that about $2.7 billion of Kodak's revenue in
1988 would be contributed by the recently acquired Sterling Drug
Company. With that acquisition, he said, Kodak has brought together
the key elements of its strategic vision --- sources of future growth
from four core businesses:
-- Photography, which he described as "an expanding technology
rather than a maturing one," and Kodak's most important source of
earnings.
-- Fibers, plastics and chemicals, a core supplier of earnings that
will "continue to grow in pace with other manufacturers."
-- Information management, "a high growth layer where we will focus
on premium value."
-- Health, which he described as a logical extension of Kodak's
science and manufacturing base and "a high growth segment for many
years to come." This segment includes Sterling Drug Inc.
Chandler said that while the company may make niche acquisitions in
the future, it "has completed the link" among the four growth areas.
Having established the organization and the structure to achieve
continued growth, the challenge now is to manage it in a climate of
continual worldwide change," he said.
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PR Newswire, May 11, 1988
Chandler predicted that 1988 would be a year of superior financial
performance. In the first quarter, Kodak reported sales increases of
25 percent, and an increase in earnings from operations of 38
percent. Net earnings were up 46 percent.
Kodak Canada Inc. sales were up 25 percent, and earnings from
operations showed a 171 percent increase. Net earnings were up 185
percent.
Chandler said Kodak's goal is a return on assets "exceeding 10
percent." In 1987, the company's return on assets was 8.6 percent.
"In addition, WE must strive for a return on equity of 20 percent,"
he said. "We virtually hit this in 1987 with 19 percent, and we
expect to do as well in each of the next several years."
Chandler pointed to several examples of the company's new pace and
direction:
- The new breakthrough family of Kodacolor VR films and the
enhanced VR-G films, followed by the recent announcement of a new
line of Kodacolor Gold films;
- The new black-and-white, Kodak T-Max P3200 professional film,
called "the world's fastest film" and capable of being exposed at
indexes up to 50,000 with acceptable results;
-- The new Kodak Create-A-Print enlargement center that allows
customers to make their own color enlargements --- a system that took
only 22 months from initial concept to introduction.
"Deliberately, relentlessly, WE are sending the message that Kodak
will not just keep pace in its chosen lines-of-business," Chandler
said. "We will set the pace."
To do that, he noted, Kodak has had to change in some fundamental
ways:
--- New approaches to business strategy including several joint
ventures with prominent worldwide firms;
---- Kodak is clearly becoming more global in executing its business
strategy, as is seen in the agreement to build a new color
photographic manufacturing plant in China in return for royalties on
the new company's production and future opportunities in the emerging
China market;
-- A sharper focus on managing operations to achieve higher
performance on behalf of customers and shareowners may involve
strategic divestitures of businesses that do not create value.
"Our aim is to reach a 'steady state' level where we manage an
intelligent ongoing review and divestiture process," Chandler said.
"We do not see divestitures as failures, but as business
opportunities worth more to someone else."
Chandler added that the company moved "quickly but not recklessly
"in the past year to seize practical opportunities. "Far from being
a diversification, our growth is a logical extension of our vision.
We are guided by a clear vision -- one that will extend our legacy
well into the 21st century.
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PR Newswire, May 11, 1988
CONTACT -- Ronald C. Roberts of Eastman Kodak, 716-724-4513
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LEVEL 3 - - 13 OF 19 STORIES
Copyright @ 1988 Reuters
May 11, 1988, Wednesday, BC cycle
SECTION: Canadian Financial Report. Financial Report.
LENGTH: 247 words
HEADLINE: EASTMAN KODAK CO <EK> TO CONSIDER DIVESTITURES
DATELINE: TORONTO, MAY 11, REUTER
BODY:
Eastman Kodak Co will consider selling operations that are not performing
well, chairman Colby Chandler told the company's annual meeting.
"Just as we have a well-managed process for making acquisitions, it is
important that these activities be complemented by dropping out of businesses
which are not creating value for Kodak shareowners," Chandler said.
If Kodak gets an offer for a business that is "substantially above what its
value is to Kodak," the company would consider selling it, president Kay
Whitmore said.
Chandler said that for 1988 the company wants to reduce the total cost of
waste incurred in its worldwide production of film and paper by 10 pct,
following a 15 pct reduction in 1987.
Asked about the presence of methylene chloride, an
industrial solvent, in ground water at its Kodak Park facility
in Rochester, New York, Chandler said the company believes
there is no health hazard to nearby residents.
"We are eager to have qualified consultants conduct tests to
verify our belief," he said.
Kodak shareholders approved a previously announced proposal by the board to
increase the number of authorized common shares to 950 mln from 500 mln.
The company said in a proxy statement that it does not at present plan to
issue any of the newly authorized common stock.
But Kodak said that in the event of an unsolicited tender offer or takeover
bid, the increased number of shares would give the board greater flexibility.
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LEVEL 3 - - 14 OF 19 STORIES
Copyright D 1988 Reuters
May 11, 1988, Wednesday, BC cycle
SECTION: Financial Report.
LENGTH: 231 words
HEADLINE: KODAK <EK> NET SEEN MEETING ANALYSTS' ESTIMATES
DATELINE: TORONTO, MAY 11, REUTER
BODY:
Eastman Kodak Co expects 1988 to be another year of vigorous growth with
earnings to meet or exceed analysts' current estimates, Chairman Colby H.
Chandler said in remarks prepared for the annual meeting.
"I believe we will exceed 17 billion dlrs in revenue, compared with 13.3
billion dlrs in 1987," said Chandler, adding that real unit growth would
continue at a multiple of worldwide real GNP and that "volume will contine to be
the key driver in this improving performance."
Chandler estimated that about 2.7 billion dlrs of Kodak's revenue in 1988
would be contributed by the recently acquired Sterling Drug Co.
He said that while the company may make niche acquisitions in the future, it
"has completed the link" among its four growth areas - photography, information
management, health and fibers, plastics and chemicals.
"Our aim is to reach a 'steady state' level where we manage an intelligent
ongoing review and divestiture process," Chandler said. "We do not see
divestitures as failures, but as business opportunities worth more to someone
else."
Chandler said Kodak's goal is a return on assets "exceeding 10 pct." In 1987,
the company's return on assets was 8.6 pct.
"In addition, we must strive for a return on equity of 20 pct," he said. "We
virtually hit this in 1987 with 19 pct, and we expect to do as well in each of
the next several years."
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LEVEL 3 - 15 OF 19 STORIES
Copyright B 1988 The Washington Post
April 22, 1988, Friday, Final Edition
SECTION: FINANCIAL; PAGE G1
LENGTH: 1041 words
HEADLINE: Study of Manufacturers' Problems Part of Campaign to Spark Debate
BYLINE: John M. Berry, Washington Post Staff Writer
BODY:
Colby H. Chandler, chairman of Eastman Kodak Co., yesterday set out to
provoke a debate about the economic perils facing the nation -- a debate he says
the presidential candidates are ducking.
At a Capitol Hill press conference, Chandler released a study, written by
three highly regarded economists, that says the nation's manufacturers remain in
serious trouble despite a recent glow of apparent health.
Chandler, who also is chairman of the President's Export Council, an
advisorygroup, said the absence of serious discussion about America's economic
future leaves him with a "sense of frustration and deep concern."
"As a nation, we sit upon an economic house of cards," he said. "What is
needed is a national debate on the future direction of economic policy that is
both realistic and responsible. Yet, I hear little
The debate he seeks would test the strongest political backbone. As part of a
plan to reduce federal budget deficits, Chandler called for, among other things,
taxation of half of Social Security benefits; higher taxes on cigarettes and
distilled spirits; a gasoline tax of 10 cents a gallon; taxation of portfolio
income earned in the United States by foreigners; tighter enforcement of the tax
laws; and consideration of a new value-added tax.
And in urging new steps to slash the nation's large merchandise trade
deficit, Chandler said that "efforts to stabilize U.S. exchange rates at current
levels would be misguided and risk a serious recession." The Reagan
administration has agreed with other industrial nations to attempt such a
stabilization. The proposals were among the recommendations of a study
commissioned by Kodak actually more a commentary than a study written by
economists Lawrence H. Summers of Harvard University and Rudigar W. Dornbusch
and James Poterba of Massachusetts Institute of Technology.
Chandler said he had sent a letter to each of the Republican and Democratic
presidential candidates noting the study's conclusions and asking, "As a leading
American manufacturer, I would like to know more about your plans to maintain a
strong manufacturing sector and a healthy U.S. economy. I am very concerned that
thus far in the presidential campaign these issues are not being addressed in a
serious and comprehensive manner."
The letter continued: "Manufacturing is doing relatively well right now
because many companies have taken the necessary steps of restructuring and
retooling to be world class competitors, and because the dollar has fallen.
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@ 1988 The Washington Post, April 22, 1988
However, the current situation must be viewed as very fragile.
"What guarantee do manufacturers have that the dollar will not skyrocket
again because interest rates must go up to keep foreign money flowing into the
U.S.? How do we avoid a deep recession or inflation, or both sometime in the
next year? What assurance do we have that another October 19 stock market crash
will not happen tomorrow?
"These are all real possibilities that pose real risks to manufacturing and,
indeed, the whole economy," Chandler's letter said. "They are serious threats
because we have failed to tackle the underlying problems that afflict this
economy; namely, a massive budget deficit coupled with very low national
savings. The result of this unfortunate combination is that we keep borrowing
huge amounts from abroad, our external debt keeps rising, and our vulnerability
to shocks keeps mounting.
"We are now half way through the presidential campaign. Yet, none of the
remaining candidates are even talking about these problems, let alone offering
solutions. Instead, we get promises of new spending programs, and pledges of no
tax increases. The country faces painful choices and difficult adjustments. But
that is not apparent from listening to the candidates for president of the
United States."
So far, Chandler has had no reply to his unusual letter from any of the
candidates.
Most of the points made in the study, "The Case for Manufacturing in
America's Future," are not new. Nevertheless, taken together they buttress the
argument that manufacturing in the United States has borne the brunt of the
impact of the economic policies chosen by the federal government in recent
years.
A low level of national savings - exacerbated by large federal budget
deficits ---- has reduced the supply of capital and hurt investment, the
economists said. Such a low savings rate has forced the United States to borrow
from abroad to finance a substantial portion of the investment that has
occurred.
"This makes trade deficits inevitable," they said, adding, "The composition
of U.S. trade implies that a large part of the burden from a rising trade
deficit falls on manufacturing industries."
But some actions that would increase the deficit are necessary, too, they
said. One of the actions, a partial restoration of the 10 percent tax credit on
investments in business equipment that was repealed in the 1986 tax overhaul,
would cost about $ 10 billion a year.
Chandler and the economists also argued strongly that the value of the dollar
will have to fall farther if the trade deficit is to be eliminated without
plunging the nation into a recession.
"Monetary policies directed at maintaining exchange rates near current levels
would be catastrophic for the manufacturing sector," the study said. "In
addition to reducing foreign demand for U.S. products and increasing American
demand for foreign products, tight monetary policies in defense of the
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@ 1988 The Washington Post, April 22, 1988
exchange rate would raise interest rates and the risk of a recession. Postponing
the inevitable exchange rate adjustment only magnifies the ultimate distress."
One of the authors, Summers, conceded that manufacturing's share of the
economy has not declined. However, he said, "The concern is not just whether we
can sell products but at what price."
Manufacturing has been able to maintain its share of output only by pushing
down real factory wages and accepting lower profitability. A healthy
manufacturing sector, Summers said, would be one in which growth of the standard
of living was comparable to that in other industrial countries - as opposed to
one in which real wages and profits are falling.
The candidates' responses should be interesting -- if they arrive.
GRAPHIC: PHOTO, KODAK CHAIRMAN COLBY H. CHANDLER SAYS A REALISTIC DEBATE ON U.S.
ECONOMIC POLICY IS NEEDED. JAMES K.W. ATHERTON
TYPE: ANALYSIS, NATIONAL NEWS
SUBJECT: ECONOMIC CONDITIONS; MANUFACTURING; DEFICIT; PRESIDENTIAL CANDIDATES;
UNITED STATES
ORGANIZATION: EASTMAN KODAK CO.
NAME: COLBY H. CHANDLER
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LEVEL 3 - - 16 OF 19 STORIES
PR Newswire
February 25, 1988, Thursday
DISTRIBUTION: TO BUSINESS DESK
LENGTH: 1263 words
HEADLINE: KODAK SAYS ITS '88 EARNINGS WILL MEET OR EXCEED ANALYSTS' ESTIMATES
DATELINE: NEW YORK CITY, Feb. 25
KEYWORD: EASTMAN KODAK PROJECTS 1988 RESULTS
BODY:
NEW YORK CITY, Feb. 25 -- Eastman Kodak Company (NYSE: EK) today
said its estimate of 1988 earnings is well in excess of those
published recently by Wall Street analysts.
The estimate by Colby H. Chandler, Kodak chairman and chief
executive officer, was conveyed by President Kay R. Whitmore in a
talk before financial analysts here today. Whitmore was among
speakers explaining the rationale for the new alliance between Kodak
and Sterling Drug, Inc.
"Late in 1986, Kodak CEO Colby Chandler advised shareowners that
1987 could well produce record earnings for our company ... and it
did," Whitmore said. "I am not here to tell you that 1988 earnings
will set another record as that should be obvious.
"But I do bring you this message from Mr. Chandler: Wall Street
estimates of Kodak earnings for 1988 were reduced by an average of 35
cents a share between Jan. 1 and Feb. 15. Based on what WE have
learned from Sterling and what we know about Kodak, we believe that
reduction can be put back into analysts' estimates. We now expect
that the earnings we report for 1988 will meet or exceed the Street's
pre-merger consensus, even after taking into account the dilutive
effect of the Sterling merger.
"That is as definitive as we intend to be on the subject of Kodak
earnings this year," Whitmore said. "It is also a statement no one
of us would have dared to make just a few years ago."
Presenting a positive outlook for the company, he said, "We are
optimistic about 1988 ... optimistic about the years beyond ... and
above all, optimistic that the benefits of our alliance with Sterling
will be very, very substantial."
Whitmore cited these points in "making clear" the rationale for the
alliance with Sterling:
-- The alliance is consistent with Kodak strategy. It will enable
the company to capitalize on its depth in the chemical sciences, with
pharmaceutical interests worldwide in scope.
-- It adds to Kodak's portfolio a highly profitable revenue stream
which is consistent with the company's financial goals of return on
assets of more than 10 percent, return on equity approaching 20
percent, and earnings from operations produced at a rate that places
the company among the top 25 U.S. corporations.
- It offers very substantial opportunities in terms of cost
efficiency through a combination of synergistic research activities,
the use of common points of distribution, the purchase of services
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and supplies, such as advertising; and consolidation of
administrative and manufacturing activities.
-- The alliance provides these benefits in a way that is sure to
enhance values with little penalty in terms of operating results on
the near term.
Whitmore said the company's move into life sciences is a logical
extension of its expertise in chemicals and research. The merger
with Sterling, which in time will create one integrated
pharmaceuticals business for Kodak, is fully consistent with company
strategy to enter the pharmaceutical industry.
He noted that life sciences and health care industry has
traditionally enjoyed rates of profitability well above the all-
industry average, that health care is expected to grow faster than
the gross national product, and that in one segment of the industry
--- health care diagnosis and imaging -- Kodak already has a business
that exceeds $1 billion in sales.
Whitmore said that the selection of Sterling was not only a logical
choice, it was one of Kodak's top choices from the beginning.
"In the ethical area," he said, "Sterling's efforts complement our
own. They are experiencing growing acceptance of their own imaging
segments, and they are introducing some important new cardiovascular
agents. In the over-the-counter area, they have an excellent
business. After successfully penetrating the pharmaceuticals market,
we had every intention of entering the over-the-counter market. And
Sterling also brings us a well-managed household products business, a
business with well-recognized brands and leading market position."
Whitmore said the price paid for Sterling "is competitive, fair, and
indicative of Sterling's inherent value." He noted that Sterling
posted record earnings in 1987 and has programs in place to continue
that level of excellence.
"We expect this merger to generate positive cash flow as early as
1989 and to contribute positively to Kodak earnings as early as
1990," Whitmore said. "So, for Kodak, the long-term reward
substantially outweighs the short-term cost."
Paul L. Smith, senior vice-president and director of Finance and
Administration, noted that analyst estimates of dilution have
understated the earnings potential of Sterling and/or overstated the
interest charge Kodak will pay to finance the acquisition.
"First, we believe Sterling's 1988 earnings will be enhanced beyond
current analysts' estimates," Smith said. "The combined strength in
managing research and development, along with each company's
marketing prowess and the savings generated by economies of scale and
consolidating some activities will have a positive effect on 1988
earnings. The on-going efforts to lower costs will continue to
produce for Sterling wider gross margins and stronger earnings
growth."
As a second point, Smith said that many of the transitional costs
associated with the purchase will be part of the acquisition cost and
will not show up on Kodak's or the consolidated company's books. The
effect will be to limit the impact these costs will have on Kodak's
1988 earnings.
The third factor is the strength of both companies. He expressed
confidence that Kodak's 1988 earnings will exceed analysts' current
estimates "by some margin." And he also pointed out that many
assumed that Kodak would be financing debt in the 10-percent to
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11 1/2-percent range.
"As you know," Smith said, "we began with a bridge loan through bank
syndication to purchase Sterling's shares. This will be converted
into both long-term and short-term fixed and variable rate debt, and,
due to the value of the dollar, a reasonable portion may be financed
outside the United States. As a result, WE are looking at a long
term rate under 9 percent."
Smith said the current estimate of the 1988 dilution is 15 to 25
cents per share.
Smith also addressed the issue of leverage, noting that the
company's debt increase from 4 percent to almost 35 percent of total
capitalization in the last decade has been the result of a conscious
effort to increase the company's leverage.
"This is a very acceptable leverage level by virtually any measure
and easily managed on Kodak's balance sheet," Smith said. "A major
part of this leverage comes from long-term assets, receivables and
inventory. The remainder is due to increased treasury stock
generated through buy-backs beginning in 1984. As you can see, this
is not the type of leverage that creates large risk."
While Kodak's leverage will be in excess of 50 percent for now,
Smith said it is the company's intention, barring any unforeseen
business changes, to return to roughly a 35-percent level by the end
of 1993.
CONTACT - Henry Kaska of Eastman Kodak, 716-724-4642, or Charles
Smith of Eastman Pharmaceuticals, 215-640-8680, or John Wood of
Sterling Drug, 212-907-3002, or Terry Kelley of Sterling Drug,
212-907-3009
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LEVEL 3 - - 17 OF 19 STORIES
Copyright B 1988 McGraw-Hill, Inc.;
Business Week
February 22, 1988
SECTION: THE CORPORATION; Strategies; Pg. 134
LENGTH: 1149 words
HEADLINE: HAS KODAK SET ITSELF UP FOR A FALL?
BYLINE: By Leslie Helm in Rochester, with Susan Benway in New York
HIGHLIGHT:
Buying Sterling Drug could erase an impressive recovery
BODY:
Since Colby H. Chandler became chief executive of Eastman Kodak Co. in
1983, he has slashed costs, shaken up the bureaucracy, and plunged into new
businesses. Today, Kodak is leaner, and its traditional photographic business
is prospering. But Chandler's expensive forays into such areas as electronic
publishing, batteries, optical memory, and floppy disks haven't paid off so far.
Now, Chandler is making his boldest move yet with the $5.1 billion purchase
of Sterling Drug Inc., the biggest takeover outside the oil industry in the past
year. The purchase, in which Kodak outbid F. Hoffmann-La Roche & Co.,
culminates a long-standing effort to build a life sciences business based on
Kodak's chemical expertise and on such diagnostic gear as blood analyzers.
Kodak's drug efforts consisted mainly of dabbling with biotechnology joint
ventures and licensing arrangements. But the Sterling purchase, says Chandler,
makes Kodak a real drug industry player "with greater certainty, sooner, and at
a better cost advantage." The hefty price tag, however, will dilute earnings
through 1991. If not handled right, the merger could derail a recovery that has
brought Kodak out of a six-year slump.
The recovery has been impressive. A management reorganization has helped
loose a flood of new products. Chandler has stemmed the erosion by Fuji Photo
Film to of Kodak's market share in film and paper. Profits tripled in 1987, to
$1.2 billion on $13.3 billion in sales. To keep its momentum rolling, Kodak has
recently announced some promising new products, including a color copier and a
machine that allows people to make their own enlargements at photo shops.
The Sterling Drug deal, however, has tarnished the company's sheen on Wall
Street. Kodak's stock has dropped 20%, to around 41. "They overpaid. They
collapsed the stock," says John M. McCarthy, a partner at Lord, Abbett & Co., a
money manager with a heavy stake in Kodak. Analysts are taking a dimmer view of
Kodak's earnings. Peter J. Enderlin, of Smith Barney, Harris Upham & Co., has
cut earnings projections for 1988 by 15%, to $3.75 a share, though that still
represents a 6% rise. One reason: higher interest costs, since financing the
takeover will increase debt to 57% of capital from 35%.
Few quibble with Chandler's rationale for diversifying. Worldwide sales of
traditional photographic film and paper, which bring in as much as 80% of
Kodak's profits, are expected to slow as video cameras WOO more customers. By
1991, Enderlin expects electronic products to grab 31% of the $16.8 billion
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that will be spent on consumer photography annually in the U.S., up from 17% in
1986. As growth in the market for traditional products slows, Kodak may be
forced to lower prices to hold on to its 50% share.
Aside from the price Kodak is paying, the nub of critics' concern is that th
company has yet to inspire confidence that it can conceive, develop, and market
new products that aren't closely related to its office-copier and traditional
photography businesses. For instance, Kodak forked over $175 million in 1985
for Verbatim Corp., a maker of floppy disks for computers. But Verbatim is
barely profitable because Kodak has found it hard to cut costs enough to be
competitive on price. Kodak also is struggling with a new information-storage
system based on a 14-inch optical disk. A 12-inch disk has become the accepted
format in the industry. "There is a difference between competing in a mature
market [film] where you are dominant and in a leading-edge technology," says
Scott C. McCready, an industry analyst at CAP International. "Kodak hasn't
learned that."
VIDEO BUST. Kodak also struck out with its videocassette recorder and
camera, which it recently yanked from stores after four years of slow sales.
Again, it failed to deliver a competitive product. Another disappointment is a
big-ticket electronic publishing system, complete with hardware, introduced in
1985. Big corporate customers are opting instead for software that runs on
standard computers, such as Apple's Macintosh.
In 1986, Kodak began a much ballyhooed attempt to sell batteries, and once
again the results are unimpressive. The company has been slow to leverage its
distribution and brand name to take market share. Although an Olympics ad blitz
may help boost sales, Kodak will be hard pressed to increase its market share
above the current 10%, and it expects only minimal profits this year.
By acquiring Sterling, Kodak may already have passed upon one solution: It
has considered buying Duracell, the No. 2 battery maker. But the $1.5 billion
price tag might be prohibitive now that Kodak must spend an additional $300
million or so on interest annually.
It appears that Chandler has made a critical choice: Instead of spending 10
times earnings to buy a premier battery maker, he's paying 23 times earnings to
buy a lackluster drug company. Sterling boasts such cash COWS as Lysol and
Bayer aspirin. But while other companies are pumping out a steady stream of
innovative prescription drugs, Sterling has just one that tops $100 million in
sales.
'HANDSOME PRICE.' Kodak executives say it's too early to count out some of
their struggling new products and say the experience in other fields is not
necessarily a guide to what might happen in drugs. They are determined to use
Kodak's background, international clout, and financial resources to help make
Sterling a major player. "We a handsome price" for Sterling, says Kay R.
Whitmore, the Kodak president to whom Sterling will report. "We have to make
sure we can get a return for it." Sterling, which made $197 million on $2.3
billion in sales last year, will account for 15% of Kodak sales.
Executives Kodak has hired from such drug giants as Ciba-Geigy Corp. and
Merck & Co. to direct Kodak's drug effort will be charged with redirecting
Sterling's product development. But getting executives from other companies to
harness Kodak and Sterling researchers together could be tough. "Research
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organizations have as much of an immune rejection system as the body," notes
Norman C. Selby, a partner at McKinsey & Co. And Sterling has lost time to make
up for. While it has stepped up spending on drug development in recent years,
analysts see little in the pipeline to get excited about.
Still, there are some potential synergies. Sterling's highly regarded sales
force could help Kodak sell its blood analyzers to hospitals. And Kodak may use
its international operations to help Sterling sell such popular household
products as Lysol in overseas markets. But for the price Chandler is paying,
Kodak will need more than marketing efficiencies. It will have to introduce a
host of fast-selling new products, too. Otherwise, the financial and management
demands of Sterling may soon put the rest of Kodak out of focus.
GRAPHIC: Picture, CHANDLER: HIS EXPENSIVE FORAYS AWAY FROM PHOTOGRAPHY HAVE YET
TO PAY OFF, PHOTOGRAPH BY PHIL MATT; Chart, HOW WALL STREET TURNED AGAINST
KODAK, DATA: BRIDGE INFORMATION SYSTEMS INC. CHART BY LAUREL DAUNIS
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LEVEL 3 - - 18 OF 19 STORIES
Copyright @ 1988 The Times Mirror Company;
Los Angeles Times
January 25, 1988, Monday, Home Edition
SECTION: Business; Part 4; Page 2; Column 3; Financial Desk
LENGTH: 808 words
HEADLINE: KODAK SNAPS ITSELF OUT OF A TAILSPIN;
CHANGE IN CORPORATE CULTURE BRIGHTENS THE FILM GIANT'S FUTURE
BYLINE: By AP
DATELINE: ROCHESTER, N.Y.
BODY:
The walls tell it all at Eastman Kodak Co.
Historically, the company's sprawling manufacturing center, known as Kodak
Park, has been painted in dull and conservative factory colors like gray or
brown.
But a summer painting project produced bright flames on fire doors, murals in
hallways, slogans and bright colors on cement walls, and pop art next to the
soda machines.
In one control room, workers can scribble milestones on the heating ducts and
the ceiling. The notations date back no farther than 1986.
"Before then, writing on the walls wasn't exactly considered the thing to
do," said Ralph Olney, a unit manager in the film-sensitizing division, whose
graffiti-prone staff works on a machine three football fields long that rolls
out more than 300 feet of color film a minute.
Relaxation of Work Rules
The new decor is the most visible symbol of the radical changes that have
given the 108-year-old photographic giant a new image and a new outlook. On
Friday, the company took a major step in diversifying into the pharmaceutical
industry by agreeing to purchase Sterling Drug for $5.1 billion.
Gone are the days when suspicion and anxiety ruled, when employees were
afraid to make suggestions and were told when to work an extra shift or when to
cancel weekend plans because more work was needed.
Today, workers are urged to shut down massive production lines If they spot a
problem. They're asked to work overtime. And they're given sophisticated
statistics and information so they understand more of the big picture.
"I think what's different is that we're told more, so we know what's
important and what it means to make a change," said Rick Ladue, a production
worker in Kodak's paper support division.
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The changes have helped lead a turnaround for Kodak, which suffered six
straight quarters of declining profits throughout 1985 and into 1986 before
things started to pick up.
Through three quarters of 1987, Kodak's profits of $936 million reached a
record high, more than triple the same period in 1986, when they were $299.4
million.
"I think what WE'VE done is moved from a parent-child relationship to
adult-adult and now people come to work excited about what they're able to do,
excited about what they themselves can impact," said Ron Heidke, who's in charge
of manufacturing film and paper at Kodak Park. There has never been a labor
union at Kodak, partly because the company always paid top salaries and offered
excellent benefits. Now the company is offering its employees something new --
the chance to speak up, Heidke said.
The transition is one that America's other large companies have either
already started or must begin soon, said Colby Chandler, Kodak's chairman
and chief executive.
"Kodak was quite representative of an old culture," Chandler said. "People
seek the comfort level of groups. They tend to take the safe routes, rather than
the ambitious and daring routes."
The change in corporate culture, along with a strict cost-cutting program and
thousands of layoffs, have helped send Kodak's sales and profits soaring.
Chandler predicted that 1987 would prove to be a record year for sales and
operating earnings when results are reported in February.
The success comes after two years that included the costly ($494 million) and
embarrassing court-ordered withdrawal from instant photography because of
violations of Polaroid Corp. patents.
Analysts are pleased with the new Kodak, but not overwhelmed.
"The company's gotten some breaks," said Michael Ellmann, a Wertheim
Schroeder & Co. analyst
What made the past year SO good, Ellmann said, is the same thing that made
previous years so bad - -- things beyond the control of corporate management.
"I mean the dollar was so strong and just kept getting stronger, which just
kept hurting Kodak," he said. "Now the dollar is weak and Kodak is getting a big
break."
New Markets
Another break, according to Eugene Glazer, of Dean Witter Reynolds Inc.: a
jump in the number of photos being taken.
"I think most everybody expected to see a 5% to 6% increase in the number of
pictures taken and it's actually running closer to 10% this year," Glazer said.
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The new aggressiveness at Kodak is unmistakable. It is acquiring new
businesses, jumping into joint ventures and discontinuing or swiftly introducing
new products.
On Jan. 13, the company made an impressive entrance into the color copying
market with a machine that is nearly four times faster than any other color
copier. The company is also selling batteries and cameras made in Japan and is
active in biotechnology.
The company's greatest challenge, Chandler said, is in keeping things from
sliding backward.
"I'm not going to be satisfied until every individual in the company feels
the need to be an individual contributor of ideas and judgment," Chandler said.
GRAPHIC: Photo, Kodak says "pit crews" formed recently to speed help to machines
will cut costs at paper plant. Associated Press
TYPE: Wire
SUBJECT: EASTMAN KODAK INC; LABOR RELATIONS; CORPORATE RESTRUCTURING
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LEVEL 3 - - 19 OF 19 STORIES
Copyright @ 1987 Reuters
December 3, 1987, Thursday, BC cycle
SECTION: Financial Report.
LENGTH: 182 words
HEADLINE: KODAK <EK> SAYS IT WILL TO LAUNCH COLOR COPIER
DATELINE: CHICAGO, DEC 3
BODY:
Eastman Kodak Co expects to introduce shortly a color copier, chairman
Colby Chandler said.
"An announcement in color copying from Kodak is imminent," Chandler said at
a meeting with analysts.
He said he had told shareholders at the May annual meeting that Kodak will
introduce the copier when "the time is right and the technology and marketplace
are ready".
Chandler declined be more specific about timing of the introduction of the
new copier.
He said Kodak field tested color copiers at selected sites during 1987.
In the 1988 first quarter, the company plans to introduce a Class 35 color
printer for traditional laboratories.
Chandler said this will be the fastest printer in the world, printing
27,000 color prints an hour on a "burst" basis and 20,000 prints an hour on a
continuous basis.
He said Kodak will have introduced 60 to 70 products during 1987 and 1988
looks equally promising.
Kodak's board will consider approval of a significant but reasonable increase
in capital spending for 1988, Chandler said.
Expenditures in 1987 totaled about 1.7 billion dlrs.
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SUNDAY DEMOCRAT AND CHRONICLE. ROCHESTER, N.Y., JANUARY 15. 1989
M
..ufacturing tied to
U.S. economic health
Kodak executive concerned about tax policies
Jim Laragy Democrat and Chronicle
Colby Chandler, Kodak chairman, is on a mission to alert people about how vital manufacturing is to the American economv.
American manufacturing industry is
How does the savings rate affect
Do you feel that the dollar is still
not faring well says Colby H. Chandler,
Kodak?
overvalued?
who as chairman and chief executive of-
Corporations in America, today, have
Yes. It's 20 percent overvalued today
ficer of Eastman Kodak Co., heads one
(profit) margins that are depressed by
and, at the rate things are going, it will
of the oldest and biggest US manufac-
about one half. They have balance sheets
have to go down to 80 yen to the dollar
turing companies. Phil Ebersole, Demo-
that are highly leveraged (with debt).
in five years.
crat and Chronicle business reporter,
And that's not just due to acquisitions.
What do you think of the idea of a
talked to Chandler recently about the
To raise capital, they've had to do more
value-added tax?
economy, job security and issues facing
borrowing. If their cost of capital is high,
A straight value-added tax applied to
the U.S. manufacturing industry. An
relative to our competitors, that is one of
everything 'across the board' would be
edited and condensed version of that
the reasons is that corporations are hold-
unfair to the poor and would be regres-
talk follows.
ing back. They don't have the cash flow.
sive. That would be true. But a value-
They don't want to go to the borrowing
added tax does not have to be those
How much time do you spend going
market.
things and it doesn't have to be an ele-
around the country talking about
That to me is the most dangerous eco-
gant concoction of complexity to avoid
manufacturing as an issue?
nomic sign we have today. In fact, maybe
those things.
Since June I've probably talked to half
it's the only one that I am really con-
I think a value-added tax is fundamen-
a dozen audiences. It's about one every
tally sound. It taxes consumption rather
month on this subject.
cerned about. That is going to cause price
increases, based on demand beyond (pro-
than investment and savings.
If we let manufacturing continue to
erode as a portion of our economy, the
duction) capacity. And that can be real
I do think, however, that the value-
inflationary. And that's very unfortunate.
added tax should be a substitute for
standard of living of the average Ameri-
Is the federal government borrow-
something else. Now Ronald Reagan ran
can is going to erode right along with it.
It seems to me that I have a responsibil-
ing crowding private corporations in
into his first buzzsaw - where was he? in
ity to try to alert people to that.
the capital market?
New Hampshire? - when he said we
Sure. That's one reason our cost of
Can you give your short list of the
ought to abolish the corporate income
capital is off. The government is absorb-
most urgent of our problems?
tax.
The most urgent is a basic philosophy
ing all of the borrowing from overseas,
Conceptually, he is right, but how do
of taxation which favors consumption and
and corporations have to get in line.
you convince the public? The problem
The borrowing to cover our federal
discourages saving. And I am using the
with the corporate business tax is that it's
word "saving" in its broadest sense 1 not
budget deficit comes in the form of the
a pass-through. Society pays that tax.
just personal saving, but the difference
negative trade balance. The way we are
Business isn't a source of wealth. Busi-
between government spending and gov-
going to have to fix that, long term, is to
ness is a conduit.
run a trade surplus.
ernment revenues. Today we have nega-
Is there anything that local political
tive savings at the federal level. And a
And if we're going to do that, we're go-
leaders and local business leaders can
very great deal of non-competitive Ameri-
ing to have to do that with manufactur-
do to promote manufacturing in the
ca flows from that basic tax policy.
ing, because 80-plus percent of all of the
Rochester area?
trade is manufactured goods.
CONTINUED
3
NTINUATION
expect from us - that we will do every-
a
manufacturing
The
most
imports.
thing
that
could
thing that we can to enhance the quality
another 10 percent who are not high
done, and this is theoretical, is for the
school equivalent.
of the work force.
annett press to present a factual view of
And we've done that, but every day
We in industry can't delegate that
:anufacturing in Rochester.
that goes by, we get better at it. I've said
problem or slop it off to someone else.
I think that there is a terrible misun-
many times in public that I don't think
We've got to take responsibility for deal-
Terstanding of what goes on in corpora-
there's time for any government agency
ing with the problem. Otherwise the risk
tions. What the motives are in corpora-
to, by itself, solve the education problem
is too great that it will not be met ade-
tions. What they have to do to be
in America from the point of view of in-
quately. And 20 what we need to do is
successful in the world.
dustrial usage of people.
employ the universities, the junior col-
I imagine the average person in Roch-
It's a matter of expectations. There are
leges, et cetera, to help us, but that we
ester doesn't realize that corporations are
people - starting back in the 1960s
better stay in charge of it.
dealing with the question of survival es-
who have expectations of earning and ca-
Fifteen years ago, it was generally
sentially every day of their lives. Was it
reer out of proportion to expectations for
accepted that if you once got a job at
someone that wrote a letter to the news-
work. I think that's turned around. We
Kodak and you made an effort to do a
paper this week that said "The God Ko-
have a lot of people coming in now that
good job. you could count on working
dak had to decide
come in with expectations to work.
for Kodak for life. Many people were
People have images that we have some-
But that's an awfully important thing
disappointed in that expectation in the
how behaved as though we were omnipo-
to a corporation - how people view their
early 1980s What I infer from what
tent and have all these choices of things
job. Did they really ask for work when
you're saying is that with its smaller
to do. In fact, hour by hour, our activities
they came in the door? Or did they ask
work force, Kodak is going to try to
are as though we were on a survival
for compensation?
return to that.
course because the forces are all there to
We're coming into a period where
Absolutely. That's what people did
drive you out of existence.
fewer young people will be entering
then. They'd start and they might actual-
Now why did I answer you like I did?
the work force. How is Kodak going to
ly end up working 40 years doing almost
Why would that change us in Rochester
respond to that?
exactly the same thing. There's no hope
if everybody in Rochester had a better
I think that it will be a dramatic effect
of that being the case. Even with the un-
appreciation? Well, for one thing, I'd like
on a company like Kodak.
skilled, you can't expect this.
to see changed expectations in the minds
Turnover will increase. Three percent
But there are lots of reasons I say what
of all of the constituencies, people who
turnover is sort of a base statistic that
I've said, which is a yes to your question.
apply for work, people who try to sell
not only applies to Kodak but applies to
I think from a pragmatic point of view we
their goods and services to the company,
any mature work force. It is the rate at
need to try to return to that kind of situ-
and that they understand that what a
which people become eligible for retire-
ation.
corporation really is, that a corporation is
ment.
And also the word you used - if they
a
pass-through.
The demand for freshly trained special-
stay on the job and do a good job, or
Things come in and things go out.
ists is going to be so great that the lateral
something like that. You'd find supervi-
Goods, materials come in and products go
movement of people across companies is
sors and others saying "What if they're
out. Money comes in from customers, div-
going to increase. To get jobs done, peo-
not doing a good job?" And somewhere
idends go out. They somehow think a
ple are going to take jobs in retirement,
the company can't afford to keep paying
corporation is a great big thing like a well
and, of course, the women in the work
people who are not doing a good job.
in the ground, and the money comes up
forces will go higher.
out of the well.
The premise I put in here is that we
One of the things that will happen at
What does the public - taking the
continue to do a good job in selection and
the same time is a clear trend toward em-
people who live in the Rand Street
hiring. Therefore when you run into per-
area as a example - have a right to
ployment security. I'll use that expres-
formance gaps on the job, the first place
expect from Kodak and what is it not
sion. Other terms that are somewhat like
you look is "What have we done as a cor-
reasonable for them or anyone else to
it are job security, lifetime employment.
poration to bring that about? Have we
expect from Kodak?
But the term employment security is
misplaced a person?" Which is the most
They have a right to expect that we'll
one that I think conceptually is worth
likely. possibility.
be good corporate citizens. We will con-
working toward. That means that once a
I've seen so many cases where a person
duct our affairs in a way that will not
person has begun to put a number of
could be taken out of a job where they
harm them and that we will be fair if
years with a corporation, the corporation
are not performing at all, they just sud-
they're employees, fair to them and equi-
has an obligation to that individual, be-
denly catch fire when they are doing
table, and help them grow.
cause they become less qualified to work
something they like to do.
I think they don't have a right to con-
somewhere else.
And this philosophy that you referred
tinually believe and attribute motives
Through a 40-year career of an employ-
to as something to return to - I agree.
ee today, obsolescence in most jobs is less
Employment security. This philosophy
that are outlandishly ridiculous. I think
than 10 years. So we're already at a point
puts the pressure where it should be, and
we're in that situation today.
where a person has to change their career
that is 'Do I have the person in the right
So what you ask is for people to be-
path, maybe in five different steps.
job, have I provided the right tools?' And
lieve that you are acting in good faith.
If you have a policy that says you're
I think that Kodak management accept
Yes. We assume others are acting in
going to do something with them, cross-
that kind of a challenge.
good faith, but I don't think that it's re-
company movements could be managed.
The only thing that can override it, of
ciprocated.
That's one thing they do in Japan very
It's an enormous burden to carry. I'm
course, is bad times. What do you do in
nicely. But we're going to have to find
seeing it in our management people. It's
bad times? Hopefully, if you plan well
ways of taking people from one stage of a
and have enough different sectors of the
dragging them down.
career and then training them to move
I surely am not asking for cheerleaders.
company, you can swing with that.
over into another kind of work.
But I would ask for objectivity.
I couldn't go back and practice engi-
Now you could ask your question all
neering. I'd be a total failure.
over again and say, "OK, that's what you
We made a big deal here a few years
say Rochester could do to help. How big
ago about retraining a lot of our people
a factor is that?" And I would say it's not
from general kinds of engineering into
a make or break factor.
computer science. We're doing a lot of
So then the make or break things do
that now. We're going to have to do
not happen on a local level?
much, much more.
The thing on the local level which is so
About 2 percent of our jobs are un-
important to the company is the quality
skilled. About 5 percent of the people we
of the work force. And to some extent we
hire, who are intelligent people, are illiter-
are responsible for that. That's one other
ate to the extent that they are not safe in
4
THE ORLANDO SENTINEL
Nov. 20, 1988
Kodak chairman spreads
gospel of manufacturing
By Randolph Picht
The percentage of workers em-
ASSOCIATED PRESS
ployed in manufacturing in America
- 20 percent of the work force - is
ROCHESTER, N.Y. - Colby
lower than at any time this century,
Chandler, chairman and chief execu-
according to the Kodak-commis-
tive officer of Eastman Kodak Co.,
sioned study "The Case For Manu-
has spent 38 years learning the les-
facturing in America's Future."
sons of business, the theories of eco-
What that means, Chandler said, is
nomics and the inside-out story of
that the large "multiplier effect"
the world's largest photography
manufacturing has in stimulating
the economy through higher wages,
company.
Now, after five years at the helm
buying supplies and raw materials,
of Kodak, Chandler is ready to take
as well as creating new and im-
his message on the future of manu-
proved products, is drying up.
facturing to the masses.
"It's a very critical
edge that
So move over, Lee Iacocca, be-
we walk," Chandler said,
cause here comes Colby "America
"We're not the country with
won't make it without manufactur-
leading productivity gains. That's a sign.
ing" Chandler.
When we reach the real crisis, we will have
At 63, the low-key engineer, who
gone so far that bringing it back is going to
grew up and still lives on a farm, is
take decades and decades."
learning how to become a stand-up
The best way to help manufacturing in the
spokesman for corporate America. If
immediate future would be to eliminate the
it sounds political, it is.
federal deficit, Chandler said. But for the long-
"Watching the swing toward a ser-
term, he suggested:
vice-intensive society and listening
Urging the government to make educa-
to some parties say that's good is
tion and other people-oriented benefits a prior-
scary," said Chandler in an inter-
ity.
view at Kodak's headquarters in
Using spending and tax policies to en-
Rochester.
courage investment in new technology and re-
"I have no intention of talking to
search.
the walls on this subject."
Implementing an incremental investment
Kodak's chief has been out
tax credit that would provide incentives for
preaching the manufacturing gospel
companies to expand a plant or buy new
to business groups, college students,
equipment.
politicians and anybody else who
Altering the nation's tax structure to put
will listen. The company also com-
a higher emphasis on taxing consumption
missioned a study by three leading
rather than the current system of taxing in-
economists on the importance of
véstment and saving.
manufacturing and started its first
:Chandler has always had a reputation on
public affairs advertising campaign
Wall Street as "Mr. Long-Term," even before
on the issue.
he took over as chairman of Kodak.
Chandler also is using his last few
:He came to the company in 1950 after gradu-
weeks as chairman of President Rea-
ating from the University of Maine with a
gan's Export Council, the chief advi-
physics degree. His worked as a quality con-
sory group to the Department of
trol engineer and then held various manage-
Commerce, to drum up support.
ment positions.
"The importance of manufactur-
He received a master's degree in manage-
ing to the economy has been some-
ment from Massachusetts Institute of Technol-
thing that's been so obvious to me,
ogy in 1964 and directed the development of
and I'm sure to others like me, that
Kodak's Ektaprint copiers and duplicators in
it might not have ever occurred to us
1973. He was appointed president of the com-
that it wasn't obvious to everyone
pany in 1977 and chairman in 1983.
else," he said.
Although leaders of service indus-
tries might disagree, Chandler
claims that one job making a car, a
copier or a computer is 10 times
more valuable to the economy than a
CONTINUED
selling insurance, waiting on cus-
tomers in a bank or making airline
reservations.
CONTINUATION
As chairman, Chandler has sent the yellow
Kodak banner charging into Japan and given
assembly-line workers almost complete control
over film and other products they make.
And he's added aspirins, batteries and
household cleaners to the list of products Ko-
dak sells through new ventures and the acqui-
sition of Sterling Drug Co.
"He never seemed as concerned with the
nuts and bolts stuff of today or tomorrow.
What interested him was Kodak three, five, 10,
20 years from now," said Brian Fernandez, a
stock analyst with Brean Murray, Foster Secu-
rities.
When Chandler started Kodak's restructur-
ing effort several years ago to cut out layers of
management and give each employee more re-
sponsibility, Chandler said he restructured his
job to include a more active role in outside af-
fairs that affect the company.
Unfortunately, it appears that no one seems
to care about the eroding manufacturing base
of the country, especially the politicians, Chan-
dler said.
"They're patching up problems, they're re-
sponding to special interests, and there's very
little sitting back in a statesman-like way say-
ing, Where do we want to lead this country?'"
he said. "You perhaps could make an observa-
tion that they can't. My feeling is they must."
ASSOCIATED PRESS
Colby Chandler records his message in studio at Kodak's headquarters.
5
THE WASHINGTON POST
Study of Manufacturers' Problems
The Case for Manufacturing
in America's Future
Part of Campaign to Spark Debate
By John M. Berry
tion. The proposals were among the recom-
mendations of a study commissioned by Ko-
Washington Post Staff Writer
dak-actually more a commentary than a
Colby H. Chandler, chairman of Eastman
study-written by economists Lawrence H.
Kodak Co., yesterday set out to provoke a
Summers of Harvard University and Rudigar
debate about the economic perils facing the
W. Dornbusch and James Poterba of Massa-
nation-a debate he says the presidential
chusetts Institute of Technology.
candidates are ducking.
Chandler said he had sent a letter to each
At a Capitol Hill press conference, Chan-
of the Republican and Democratic presiden-
dler released a study, written by three highly
tial candidates noting the study's conclusions
regarded economists, that says the nation's
and asking, "As a leading American manufac-
manufacturers remain in serious trouble de-
turer, I would like to know more about your
spite a recent glow of apparent health.
plans to maintain a strong manufacturing
Chandler, who also is chairman of the
sector and a healthy U.S. economy. I am
President's Export Council, an advisory
very concerned that thus far in the presiden-
NEWS
group, said the absence of seri-
tial campaign these issues are not being ad-
ANALYSIS
ous discussion about America's
dressed in a serious and comprehensive
economic future leaves him
manner."
BY JAMES THE WASHINGTON POST
with a "sense of frustration and deep con-
The letter continued: "Manufacturing is
Kodak Chairman Colby H. Chandler says a realistic debate on U.S. economic policy is needed.
cern."
doing relatively well right now because many
"As a nation, we sit upon an economic
companies have taken the necessary steps of
house of cards," he said. "What is needed is a
restructuring and retooling to be world class
from abroad, our external debt keeps rising,
chosen by the federal government in recent
national debate on the future direction of
competitors, and because the dollar has fall-
and our vulnerability to shocks keeps mount-
years.
economic policy that is both realistic and re-
en. However, the current situation must be
ing.
A low level of national savings-exacer:
sponsible. Yet, I hear little
viewed as very fragile.
"We are now half way through the presi-
bated by large federal budget deficits-has
The debate he seeks would test the
"What guarantee do manufacturers have
dential campaign. Yet, none of the remaining
reduced the supply of capital and hurt invest-:
strongest political backbone. As part of a
that the dollar will not skyrocket again be-
candidates are even talking about these
ment, the economists said. Such a low sav-
plan to reduce federal budget deficits, Chan-
cause interest rates must go up to keep for-
problems, let alone offering solutions. In-
ings rate has forced the United States to
dier called for, among other things, taxation
eign money flowing into the U.S.? How do
borrow from abroad to finance a substantial
stead, we get promises of new spending pro-
of half of Social Security benefits; higher tax-
we avoid a deep recession or inflation, or
grams, and pledges of no tax increases. The
portion of the investment that has occurred:
es on cigarettes and distilled spirits; a gaso-
both sometime in the next year? What assur-
"This makes trade deficits inevitable,"
country faces painful choices and difficult ad-
line tax of 10 cents a gallon; taxation of port-
ance do we have that another October 19
justments. But that is not apparent from lis-
they said, adding, "The composition of U.S.
folio income earned int the United States by
stock market crash will not happen tomor-
trade implies that a large part of the burden
tening to the candidates for president of the
foreigners; tighter enforcement of the tax
row?
from a rising trade deficit falls on manufac-
United States."
laws; and consideration of a new value-added
"These are all real possibilities that pose
turing industries."
tax.
real risks to manufacturing and, indeed, the
So far, Chandler has had no reply to his
But some actions that would increase the
And in urging new steps to slash the na-
whole economy," Chandler's letter said.
unusual letter from any of the candidates.
deficit are necessary, too, they said. One of
tion's large merchandise trade deficit, Chan-
"They are serious threats because we have
Most of the points made in the study, "The
the actions, a partial restoration of the 16
dler said that "efforts to stabilize U.S. ex-
failed to tackle the underlying problems that
Case for Manufacturing in America's Fu-
percent tax credit on investments in busi-
change rates at current levels would be
afflict this economy; namely, a massive budg-
ture," are not new. Nevertheless, taken to-
ness equipment that was repealed in the
misguided and risk a serious recession." The
et deficit coupled with very low national sav-
gether they buttress the argument that man-
1986 tax overhaul, would cost about $10 bit
Reagan administration has agreed with other
ings. The result of this unfortunate combina-
ufacturing in the United States has borne the
lion a year.
industrial nations to attempt such a stabiliza-
tion is that we keep borrowing huge amounts
brunt of the impact of the economic policies
See MANUFACTURE, G3, CoL 4
Study Aimed
conceded that manufacturing's share
of the economy has not declined.
At Sparking
However, he said, "The concern is
not just whether we can sell prod-
ucts but at what price."
Economic Debate
Manufacturing has been able to
maintain its share of output only by
MANUFACTURE, From G1
pushing down real factory wages and
accepting lower profitability. A
Chandler and the economists also
healthy manufacturing sector, Sum-
argued strongly that the value of the
mers said, would be one in which
dollar will have to fall farther if the
trade deficit is to be eliminated with-
out plunging the nation into a reces-
sion.
"As a nation, we sit
"Monetary policies directed at
maintaining exchange rates near
upon an economic
current levels would be catastrophic
for the manufacturing sector," the
house of cards."
study said. "In addition to reducing
- Colby H. Chandler
foreign demand for U.S. products
Eastman Kodak Co. chairman
and increasing American demand for
foreign products, tight monetary
policies in defense of the exchange
growth of the standard of living was
rate would raise interest rates and
comparable to that in other industri-
the risk of a recession. Postponing
al countries-as opposed to one in
the inevitable exchange rate adjust-
which real wages and profits are fall-
ment only magnifies the ultimate
ing.
distress."
The candidates' responses should
One of the authors, Summers,
be interesting-if they arrive.
DEMOCRAT AND CHRONICLE, ROCHESTER, N.Y., FRIDAY, APRIL 22. 1988
BUSINESS
Kodak's chief
sparks debate
on peril facing
U.S. economy
Chandler
Chandler
The study was done by Rudiger Dorn-
busch and James Poterba of Massachu-
consumption rather than on sav-
setts Institute of Technology and Law-
ings and investment. One possibil-
rence Summers of Harvard University.
ity is a value-added tax; a value-
exhorts
Chandler, in a press conference at the
added tax is like a sales tax, but
Russell Senate Office Building in Wash-
it's imposed at all stages of pro-
ington, D.C., said the study, which he
duction, not just sales to consum-
candidates
largely agrees with, underlines the impor-
goods. ers, and it's rebated on exported
tance of manufacturing.
Any investment credits should
Although manufacturing pro-
be for new plants and equipment,
By Phil Ebersole
vides less than 20 percent of U.S.
not replacements, he said.
Democrat and Chronicle
jobs, it produces more than 60
The study opposes U.S. barriers
Colby H. Chandler, chairman and chief
percent of U.S. wealth and per-
against imports, but says the fed-
executive officer of Eastman Kodak Co.,
forms 95 percent of private re-
eral government should act to
yesterday called on the presidential can-
search and developemnt.
break down foreign barriers to
But American manufacturing is
U.S. products.
didates to get serious about the nation's
economy and its troubled manufacturing
in trouble, Chandler said.
Kodak spokesmen didn't know
industries.
U.S. trade volume has grown
whether Chandler will make pub-
He also made public a study by three
only 2.7 percent a year since 1968,
lic the candidates' replies.
professional economists, commissioned by
compared with 4.4 percent for oth-
They said only a limited num-
Kodak, which concludes that the United
er industrial nations and 7.9 per-
ber of copies of the study are on
States sits upon "an economic house of
cent for Japan. U.S. gains in pro-
hand. They'll announce later
cards."
ductivity have been less than
whether and how people can send
Chandler said he's sent letters to each
other countries, and, in recent
for copies.
of the candidates asking them to outline
years, only about half the gains
their economic plans in detail - some-
made by Japan.
thing none of them has done yet, he said.
"It is true we in manufacturing
"The next president of the United
States will be presented with a painful
are doing better" in the past few
choice," he said.
years, he said, but that's due
"Swallow the bitter
largely to the decline in the U.S.
medicine of budget
dollar exchange rate and the larg-
cuts, tax increases
history. est peacetime military buildup in
and structural tax re-
forms or accept
The balance of trade in manu-
recession, global eco-
factured goods has gone from a
nomic retreat and a
$17 billion surplus in 1980 to a
lower standard of liv-
$170 billion deficit in 1987, net na-
ing."
tional savings have declined from
The study, "The
7 percent in the 1970s to 3 percent
Case for Manufactur-
in the 1980s and the federal bud-
ing in America's Fu-
C. Chandler
get 1980. deficit is triple what it was in
ture," makes several proposals which
themselves may lower the living stan-
To balance the budget, the
dards of ordinary Americans.
study concludes, not even Social
These include taxes on consumption, a
Security should be considered ex-
cheaper U.S. dollar and cuts in federal
empt from budget cuts. "I know
domestic programs, possibly including So-
such cuts would be extremely con-
cial Security.
troversial," Chandler acknowl-
edged.
But such measures are needed to pre-
serve manufacturing industry. "Growth in
He said the study advocates
our manufacturing sector translates into
new taxes, which should be on
more high-wage jobs and a higher stan-
dard of living for all of us," Chandler
said.
HOBART ROWEN
Facing the Challenge Ahead
E
xcept for died-in-the-wool
to come up with detailed plans for
Reaganites, the current assumption
dealing with the problems.
is that the U.S. economy faces a
Of course, Vice President George
staggering set of problems over the next
Bush doesn't concede that there is a
decade, and that it will be the unenviable
The Washington Post
task of the new president-Republican
or Democrat-to begin unwinding some
The current
of the mistakes of the past eight years.
"The economy increasingly is resting
on the shifting sands of debt," Sen. Paul
assumption is that the
Sarbanes (D-Md.) said at a press
conference in conjunction with the annual
economy faces
report of his Joint Economic Committee
(JEC).
staggering problems.
Coincidentally, Chairman Colby H.
Chandler of the Eastman Kodak Co., in
releasing a new study that focuses on the
major economic problem, instead hailing
special problems of manufacturers, said
the great advances made under Reagan.
that the United States sits on "an
And the JEC's minority report, contest-
economic house of cards." And he chided
ing Sarbanes' account as "gloom and
all the presidential candidates for failing
See ROWEN, H8, Col. 1
PRIL 24, 1988
HOBART ROWEN
Facing the Economic Challenge Ahead
ROWEN, From H1
doom," said: "Never has the
foundation of our economy been
stronger."
But the point made by Sarbanes
and the majority of the joint
committee is that Reaganomics
has left "a legacy of sharp
imbalances-imbalances that
cannot be sustained."
Sarbanes is talking about a
half-dozen key areas-especially
debt, where the trend lines have
taken an unprecedented turn for
the worse: business, consumer,
Third World, and U.S.
BY JAMES K.W. ATHERTON-THE WASHINGTON POST
government debt all have piled up
Rep. Chalmers Wylie, left, and Sen. Paul Sarbanes present JEC report.
to unbelievable heights.
For example, the study
manufacturing sector; or accept
substitute for effective
commissioned by Kodak-by
recession, global economic retreat
presidential leadership."
economists Rudiger Dornbusch,
and a lower standard of living.
The Dukakis aide said that the
James Poterba and Lawrence
Sadly, in the campaign of 1988,
NEC, scheduled to report in
Summers-observes that the
competitiveness remains a
March 1989, will be late in
federal government now pays
buzzword, rather than a serious
dealing with the problem. Bush or
$586 million a day to service its
national goal."
Dukakis would appoint two new
debt, or more last year than the
The Dornbusch-Poterba-
members to the commission after
aggregate earnings of most big
Summers recommendations
the election, and could alter the
corporations.
include a new look at the Tax
timetable. But each, clearly,
The JEC's Democrats also are
Reform Act of 1986, which they
wants to make no commitments in
troubled that real hourly
say was "a step backwards" in
advance.
compensation paid to workers
promoting savings and
In his campaign speeches,
(including fringe benefits) have
investment. They also would
Dukakis promises a "one hundred
not risen in this decade. In part,
abandon the Reagan
days" crash economic program to
this is a result of the "hit" that
administration's "misguided"
"build a brighter economic
American rust-bucket industries
effort to hold the dollar steady at
future." It's too early to get a
had to take when their
current levels. "Policymakers
sense of what will be involved. But
performance proved to be
if Dukakis is elected, my hunch is
noncompetitive with imports. (In
should recognize that a continued
that some of the elements of the
part, the failure of compensation
dollar decline is both likely and
Dornbusch-Poterba-Summers
to keep pace with productivity
desirable," they say.
program may appeal to him.
also implies weaker union power.)
In grappling with the dilemma
He's unlikely to confront the
But Sarbanes and his
of how to reshape economic
deficit problem head-on with a big
Democratic colleagues on the JEC
policy, the newly elected
tax increase all at once, but rather
are caught in a political dilemma:
president might gain political
would try to sell a multiyear
They can neatly define the
"cover" by relying on a study now
deficit-reduction program to
problems, and even suggest the
in progress by the new National
Congress and private leaders in
solutions in a general
Economic Commission (NEC),
business and labor-recognizing
way-reduce the deficits, be
cochaired by Democrat Robert
the strong links between domestic
more adventurous on Third World
Strauss and Republican Drew
and international economic-policy
debt, do better on trade, stress
Lewis.
goals.
economic growth. But they can't
George Bush has already
As for Bush, he'll face the same
be precise, because a tax increase
indicated he would give short
grim reality as would
is a necessary element.
shrift to the NEC, fearing it is
Dukakis-and ultimately will have
Chandler, as a businessman, is
geared to recommending a major
to take many of the same steps,
more candid: "The next president
tax increase. An aide to Michael
including tax increases. Either
of the United States will be
Dukakis, in response to my
Bush or Dukakis will have only a
presented with a painful choice:
question on how the
short window of opportunity in
swallow the bitter medicine of
Massachusetts governor will deal
which to act. If they don't, the
budget cuts, tax increases, and
with the Strauss-Lewis group,
legacy of voodoo economics could
structural tax reforms to begin to
said: "He endorsed the creation of
accelerate the process of
cure our root economic maladies
the commission last October, but
declining American power in
and strengthen America's
he doesn't believe it can be a
world affairs.
THE WASHINGTON POST
MONDAY, APRIL 25, 1988
William Raspberry
Who Says We're Post-Industrial?
Post-industrial America is moving from a
years, and, in any case, deteriorating quality is
tic product, but its purchases from other firms
manufacturing to a service-based economy.
just one of the things that has gone wrong.
represent more than a third of the gross domes-
Say it often enough, with enough matter-of-fact
The principal culprit, he says, is the failed
tic product, and its shipments account for near-
certitude, and it starts to sound as unchallenge-
"experiment" of the early 1980s-the fiscal and
ly 60 percent of the gross domestic product.
able as the announcement that your teen-age son
monetary policies that produced America's
Moreover, a key source of economic growth
is moving from adolescence to adulthood-that is
trade and budget deficits, largely by overvalu-
is improved productivity resulting from re-
ing the dollar.
search and development. The manufacturing
to say, both inevitable and desirable.
"We knowingly watched this happen. All of us
sector, while accounting for only a fifth of the
Well, Colby H. Chandler says it's neither, and
had a chance to scream, but business didn't
gross domestic product in 1984, was responsi-
the chairman and chief executive officer of
begin to complain until 1984. Academia didn't
ble for more than 96 percent of all R&D
Eastman Kodak Co. has commissioned a schol-
complain. Economic journalists didn't complain.
expenditures. And finally, unlike the service
arly study to prove the point. He was down
The assumption was that strong is good."
sector, every manufacturing job creates three
from his Rochester headquarters last Friday to
But when it comes to the overvalued dollar,
other jobs in the economy.
release the results of that study: "The Case for
he says, it turns out that strong is terrible.
As a result of all these factors, says Chandler,
Manufacturing in America's Future."
Item. The federal debt is three times larger
the decline in manufacturing has turned the U.S.
"To begin with," he told me in an interview
today than it was in 1980, and the debt service
economy into "a house of cards" that threatens to
prior to his Capitol Hill press conference, "we
alone-some $586 million a day-is costing the
topple if something isn't done soon.
should not be viewing ourselves as post-indus-
U.S. Treasury more every three days than
And what should be done? The overriding
trial. Certainly our trading partners aren't
Kodak, one of the top 10 firms in the country,
need, says Chandler, is to reduce the federal
viewing themselves that way, and we're losing
earned in all of 1987.
deficit by reducing expenditures, even in such
our export market-80 percent of it in manu-
Item. Our net savings rate has declined from
sacrosanct areas as defense and Social Security,
factured goods-to them.
7 percent in the '70s to only 2 percent today-
"I have no quarrel with the service sector,
half of the British rate, a fifth of the rate in
and by increasing revenues.
France and Germany, and a mere eighth of the
"As far as raising taxes is concerned, I try to
but I think we need a balance in the world
be careful to talk about it in terms of tax
economy. For us to shift to a service economy,
Japanese rate.
Item. The U.S. trade balance in manufac-
structure. We talk an awful lot about tax reform.
which has a significantly lower wage structure
tured goods has "collapsed" in the 1980s from a
One of these days we ought to do it. All we've
than the manufacturing sector, while our com-
$17 billion surplus to a deficit of $170 billion
done so far is fool around with the rates. We still
petitors are becoming more industrial lowers
last year, including a first-ever deficit in high-
encourage consumption and discourage savings
our standard of living. We are becoming a
and investment."
tech goods.
market for foreign goods."
Item. America in the 1980s has lost 1.2
Chandler and the authors of his new study have
But isn't that because Americans are turning
million manufacturing jobs-2 million if you
some ideas as to how to restore American
out shoddy products while our competitors in
count from the peak levels of 1979.
manufacturing to its place in the world economy.
Europe and the Far East are focusing on quality?
Chandler says we have failed to grasp what
But for now, he'd be content to trigger a serious
Not entirely, says Chandler. He won't deny
the Kodak-commissioned study makes clear:
national debate on the subject.
that product quality has had its effect on Ameri-
that there are hidden costs in the shift from
"Right now, nobody's talking about it very
can manufacturers, but he insists that the
manufacturing to service. Manufacturing may
much: not business, not academia, not our elected
quality gap has narrowed significantly in recent
account for only 20 percent of the-gross domes-
officials, and not the people in your business."
The Case for Manufacturing
in America's Future
P
AL
XP
the
("
Pani
LEAVE
The Case for Manufacturing
in America's Future
by
Rudiger Dornbusch
James Poterba
Lawrence Summers
with a foreword by
Colby H. Chandler
1988
Colby H. Chandler
Chairman and Chief Executive Officer
Eastman Kodak Company
In the first half of the decade, the
United States conducted an
experiment in national economic
policy which brought both great benefit and great
harm to the U.S. economy. Inflation, which
seemed out of control in the 1970's, was tamed,
and we have experienced the longest peacetime
economic expansion in the postwar period.
These gains, however, were achieved at substantial
cost, since we have run the largest budget and
trade deficits in our history. These deficits
fundamentally altered America's position in the
world. Where we were its largest creditor, we are
now dependent on foreign financing and are its
largest debtor.
At the time these policies were being
implemented, American manufacturers failed to
fully appreciate how they would affect our ability
to do business at home and abroad. Indeed, the
toll has been very high. Domestic and world
markets, which traditionally were ours, were ceded
to others as our competitiveness plummeted due
in large measure to an overvalued dollar.
To be sure, there was a silver lining in this very
difficult period for many of us. It forced manufac-
turers to make substantial internal adjustments,
adjustments which in many cases needed to be
made and for too long had been delayed.
It is my sense that we learned a very important
lesson: namely, we cannot afford to be complacent.
There always will be more that needs to be done
to improve the quality of our products and cut
costs if we are to remain on top in an intensely
competitive world marketplace. In a very real
sense, change and the resulting need to adjust
have accelerated exponentially beyond the pace of
the 1950's, 1960's or even the 1970's.
2
We also learned another lesson during these
years: that manufacturing has a critical stake in
the conduct of national economic policy. Even if
we make top-quality products at low cost, it is
difficult to be competitive if policies at the
national level result in massive domestic and
external deficits.
With this lesson in mind, we engaged in an
effort to learn more about the importance of
manufacturing to the overall economy, and the
effect of economic policy on the prospects for this
sector. The present study, "The Case for
Manufacturing in America's Future" results from
this undertaking. It documents that a strong
manufacturing sector is essential to the health of
the overall economy and our future standard of
living. It also shows that, relative to manufacturing
in other industrial countries, U.S. manufacturing
is not faring well and could be doing better if
appropriate policies were in place.
We believe that the policy debate on economic
choices will be improved if a manufacturing
perspective is presented in a coherent, sensible
and readable fashion. It is in this light that I urge
a careful review of this report. It is meant to
stimulate thought and discussion.
I enjoyed participating in discussions in the
preparation of this project and I personally
support the broad thrust of its policy
recommendations. Others might disagree. But we
need an informed and thoughtful debate in this
country about the direction of economic policy
over the next several years. We face very hard
choices and difficult adjustments. This report
should add to this essential debate.
Cothy Chendla
3
EXECUTIVE SUMMARY
This report examines the competitiveness of
We believe that the primary reason for the
American manufacturing and its relation to
failure of American manufacturers is national
national economic policies. It begins by
economic policies that have given rise to huge
highlighting the crucial role of manufacturing
twin trade and budget deficits, favored
in the American economy, and examining the
consumption over saving and investment, and
recent performance of the U.S. manufacturing
been insufficiently sensitive to the need for
sector. We find that:
free markets both at home and abroad. We
The economic importance of manufacturing
offer policy recommendations directed at each
is disproportionate to its relative share in the
of these areas:
economy. While manufacturing contributes
Fiscal Policy
one fifth of national output, it does more
than ninety-five percent of private research
Bringing Federal budget deficits under
and development. It is an important provider
control should be the overriding priority of
of high-wage jobs and a major source of
national economic policy. Reduced budget
product demand for other sectors.
deficits and increased national saving is
essential if American competitiveness
Manufacturing firms bear the brunt of
problems are to be resolved. This will require
cyclical fluctuations and macroeconomic
consideration of spending cuts in previously
policies that generate substantial trade
sacrosanct budget areas, including Social
imbalances. Virtually all of the swing in the
Security, as well as a significant increase in
overall U.S. balance of trade between 1979
Federal tax collections. In the short run,
and 1985 is accounted for by movements in
various excise taxes could generate
manufacturing trade. Manufacturing employ-
significant increases in Federal revenues, but
ment has contracted throughout the 1980s
for the long run, serious consideration
as (at least until very recently) both domestic
should be given to new national
and world markets have increasingly been
consumption taxes.
ceded to foreign competitors.
Structural tax policies should be redirected
In Japan and in all non-U.S. OECD countries
towards the goals of promoting saving and
as a group, manufacturing is growing more
investment rather than consumption. From
rapidly than total output and the importance
this perspective, the 1986 Tax Reform Act
of manufacturing in economic activity is
was in important respects a step backwards.
therefore rising. In the U.S., by contrast,
Serious consideration should be given to
manufacturing is at best constant or even
restoring the investment tax credit, perhaps
declining if we look at the 1979-1985 period.
on an incremental basis. A crucical long run
By international standards the U.S. is
policy priority is finding ways of raising
experiencing both low absolute and low
anemic American private saving rates.
relative growth in manufacturing. Our share
in world trade has been falling, and import
penetration in our own market has increased
dramatically.
4
Structural Trade Policies
Exchange Rate Polices
The newly industrialized countries pose a
Efforts to stabilize exchange rates at current
significant and increasing challenge to
levels are misguided. They run very serious
American manufacturers. Efforts to thwart
risks of throwing the economy into recession
the entry of their products into the United
and make an eventual financial collapse
States are not likely to succeed, and if they
more likely. American monetary policy
did succeed would impose large costs on
should be directed at insuring continued
American consumers. Instead of seeking to
economic growth as the budget deficit
block imports American policy should
declines, not at arbitrary exchange rate
concentrate on opening up markets for
targets. Policymakers should recognize that
American products in the newly
a continued dollar decline is both likely and
industrialized countries.
desirable.
Protectionist measures whether to limit
Rapid growth in the world economy and the
imports or to discourage foreign direct
expanding markets that it brings about are
investment in the United States should be
crucial to the health of the manufacturing
avoided at all costs. Protection only invites
sector. As the United States brings its
retaliation. Even if there were no retaliation,
current account back into balance, it should
protectionist policies would strengthen the
encourage other nations to stimulate
dollar making US exporters less competitive.
domestic demand to replace export demand.
Foreign investment is likely to benefit the
economy even though in some cases it will
hurt entrenched American firms.
5
INTRODUCTION
The competitive problems of American manufacturing firms
This report concentrates on three areas where changes
have caught the attention of policymakers, the press and
could do a great deal to restore the health of American
the public in the last few years as never before. Record
manufacturing: fiscal policy, monetary policy, and structural
trade deficits, significant foreign penetration of American
trade policy.
markets, declining rates of real wage and productivity
The most serious policy problem for the manufacturing
growth, and low profitability are all symptoms of the
sector is the continuation of large Federal budget deficits.
serious underlying problems confronting U.S.
Federal deficits have absorbed more than two-thirds of
manufacturing. This report seeks to diagnose and suggest
private saving in recent years, and national saving has
treatments for the serious ills that afflict the American
averaged less than three percent of GNP. Low national
manufacturing sector.
saving hurts manufacturing in two ways. First, it reduces
We begin by reviewing the role of the American
the supply of capital and chokes off much needed
manufacturing sector in the American and world
investment. This hurts manufacturers in their role as
economies. It is readily apparent that the economic
producers of capital equipment, and it discourages them
importance of manufacturing is disproportionate to its
from making productivity enhancing investments. Second,
relative share in the economy. While manufacturing
the low national saving rate forces the United States to
contributes one fifth of national output, it does more than
borrow from abroad in order to finance investment. This
ninety five percent of the economy's private research and
makes trade deficits inevitable. The composition of U.S.
development. It is an important provider of high-wage jobs
trade implies that a large part of the burden from a rising
and a major source of product demand for other sectors.
trade deficit falls on manufacturing industries.
The importance of the manufacturing sector makes it
Reducing Federal deficits will require both spending cuts
particularly alarming that it has experienced declining
and increased taxes. Spending must be scaled back in areas
employment and deteriorating world market share in
of the budget like Social Security that have heretofore
recent years.
been sacrosanct. In the short run, various excise taxes
Many discussions of the problems facing the
could generate significant increases in Federal revenues,
manufacturing sector emphasize factors specific to
but for the long run, a new national consumption tax
particular industries or firms, such as product quality or
should receive serious consideration.
trade barriers. While these issues no doubt have a role, the
Reducing Federal deficits is the most potent and reliable
suddenness with which the competitiveness problem arose
way to increase national saving. But the enormity of the
suggests the need to look elsewhere for its primary causes.
gap between American and foreign saving and investment
American management practices and product quality did
rates, also justifies policies to stimulate private saving and
not deteriorate abruptly in the 1980s, yet the trade deficit
to encourage investment. Structural tax policies can play
ballooned. There is little evidence that trade barriers
an important role here, particularly in stimulating
against American goods have increased in recent years,
productivity enhancing investments in equipment.
although they are a significant problem. Instead, the
Unfortunately the Tax Reform Act of 1986 did more to
changes in the economic environment that have caused
stimulate consumption than investment, and constituted a
problems for manufacturing principally have involved
step backwards in this respect. Serious consideration
macroeconomic policies.
should be given to restoring the investment tax credit,
possibly on an incremental basis.
6
A second crucial problem for American manufacturers in
Much of this report focuses on exchange rate questions
recent years has been the extraordinary movements in the
and the appropriate monetary-fiscal mix. In the medium
exchange value of the dollar. The strong dollar has been,
and long run, the performance of manufacturing depends
and continues to be, the proximate cause of the reduced
as well on trade policies. Until very recently, protectionism
competitiveness of American manufacturing firms.
was on the rise in the wake of the sharp loss in
Manufacturing competes on world markets. If an overly
international competitiveness. The immediate risk of major
strong dollar lowers Japanese wages measured in dollars,
protectionist measures has abated, but the need to
then Japanese firms are in an extraordinary position to
establish a more aggressive export-oriented trade policy
gain market share in the United States and other countries.
remains. This is not as urgent as policy action in the
While the dollar has come way down from its peak levels,
macroeconomic sphere, but failure to establish appropriate
our reading of the evidence indicates that it will have to
policies may unnecessarily delay or even jeopardize major
fall further if trade balance is to be restored without a
U.S. export opportunities in foreign markets.
recession. Certainly, a balance of manufacturing trade does
With respect to structural trade policies, the key is to
not appear to be within reach at current exchange rates.
avoid doing the wrong thing. The temptation to protect
Manufacturing has an additional stake in a further dollar
American firms from foreign competition is very strong
decline. Like other sectors of the economy, manufacturing
given our large trade deficit. Nonetheless protectionist
will fare much better if the economy enjoys a "soft
measures, whether to limit imports or to discourage foreign
landing" as current imbalances are unwound. The necessary
direct investment, should be avoided at all costs. Protection
deficit reduction measures will reduce demand and slow
only invites retaliation. Even if there were no retaliation,
the economy. The slack can only be taken up by increased
protectionist policies would strengthen the dollar and
net exports, which requires a decline in the exchange rate,
make American exporters less competitive. Limiting foreign
or by expansionary monetary policies which would have
investment in the U.S. is equally bad policy for all the
the same effect. Monetary policies directed at maintaining
reasons we prod developing countries to liberalize their
exchange rates near current levels would be catastrophic
foreign investment regimes.
for the manufacturing sector. In addition to reducing
foreign demand for U.S. products and increasing American
demand for foreign products, tight monetary policies in
defense of the exchange rate would raise interest rates and
the risk of a recession. Postponing the inevitable exchange
rate adjustment only magnifies the ultimate distress. The
best way for monetary policy to help manufacturing as well
as other sectors is to allow market forces to determine the
level of the dollar. This would enable monetary policy to be
directed at the crucial objective of maintaining full
employment.
7
I. MANUFACTURING AND THE AMERICAN ECONOMY
The health of the American manufacturing sector and the
The Integral Role of Manufacturing in the U.S. Economy
American economy are closely related. American
Manufacturing's share of employment substantially
manufacturers cannot remain competitive unless the
understates the sector's importance: without a viable
aggregate economy prospers, and it is very unlikely that
manufacturing sector, the American economy will not be
aggregate economic activity can grow rapidly without a
able to provide rising standards of living to workers while
thriving manufacturing sector. This section begins by
also permitting producers to remain competitive on world
suggesting several reasons why a strong and growing
markets. We develop three aspects of this argument: the
manufacturing sector may serve as a potent stimulus to
role of manufacturing in technological progress, the quality
economic growth. We then investigate these links by
of jobs it provides, and its important linkages to the
highlighting the manufacturing sector's special sensitivity
broader economy.
to both cyclical fluctuations and to movements in the
Numerous studies have shown that the primary source of
balance of trade. We conclude by providing a global
economic growth is improved production techniques that
perspective on the recent performance of the U.S.
allow increased amounts of output to be produced from
manufacturing sector, focusing on its role in world trade
given amounts of capital and labor. Such technical
and its growth relative to the manufacturing sectors of
improvements, as well as improved products, derive from
other industrialized nations.
research and development expenditures. These expenditures
The manufacturing sector employs about twenty percent
benefit not only the firms that make them, but also
of the nation's workforce. Manufacturing employment as a
competitors who emulate successful products and
share of total employment has been declining for over
production techniques and customers who are able to
three decades.
purchase goods at lower cost. Since those who spend on
Figure 1
research and development do not capture all the benefits,
Manufacturing Share of Total Employment: 1948-1987
ensuring an adequate level of research and development is
Percent
a chronic economic problem. That is the justification for
government funding of basic research, and other public
35
policies.
Table 1 illustrates the crucial role of manufacturing
30
industries in spurring technical progress. While
manufacturing accounted for 20.7 percent of gross
25
domestic product in 1984, it was responsible for
96.3 percent of all R&D expenditures. Each dollar of
manufacturing value added is associated with 8.9 cents of
20
R&D spending, while a dollar of value added in the non-
manufacturing sector is accompanied by less than one
15
tenth of one cent of R&D. The central role of
1950
1960
1970
1980
manufacturing in undertaking R&D underscores the need
Source: US Bureau of Labor Statistics, "Employment Situation," annual averages
for a healthy manufacturing sector if American business is
to maintain an adequate rate of research spending in the
Figure 1 shows that manufacturing jobs accounted for over
coming decades.
30% of employment during the early 1950s. but only 18%
Table 1
of employment in 1987. Manufacturing's share of
The Importance of Manufacturing to
employment is now lower than at any time this century.
Research & Development
Although the relative importance of manufacturing has
Manufacturing
Non-Manufacturing
declined through time, its absolute size has grown for most
of the postwar period. Between 1950 and 1980, for
R&D Expenditures
($ billion, 1984)
69.0
2.6
example, the number of manufacturing jobs increased by
R&D/Value Added
.089
.001
nearly five million. The 1980s differ from earlier decades,
R&D/Employee
however, because this absolute growth trend has been
($ thousands, 1984)
3.610
.035
reversed. Manufacturing firms employed 19.1 million
Source: National Science Foundation, Bureau of Labor Statistics.
persons in 1987, a decline of 1.2 million from the level in
1980 and almost two million from the peak manufacturing
employment level in 1979. This absolute decline in
manufacturing employment, despite robust economic
growth in recent years, accounts in part for recent concern
with the health of American manufacturing.
8
WHAT ABOUT AUDMATION
The greater tendency for manufacturing firms to invest
Figure 2
in research and development reflects the greater
The Share of Manufacturing in GDP
opportunities for technical progress in manufacturing
Percent
relative to other sectors of the economy. While measurement
31
problems make it difficult to compare productivity growth
30
in manufacturing with that in other sectors, estimates of
productivity growth supplied by the Bureau of Labor
29
Statistics support this view. Productivity is higher, and
28
NOMINAL
grows faster, in manufacturing than in other industries.
27
The quantity of output produced per hour of worker input
26
in manufacturing has grown nearly 3.5% per year since
1970. Nonmanufacturing productivity has increased only
25
0.3% per year. Similar differentials for other postwar
24
periods are shown in Table 2.
23
Table 2
22
Productivity Trends in Manufacturing and Other Sectors
(% Per Year)
21
REAL
20
Manufacturing
Non-Manufacturing
19
1950-1986
2.70
1.54
1950-1973
1947
'50
2.79
'53
'56
'59
'62
2.25
'65
'68
'71
'74
'77
'80
'83
'86
1974-1986
2.53
0.21
1980-1986
3.49
0.32
In addition to spurring technical advance, a developed
manufacturing sector also provides good jobs to workers.
Source: BLS. Non-manufacturing denotes private, non-farm,
non-manufacturing.
Average hourly compensation in manufacturing is higher
than compensation in many other sectors. Table 3 presents
The pattern of especially rapid productivity growth in
summary information on compensation in different sectors
manufacturing is a worldwide phenomenon. During the
throughout the postwar period. The gap between wages in
period 1973-1984, manufacturing productivity exceeded
manufacturing and in the rest of the economy has changed
that in all other sectors by 1.75 percent per year in the
relatively little through time: manufacturing jobs
United States, by 5.4 percent per year in Japan, and by
consistently appear to pay more than 20% more than jobs
2.9 percent per year in Europe. Countries that specialize in
in the non-manufacturing sector, and nearly 30% more
producing products where productivity rises rapidly are
than service sector jobs.
likely to enjoy more rapid growth than those that produce
Table 3
products where growth is stagnant. This partly explains the
Hourly Compensation in Manufacturing
keen international competition in manufacturing
and Other Sectors
industries.
(1986 $ per hour)
Productivity differentials explain why some measures
show no decline in manufacturing's role in the U.S.
Total
Manufacturing
Services
Trade
economy. Figure 2 presents the share of manufacturing in
Non-Manufacturing
gross domestic product. The solid line shows the share
1950-86
$12.26
8.47
9.72
8.85
holding the relative prices of different goods constant at
1986
$15.70
12.17
10.81
12.75
their 1982 levels. It demonstrates that manufacturing has
accounted for just over twenty percent of output throughout
Source: Department of Commerce, Bureau of Labor Statistics.
the postwar period. If the calculation is based on actual
prices in different years, however, as the broken line
demonstrates, the manufacturing share of output declines
in tandem with the manufacturing share of employment.
The difference between the constant-price and actual-price
calculations is dramatic because rapid productivity growth
in manufacturing has lowered the relative price of
manufactured goods throughout the last three decades.
9
The explanation of wage differentials between
purchases from other firms. While some intermediate goods
manufacturing and other sectors is not entirely clear. In
are imported, manufacturing firms constitute a significant
part, the pay differential reflects the greater extent of
source of demand for the output of other industries. This is
unionization in the manufacturing sector. In part, it reflects
illustrated in Table 5, which shows the increase in
the fact that manufacturing workers are on average older
unemployment rates in sectors other than manufacturing
and better educated than those in other sectors of the
that results from a one percentage point rise in
economy. As Table 4 shows, however, these factors cannot
manufacturing unemployment. This table explains why the
explain the entire differential.
whole economy has a large stake in the manufacturing
Table 4
sector's performance.
Interindustry Wage Differentials
Table 5
(Deviation from All-Industry Average)
Spillover Effects of Manufacturing Unemployment
Industry
Wage Deviation
Increase in Sector Unemployment
Sector
Rate from One Point of
Transport & Public Utilities
+22.9%
Manufacturing Unemployment
Mining
+ 19.3%
Construction
+ 12.3%
Construction
3.2
Manufacturing
+9.7%
Wholesale Trade
1.4
Wholesale & Retail Trade
-9.3%
Retail Trade
1.5
Finance, Insurance, and Real Estate
- 13.2%
Finance, Insurance,
Services
- 16.4%
Real Estate
0.7
Services
2.4
Source: Alan Krueger and Lawrence Summers, "Efficiency
Professional
-0.1
Wages and the Wage Structure," National Bureau of Economic
Government
1.0
Research Working Paper 1952, June 1986. These estimates
Weighted Sum
2.0
correct for differences in age, experience, and schooling
between individuals in different industries.
Source: Kevin J. Murphy and Robert Topel, "Unemployment in
the United States," in NBER MACROECONOMICS ANNUAL,
Manufacturing firms may choose to pay workers higher
1987, Stanley Fischer, ed.
wages than those in other industries for a variety of
reasons. First, the integrated character of manufacturing
Manufacturing linkages are important in an additional
production puts a premium on development of a stable and
sense as well, since many services that feature prominently
cooperative work force, objectives which are fostered by a
in visions of the "post industrial economy," such as
high wage policy. Second, the nature of production in
education, banking, and communications, are demanded in
many manufacturing industries requires workers to develop
significant part by the manufacturing sector. The health of
specific skills on the job that justify the payment of high
these progressive parts of the service sector is therefore
wages. Third, higher productivity in manufacturing may
tied to the performance of American manufacturing firms.
enable firms to pay higher wages than those available in
The three considerations reviewed here-technical
other industries. While the relative importance of these
progress, quality of jobs, and interindustry linkages-all
different factors in determining the manufacturing wage
suggest that a strong manufacturing sector is important to
premium remain unclear, the implications of the
a prosperous American economy. Hence, policy should seek
manufacturing wage premium are apparent: more high
to remove artificial impediments to American
wage jobs are likely to result from expansion of the
manufacturing, and to create an environment where
manufacturing sector than from expansion of other sectors.
industrial firms have strong incentives to expand output
The higher level of wages in manufacturing signals the
and employment. The next two sections documents the
greater productivity of additional manufacturing workers.
recent experience of the U.S. manufacturing sector and
Economies with large and expanding manufacturing
places the domestic manufacturing sector in the world
sectors will grow faster than those with small and
context.
contracting manufacturing bases.
U.S. Manufacturing in the U.S. Economy
A final reason for the manufacturing sector's
disproportionate influence is its close linkage to other
Despite manufacturing's stable share of constant-dollar
sectors of the economy. In 1986, value added in
national output, the sector bears a disproportionate share
manufacturing was 799 billion dollars or 20.1 percent of
of cyclical fluctuations. A one percent decline in aggregate
gross domestic product. However, shipments by
output has historically been associated with a 2.2 percent
manufacturing companies equalled $2279 billion or 57.4
decline in manufacturing output. Between 1981 and 1982,
percent of GDP. The difference of $1480 billion, 37.3
for example, gross domestic product declined by 2.5
percent of GDP, represents the manufacturing sector's
percent but the output of the manufacturing sector
10
declined by 4.5 percent. Durable goods manufacturers are
Table 7
especially sensitive to cyclical fluctuations because of the
U.S. Manufacturing and Trade
volatility in spending on both consumer durables and
(Percent of Gross Domestic Product,
investment. Between 1981 and 1982, durable
Business Cycle Peak Years)
manufacturing output declined over ten percent.
1969
1973
1979
Table 6 presents the changes in real manufacturing
1985
output, and the output of non-manufacturing firms,
Current Account/GDP
.04
.53
- .04
2.97
between business cycle peaks and troughs since World War
Merchandise Trade
.06
.07
-1.12
-3.14
II. The table shows that manufacturing's greater volatility
(of which Manufacturing)
.18
.02
.17
-2.61
Service Trade
.64
.90
1.38
.63
during the 1982 recession is not an outlier.
Table 6
Source: G. Hatsopoulos and P. Krugman, "The Problem of U.S.
Competitiveness in Manufacturing," New England Economic
Percentage Change in Output,
Review, January/February 1987.
Manufacturing and non-Manufacturing
The performance of manufacturing in the 1980s has
Manufacturing
Non-manufacturing
been substantially improved by one important domestic
Economic Upturns:
policy development: the U.S. defense build-up. The
1954 to 1957
12.1%
8.6%
1958 to 1960
manufacturing sector is a substantial beneficiary of defense
11.6%
7.3%
1961 to 1969
58.1%
spending. The Bureau of Labor Statistics estimates that
37.8%
1970 to 1973
22.6%
10.5%
fifty seven percent of all private employment that is
1975 to 1980
21.5%
16.4%
generated by defense spending is within the manufacturing
1982 to present (1986)
28.0%
15.8%
sector, primarily durable manufacturing. The Bureau also
Economic Downturns:
calculates that defense spending was directly responsible
1953 to 1954
-7.3%
0.3%
for 1.04 million manufacturing jobs in 1977, 1.20 million in
1957 to 1958
-8.7%
1.6%
1980, and 1.81 million in 1985. Between 1980 and 1986.
1960 to 1961
0.2%
3.2%
1969 to 1970
-5.6%
1.2%
when total manufacturing employment contracted by 1.29
1973 to 1975
- 11.9%
1.3%
million, defense-related employment actually increased by
1981 to 1982
-6.1%
- -1.5%
.74 million. These statistics imply striking heterogeneity in
the experience of defense-related and other parts of
Source: Commerce Department. Turning point years based on
National Bureau of Economic Research dating of business
manufacturing, since non-defense manufacturing
cycle.
employment has declined by just over two million jobs
during the last six years. Had defense spending remained
The average increase in manufacturing output during
constant at its 1980 level throughout the decade,
expansions is 25.7%, compared with 16.1% in non-
manufacturing employment in 1986 would have been 18.3
manufacturing sectors. Manufacturing output typically
million, more than ten percent below its level only six years
declines 6.6 percent during a downturn, compared with a
earlier.
one percent output increase during similar periods in non-
The roll of defense in bolstering the manufacturing
manufacturing.
sector must be highlighted for three reasons. First, without
Just as manufacturing firms bear the brunt of cyclical
the defense buildup manufacturing employment in 1987
fluctuations, they also bear the burden of macroeconomic
would be nearly three million below its peak in 1979, and
policies that generate substantial trade imbalances. Table 7
at its lowest absolute level since 1965. This would imply a
shows the changes in the composition of the U.S. trade
much faster rate of manufacturing contraction during the
balance between 1979 and 1985. Two conclusions are clear.
1980s than in either the 1960s or 1970s. Second, the
First, virtually all of the swing in the overall trade balance
tighened fiscal environment of the late 1980s and early
during this period is accounted for by movements in
1990s makes future expansion in defense outlays unlikely.
manufacturing trade. Second, manufacturing trade dwarfs
Significant spending cuts, relative to the levels of the early
trade in services. Policies that cause the U.S. to run trade
1980s, are the most probable course. Just as the
deficits therefore inevitably have a large impact on the
manufacturing sector benefits the most when defense
manufacturing sector.
spending increases, it will be the largest loser as spending
declines. Finally, reduced defense spending is likely to have
particularly large effects on a small group of industries. The
U.S. shipbuilding industry, for example, sells 93 percent of
its output to the federal government. Two thirds of the
aircraft industry's final sales, and more than three quarters
11
of sales by munitions firms and the manufacturers of
Some might argue that trade volumes cannot accurately
aircraft and missile engines, are purchased by the federal
reflect U.S. manufacturing performance because in past
government. Defense cutbacks will therefore lead to rather
years the United States has grown rapidly relative to the
concentrated employment reductions.
rest of the world. As a result, U.S. exports to the slow
growing rest of the world would tend to rise less than
U.S. Manufacturing: The Global Perspective
foreign exports which include exports to the United States.
We saw previously that manufacturing has remained
Even this argument cannot be viewed favorably. Between
relatively constant as a share of constant dollar GNP. This
1968 and 1985, manufacturing value added grew at an
fact is often adduced as a counterpoint in the discussion
annual rate of 7.9 percent in Japan, 4.4 percent OECD
about poor U.S. manufacturing performance and
countries other than the U.S., and only 2.7 percent in the
deindustrialization. It does not, however, address the
U.S. Figure 3 contrasts manufacturing growth in Japan, the
question of whether U.S. manufacturing could be doing
country with the highest average growth among industrial
better. This can be investigated by comparing the recent
nations, and the U.S.
performance of the manufacturing sectors in the U.S. and
other nations.
Figure 3
To judge the performance of the United States in a
Manufacturing GDP
global context we look at relative growth rates and shares
Index: 1968=100
of manufacturing in trade and production. Consider first
400
the U.S. performance in world trade. In the past fifteen
350
years the U.S. share of trade in manufactured goods has
been eroded by the emergence of major competitors such
300
as Japan and the NICs. The loss of international
competitiveness can be documented by examining the U.S.
250
share in world manufactures trade. Although the U.S. share
JAPAN
in the dollar value of world trade has hardly changed
200
during the last fifteen years, this conceals poor
performance on volumes because of the overvaluation of
150
U.S.
the 1980s. Table 8 shows the behavior of manufactures
export volumes for the U.S., Japan, Europe, and the world.
100
The simplest way to read this table is to compare the
average growth rate of U.S. manufactures exports with that
50
of the world. For the last fifteen years, U.S. exports have
grown three percent less per year than those of the rest of
0
1968 '69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85
the world. Data for 1986-87 will not change that evidence;
on the contrary, while exports have been rapidly rising,
imports are still increasing and their level is significantly
Even considering shares in the value of trade we can find
higher than previously.
a significant deterioration of the U.S. position in some
Table 8
industries. Electronic goods are a clear example. In the
Volume of Manufactures Exports
period 1979 to 1985 the U.S. share in industrial countries'
(Index 1980 = 100)
exports declined by 4.3 percent in automatic data
processing equipment, 2.3 percent in consumer electronics,
Avg. Growth
6.3 percent in electronic parts, and 2.8 percent in business
1970
1980
1981
1985
Rate
1970-85 (%)
electronics. For other high technology products the decline
is quite apparent even when we exclude the rapidly
U.S.
49
100
96
81
3.4
growing exports from the Southeast Asian NICs.
Japan
39
100
111
142
9.0
The absolute growth of manufacturing here and abroad,
Europe
56
100
103
122
5.3
Developing
30
100
110
188
13.0
shown in Table 8, suggests that the U.S. has done relatively
Countries
poorly. Further evidence in the same direction appears in
World Exports
51
100
104
130
6.4
Table 9, which compares the ratio of manufacturing value
added to GDP for the U.S. and other countries.
Source: United Nations
Manufacturing shares measured in current prices are
declining everywhere, but more so in the U.S. than abroad!
The relative performance in manufacturing using constant
price measures to indicate whether manufacturing is a
growing or declining share of economic activity also
12
evidences weak U.S. experience. Since 1979, manufacturing
Figure 4
output grew 2.5 percent per year in the non-U.S. OECD
Capital Goods: Import Penetration
countries (7.9 percent in Japan), but only 2.2 percent per
year in the U.S. While the non-U.S. OECD experienced non-
Percent of Domestic Absorption
40
manufacturing growth of 2.1 percent (4.0 percent in
Japan), in the U.S. the non-manufacturing sector grew
38
2.5 percent per year. These trends are at least in part
36
attributable to higher rates of manufacturing productivity
34
growth in other nations. Table 10 presents comparative
32
evidence on this question:
30
Table 9
28
Manufacturing Share in GDP
26
(Percent of GDP)
24
U.S.
Japan
Europe
Non-U.S. OECD
22
1960
28.3
33.9
31.5
30.7
20
1975
22.7
30.2
28.2
27.7
18
1980
21.8
29.2
26.9
26.7
1985
20.4
29.8
25.6
25.9
16
14
Source: OECD Historical Statistics
12
Table 10
1980
'81
'82
'83
'84
'85
'86
'87
'88
Average Annual Manufacturing
Productivity Growth
Figure 5
U.S.
Japan
Europe
Non-U.S. OECD
Consumer Goods: Import Penetration
1960-68
3.2
9.0
5.1
5.2
Percent of Domestic Absorption
1968-79.
2.4
7.7
4.0
4.6
12
1979-85
3.5
6.3
2.8
3.6
Source: OECD Historical Statistics
11
Lower productivity growth affects cost competitiveness
and the standard of living. It implies that real wages cannot
10
rise as rapidly as they can in high productivity growth
countries, or, if they do, cost competitiveness is lost.
One of the consequences of the slower productivity
9
growth rate in the United States is displayed in Table 11,
which reports the import penetration ratios for U.S.
8
markets. Import penetration is defined as the share of
imports in apparent consumption, i.e. production less
exports. The evolution of import penetration in the past
7
seven years is nothing short of dramatic, both in the size
and speed of the change. (Figures 4 and 5 plot the
evolution of this data series).
6
1980
'81
'82
'83
'84
'85
'86
'87
'88
Table 11
Import Penetration
(Percent of Apparent Consumption)
Rising import penetration in the capital goods sector is
particularly dramatic: today nearly 40 percent of all
Consumer Goods
Capital Goods
equipment is imported. Whereas relative export growth
1980
6.9
14.6
rates may misrepresent manufacturing performance because
1987
11.6
37.7
export markets may experience different growth rates, the
Source: Federal Reserve Board; 1987 value is average for
import penetration ratio tells an unambiguous story: U.S.
Q1-Q3
manufacturing has been falling far behind, losing market
share in the home market.
13
To illustrate these changes in ability to compete at home
In the U.S. by contrast manufacturing is at best constant, or
we look at U.S. relative performance in high technology
even falling if we look at the 1979-85 period. Thus, by
trade. Table 12 shows the U.S. trade balance for various
international standards, U.S. manufacturing is performing
products. While there continues to be a trade surplus for
poorly: our share in world trade has been falling, and
some categories, there is also a uniform pattern of decline.
import penetration in our own market has increased
The trade surplus in all high technology trade fell from
dramatically.
nearly 60 percent of exports to less than 30 percent
It is sometimes argued that the relative decline of U.S.
between 1980 and 1985.
manufacturing was inevitable, that our post-war dominance
was unsustainable. That is too easy a way to rationalize the
Table 12
evidence. We will argue below that policies, such as an
High Technology Balance of Trade
overvalued dollar, have vastly facilitated and accelerated
(Billion $)
this decline unnecessarily. We need to ask whether the U.S.
1980
1985
can afford to continue yielding markets abroad and our
Total
27.4
11.7
own market to foreign suppliers? Large budget deficits in
Drugs
1.0
0.8)
the past few years have masked our decline and created the
Industrial Organic Chemicals
4.2
2.8
illusion that the U.S. economy can muster strong growth.
Computers and Office Equipment
6.2
2.6
In fact, in terms of our standard of living, we are falling
Communications Equipment
0.2
-2.0
behind. Inappropriate macroeconomic policies are as
Electronic Components
0.9
-4.2
Aircraft and Parts
11.9
12.7
important in explaining our poor performance as any
Scientific Instruments
3.0
- 1.0
catching up process abroad. Hence, the notion that there is
no need for alarm or that there is nothing we can do as we
Source: GATT
lose out in all fields must be firmly rejected. The next two
sections consider how exchange rate and fiscal policies
The statistics presented above suggest that in Japan and
in all non-U.S. OECD countries as a group, manufacturing
have contributed to our poor performance as it emerges in
is growing more rapidly than total output and thus the
an international comparison.
importance of manufacturing in economic activity is rising.
14
II. FISCAL POLICIES AND U.S. MANUFACTURING
The competitive problems of American manufacturing have
must choose between two unpleasant alternatives:
many sources. Our low national saving rate is the most
borrowing on a massive scale from abroad, with the
important cause of the huge U.S. trade deficit and the
attendant dislocations in the manufacturing sector which is
consequent weakness of American manufacturing. While
subject to international competition; or reducing further
the federal government can have only a limited impact on
our rate of net investment from its current low level.
foreign trade practices or the attitudes of American
Low national saving is the ultimate cause of other
management, there is a great deal that tax and fiscal
problems that are frequently identified as barriers to U.S.
policies can do to increase our national saving rate.
competitiveness. The high level of the dollar in the early
The American National Saving Problem
1980s was a direct result of capital inflows caused by the
high interest rates. The lasting effects of high exchange
A country's current account deficit equals the difference
rates, which dislodged American firms from many of their
between its national saving and investment rates. Nations
traditional markets both at home and abroad, are still
like the United States that invest more than they save
being felt. While monetary factors have caused the dollar to
borrow funds from abroad. The only way foreign funds can
decline substantially since February of 1985, trade balance
come into the United States is for Americans to import
remains impossible at current levels. As the dollar declines
more than they export. Japan's situation is the mirror
to a level where trade balances, the U.S. will cease
image of that of the United States. Japan saves more than
borrowing from abroad. Instead, it will have to rely on its
it invests and so runs chronic current account surpluses.
supply of domestic saving to finance investment. Failure to
Table 13
increase domestic saving will induce a dramatic increase in
National Saving and Investment,
the cost of capital and a sharp decline in the American
U.S. and Japan (Percent of GNP)
investment rate.
It is often suggested that a high cost of capital inhibits
Japan
American investment and encourages myopia amongst
Net
Net
Current
American managers. Table 14 illustrates that American
National
National
Account
Year
manufacturers face much higher costs of capital than their
Saving
Investment
Balance
Japanese counterparts.
1975
19.4%
19.9%
- 0.5%
1980
18.3%
Table 14
19.5%
- 1.2%
1981
18.5%
18.6%
- 0.1%
Cost of Capital Differential
1982
17.9%
17.5%
0.4%
Between U.S. and Japan
1983
17.0%
15.5%
1.5%
Real Interest
1984
18.2%
15.7%
Earnings-Price
Cost of
2.5%
Rate
1985
Ratio
16.7%
13.0%
3.7%
Capital
1986
-
-
-
U.S.
6.6%
8.5%
12.9%
Japan
3.2%
3.8%
United States
8.4%
Net
Net
Current
Source: G.N. Hatsopoulos and S.H. Brooks, "The Gap in the
National
National
Account
Cost of Capital, in R. Landau and D. Jorgenson, eds.,
Year
Saving
Investment
Balance
Technology and Economic Policy (Cambridge: Ballinger
Publishers, 1986).
1975
2.8%
2.1%
0.7%
1980
4.4%
4.2%
0.2%
An American manager facing the capital cost in Table 14
1981
5.3%
5.2%
0.1%
would be willing to invest $.37 in return for a dollar six
1982
2.0%
2.0%
0.0%
1983
2.0%
3.2%
- 1.2%
years from now, compared with $.66 for his Japanese
1984
4.5%
7.1%
- 2.6%
counterpart. It is hardly surprising that Japanese managers
1985
3.2%
6.2%
- 3.0%
often appear to take a longer view than American
1986
2.0%
5.5%
- 3.5%
executives. A key reason for the cost of capital differential
Source: OECD Quarterly Income Accounts.
is that Japan's high saving rate increases the supply of
capital available to Japanese firms, while the low saving
Table 13 displays the recent history of U.S. and Japanese
rate in the U.S. makes capital scarce and drives up its cost.
national saving rates. It is clear that reduced national
These considerations suggest that raising our national
saving is the primary reason for the deterioration in
saving rate is essential if American manufacturers are to
America's trade performance. With a national saving rate
regain competitiveness on world markets. Increased saving
below 3 percent, as in the last few years, the United States
will reduce the U.S. cost of capital, encouraging the long
15
horizon investments needed for productivity growth. It will
Social Security benefits have risen much more rapidly
also obviate the need for capital flows and the attendant
than wages over this period, due to a combination of slow
exchange rate misalignments that preclude effective
productivity growth and generous indexing provisions.
competition for many manufacturing firms.
Since 1970, real Social Security benefits have grown one
Federal Deficits and National Saving
percent per year faster than wages. One attractive option
for reducing net outlays on Social Security while inflicting
The most potent and reliable way to increase national
minimal hardship on program beneficiaries involves taxing
saving is to reduce the federal budget deficit. Figure 6
the portion of benefits that do not represent the return of
shows that federal borrowing has absorbed a large and
workers' contributions. Such a policy would reduce Social
increasing share of private saving in recent years,
Security expenditures by $19 billion per year in 1992, but
depressing our national saving rate. In 1986, dissaving by
it would principally affect upper-income elderly households
the federal government was ninety percent as large as the
for whom Social Security is only one component of family
flow of private saving generated by households and
income.
corporations. While the federal deficit fell by almost one
The political difficulty in generating support for sizable
third between 1986 and 1987, this decline was largely a
reductions in real Social Security benefits, coupled with the
reflection of transitory factors relating to the Tax Reform
need for new revenues to support spending on emerging
Act and the sale of federal assets. As a consequence, official
priorities like education, infrastructure, and civilian R&D
projections call for federal deficits approaching $200 billion
and the need to restore tax incentives to spur saving and
in coming years if substantial policy changes are not
investment, makes a tax increase in the next few years
enacted.
almost inevitable. The challenge for economic policy will be
Figure 6
to choose tax measures that do not interfere with
CALL to Counsel Eco Advisors
Budget Deficits and Private Saving (1960-1986)
competitiveness by interfering with incentives to save or
invest. Two broad approaches are possible-piecemeal
Percent of GNP
reforms that raise taxes on socially harmful activities, and
broad based value added taxes that raise revenue with
Steve LAMBAfeld 5084
10
NET PRIVATE SAVING
minimal effects on economic incentives.
8
Several piecemeal reforms on both the tax and spending
sides of the budget could trim the deficit while creating
6
desirable economic incentives. These include:
4
BUDGET DEFICIT
Restoring taxes on cigarettes and distilled spirits to
their 1952 level (in real terms) and equalizing the tax
2
rates on alcoholic beverages. These taxes would raise
more than $10 billion a year.
0
Requiring firms to amortize their advertising outlays.
-2
Since annual advertising spending by U.S. corporations
1960
1970
1980
totals approximately $75 billion, this policy would
raise up to $10 billion a year over the next several
years. It would also reduce the current tax bias
towards promotional outlays and away from
The major growth area in the federal budget where
productivity enhancing new investments in plant and
spending cuts are possible is Social Security. Table 15
equipment.
presents the growth rates of Social Security benefits and
average hourly earnings during the last two decades.
Increasing the gasoline excise tax by ten cents per
gallon. This would raise $9 billion a year and also
Table 15
encourage energy conservation. Unlike a general oil
Growth of Disposable Income and
Social Security Benefits, 1970-1985
import fee it would not burden the many companies
that use energy products as an intermediate good in
Real Per Capita
Real Social
their production.
Disposable Income
Security Benefits
1970
100.0
100.0
1975
112.0
133.5
1980
123.3
145.5
2.2%
1985
132.0
200/5500
153.8
2/55
Source: Council of Economic Advisors, and Bureau of Labor
44
Statistics. 1970 values normalized to 100 by the authors.
16
Imposing taxes on portfolio income earned in the
taxes are more shelter-proof than income taxes: anyone
United States by foreigners. This could raise about $5
who lives well has to pay them. The only way the rich can
billion a year and at the same time promote U.S.
avoid these taxes is by saving, making their income
competitiveness by reducing capital inflows.
available for investment, an outcome that is particularly
Tightening the enforcement of existing tax laws.
desirable given the low U.S. saving rate.
While the precise revenue yield from increased
It is also possible to modify the tax to reduce its
enforcement is uncertain, approximately $100 billion
regressivity, even as measured from annual income flows.
of potential revenue is lost each year due to tax
For example, the tax base for the VAT could be defined
evasion. There is little doubt that increases in the
exclusive of food, housing, and medical care. These
Internal Revenue Service budget are repaid several
exemptions lower the revenue yield from the tax, from $21
times over with increased revenues. This strategy for
to $12.4 billion per one percentage point of tax rate. Even
raising revenue would encourage obedience to the
this more limited revenue base would still permit major
law, at the possible cost of harassing some taxpayers.
inroads in reducing the federal deficit. A further option for
A number of states, however, have succeeded in raising
improving equity would involve combining the value added
revenues through enhanced enforcement.
tax with benefit increases for means-tested programs such
as Aid to Families with Dependent Children and
This package of competitiveness-enhancing tax measures
Foodstamps. The Congressional Budget Office recently
could raise up to $50 billion annually without rescinding
estimated the cost of raising benefits through these
any of the 1986 tax reforms. It would not entail any
programs to preserve the real purchasing power of
increase in tax burdens on savers, investors, or industries
recipients, concluding that per one percent tax rate the
facing international competition. The package represents
VAT would now net $16.3 billion for the federal
an attractive first step in attacking the deficit problem, but
government.
it may not adequately reduce the budget deficit. This is
The second argument against the VAT holds that it will
especially likely if Congress chooses to enact new spending
fuel excessive government spending by acting as a "money
programs, or if some of the incentives for saving and
investment are restored to the tax code.
machine". The current fiscal climate makes this possibility
unlikely. While some European countries may have
The most effective device for significantly reducing the
federal deficit without undue distortions of individuals'
succumbed to the temptation to raise spending in the
aftermath of adopting a VAT, the large deficits that are
work and saving decisions is a broad-based value added tax.
forecast for the U.S. federal government over the next few
Value added taxes, a principal revenue source in most
years suggest that the first priority will be providing tax
European nations, are a form of consumption tax. In the
United States, even a value added tax at a relatively low
revenues to pay for existing programs. We do not expect
major new spending initiatives in the immediate future,
rate would raise enough revenue to significantly reduce the
even if a VAT is adopted.
federal deficit. If levied on a comprehensive base of
Adopting a value-added tax will improve the competitive
consumption goods, the VAT would raise $21 billion for
each percentage point of the tax rate. A five percent VAT,
position of U.S. manufacturing principally through its
therefore, would raise more than $100 billion and provide a
favorable impact on the budget deficit. Contrary to the
frequent claims of consumption tax advocates, the VAT
natural complement to the competitiveness-enhancing tax
package described above.
does not provide a direct subsidy to firms that export.
Those who oppose adopting a consumption tax typically
Consumption taxes are essentially equivalent to retail sales
raise two arguments: that the tax is regressive and unfair,
taxes, although the mechanics of collecting the revenue
and that once the tax was in place Congress would find it
varies between particular proposals. With a value added tax,
revenue is collected from each firm based on the difference
easy to increase the rate and therefore to finance additional
between the cost of its inputs and the revenue it receives
outlays. The first argument, regressivity, derives from the
fact that low income households consume a higher fraction
for goods sold. If a company exports a product, it does not
of their income than high-income households. This
pay any tax on its value-added for the product and in
addition it may receive a rebate for the value added tax
argument is flawed, however. It neglects the possibility that
income fluctuations are transitory, and that consumption
paid by its suppliers. Although this may seem like a subsidy
actually provides a better measure of economic well-being
to exported goods, the rebate in effect just compensates
than income. On a lifetime basis consumption taxes are
the exporting firm for the higher price that it paid for its
much more progressive than they appear to be on the basis
inputs on account of its suppliers' taxes. This implies that
of annual data. Furthermore, consumption or value added
there is no net subsidy to exporting. Similarly, all imported
goods would be taxed, so that consumers would not detect
any differential between the retail prices of domestic and
imported goods.
17
There is room for debate about the best way to reduce
corporate saving, so that a one dollar decline in corporate
the federal deficit, but not about the need to do so. It is
saving prompts a fifty cent increase in personal saving, then
crucial to remember that budget deficits are not an
shifting the tax burden from individuals to firms has
alternative to spending cuts or tax increases. They are only
important consequences. In the short run, it suggests that
a device for deferring these painful measures. Running
total private saving could decline by approximately sixty
large deficits now only postpones and magnifies the painful
billion dollars over the next five years.
adjustments that will ultimately be necessary.
Tax Policies to Promote Investment
Tax Policies to Promote Private Saving
Raising national saving is necessary but not sufficient to
Reducing the federal budget deficit is the single most
restore the international competitiveness of American
powerful tool for raising national saving. It is important,
manufacturers. It is also necessary to provide adequate
however, not to neglect the possibility of increasing private
incentives for plant and equipment investment. The Tax
saving. This can be done either by providing incentives for
Reform Act of 1986 is particularly unfortunate from this
individuals to consume less and save more, or by
perspective. The Act raises the tax burden on new
encouraging firms to retain a higher fráction of their after-
investments by both manufacturing and non-manufacturing
tax profits in order to increase corporate saving. We
firms. Equipment investments are especially hard hit
consider policies of each type in turn.
because of the abolition of the investment tax credit, which
It is difficult to isolate particular factors that can account
previously provided a 10 percent reduction in the effective
for the abrupt decline in personal saving during the 1980s.
purchase price of new equipment. This section quantifies
This complicates the task of suggesting methods for raising
the adverse effects of this legislation and then discusses
personal saving. One potentially valuable instrument in the
a revenue-efficient method of restoring the investment
drive to encourage saving, Individual Retirement Accounts,
tax credit.
was unfortunately scaled back in the most recent round of
The total tax burden on corporate investment depends
tax reform. The U.S. experience with widely-available IRAs
principally on three features of the corporate income tax:
was too brief to permit a definitive estimate of how they
the statutory corporate tax rate, the generosity of tax
affected saving. The central issue is the extent to which
depreciation, and the rate of investment tax credit. The
IRA saving reflects transfers of resources from other assets
difference between the before-tax and the after-tax return
as opposed to "new" saving. Some studies suggest that
to corporate investment projects is a useful way of
most IRA contributions were additions to the total saving
summarizing the extent to which the tax system
flow, with only about thirty cents of each dollar of
encourages or discourages investment. This difference, as
contributions drawn from existing saving instruments.
a fraction of a project's pretax return, is known as the
Personal saving accounts for slightly more than half of
effective tax rate. For example, if an investment project
private saving. The remainder is made up by corporate
yields a ten percent return before corporate taxes but only
saving, the undistributed profits that firms retain and re-
a seven percent return after-tax, its effective tax rate is
invest. The level of corporate saving fluctuates for a variety
30 percent. The effective tax rate concept played a central
of reasons, most importantly the rate of pretax profitability
role in the effort to "level the playing field" with the 1986
earned on corporate investments. One policy instrument
tax reforms.
that can alter corporate saving, however, is the level of
Table 16 shows how recent changes in tax legislation
corporate income taxes. The corporate sector saves a much
have altered the effective tax rates on two asset categories,
higher fraction of its income than the household sector.
general industrial equipment and industrial structures. The
While the personal saving rate as a fraction of disposable
first two entries illustrate the importance of the Economic
income is about 3 percent, corporations often save more
Recovery Tax Act of 1981 in lowering the tax burden on
than half of their after-tax earnings for reinvestment. This
equipment. In 1980, both equipment and structures faced
pattern has important implications for private saving in
substantial tax burdens, with the effective tax rate on
light of the Tax Reform Act of 1986, which in the interest
structures more than twice that on equipment. Effective
of "revenue neutrality" raised corporate tax burdens over
tax rates had increased during the 1970s in part because
the next five years by approximately $120 billion while
the tax system permits firms to depreciate assets based on
lowering individual tax rates an equal amount.
their historic cost, and this failed to adequately compensate
While some believe that altering the level of corporate
firms for asset decay when inflation pushed the
saving does not affect the level of total private saving
replacement cost of assets well above these costs. The
because households "pierce the corporate veil" and
Economic Recovery Tax Act shortened depreciation lives
recognize the saving that corporations are doing on their
and reduced the effective tax burden, especially on
account, recent evidence questions that conclusion. If
equipment. The combination of the investment tax credit
household saving responds by only half as much as
and accelerated depreciation actually made the after-tax
18
return to some equipment investments higher than the
bill is having on new investment. This is because the
pre-tax return, as indicated by the negative effective tax
reduction in corporate tax rates from 46 to 34 percent has
rate in 1981. The effective tax rate on structures also
the primary effect of reducing taxes on profits earned from
declined, but by much less.
investments that are already in place. On the other hand,
Table 16
the abolition of the investment tax credit raises the tax
Effective Tax Rates
burden on new capital. Table 17 presents a decomposition
on Corporate Assets, 1981-1988
of the changes in the tax burdens on old and new capital.
Over the five year period ending in 1991, the Tax Reform
General
Industrial
Year
Industrial Equipment
Structures
Act lowers the taxes on old capital by nearly seventy billion
dollars, and it raises tax burdens on new capital by $188
1980
22.0%
50.8%
billion. Since the law's incentive effects depend principally
1981
- 6.8%
41.7%
on the tax facing new investments, some reduction in
1986
- -3.3%
45.6%
1988
38.0%
37.0%
investment is likely due to the new legislation.
Table 17
Source: Alan J. Auerbach, "Corporate Taxation in the United
States," Brookings Papers on Economic Activity, 1983:2, p.467,
1986 Tax Reform's Impact on New and Old Capital
and "The Tax Reform Act of 1986 and the Cost of Capital,"
Change in Taxes on
Change in Taxes on
Journal of Economic Perspectives, 1 (1987), p.77.
Old Capital
New Investment
The tax environment in 1986 was somewhat less
1987
0.8
24.3
generous to new investment than that in 1981, since
1988
-8.6 -
32.5
legislative changes in 1982 and 1984 had weakened some
1989
- 17.1
39.6
of ERTA's depreciation provisions. The last two rows in
1990
- 20.1
43.5
1991
- 23.3
48.5
Table 16 demonstrate the impact of the 1986 Tax Reform
Total
- 68.3
188.4
Act on investment incentives. The effective tax rate on
equipment rises from 3.3 percent to 38.0 percent,
Source: L. Summers, "A Fair Tax Act that's Bad for Business,"
substantially above the level in 1980 when there were
Harvard Business Review, March-April 1987.
widespread calls for tax reform. The new tax law therefore
Most discussions of how the Tax Reform Act affects
more than undoes the 1981 Act's increased investment
investment have focused on effective tax rates, ignoring
incentives. While it does reduce the effective tax rate on
changes in other parts of the corporate tax code that
structures slightly, from 46 to 37 percent, the increased tax
increase total corporate tax payments without directly
burden on equipment is likely to discourage investment in
altering investment incentives. The reform's increase in
precisely the asset categories that reflect the greatest
average tax rates will reduce the supply of undistributed
amount of technological progress.
profits available for reinvestment. Some firms will find that
The 1986 tax reform raises the tax burden on investment
investment projects that could have been financed from
in manufacturing and other sectors. The particular
retained earnings under the previous tax law will now need
disincentive for equipment investment is likely to affect
to be financed by borrowing or issuing new shares. Since
manufacturing more than other sectors, however, because
external finance is generally recognized as more costly than
manufacturing firms both use equipment and produce it.
internal finance, both because of the transactions costs
While less equipment intensive than firms in the
associated with issuing securities and the difficulties of
transportation industry, manufacturing firms in 1986 used
convincing potential investors that prospective projects
$29,500 of equipment per worker, compared with $15,600
yield acceptable returns, the smaller supply of internal
per worker in the non-manufacturing sector. Raising the
finance is also likely to reduce investment.
cost of equipment raises the production costs of
The need to encourage investment provides a case for
manufacturing firms, raising the prices of American
reinstituting the investment tax credit in some form,
manufactured goods in both domestic and world markets.
particularly if the economy goes into recession or
Reductions in the demand for equipment inevitably reduce
investment spending lags. Restoring the full investment tax
the demand for manufacturing output, particularly in the
credit for equipment would cost nearly $40 billion a year,
high-technology sector.
exacerbating the budget deficit by an amount that is likely
The fundamental structure of the recent tax reform is
to be intolerable unless taxes are available from a new
flawed, because it reduces the incentive for new investment
revenue source such as the VAT. It may nevertheless be
while providing a windfall to the owners of existing capital.
possible to regain a large fraction of the credit's incentive
The 1986 Act increases total corporate tax liabilities by
effect at a small fraction of the cost by a adopting an
about $125 billion over five years. However, this
incremental investment tax credit. The incremental credit
substantially understates the adverse impact that the tax
would apply only to the change in a firm's net capital stock
19
between two adjacent years. In effect, it would subsidize
Figure 7
expansion of the net stock of plant and equipment but
Growth Rate in Productivity and Capital-Labor Ratio
provide no subsidy to replacement investment.
in Manufacturing (1970-1986)
While the precise definition of the net capital stock and
net investment depends upon assumptions about the rate
Growth Rate in Productivity
at which capital decays and would therefore require careful
8
legislative drafting, the underlying principle is clear.
Applying the credit only to net investment preserves the
7
same incentives as the existing ITC for any firm with a
growing capital stock, yet it reduces the revenue cost of
6
Japan
the investment credit by about 70 percent (the ratio of net
to gross business equipment investment was .31 in 1986).
5
Even if the incremental ITC were financed by an increase
in corporate tax rates, it would provide much needed
France
West
stimulus to the manufacturing sector over the next few
4
Germany.
years.
UK
Figure 7 indicates the importance of raising rather than
3
US
reducing our rate of investment. American manufacturers
have enjoyed slower productivity growth than
2
manufacturers in any of our major competitor nations,
2
3
4
5
6
7
8
including Great Britain, over the past 15 years. The figure
Growth Rate in Capital - Labor Ratio
also shows a strong association between rates of growth
Source: "Presentation on Competitiveness."
and increases in capital labor ratios.
We conclude by summarizing our policy
recommendations in this area:
Bringing federal budget deficits under control should
be the overriding priority of national economic policy.
Reduced budget deficits and increased national saving
are essential if American competitiveness problems are
to be resolved. This will require spending cuts in areas
of the budget like Social Security that have heretofore
been viewed as sacrosanct, as well as significant
increases in federal tax collections. In the short run,
various excise taxes could generate significant
increases in federal revenues, but in the long run,
consideration should be given to new national
consumption taxes.
Structural tax policies should be redirected towards
the goals of promoting saving and investment rather
than consumption. From this perspective, the 1986
Tax Reform Act was in important respects a step
backwards. Serious consideration should be given to
restoring the investment tax credit, perhaps on an
incremental basis. A crucial long-run policy priority is
finding ways to raise the anemic American private
saving rate.
20
III. EXCHANGE RATE ISSUES
This section examines the relationship between exchange
Table 18
rate policies and the health of the manufacturing sector.
Unit Labor Costs in Manufacturing,
Two separate lines of argument against policy proposals to
(1979 = 100, U.S. Dollar Basis)
stabilize exchange rates at current levels are presented.
U.S.
Japan
Germany
First, exchange rate movements-given unit labor costs
here and abroad-affect competitiveness and hence sales,
1979
100
100
100
1985
124
86
73
profitability and employment in the manufacturing sector.
1986
123
123
102
Adjustment to exchange rate changes is an important
strategic decision for firms who have to decide whether to
Source: U.S. Dept. of Labor
sacrifice export profits or market share when domestic
exchange rates appreciate. We comment on this range of
Table 18 shows that in 1980-85 foreign firms enjoyed a
issues especially in the context of Japanese strategic
sharp reduction in their cost basis (in dollars) thus placing
pricing decisions that have caused American import prices
them in an extraordinary position to compete in the U.S.
to move only moderately as the dollar has depreciated.
market. Since early 1985 dollar depreciation has gone some
Second, exchange rates must be allowed to decline as
distance to undo the artificial loss in competitiveness,
budget deficits are reduced if the American economy is to
although as we will argue below, the dollar has not yet
encounter a "soft" rather than a "hard" landing. While
declined far enough to fully restore American
trade imbalances can be financed by international
competitiveness.
borrowing for a time.there comes a day of reckoning. One
Although exchange rate movements shift unit labor costs
risk is that as in Latin America, there will be a sudden and
measured on a dollar basis, the step from there to changes
unexpected period of credit rationing, leading to a collapse
in competitiveness and changes in trade flows is not
of the dollar that forces policy makers to sharply increase
automatic for several reasons. First the broad index of unit
interest rates and throw the economy into recession.
labor costs need not be representative of the unit labor
Manufacturing would be especially hard hit because of its
cost experience in the traded goods sector. Firms that are
cyclical sensitivity.
put at an advantage by depreciation may make wage
settlements above the national average and conversely,
Exchange Rates and Manufacturing Profitability
firms that are pressured by foreign competition as a result
When international capital flows. in response to interest
of appreciation may trim costs by denying wage increases at
differentials or expectations, exchange rates move. This
the national level. They may also be literally forced into
affects competitiveness and disturbs price-cost relations in
achieving unusually high rates of productivity growth.
all markets exposed to world trade. Thus, in 1980-85 when
These deviations from national averages do not, however,
the dollar appreciated by more than 50 percent against the
fully offset the broad swings in competitiveness indicated
currencies of our main trading partners, foreign firms
in Table 18. They merely mitigate them.
reduced the dollar pricès at which they sold in the U.S.
The second slippage between shifts in unit labor cost
market and U.S. firms had difficulty selling abroad at
brought about by exchange rate movements and changes
unchanged prices in dollars. Our exporting firms had to
in competitiveness comes from the cost of materials and
chose whether to cover costs, raising prices in foreign
intermediate goods. In the U.S. in 1980-85 falling
currency and thus losing market share, or keeping foreign
commodity prices in dollars dampened the loss in
currency prices unchanged and accept much smaller (or
competitiveness and at present, with rising commodity
even negative) profit margins.
prices, the gain in competitiveness is more limited than
For manufacturing the exchange rate experience of
exchange rate movements suggest.
1980-85, and the partial correction in 1985-87, has been an
The third factor which has become quite important, at
extraordinary experience. The exchange rate became the
least in the Japanese experience, is the possibility of
chief variable in determining business success, not
shifting sourcing of intermediate goods to much lower cost
productivity, marketing, and quality, factors under
NICs. Such a policy can in principle offset much of the
management control. With their success or failure
impact of a major currency appreciation. It helps at the
mandated by factors beyond their control, the frustration of
same time to put pressure on local suppliers to grant major
the business community in recent years is understandable.
price concessions.
The extent of these three elements of cost reduction can
be judged from data developed from a sample of more than
400,000 Japanese firms and shown in Table 19.
21
Table 19
Interestingly, the extent to which Japanese firms price to
Price and Cost Adjustment in
the market depends on the industry. Table 20 reports the
Japanese Manufacturing (percent)
pass through of exchange rate changes to dollar export
Japanese Manufacturing
Japanese Exports
prices for a variety of goods. For industries where
Costs
Prices in Yen
worldwide competition is very intense, as for example in
Prices
Prices
in Yen
in $
iron and steel or color TVs, there is relatively little pass
Domestic
Export
Yen/$
US
through. But in sectors where Japanese firms can expect
1984
1.3
0.2
0
7.3
not to lose market share as significantly as a result of price
8.4
1985
-3.0
2.5
1.4
23.9
- -20.3
increases, the pass through is much greater. The average-
1986
- 10.4
-7.4
- 14.5
6.9
- 20.0
59.2 percent-tells us that there is considerable slippage
between exchange rate movements and shifts in
Source: Wakasuki (1987)
competitiveness.
First note that Table 19 shows significant cost
Table 20
reductions in Yen in 1985-86. These are due to reduced
Japanese Pass Through of
costs of labor, capital and especially intermediate inputs.
Exchange Rate Changes" (Percent)
Prices of manufactured goods in the Japanese markets
Average
59.2
Metal Formation Mach.
50.4
declined in Yen by more than 7 percent, but Japanese
Iron & Steel
13.7
Color TV
37.7
export prices of manufactures declined by twice that
Chemicals
35.6
Passenger Cars
57.7
amount. Thus in the export sector firms were willing to
Information Machinery
43.7
Copy Machines
75.3
trim profit margins severely in order to maintain their
market shares.
Percent Change in $ export price as a ratio of the percent $
depreciation
Figure 8 shows export prices in dollars of the U.S. with
Source: Wakasugi (1987)
those of Germany and of Japan. These bilateral
comparisons reveal that competitiveness as measured by
Even though slippage exists Figure 8 above does show
the index of relative export prices moved by far less than
that large swings of exchange rates, as in 1980-85 and
the exchange rate, especially in the case of Japan. For the
1985-87 bring with them a significant impact on
period 1980-85 the yen appreciated by 45 percent but the
competitiveness. The pattern of the bilateral
index of relative export prices changed by less than
competitiveness measure mirrors the timing of dollar
20 percent. The various factors noted above, especially cost
appreciation and dollar depreciation.
management and strategic pricing explain the lack of a
With this background on exchange rates and price
very tight relationship.
competitiveness in mind, what should be the attitude of
manufacturers toward exchange rate movements? Quite
Figure 8
unambiguously, dollar depreciation not offset by domestic
Relative Export Price
wage and price inflation is beneficial. It places U.S. based
Index: March '80 = 100
manufacturers on a better footing to compete in the U.S.
110
market and in markets abroad. By contrast, dollar
appreciation, even if it reduces inflation and contains wage
pressure, as was the case in 1980-85, is immensely
100
JAPAN U.S.
damaging. There is accordingly an immediate, obvious and
strong link between exchange rate movements and
90
manufacturing prosperity. The one thing American
manufacturing does not need is a "strong dollar".
The Problem of Postponing Adjustment
80
At present, after five years of economic expansion, the U.S.
GERMANY U.S.
economy is very close to full employment with an
70
unemployment rate below six percent. But, as we have
already stressed, the United States continues to run large
budget and trade deficits. Figure 9 shows the nominal
60
external deficit as a fraction of nominal GNP, and Figure
10 shows net exports in constant dollar, again as a fraction
of GNP. Both Figures leave no doubt that the trade deficit
50
1980
'81
'82
'83
'84
'85
'86
'87
'88
22
remains far from full and early correction. In addition to
The Federal Reserve might be forced into raising interest
the direct impact on manufacturers, a large and ongoing
rates sharply to stop the plunging dollar. A recession would
trade deficit risks serious general economic problems.
be inevitable.
Figure 9
Today such a course is avoidable, if budget deficit
The U.S. External Deficit
correction takes place and further exchange depreciation is
allowed. However, absent implementation of adjustment
NIA, Percent of GNP, 3 Qtr. MA
measures now, a confidence crisis some years down the
2
road becomes increasingly likely. In an atmosphere of
1.5
uncontrolled crisis, adjustment becomes infinitely harder
and more painful.
1
Diagnosis of the U.S. International Trade Position
0.5
We have already discussed the measures that are necessary
0
if the budget deficit is to be reduced. We now turn to why
-0.5
further dollar depreciation is a necessary part of the
adjustment process. The decline of the dollar through the
-1
spring of 1987 has brought the level of the U.S. real
exchange rate back to the level of 1980, as shown in
-1.5
Figure 11.
-2
Figure 11
-2.5
U.S. Real Exchange Rate
-3
Index: 1980-82=100
1971
'74
'77
'80
'83
'86
'89
135
130
Figure 10
125
Net Exports
120
NIA; 1982 Dollars
115
80
60
110
40
105
20
100
0
95
-20
-40
90
-60
85
-80
1970
'73
'76
'79
'82
'85
'88
-100
Note: The real exchange rate is the relative wholesale price of nonfood
-120
manufactures. Source: Morgan Guaranty
-140
-160
At that time the U.S. was roughly in external balance.
-180
Can we expect that the depreciation of the past two years
1980
'81
'82
'83
'83
'84
'85
'86
'86
'87
'88
will, when all the lags have played themselves out, bring
U.S. trade into balance? The answer is almost certainly no
The concern is that if the deficit does not get eliminated
for the following reasons:
by an early increase in the saving rate and a real
There has been a permanent decline in agricultural
depreciation of the dollar the growing imbalance and
prices which hurts export revenues.
external debt accumulation may get out of control. The
realistic possibility arises that after years of borrowing
The differential in demand growth between the U.S.
abroad, further borrowing could suddenly become
and other industrial countries amounted to more than
impossible because of a loss of confidence. At that stage
ten percent. There is no prospect of an early reversal
the dollar could collapse with a strong inflationary impact.
of this pattern.
23
In 1980 Latin debtor countries were borrowing and
Figure 12
spending; today they are paying interest by earning
Real Exports and Imports
export revenues. chiefly in the U.S. market.
NIA, 1982 Prices
In 1980 the U.S. was a net creditor. Today the country
580
is already a net debtor and that position will be
560
deteriorating at a rate of $100 billion a year or more.
540
IMPORTS
Increasing external debt will cumulate with interest so
520
that ultimately a trade surplus, Latin American-style, is
500
needed to pay the interest bill.
480
The protracted overvaluation brought foreign firms
460
into the U.S. market and dislocated U.S. firms abroad.
440
These developments are not easily reversed
420
particularly when the overvaluation of 1980-85 merely
400
accelerated entry of competitors into traditional U.S.
EXPORTS
380
markets which otherwise would have occurred
360
sometime later.
340
The NICs have established themselves in wide-open
320
U.S. markets. Given the growth rates of their exports
300
the 7 year span of time since 1980 has made a
1980
'81
'82
'83
'84
'85
'86
'87
'88
'89
dramatic difference to the U.S. trade balance.
These various factors, each negative, create a strong
presumption that the U.S. external balance will not come
Contrasting with the favorable development of export
nearly into balance at current exchange rates. Of course,
volume, there has been continued growth in import
adjustment lags are significant. The depreciation of
volumes, depreciation notwithstanding. The reason can be
1985-87 will take at least a year to fully work itself out.
seen in Figure 13 which shows to date very little
However, all forecasts from econometric models predict
adjustment in the relative import price and as a result no
that the U.S. deficit in the current account, at the current
significant effect on trade flows.
real exchange rate and given broadly equal growth rates of
Figure 13
demand in the industrial countries, will not even fall to
The Relative Price of Imports
$100 billion. The most recent forecast of the OECD places
the 1988 U.S. trade deficit at more than $120 billion. If
Index: 1977=100
exchange rates remain stable, the current account deficit
130
will actually rise thereafter.
The argument that further depreciation is required to
120
balance the current account is often countered with the
charge that depreciation does not work-witness the
110
failure of the trade balance to improve. There is not much
substance to the argument: as we saw above, exchange rate
100
movements do not translate into one-for-one changes in
competitiveness, but there is also no evidence whatsoever
90
that they are fully offset by cuts in profit margins and cost
reductions. Moreover, given the large profit margins
80
accumulated in 1980-85, while the dollar became
increasingly overvalued, it is not surprising that foreign
70
firms were able to avoid one for one prices increases in the
first round of depreciation.
The same resistance will not be possible as the dollar
60
1970
'73
'76
-79
'82
'85
'88
declines further. On the contrary, dollar depreciation will
Note: Relative price of nonoil imports
become increasingly effective. This is clearly shown in
to the price of industrial goods
Figure 12.
24
Further dollar depreciation will raise the losses of
but not indefinitely
within a decade the ratio of
foreign firms in the U.S. market to such extremes that they
debt to GNP would be as high as that of Brazil and a
will cave in and raise prices. At that point trade flows will
major concern. This is not a feasible outcome. Sooner
start reacting. The sooner and stronger the adjustment of
or later a reluctance of foreigners to continue to
the dollar, the more rapidly U.S. manufacturers can begin
rapidly increase their holdings of U.S./debt
replacing imports in the home market.
instruments will force a decline in the dollar large
Before considering how much further the dollar needs to
enough to enable U.S. firms to sell on world
fall to close the external balance gap, we briefly explore the
markets
Doesn't this mean that worries about the
view that there is no need for active concern about the
manufacturing sector are therefore misplaced? The
level of the dollar.
answer is no
The longer-term issues of U.S.
Why the Dollar Might Have Depreciated Enough
performance in manufacturing will reinforce these
costs. Because of U.S. problems with productivity,
Most observers who feel that the dollar now is correctly
technology, and quality, in order to balance U.S.
valued place their confidence in one of two arguments.
manufactures trade, the dollar must fall relative to
Either they argue that adjustment lags to the depreciation
other currencies substantially below historical levels.
of the past two years are long and that patience is required
Exacerbating this problem will be the damage done
to await the full benefits. Or else they believe that there is
to U.S. market position by the sustained strength of
[basically no need for U.S. current account balance because
the dollar".
deficits can be financed almost indefinitely.
As we have seen, the adjustment lag argument does not
International skepticism about the U.S. ability to adjust
stand up to scrutiny. All available evidence on adjustment
is already keeping private savers abroad from further
lags indicates that they are present and, adjustment to
accumulation of dollar assets. Today it is primarily central
exchange rate changes only occurs gradually. But the
banks who are financing the external imbalances in an
available evidence is also unanimous in suggesting that
effort to "keep the dollar One can understand the
after all adjustments have occurred there remains a very
interest of Germany and Japan in sustaining an overpriced
sizeable deficit-at least $100 billion by 1990. Only if the
dollar, but it is hard to understand why the Federal
rest of the world experienced a major spurt in demand
Reserve should collaborate with high interest rates and
could the gap be closed at the current level of the dollar.
intervention.
Of course such a spurt is quite unlikely.
Policy Towards the Dollar
A different argument holds that the U.S. does not really
need to adjust because deficits can be financed for a very
Just how much of a dollar decline is required depends on
long period. This argument is based on the notion that the
what level of sustained deficit is acceptable and on what is
U.S. has an almost unlimited ability to finance current
assumed about relative growth rates of spending here and
account imbalances by selling off assets. It is true that the
abroad. We are not aware of any forecasts of the U.S.
rest of the world holds even now a small share of its
external balance that predict reductions of the deficit to
portfolio in the form of U.S. assets. Therefore, there is a
near zero levels at the current level of the dollar. Estimates
large pool of saving from all industrialized countries
of the likely deficit by 1990 differ widely, but all estimates
available to finance a continuation of the deficit even at
have in common the snowballing effect of deficits on debt,
$100 billion levels. Just as a country with a terms of trade
interest payments and hence future deficits. The rapidly
improvement can spend the extra real income without
growing interest burden implies that the noninterest part
impairing its creditworthiness so can the U.S. spend the
of the current account will have to show ever larger
rents that flow from the attractiveness of its assets.
improvement to balance the growing interest charges. For
If the world economy had newly discovered U.S. assets,
that, a further depreciated dollar is necessary the longer
and if as a result there were massive capital gains, U.S.
the adjustment is postponed.
residents could spend some of that increased wealth. The
Estimates of the size of the required adjustment of the
question is, however, what happens when the capital gains
dollar range widely. Recent statements by a group of
run out. Krugman and Hatsopoulos (1987) have raised
experts assembled by the Institute of International
exactly that question, and they conclude that concern over
Economics came out with a low estimate of only 10 to
the long run outcome of the deficits is urgent:
20 percent. But this estimate came in a context of a major
"The U.S. compensated for its manufacturing deficit,
adjustment in spending growth in Europe and Japan with
complementary policies in some South East Asian NICs.
not by selling more of something else, but by
Other estimates assume that spending growth here and
running down its overseas investments and by
abroad proceeds exactly at the same rate. In that case a
borrowing from foreigners. This can go on for years,
much higher real depreciation of 30 percent would be
25
required to eliminate the noninterest deficit in the external
Figure 14
balance. A realistic scenario might lie between these two
U.S. Net Exports 1982:4-1986:4
with some increase in the growth rate of spending abroad
and Forecasts under Alternative Foreign Growth Rates,
and some decline (due to budget correction) at home. In
1982:1-1992:4
that setting a 15 percent real depreciation of the dollar
Percent of GNP
against all American trading partners might be necessary.
1.5
Since countries including Canada, Latin America and some
countries in South East Asia that have tied their currencies
1.0
to the dollar account for close to half of US trade the
remaining currencies such as the Deutsche Mark and the
0.5
Yen have to appreciate by far more than 15 percent. In this
FASTER
FOREIGN GROWTH
sense, a rate of 100 Yen/$ is not at all implausible.
0.0
Sometimes it is suggested that growth in foreign
demand can bring about a balance in US trade without any
-0.5
need for further dollar depreciation. This is not realistic
(see Figure 14). Unless the rest of the world increases
-1.0
CONSTANT
spending growth by significantly more than 2 percent for a
FOREIGN
GROWTH
number of years, shifts in spending growth here and
-1.5
abroad by themselves cannot balance our trade accounts.
Too much of the extra foreign spending falls on their
-2.0
goods, not ours and too much of our budget reduction is
reflected in reduced demand for U.S. goods rather than in
-2.5
an improvement of the trade balance. Thus a gain in
competitiveness is required to complement spending
-3.0
adjustments, shifting world demand toward U.S. goods.
1983:1
1985:1
1987:1
1989:1
1991:1
26
In the discussion about the need for further dollar
high interest rates-thus hurting investment, growth and
depreciation it is frequently argued, especially by our
even the budget-if rates were fixed near the current
trading partners, that budget correction, not dollar
levels. There may well be a case for returning to more fixed
depreciation is the answer. They do not say outright that
rates once the large imbalances in the world economy are
we should solve our problem by a recession, but this is
trimmed. but this is clearly not the time.
where their logic points. If reductions in budget deficits do
The right dollar policy is essentially one of not
not operate on the trade deficit by reducing exchange
intervening, except to the extent of smoothing short run
rates, they can only work by reducing domestic incomes.
excessive fluctuations. Once the budget deficit is cut (or
This means recession.
expected to be cut) easier monetary policy can afford to
U.S. budget correction is certain to make some
support growth without risking much higher inflation.
contribution to balancing trade. But the trade deficit will
Easier monetary policy would almost certainly lower the
not disappear as a by-product of U.S. budget correction.
value of the dollar and thus make manufacturing more
Increased taxes and expenditure cuts will surely improve
competitive. In that way full employment can be sustained
the external balance. But budget cuts reduce all spending,
in the difficult phase of a major fiscal contraction.
including domestic goods. As a result there will be an
There are costs and benefits to a dollar decline. In the
increase in unemployment unless a gain in competitiveness
United States it is tempting to forego further dollar
creates an offsetting increase in net exports. This is
depreciation on the argument that this would spare us the
precisely the stage where monetary policy comes to play its
risk of higher inflation. Further dollar depreciation. and
role. Easing monetary policy to sustain growth in the face
full price adjustments to the past depreciation which have
of budget cuts assures that part of the adjustment takes
not yet occurred, will surely bring more inflation. But that
place via dollar depreciation and increased net exports.
is an unavoidable adjustment required to restore our
Should the U.S. actively seek or prevent movements in
competitiveness. We can postpone that inflation. but only
the dollar? Our view is that a hands off policy is far
at the cost of a much larger and more painful adjustment
preferred, given the present uncertainties about
later. The choice is not between depreciation or no
equilibrium exchange rates, to any attempt to fix the dollar
depreciation, but rather between a soft landing and a hard
in a new exchange rate agreement. The U.S. would run the
landing. For manufacturing, and for the entire economy,
serious risk of having to defend an overvalued dollar by
the soft landing option is by far preferred.
We conclude this section by summarizing
our policy recommendations:
Efforts to stabilize exchange rates at current levels are
misguided. They run very serious risks of throwing the
economy into recession and make an eventual
financial collapse more likely. American monetary
policy should be directed at insuring continued
economic growth as the budget deficit declines, not at
arbitrary exchange rate targets. Policymakers should
recognize that a continued dollar decline is both likely
and desirable.
Rapid growth in the world economy and the
expanding markets that it brings about are crucial to
the health of the manufacturing sector. As the United
States brings its current account back into balance, it
should encourage other nations to stimulate domestic
demand to replace export demand.
27
IV. THE NICS, PROTECTION AND FOREIGN DIRECT INVESTMENT IN THE U.S.
The previous discussion has focused on exchange rates as
An outward looking manufacturing sector, which is the
an important part in the adjustment process that corrects
appropriate perspective in the context of trade balancing
the budget and trade deficit. In this section we explore
and rising competitiveness, cannot afford to take a narrow
three related policy issues that arise in a longer term
view of foreign investment in the U.S. Of course, foreign
context of structural change; the challenge posed by the
investment here means competition for managers, but it
newly industrialized countries (NICs), questions of
also means good jobs and increased manufacturing activity.
domestic protection, and the role of foreign investment in
We therefore urge a very open policy toward direct foreign
the U.S. economy.
investment in the U.S., just as we have been urging such a
U.S. trade policy has gone in opposing directions in the
policy on Canada or Mexico.
past twenty years. Tariff reductions have meant increasing
trade liberalization, while trade has increasingly been
The Emerging Role of the NICs in U.S. Trade
restricted in areas where U.S. producers showed special
The emergence of the newly industrialized countries
vulnerability. The form these trade restrictions have
(NICs)-countries like Korea or Brazil, Mexico and
taken-quotas (QRs) and voluntary export restraints
Taiwan-as major world suppliers of manufactures is even
(VERs), non-tariff barriers (NTBs) and orderly marketing
today underestimated. It helps to remember the role of
arrangements (OMAs)-make them especially costly in
Japan in world trade only thirty years ago. In 1955 Japan's
terms of resource allocation and hence particularly
share in world exports was only 2.3 percent while today it
undesirable. The extent of these restrictions can be judged
is more than 10 percent. From producing "cheap" goods for
from the World Bank's claim in its 1987 Report that about
exports Japan has moved to become the leading world
15 percent of U.S. imports are covered by "hard core
trader. The progress of the NICs is no less spectacular. In
NTBs."
1963 they accounted for 4.3 percent of world exports of
Moreover, these administrative restrictions on trade are
manufactures, in 1973 for 6.9 percent and already for
widening in scope. In the 1960s they applied mostly to
12.4 percent in 1985.
textiles and apparel and to particular agricultural goods.
Table 22 shows U.S. trade with all developing countries.
Today microchips, steel, automobiles and a large range of
Note in particular the $50 billion deterioration in our
manufactures of special interest to developing countries
manufacturing trade balance with these countries. And
already fall into the categories subject to administrative
their export boom is only starting. Mexico's manufactures
trade decisions. The World Bank's index of trade
exports last year grew by 48 percent, Korea recorded export
restriction, which measures particularly the impact of non-
growth of manufactures (other than ships) of 33 percent.
tariff barriers, has increased from 100 in 1981 to 123 in
These are not trend growth rates, but every year a few
1986. This increase in protectionism by the U.S. exceeds
NICS manage trade expansion at these rates and the others
that in any other industrialized country. We argue that it is
enjoy export growth rates of at least 10 percent on average.
essential that this trend be stopped. To the degree there is
Table 23 shows that in U.S. manufactures imports
protection, it should be exercised in a more cost-effective
developing countries today have a share nearly equal to
form and protection itself should be reassessed and
that of Japan. Moreover, their role is not only apparent in
hopefully reversed.
textiles and clothing where low wage, unskilled labor can
In the past ten years the newly industrialized countries
be expected to have an edge, but increasingly in
(NICs) have been emerging as a major factor in U.S. trade.
engineering goods and household appliances.
Their competitiveness has invited a number of responses: to
Table 22
take advantage by importing components from these
U.S. Manufactures Trade
countries or locating production there; to seek protection
With Developing Countries (Billion $)
by quotas or voluntary export restraint; or to assume the
problem away or belittle it. We will argue that
Imports
Exports
Balance
manufacturing cannot afford to disregard the growing role
1980
29.5
55.6
26.1
and opportunity presented by the appearance of the NICs
1981
35.1
61.5
26.4
as competitive production centers. We advocate that taking
1985
65.5
46.0
19.5
advantage of the opportunities is a far better response than
1986
77.3
49.4
27.9
seeking protection. Our recommendation is that
manufacturers should seek to influence policy in the
Source: GATT and U.S. Department of Commerce
direction of securing market opening in these countries,
including free trade areas with Mexico, Brazil and Korea
rather than trade restrictions.
28
Table 23
Table 24
Share of Japan and
Hourly Compensation in Manufacturing
Developing Countries in U.S. Imports
($/hour at 1987 exchange rate)
Developing
United States
$13.09
Korea
Japan
$1.68
Countries
Germany
16.00
Taiwan
2.08
Japan
10.94
Singapore
2.51
1973
1985
1973
1985
France
11.89
All Imports
14.7
20.2
29.9
34.0
United Kingdom
8.19
Manufactures
22.0
27.9
17.4
26.0
Note: The data refer to all of manufacturing. They represent
Textiles & Clothing
14.5
6.0
56.0
68.2
1986 levels of hourly compensation evaluated at June
Engineering Products
36.9
37.9
10.1
18.1
1987 exchange rates.
Household Appliances
52.7
59.6
23.7
30.9
Source: U.S. Department of Labor
Source: GATT
It is tempting to down play these developments arguing
Even in the area of capital goods import substitution is
that the share of the NICs in world trade is small and that
taking place in the NICs and their exports are now starting
even at high growth rates they present no near term
to appear. The NIC's exports are no longer textiles or
problem. But that would be as much of a mistake as to
rubber footwear. On the contrary, the NICs are now.
have misunderstood the inevitable rise of Japan over the
producing consumer durables with their own brand
past twenty years.
product names. Korean producers, for example, now prefer
Three arguments have been used to minimize the role of
to market "Leading Edge" computers or "Hyundai" cars
the NICS for an importing country like the United Stares.
under Korean new and untested brand names rather than
First, it is suggested that the share in imports from the
be satisfied to produce and sell anonymously through U.S.
NICs is so small that even with high growth rates there is
or Japanese distributors under their established brand
no serious threat. The argument is clearly wrong in that
names. This new strategy, of course, diverts a significantly
high growth rates persisting for a number of years simply
larger share of oligopolistic profits toward the Korean
alter the landscape. By 1987 the NICs represented a
producers. The strategy also reflects an extraordinary
significant factor in trade problems and trade policy for
confidence that the developed countries should worry
the U.S.
about. This is all the more the case in that South East
The second argument that is advanced is that the NICs
Asian NICs believe their export success reflects not only
will spend their export revenues on extra imports. This
price but even more so quality performance.
argument is unsatisfactory. The NICs have high saving rates
The dramatic increase in the trade potential of the NICs
and not all of their extra saving necessarily translates into
has become particularly clear in the aftermath of dollar
increased spending and hence increases in imports. Part of
depreciation. The NICs turned out to be sufficiently
their income may be used to pay off debts with trade
competitive suppliers of components so that Japanese
surpluses, such as Korea is doing now or Mexico, or they
firms, by simply shifting their sourcing away from Japanese
may use the income from strong export growth to invest
firms to Korea or to Taiwan, could make up much of their
abroad or add, like Taiwan, to their reserves. Whatever they
loss of export competitiveness. The combination of
do, there is no automatic mechanism that translates extra
extraordinarily low wages (see Table 24) combined with
exports into extra imports. But even if all the extra exports
productivity levels not far off those in industrial countries
were spent on imports we may still face a situation of
(in large part a reflection of extraordinary working hours
triangular trade: the NICs export to the U.S.A. and use the
and discipline-Koreans say the Japanese are lazy!) made
export proceeds to buy from Japan. And then Japan does
these countries super competitive. More than a decade of
the saving and investing in the United States. Thus, one
record investment rates established the industrial capacity.
way or another an export drive by the NICs may displace
U.S. production in manufacturing.
The third argument that is used to minimize concerns
about the NICs is made on the basis of productivity.
Recognizing that wages are extremely low in the NICs, it is
argued that the low wage reflects low labor productivity
and hence is not a threat to U.S. manufacturing. But that
argument no longer holds true. In many activities labor in
the NICs, certainly in Southeast Asia, is not significantly
less productive than is U.S. labor. Accordingly the wage
differential represents a massive competitive advantage for
29
labor intensive activities. The ease and speed with which
components to these countries. Given current trade
technology and physical capital can move today enhances
patterns in the world economy and the likely further
the ability of firms to shop worldwide for favorable
decline in the value of the dollar, it would be highly
locations.
desirable for Korea and Taiwan to peg their currencies to a
An example may serve to highlight just how powerful
currency basket in which the yen had significant weight
this new competition can in fact turn out. In a study
rather than merely to the dollar.
entitled Automation and Global Production Shaiken and
Trade policies probably have the potential to have a
Herzenberg of the University of California in San Diego
longer lasting impact on our trade relation with developing
report on the relative costs of car engine plants of a U.S.
countries than do exchange rate policies. Most developing
firm located in Mexico and in the U.S. The Mexican firm
countries continue to restrict imports of a wide range of
was staffed by labor without prior work experience. The
manufactured goods, services and agricultural goods.
authors summarize their findings as follows:
Forcing appreciation on these countries may simply mean
the Mexican plant achieved comparable machine
that we will buy from Japan what we bought before from
efficiency, labor productivity, and quality to the U.S.
Korea or Taiwan. It would be much better for American
plant within its first two and one half years of
policy to concentrate on gaining market access and hence
operation. Comparable does not mean equal. On some
increased exports.
production operations the Mexican plant was more
Indeed, it may be worth considering bilateral free trade
advanced, on others it was less efficient. Overall, the
agreements with major NICs such as Mexico, Brazil or
Mexican plant achieved 80 percent of the machine
Korea where the large (and protected) emerging markets
efficiency of the U.S. plant, 75 percent of its labor
offer a very attractive opportunity for U.S. manufacturing.
productivity, and a quality rating somewhere between
The argument that the United States should seek free
the two North American plants. A major advantage for
trade arrangements with countries like Brazil, Mexico or
the Mexican plant is a wage less than 10 percent that
Korea seems at first sight far fetched. But the example of
of the U.S. plant."
Europe surely highlights the extraordinary gains to be
reaped from a trading area. Moreover, Europe has been
It is clear that for very capital intensive processes
expanding and closing. New members have joined-most
requiring high skill labor the U.S., Europe or Japan remain
recently Greece, Spain and Portugal. Turkey and North
perfectly viable locations. But for processes that have a
Africa are already opening discussions for membership. For
significant labor share-say more than 20-30 percent-we
the United States this expansion of the European Common
should expect very rapid phasing out of U.S. locations.
Market is an adverse development. It means European firms
Automation, of course, moves in the direction of
will increasingly displace U.S. exports in their own markets.
maintaining the viability of a U.S. location, but that applies
This development will be strongly reinforced with the
to production, not to employment.
creation of the full-fledged "internal market," i.e. the
The NICs pose very delicate problems for US trade policy.
removal of all forms of trade impediment.
To the extent that they produce components they compete
While the U.S. must expect to lose market share in
directly with U.S. suppliers of components and as such
Europe a similar development is occurring in the markets
their competition is a source of friction. But recourse to
of developing countries. Japan is increasingly replacing the
low cost components or intermediate goods from the NICs
United States as a supplier of technology and
is an important means of sustaining the competitiveness of
manufactures. Part of the deterioration in U.S. performance
U.S. produced final goods. Denying access to intermediate
is certainly explained by the strong dollar. But in part the
goods from the NICs would raise the cost of U.S.
Japanese performance reflects a conscious effort to
production and hence leave us less competitive in our
cultivate expanding markets of the future by hardnosed,
confrontation with other industrialized countries. Thus it is
far-sighted investment strategies. Table 25 compares the
especially important to stave off protection in this field. Of
changing trade performance of the U.S. and Japan.
course, that does not imply that we should not take an
interest in trade and exchange rate policies of the NICs.
Table 25
We have argued above that the authorities should
Share of Total Imports
basically abstain from manipulating the dollar, allowing
from the United States and from Japan
market forces to set exchange rates. But what about the
All Developing
Korea
currencies of Korea or Mexico or Taiwan which are fixed to
Countries
the dollar? If these countries follow the dollar in a decline
1980
1986
1980
1986
our gain in competitiveness would be diminished. Indeed,
as we noted above, Japan might maintain competitiveness
U.S.
15.7
14.3
22.2
20.2
of final goods by increasingly shifting the sourcing of
Japan
10.0
13.7
26.6
33.3
Source: IMF
30
A policy of free trade areas with selected, major
resource utilization in the export sector may well be the
developing countries would be a dramatic step to open
most productive way of using the nation's resources.
these markets to U.S. exports on a preferential basis. There
A second crucial area for commercial policy concerns
are a number of advantages. First and foremost, the policy
quantitative restrictions on imports and voluntary export
would ensure that U.S. exporters get ahead of Japanese
restraints. In the past decades tariffs have been whittled
firms in entering these markets which at present are semi-
down in successive rounds of international trade
closed. Second, there would be a lasting offset to the
negotiation to relatively low levels. For most goods they no
shrinking or closing of the European market. Third, we
longer represent a significant obstacle to trade. Indeed, the
would have more leeway in accepting goods from
massive dollar overvaluation of 1980-85 "liberalized"
developing countries if at the same time we can assure that
imports far beyond any protection tariffs give.
trade is a two-way street.
Of course, there are also political costs to a free trade
Table 26
arrangement. We could no longer restrict imports from our
Examples of Post-Tokyo Round Tariff Rates
partners in sensitive areas such as steel or automobiles.
U.S.
E.C.
Japan
That may ultimately be an advantage, since as we noted
Beverages and Tobacco
4.7
10.1
25.4
above, these trade restrictions are very costly. On strictly
Wearing Apparel
22.7
13.4
13.8
economic grounds it is difficult to believe that the U.S.
Nonelectrical Machinery
3.3
4.4
4.4
would not achieve major gains from such a forward looking
Electrical Machinery
4.4
7.9
4.3
trade policy.
Transport Equipment
2.5
8.0
1.5
Trade Policy
Source: GATT
In the past few years, in large measure as a result of dollar
In special areas such as textiles or food tariff protection
overvaluation, the U.S. has seen a sharp reemergence of
remains important, but an indication of the low rate of
protectionist sentiment. The proposed local content bill
tariff protection in the U.S. is the fact that tariff revenue as
was one piece of very protectionist legislation, and so was
a fraction of dutiable imports is now only 5.5 percent. This
the Gephardt amendment. Manufacturing has regrettably
compares with 10-20 percent in the 1950s and 1960s.
not taken a strong stand against protection. But it is not
But the low tariff rates are in many areas a misleading
difficult to recognize that all of manufacturing cannot gain
indication of how free trade is in fact. In several areas
from protection. Firms who do not have any engagement in
where U.S. manufactures have felt intense import
international trade would lose because they would
competition (steel, automobiles and many of the goods
experience a costly increase for some intermediate goods
produced by the NICs) our administration has imposed
(say steel) where protection raises the domestic price. Firms
quotas or urged foreign countries to administer a voluntary
who export would not only have higher costs as a result of
export restraint program. But quantitative restrictions or
increased prices of some intermediate goods, but they
voluntary export restraints abroad are inefficient devices
would also find quite possibly that foreign markets would
from a point of view of resource allocation and from a
be close to them in response. An import competing firm
budgetary perspective. They create monopoly positions for
taken in isolation is right to believe that if there were
domestic firms which can exploit consumers without any
substantial protection foreign competitors would be
public benefit to match. We therefore recommend
excluded. But for the manufacturing sector in the
substitution of tariffs for quantitative restrictions. Tariffs
aggregate it is difficult to accept that we can exclude
leave room for competition-there is protection, but
foreign goods without any costs.
foreign firms can overcome it if they are willing to lower
While U.S. firms competing with imports would see an
their prices sufficiently. At the same time the government
advantage in protection, national economic policy must
collects revenue from the tariff and hence some
recognize the adverse effects on exporters. The best way- to
contribution is made to the task of budget balancing.
deal with international competitiveness is to use the
In the longer run we should reexamine whether there is
exchange rate rather than protection. Exchange
any ground to support differential protection beyond a
depreciation works symmetrically exerting pressure on
moderate tariff of 5 percent or so. There is no evidence
foreign firms to raise their prices in the home market and
from studies of adjustment under protection that would
giving exporting firms a competitive edge in foreign
indicate that U.S. firms in fact have emerged competitive on
markets. There is no reason why exporters should not also
a scale that would reward society for the initial investment
be allowed to make a contribution to and prosper from the
in protection.
task of closing the external balance gap. Indeed, expanding
The only economic argument for protection concerns
"infant industries" where temporary protection provides the
means to achieve the scale and learning by doing which
31
ultimately makes an industry cost competitive at the world
The table makes a very simple point: protection is
level. Our protection is not of that variety at all. It is
expensive. It is an expensive way to save jobs-tl cost
permanent protection for those industries that have long
benefit ratio is more than 20! It is an expensive way to give
ceased to be competitive internationally. In such cases
firms rents and, perhaps worst, foreigners collect rents as a
society should support adjustment, not subsistence. The
result of our protective policies. These rents could at least
economic costs of keeping alive inefficient industries are
be collected by the Treasury to help balance the budget.
extremely high: David Tarr and Morris Morke of the
The examples given here are by no means special or
Federal Trade Commission in a study entitled Aggregate
extreme. Study after study reveals that permanent
Costs to the United States of Tariffs and Quotas on Imports
protection is exceptionally expensive. Hand in hand with a
report that the cost of U.S. protection amounts to almost
sounder macroeconomic mix and a more realistic exchange
$10 billion per year. That number represents the costs to
rate should go a policy of reevaluating the trade regime.
consumers of protection over and above the benefits
Free trade areas, more efficient protection and ultimately
created for firms and workers in the protected industries.
dismantling of protection all help manufacturing achieve a
In an estimate of the costs of voluntary export restraints
more cost effective resource allocation.
for automobiles and of quotas for steel, to give concrete
Direct Foreign Investment in the United States
examples, the authors report the following finding:
Finally we want to touch briefly on the controversial issue
Table 27
of foreign investment. In the past few years foreign firms
The Costs and Benefits of Protection
have attracted attention with their direct investment in the
(Billion 1987 $ unless noted)
U.S. in the area of manufacturing. Quantitatively these
Automobiles
Steel
investments remain very small as Table 28 brings out.
Consumers' losses from higher prices
1123
1241
Table 28
U.S. Producers' Gains
130
481
Foreign Direct Investment
Net loss to the U.S. economy
993
881
in the United States (Billion $)
Quota Rent to foreign firms
932
629
Flows
1986
Loss to the economy per job savedᵃ
244,235
88,525
Cost Benefit Ratioᵇ
21.4
24.6
1983
1984
1985
1986
Stock
Total
8.1
15.2
23.1
31.5
209.3
ᵃLosses to the economy in thousand dollars per job saved.
Manufacturing
3.1
3.1
12.1
13.7
68.1
ᵇLosses to the economy per dollar of earnings saved as a
result of protection.
By Country:
Japan
0.4
1.8
1.2
4.7
23.4
Source: Tarr and Morkre
Europe
4.9
6.5
15.4
17.1
141.7
Source: Dept of Commerce
32
Employment by foreign-owned affiliates now is
It is often argued that domestic firms, by relying on
3.2 million and foreign investors own 15 million acres of
domestic suppliers, create more jobs than foreign firms
U.S. real estate. But even though the numbers for foreign
who may use the U.S. location only as an assembly plant
penetration by direct investment remain moderate-
for foreign components. That view implicitly compares a
certainly compared to trade penetration-the spector of
situation of autarchy and no foreign direct investment as
increasing competition in the home market from foreign
the alternative. But U.S. consumers will not (and should
producers, even after dollar depreciation, makes domestic
not) accept that all low cost production from abroad be
manufacturers apprehensive. Hence the question whether
excluded. A more viable strategy that does not send us on
foreign investment is or is not in the national interest.
the road to increasing protection is to make the best of the
In advocating more liberal policies in developing
international division of labor. A realistic value of the dollar
countries we always argue that foreign investment brings
assures that we are not outpriced across the board. With
benefits in the form of capital, technology and experience.
that safeguard we can afford to let the most efficient firms
The same argument applies to foreign direct investment in
(whether "domestic" or "foreign") produce in the U.S. The
our own economy. If foreign firms can create high wage
most efficient firm, in the end, will create the most
jobs here we should prefer that to having our
sustainable good job and hence will contribute best to our
manufacturing workers displaced by imports.
standard of living. There is no question that the increasing
division of labor will mean more trade in intermediate
goods. It would be ill-advised to bar foreign firms from
establishing operations here. using at least some of the
domestic resources, while bringing in some inputs from
abroad.
We conclude this section with a brief summary of our
main policy recommendations:
The newly industrialized countries pose a significant
and increasing challenge to American manufacturers.
Efforts to thwart the entry of their products into the
United States are not likely to succeed, and if they did
succeed would impose large costs on American
consumers. Instead of seeking to block imports,
American policy should concentrate on opening up
markets for American products in the newly
industrialized countries.
Protectionist measures whether to limit imports or to
discourage foreign direct investment in the United
States should be avoided at all costs. Protection only
invites retaliation. Even if there were no retaliation,
protectionist policies would strengthen the dollar
making US exporters less competitive. Foreign
investment is likely to benefit the economy even
though in some cases it will hurt entrenched
American firms.
33
SUMMARY
The fortunes of manufacturing and the rest of the economy
are closely linked. The American economy is unlikely to
succeed in meeting the twin goals of full employment and
rapid living standards unless the competitiveness of the
manufacturing sector is restored. Conversely, the
manufacturing sector is unlikely to prosper, unless the
general macroeconomic imbalances that have led to the
twin budget and trade deficits of recent years are corrected.
The situation created by the macroeconomic policies of
the last decade is serious. American manufacturers have
lost market share in world markets while at the same time
providing for only modest growth in workers' real wages
and low rate of profit for shareholders. Ominously, import
penetration ratios especially in capital goods industries
have risen sharply. Without the major defense build-up
which is now coming to an end, the manufacturing sector
would have contracted significantly.
If the policy environment is not altered, the competitive
problems of American manufacturing will only increase.
Inadequate national saving and investment will lead to slow
productivity growth. Excessive exchange rates will cause
our foreign debts to mount rapidly, threatening an
eventual collapse of the dollar with dire consequences for
the financial system. Misguided trade policies that close
markets rather than opening them risk a breakdown of the
relatively free trading system that has effectively promoted
prosperity for the past forty years.
Fortunately, there are constructive and feasible policy
steps that can be taken to strengthen the American
economy and manufacturing's role in it. There is no
inherent reason why American manufacturing needs to give
up its traditional preeminence. But prompt policy action is
required in three areas: fiscal policy, international
macroeconomic policy, and structural trade policy.
34
About the authors of this study:
Rudiger W. Dornbusch
Rudiger W. Dornbusch holds the Ford International
Professorship of Economics at Massachusetts Institute of
Technology. Dornbusch is a member of the Social Science
Research Council Committee on Growth and Stability and
is a fellow of the American Academy of Arts and Sciences of
the Econometric Society. The author and editor of
numerous books and publications, he is associate editor of
the Quarterly Journal of Economics. He holds a doctorate
from the University of Chicago.
James Poterba
James Poterba is an associate professor of economics at
Massachusetts Institute of Technology and a research
associate of the National Bureau of Economic Research. He
specializes in analyzing how taxation affects corporate and
individual behavior. Poterba is an associate editor of The
Journal of Finance and The Journal of Public Economics. A
frequent author in professional journals, Poterba holds a
doctorate from Oxford University.
Lawrence H. Summers
Lawrence H. Summers is the Nathaniel Ropes Professor of
Political Economy at Harvard University. He specializes in
macroeconomics, the economics of taxation and the study
of financial markets. The first social scientist to win the
National Science Foundation's prestigious Waterman
Award, Summers is a frequent author in business and
professional journals, and serves as editor to The Quarterly
Journal of Economics. He holds a doctorate from Harvard.
Eastman Kodak Company
Communications & Public Affairs
343 State Street
Rochester, NY 14650
35
no Fation
THE WHITE HOUSE
WASHINGTON
March 20, 1989
Dear Mr. Baruch:
Thank you for sharing your thoughts on a
competitiveness theme to highlight the
Administration's goals.
I will pass your ideas to our staff in the
White House formulating the President's
message for their consideration.
Regards,
John H. Sununu
Chief of Staff
Mr. Jordan Baruch
1200 18th Street, N.W.
Suite 610
Washington, D.C. 20036
CC: Chriss Winston w/ incoming - FYI
Jordan Baruch ASSOCIATES INC.
14 March 1989
Dr. John Sununu
The White House
Washington, D.C. 20500
Dear Dr. Sununu:
I take the liberty of writing to you as a fellow alumnus of MIT and former professor
in NH (at both Tuck and Thayer at Dartmouth). Should you need additional
information to make sure I'm not a nut, you can check with Bruce Merrifield, my
successor at Commerce.
Over the next few months the President will be coming under enormous pressure to
increase our "competitiveness". He is also going to be pulled into the debate on
High Definition T.V. (HDTV). In addition, the administration is likely to get a lot
of garbage about not having national goals or visions of the future. I'd like to
suggest a possible program that can, I think, address all three of the above points.
I've phrased it as a Presidential Announcement (akin to John Kennedy's "Man on the
moon in this decade).
Presidential Announcement
When President Kennedy announced, as a national goal, putting a man on the
moon within the decade, he set us a task that caught the imagination of the
country and one at which we succeeded. That task, however, did not
directly address the needs we had then -- and have now -- for a greater
civilian technology, education for our young and a continu ng, growing
competitive position in world commerce. Some of its developments did, of
course, impact those needs but only peripherally to the central goal. Today,
I am announcing a national goal that will directly impact our people's well
being.
1200 18TH street. NORTHWEST. SUITE 610. WASHINGTON. D.C. 20036 202-659-1251
Dr.
14 March 1989
Page 2
By the year 2000, this nation will develop a telecommunication system that
will provide a Window On the World affordable by every school, by publicly
accessible community centers, libraries and even homes.
Rather than pursue the course toward High Definition Television being taken
in Europe and Japan, we will pursue an overall system that links our
capabilities in fiber-optics and satellite transmission, our skills in ed-
ucational and entertainment software creation. our experience in the
construction of open-architecture computers and mass storage devices and
our enormous and growing store of machine-accessible knowledge.
The Window On the World will bring to the lay user both ordinary television
programs and those with which he or she can interact -- taking the roles of
detective or astronaut or explorer. It will bring whole new educational
experiences, in and out of school such as those being developed at MIT's
project Athena to students from grade school to graduate school. Doctors,
lawyers, accountants, astrophysicists and grocers will use it to organize and
exchange their knowledge with each other and with their clients. Broad-
casters will have the opportunity to develop whole new forms of programs,
educational publishing will take on a new meaning. Indeed, since the
Window On the World will be an open-architecture system - with many
manufacturers able to enhance its abilities, it will become a totally new
form of communication and information use for lay users and professionals
alike.
To secure that goal will require a common commitment among many parts
of the private sector. Computer companies and universities, communication
firms and teachers, chip manufacturers and broadcasters, writers and artists
and many more will find their capabilities pulled by the demands on the
system. In government, the National Science Foundation, NOAA,
Commerce, the Department of Defense and other agencies will develop
action programs in support of this goal under the coordination of my Science
Advisor and the OMB. We will get it done.
14 March 1989
Page 3
What's more, the final product will be accessible. It's educational potential
will be available in the South Bronx and in Appalachia as well as in the
wealthier areas of the country.
While the responsibility for realizing this goal rests primarily with the
private sector, the leverage of government programs will be used to make
its benefits truly public.
- -0-0-0-0-0-
Dr. Sununu, I recognize the cheekiness of my trying to frame a national goal for
the President, but it's one I think we can do and, just as important, it has something
in it for virtually everyone. We need such a goal.
I realize how sketchy this letter is but I'd be happy to talk it over further with you
if you like. There has really been far more thought involved in the program than
appears at first reading. I'll be in South America from March 16th to the 26th but
my secretary can get in touch with me.
Thanks for reading -- I hope this can help.
Sincerely yours,
Jordan J. Baruch
Big Dooley - -
Presidents and others talk
about "line item veto casif as
all voters know what talking
about, and why. I'aint so.
Geogon defendend his role for
wanting a balanced budget in terms
that people didn't understand. That's
why Congress seed was able to
sell the idea of the "Reagon deficit."
Buisident Bush wants to
lower the capital gains tax He
assumes votes understand. most
do not. The scott Burns article
would allow you to write a
brief explanation for insertion
in a speech.
write about line-item yet, explain
If you ever are called upon to
that some Registation carries Book- -
Garrel amendments for study of the
set life of the australian that diddle,
on some such. To get legistation into
law, the President must accept the
bank band issues, etc., etc.
Dad
also
Tuesday, May 2, 1989
The Ballas Morning Nelus
7D
Lowering the investor tax would be a capital idea
SCOTT BURNS
mjsts call a high propensity to save,
15 or 20 percent if you knew you
ing our lunch, Japan and Germany,
raising equity capital.
The first playing field to level is
lowering the capital-gains tax
could get a new home mortgage at 7
have virtually no capital-gains
While U.S. manufacturers cut
the big one, the global one. After
Continued from Page 1D.
should have a dramatic impact on
percent as a result?
taxes. Long-term gains are exempt
back inventory because it costs so
we've done that, then we can look at
cause more capital gains will be re-
our national savings rate. It would
When push comes to shove, "fair-
from taxes in Germany and are
much to keep stock on shelves, the
what we do domestically to make
alized and, therefore, taxed. In ef-
increase.
ness" doesn't apply very well, People
taxed at 5 percent in Japan.
Germans and the Japanese do it
different parts of society feel better.
fect, what the Treasury loses in
Increase the domestic savings
with large incomes and capital tend
One result is that both nations
with ease. It costs them half as
That is, in exchange for a lower cap-
lower rates will be made up in vol-
rate enough, and we might not de
to save. If we want to increase our
have a lower cost of capital than we
much. Day after day, they have more
ital-gains tax rate, we restore the
ume.
pend on foreign lenders to finance
Tate of saving, the fastest way is to
do. They compete using 5 percent
to sell, and they have it now, so do-
IRA deduction and, perhaps, expand
Which brings us to an important
the federal deficit. Interest rates
decrease the capital gains tax.
financings; we compete using 12 per-
mestic manufacturers lose market
the personal exemption. That would
distinction. The capital-gains tax is
would fall, the deficit would fall,
. Economics. It may be nice to
cent financings and have difficulty
share.
benefit the many, without risk.
voluntary.
and even people with nothing but
have a "level playing field" in Amer-
You and I don't have much
debts would benefit because the cost
ica but do we want to do it by
choice about our income taxes. We
of financing a house, a car or any-
forcing ourselves to run on one leg.
pay taxes for the wages and salary
thing else would decline.
while the rest of the world runs
we are paid. Indeed, we pay them on
To be sure, the benefit is indi-
with two?
the spot and don't have much choice
rect, but it is real. Let's put it this
While we debate whether the
about it.
way: Would you mind if the rich got
capital-gains tax should be 20 or 28
But capital gains are different. If
to pay taxes on capital gains at only
percent, the two nations that are eat-
you own a stock that has appreciated
handsomely, you might think it wise
to sell it, or some of it but it is a
decision. You can delay the sale for
a year. Maybe two years.
In fact, if you're really spiteful
Lowering investor tax a capital idea
and hate paying taxes, you can sim-
. Tax revenues. One of the popular argu-
ply refuse to sell your stock and
Funny things hap-
come.
keep the capital gain until you die.
Before 1986, one-half of all capital gains es-
ments against lowering the tax is that it will
pen in Washington
caped taxation altogether, and the highest tax
reduce federal tax revenues when we have a
Then it will magically disappear in
Right now, for in-
you could pay was 20 percent. After 1986, every
pressing need for more revenues. not less. Af-
the valuation of your estate. (Some
stance, there is an on-
wags have suggested this is our only
dime of capital-gains income became taxable
ter all, there is still a massive federal deficit.
going debate about the
and was thrown into the same pot as wage in-
This kind of discussion brings out all the
Photo Copy Preservation
remaining incentive for dying.)
capital-gains tax. Presi-
come so it was taxed at 15, 28 or 33 percent.
technicians, the econometricians and their
In effect, we have a choice about
dent Bush has proposed
models, to estimate the impact.
capital-gains taxes. We can pay at a
lowering it, restoring
Which means that capital-gains taxes were
The Congressional Budget Office, which règ.
tax rate of 0 percent by not selling
most of the "prefer-
SCOTT
increased For some people not the very rich
ularly makes the implausible assumption that
the asset. Or we can pay at a tax rate
ence" that capital gains
BURNS
the tax was increased substantially.
individuals never respond to changes in the
of 15, 28 or 33 percent, depending on
enjoyed before the 1986
our income. The larger the differ-
Although a growing constituency believes
tax laws by altering their behavior, believes
tax reform.
that the best tax law would be a stable tax law,
that a reduction in capital-gains tax rates will
ence between zero taxes and the tax
In case you don't remember, before Con-
rate we'd have to pay, the greater
whatever it was, a good case can be made that,
work to reduce capital -gains tax revenues.
gress made a big fuss about having us all play
arguments for a "level playing field" notwith-
The Treasury, which once thought the same
the chance transactions will be sup-
on a "level playing field" by bulldozing the na-
pressed
standing. we have a pressing need for a lower
way, now thinks revenues will increase be
tion's real estate values, they also taxed capital
My bet is that lots of people, con-
gains at lower rates than ordinary earned in-
capital gains tax. Here are the arguments:
Please see LOWERING on Page 7D.
fronted with a tax of 28 to 33 per-
cent, will elect to die with their
stocks on. Ironically, while creating
a "level playing field," Congress will
have imposed a high tax on people
who have circumstances that force
them to sell assets while allowing
people with abundant means to, in
effect, "take it with them when
In fact, if we are going to address
they die.
a major problem, it might be good to
. Fairness. Probably the most
turn the entire argument around.
People with incomes more than
popular argument against lowering
the tax is that it will be just another
$200,000 a year account for 59 per-
tax break for the very rich. In fact,
cent of all capital gains. Since people
with such incomes have what econo-
while capital gains are an important
part of the income of the rich, peo-
ple who aren't rich have capital
gains, too. They just don't have as
many. According to Internal Reve-
nue Service figures, about 28 per-
cent of all capital gains realized
by people with adjusted gross in-
comes of $100,000 or less.
THE WALL STREET JOURN
LEISURE & ARTS
Rock of Ages: The Who Turn 25
"cast the band in stone" as fans came to
By PAM LAMBERT
ing, it's the electric Townshend that ig-
expect more of the same. After that "none"
nited The Whols legendary live act.
East Rutherford, N.J.
of us really knew what kind of record we
One had only to compare this set's
Somebody in the end said to me, 'Well,
should make.'
"Baba O'Riley," featuring Townshend on
what would you do it for? What would be a
Townshend confesses to similar trouble
acoustic, with previous tours' electric ver
price that you'd goout and endanger your
as a solo-artist. "When I start to make a
sions as captured in the 1979 Who docu-
hearing and push yourself closer to that in-
record I don't know what style to make it
mentary "The Kids Are Alright. There
evitable knee operation, what would it be
in, he explains. "I like too much music."
you can't take your eyes off the bobbing,
worth?' rock star Pete Townshend re-
Indeed. his new "Iron Man" album, con-
bouncing guitarist, and the sounds he
counts with a grin. "And I sort of pulled a
taining-songs from the musical he hopes to
wrests from his Gibson Les Paul seem to
figure out of a hat and the price I named
stage next year, may stun many Who fans
be an organic outgrowth of his perpetual
was one million five. hundred thousand
with its diversity and rich orchestration.
motion.
pounds after tax."
What won't surprise anybody familiar with
"From the moment I put the electric
And SO it was this past weekend that the
"Tommy" are the themes of the work,
grizzled guitarist found himself facing four
based on a children's fable by English poet
guitar on I start to loosen up physically,"
sell-out crowds at Giants Stadium with a
laureate Ted Hughes.
he confirms before the stadium show, "and
then adrenalin starts to flow and then I
band he describes as "dead dogs" in cre-
"They both about frightened little
boys, I suppose, a subject which I can still
don't really know what I'm doing any
ative terms, a band that had disbanded
more."
seven years ago, a band called The Who.
write about," Townshend says with a
Songwriter Townshend and the other
chuckle. "I think that I did carry an enor-
The story was pretty much the same at
surviving members of the British group,:
mous amount of my childhood self into
the concert itself, which avoided the pre-
adulthood, and that's something I'm very
dictable greatest-hits pathway. After open-
singer Roger Daltrey and bass player John
grateful to rock about. One thing you'r al-
ing with a half-hour of "Tommy" tunes,
Entwistle, were kicking off a summerlong
25th anniversary tour which takes them to
lowed to do as a rock performer is to be a
the program ranged thoughtfully through-
Washington's RFK Stadium tomorrow and
you re positively encour-
out The Who's career, focusing on some of
Friday. By its end Sept. 3 they will have
aged to be one. Unfortunately you not
the outstanding early work which Town
performed 40 stadium shows plus two char-
protected as a child is protected, SO some-
shend feels has been slighted. There were
ity benefits of Townshend's pioneering
times you kind of die in the process.
side trips into members' solo efforts, and
The Who's gonzo drummer Keith Moon
interesting cover versions of music that in
rock opera "Tommy." They will take
home at least $30 million.
was one such casualty, ODing in 1978 on
fluenced the group. The band particularly
smoked on Bo Diddley's "I'm a Man.'
Fans responded to The Who reunion by
medication he was taking to help stop
drinking. Townshend was nearly another.
Daltrey's vocals were down and dirty:
snapping up tickets in record time. The
Townshend danced with his red Stra
rock press reacted less warmly. Critics
One of his excesses, years of drunkenly
tocaster.
who never told Bob Dylan to pack it
practicing guitar through headphones at
deafening volume, caused tinnitus con-
For much of the show, though, Town-
n-despite his dismal recent songwriting-
stant ringing in the ears. So "Tommy," the
shend was a more subtle presence on
seemed somehow offended that the author
saga of an abused deaf, dumb and blind
acoustic. This shifted some attention to
of the ultimate teen anthem "My Genera-
tion" and his mates would have the temer-
boy, is now being performed by a man un-
bassist Entwistle, whose dynamic playing
ity to return for one last hurrah.
able to fully hear his own music
has long been overlooked. But, mainly
Maybe they feared a fortysomething
At the "Tommy" benefit last Tuesday
Townshend's subdued performance had the
at New. York's Radio City, some changes
effect of putting the songs in the spotlight
group couldn't possibly compete with
were immediately evident. To fill out the
Judging from the response of the youngish
memories of the days when, driven by
songs at the lower volume demanded by
crowd, this music is already moving the
Townshend's full-contact guitar attack, the
Townshend's damaged ears, The Who had
next generation.
band. set rock standards for power, vol-
ballooned to big band size: 15 musicians in-
ume, and demolition. Maybe they were fed
cluding five horns and three backup vocal-
up with all the "dinosaur" acts dominating
ists. (The stage will be even more crowded
this summer's concert calendar. Or per-
for the fundraiser August 24 at Los An-
haps they were just put off by Townshend's
candor in discussing his motives, which in-
geles's Universal Amphitheater, a per-
formance with guest stars to be simulcast
clude the desire to publicize his ambitious
solo project "The Iron Man" (Atlantic)-
on pay-per-view cable. And Townshend,
the only record release coinciding with the
whose powerful rhythmic chording and
tour.
slashing style influenced a generation of
"We actually sold very, very few al-
electric players, was sporting an acoustic
guitar.
bums relative to our popularity," Town-
shend says during a pre-concert interview.
As the band moved briskly through the
hour-plus. of this slightly "condensed
Fatigue evident on his basset hound fea-
tures, he looks more like a man ready for
"Tommy," the rejiggered arrangements
worked surprising¹v well. There were
Photo Copy Preservation
Michael Kinsley
George on My Mind
The 150th birthday of the man who explained it all.
Some agency in Tokyo announced
world's wealth is created from these
the one less industrious and intelligent,
landowners' claim on all the wealth
recently that Japan is now richer than
elements and divided among the work-
the other less disposed to save and
that has been produced since then has
the United States, thanks largely to
er, the capitalist and the landlord. But
invest." By contrast his solution would,
grown disproportionately.
the explosion in Japanese land prices.
whereas the return to labor is the
in one swoop, "raise wages, increase
Real estate has always been the
Adherents of the American economic
reward for effort and the return to
the earnings of capital, extirpate pau-
largest category in the "Forbes 400"
philosopher Henry George will recog-
capital is the reward for saving, the
perism, abolish poverty, give remuner-
list of the richest Americans. In the
nize the fallacy immediately. How is a
return to land is the reward for noth-
ative employment to whoever wishes
1989 list, just published, it slips nar-
George would sneer at the policy of
society enriched by the fact that the
ing more than possession of a limited
it, afford free scope to human powers,
rowly to second place with 77 out of
giving away broadcast licenses for
same land now sells for twice as much?
resource.
lessen crime, elevate morals and taste
400. But most on the list owe at least a
free. He would understand the logic of
This simply represents a transfer of
The rising value of land, George
and intelligence, purify government
part of their wealth to ownership of
an excess-profits tax on domestic oil
wealth to land owners from those who
reasoned, is not the result of the
and carry civilization to yet nobler
real estate or mineral resources such
and gas. He would see the futility of
wish to own land: overwhelmingly,
owner's efforts but a result of the
heights."
as oil. America's richest man, John
various current liberal schemes to
other Japanese.
growth of society. If. you own land,
Obviously there are problems with
Kluge, increased his fortune by $2
"help" first-time home buyers through
Henry George was born 150 years
"you need do nothing more. You may
this magic cure-all. Land is not the
billion last year simply by owning cellu-
government subsidies, all of which will
ago in Philadelphia. He dropped out of
sit down and smoke your pipe; you
root of all economic evil. And George
lar telephone franchises given away
simply get capitalized into higher home
school at age 13, wound up working as
may lie around like the lazzaroni of
had no satisfactory answer to the com-
free by the government. Henry
prices. He would go ballistic over the
a printer in San Francisco and, in
Naples or the leperos of Mexico; you
plaint that most current owners of
George was viciously witty about for-
idea of reopening the capital gains tax
1879, self-published his masterwork,
may go up in a balloon, or down a hole
natural resources paid at least part of
tunes built on government-granted
break for real estate.
"Progress and Poverty." It became a
in the ground; and without doing one
their current value, so expropriating
monopolies.
Above all, perhaps, George would
best-seller, and George himself be-
stroke of work, without adding one
all that value through taxation would
What I like best about Henry
observe how the developed world has
came "the third-most famous man in
iota to the wealth of the community
be unfair.
George is the way he combines radical
been suffering in recent years from
the United States" after Mark Twain
you will be rich."
But George's instinct that the hid-
egalitarianism with an equally radical
real estate sickness. At times when
and Thomas Edison, according to his
The landowner's profit, George
den "landowners tax" on the produe
belief in free-market capitalism. But he
the reward for happening to own a
granddaughter Agnes George DeMille
maintained, is merely a tax on the
tive elements of society would grow
noted the difference between capital-
middle-class house has been greater
(yes, the choreographer). Soon after
truly productive factors, labor and cap-
with time and prosperity is probably
ism in theory and the actual economy
than the reward for middle-class labor,
George died in 1897, however, his
ital. And George's solution was to tax
correct. According to Federal Reserve
he saw around him. He distinguished
this disease has twisted values, sucked
theories were almost completely for-
away the entire rental value of land,
figures, the share of America's nation-
between the accumulation of wealth
away productivity and redistributed
gotten.
using the proceeds to abolish all other
al wealth represented by land grew
and the creation of wealth. And he
wealth at random. And if, as many
George began from the premise
taxes. "Taxation which diminishes the
from a fifth in 1946 to a quarter in
recognized that wealth accumulated in
believe, the process is now going into
that there are three factors of produc-
earnings of the laborer or the returns
1988. There is the same amount of
nonproductive ways was not merely
reverse, the dislocations will be just as
tion-labor, capital and natural re-
of the capitalist," he argued in good
land in America as there was at the
unfair but actually bad for economic
severe.
sources- (primarily land). All the
supply-side fashion, "tends to render
beginning of the postwar boom, but
growth.
© 1980, UFS/The New Republic, Inc.
THE WASHINGTON POST
Study Sees Shortfall of Graduates in Technical Skills
Task Force Recommends Efforts to Recruit Women and Minorities in Science, Engineering
By Kenneth J. Cooper
"These numbers are real in the
degrees in science and engineering
The federal government provide
Washington Post Staff Writer
sense that all of these people who
are even higher: three times as
college scholarships and research
will be entering the work force are
many white women, 12 times as
experiences to high school students
To meet labor market démands
already born," said Sue Kemnitzer,
many Hispanics and 20 times as
who want to pursue science and
for technical skills in the next cen-
executive director of the Task
many blacks. Last year, for in-
engineering, particularly to women,
tury, a congressionally chartered
Force on Women, Minorities and
stance, only 47 black Americans
minorities and handicapped stu-
panel estimates that the nation's
the Handicapped in Science and
received doctorates in science and
dents. President Bush has proposed
colleges must graduate twice as
Technology. The panel of 48 gov-
15 in engineering.
funding two such scholarships in
many white women in science and
ernment, business and education
No estimates were made con-
each congressional district.
engineering, five times as many
cerning handicapped students be-
Local school districts station a
black students and seven times as
leaders issued its final report yes-
cause no statistics are collected on
terday.
math and science expert in each
many Hispanics-beginning next
The panel said the projected in-
the types of degrees they receive.
elementary school and emphasize
year.
In its long list of recommenda-
scientific careers as "the best way
The panel, established by Con-
creases in undergraduate degrees
tions, which were endorsed by the
'up' for students from disadvan-
gress in 1986, arrived at the esti-
in engineering and science must be
White House Office of Science and
taged backgrounds." Currently,
mates by combining projections
achieved in every year of the
Technology Policy, the panel pro-
most elementary teachers do not
from the National Science Founda-
1990s, a goal that Kemnitzer ac-
posed that:
specialize and provide instruction in
tion, which foresees a shortfall of
knowledged would be impossible to
Colleges "set quantitative goals
every academic subject.
560,000 scientists and engineers in
reach next year. "That is one point
for recruiting and graduating more
. Private industry fund training
the year 2010, and the Bureau of
we're trying to get across-how
students in science and engineer-
programs to improve the math and
Labor Statistics, which projects that
dramatic the changes have to be,"
ing, especially from underrepre-
science knowledge of teachers, in-
85 percent of new workers in the
she said.
sented groups." But: the panel,
cluding sponsoring trips to national
year 2000 will be women or minor-
The panel's projected demand for
Kemnitzer said, rejected specific
meetings of math and science
ities.
women and minorities with doctoral
quotas for each group.
teachers.
Photo Copy Preservation
Business
The New York Times
MAY 16, 1990
reaucrats in just five years. It is al-
The same is true of Federal debt.
Don't Raise
most $1 billion of new tax money for
As a percentage of G.N.P. it has been
every single Congressman.
falling in recent years and now stands
Taxes
Surely, $419 billion is more than
at about 40 percent. That is lower
enough for those rascals.
than at any time from 1945 to 1965. It
Then how can there be a problem?
was not a serious problem then, and it
Because politicians want to spend
is not a serious problem now.
even more than the cash that is flood-
The real problem with our economy
By Martin Anderson
ing in on them. Displaying remark-
is that politicians want to spend more
able ingenuity, they have figured out
of our money than they have any
STANFORD, Calif.
how to spend much, much more than
right to. But where is it written that
he brazen cry to raise
the paltry $1 trillion and change that
government has a right to an ever in-
T
taxes in 1990 has to be
they have today.
creasing share of our income?
the most shameless as-
And that is unconscionable. Here
In fact, as our economy grows ever
sault on Americans'
we are rolling along in the 89th month
more huge - into the $6 trillion and
pocketbooks in this
of the greatest economic expansion in
$7 trillion dollar range - we should
century.
our history, with 19 million new jobs,
be getting savings in Government
We have just had the largest back-
a gross national product of nearly $6
operations from economies of scale.
to-back annual tax increases in our
As peace breaks out around the world
history. In 1988, the Government got
and our economy gets bigger, the
$751 billion of our money. This year, it
Government should take a smaller
will get that and another $165 billion.
The deficit
percentage out of our pockets.
That whopping increase in tax re-
Rather than raising taxes, we
ceipts a product of economic
growth and inflation - is one of the
isn't the real
should be taking decisive steps to
keep the economic expansion rolling,
best kept secrets in America.
to create more jobs. In addition to re-
Washington is awash in tax money.
problem.
fraining from tax hikes, here are
During the next three fiscal years,
three things we should do in 1990:
tax revenues are expected - without
Eliminate the capital gains tax
any change in tax rates - to increase
(which will create hundreds of thou-
by another $254 billion. That's a
trillion, low inflation, interest rates
sands of jobs and put us on a more
grand total of $419 billion of new
and unemployment, a stock market
equal footing with foreign competi-
spending money for the Federal bu-
that has tripled in the last seven
tors), and delay any increase in the
years - and these bozos want to jeop-
Social Security tax for at least one
Martin Anderson is a senior fellow of
ardize it all by raising tax rates.
year. Getting rid of the capital gains
the Hoover Institution, at Stanford
Moreover, the collapse of socialism
tax will raise Federal revenues.
University.
and the prospects of bilateral nuclear
Delaying the Social Security tax for a
disarmament will soon produce a
year would cost about $12 billion.
financial windfall. The savings over
Earmark all of the "peace divi-
the-next-decade-could-easily-accumu-
dend" for further deficit. reduction
late to more than $500 billion.
and to pay for the delayed Social Se-
How bad is the Federal deficit? The
curity tax increase.
deficit, as a percentage of gross na-
Slow, by a measly two or three
tional product, has fallen steadily
percentage points a year, the incred-
since 1985 (when it was 5.4 percent)
ible growth of Federal spending. If we
to an estimated 2.2 percent for 1990.
could do that, we could balance the
Even with the latest revised "the sky
budget easily in a few years.
is falling" estimates, the deficit
When it comes to spending taxpay-
would still be only 2.6 percent of
ers' money, politicians and bureau-
G.N.P. in 1990 and 1.5 percent in 1991.
crats - of either party - have no
We have had deficits in this range
sense of restraint. They need to be
many times before. They are serious
disciplined.
but not catastrophic, and certainly
The only way to deal with them is to
not justification for raising tax rates
just say no- no more new taxes.
and jeopardizing the economy.
Read our lips.
WEDNESDAY, JANUARY 24, 1990
Moynihan Lays Budget Debate Bare
By HERBERT STEIN
should be financed.
ments are for the surplus. would not op-
In the fairy tale, when the small boy
The surplus-deficit question is a ques-
pose my sentiments to those of the Ameri-
said that the emperor had no clothes on,
tion about the desirable rate of national
can people, but I do not believe that the is-
the townspeople immediately agreed and
saving and investment, which is important
sues have been presented to them clearly.
got an emperor with more sense and deco-
because of its effect on the rate of growth
Perhaps Sen. Moynihan's proposal to cut
rum.
of the national income. The larger the
the revenue will prod people into thinking
In the real world, of course, the elder
budget deficit the smaller is the share of
whether, why and how much they care
statesmen whisked the boy away and shut
private saving that is available to finance
about the deficit.
him up, because they knew that the truth
private investment, and the smaller the
With respect to the financing of Social
threatened their positions and privileges.
private investment the slower will be the
Security there are three main options, al-
Sen. Daniel Patrick Moynihan's pro-
growth of the national income.
though various combinations are conceiv-
posal to cut the Social Security payroll tax
One could argue that continuation of
able:
reveals that our fiscal policy and espe-
cially our talk about it is bare of logical
substantial budget deficits is appropriate,
Social Security benefits could be fi-
clothing. Whether the New York Demo-
for several reasons. Per-capita income in
nanced out of the general revenue, just as
the U.S. is very high and it is still growing,
national defense and interest on the debt
crat's proposal will have the fairy-tale end-
although not SO fast as in some earlier pe-
are financed. This seems manifestly un-
ing or the real-world ending is uncertain. I
riods. Getting richer faster is not one of
fair. Most Social Security benefits go to
would bet on the real world.
people who are not poor and who have
The idea of cutting payroll taxes raises
our most urgent needs. People in some
no legitimate claim to support from the
many sensitive questions:
general- taxpayer, Their only legitimate
If raising taxes is a sin, isn't cutting
taxes a blessing?
Board of Contributors
claim to the benefits is that they paid for
If raising taxes would invite all kinds of
them themselves, through the payroll tax.
wasteful expenditure, wouldn't cutting
And the only justification for the payroll
taxes eradicate wasteful expenditure?
Discussion could punc-
tax is that it is the way of paying for the
benefits. (And that is why the claim that
If cutting the capital-gains tax would in-
crease the national income and raise the
ture a lot of too-hot-air bal-
the payroll tax is "regressive" is beside
loons, if thetalk is not snuffed
the point.)
federal revenue, wouldn't cutting the pay-
roll tax have the same effect? (I believe
Social Security benefits could be paid
that for $100,000 I could get an economet-
out by the poobahs of both
for by payroll taxes on a "pay-as-you-go"
rician to prove that it would.)
system. That is, each year's payroll taxes
If cutting the capital-gains tax would be
parties who fear it might lead
would be sufficient to pay that year's bene-
good for labor because it increases the sup-
to the idea that there should
fits. That would be an unfair system be-
ply of capital with which labor works,
cause the payroll tax paid by each worker
wouldn't cutting the payroll tax be good for
be a T-X increase.
would depend not on the cost of his own
benefits but on the costs of the benefits of
savers and investors because it would in-
crease the supply of labor? (For an addi-
people who are retired while he is working.
other countries have a high propensity to
tional $50,000 I could get that proved
Thus, a worker when the number of pen-
save and to invest here, which reduces the
also.)
sioners is relatively low would pay less tax
importance of our own saving. Also, the
than a worker when the number of pen-
The 1981 Tax Cut
Americans of this generation have made,
sioners is large. Following this system now
If cutting the payroll tax is a bad idea
and continue to make, a higher-than-usual
would mean a much lower payroll tax rate
because it would require the next genera-
investment in the security of future gener-
today than 30 years from now, when the
tion to pay higher taxes to cover Social Se-
ations-which should count in any reckon-
ratio of pensioners to workers will be much
curity benefits, wasn't the 1981 tax cut a
ing of what we owe our children and
higher.
bad idea because it requires future tax-
grandchildren. Moreover, there are some
payers to pay higher taxes to cover the in-
studies to suggest that the contribution to
The Fairest System
terest on the debt resulting from the tax
economic growth made by more saving,
Social Security benefits could be paid
per se, is small compared, for example,
for by the contributions made on behalf of
reduction? And wouldn't it be a good idea
now to raise taxes so that the next genera-
with the contribution of education and re-
each worker during his lifetime, plus accu-
tion will not have to pay such high taxes to
search.
mulated interest. Each worker would pay
cover the interest on the debt we are now
On the other hand, there are reasons to
for his own benefits. This is the general
accumulating?
believe that the federal government should
system under which we are now operating,
And if cutting the payroll tax would re-
be running a surplus to contribute to the
although it does not apply exactly to each
duce the revenue, are the Office of Man-
national saving. The private saving rate is
worker. This is the fairest system. It
agement and Budget and Congress now SO
lower than it used to be-before 1980-and
means that reserves would be accumulated
devoid of imagination that they cannot find
we have been absorbing an extraordinarily
during periods when the ratio of retirees to
a way to get the revenue loss outside the
large part of the private saving to finance
workers is low as now, and depleted when
Gramm-Rudman deficit calculation?
the budget deficit. Thus, the stock of capi-
the reverse is true, as it is expected to be
And even if cutting the payroll tax
tal owned by Americans has been rising
in 30 years or SO.
would violate the Gramm-Rudman deficit
slowly. Also we have ahead of us an in-
If the Moynihan proposal were adopted,
limits, what is so great about those limits
crease in the proportion of the population
the present generation of workers would
anyway?
that is retired, which means an increase in
not be paying enough to cover the costs of
Discussion of the Moynihan proposal
the proportion of consumers to producers.
its future benefits. When these workers re-
could puncture a lot of too-hot-air balloons,
This makes a case for building up the
tired, their benefits would have to be made
If the discussion is not snuffed out by the
stock of income-producing capital to ease
up from higher payroll taxes on the people
poobahs of both parties:who fear that such
the future burden of taking care of the re-
then employed or from the general reve-
talk might lead to the idea that there
tirees.
nue. That Is the basic flaw in the Moynihan
should be a T-X: increase. And beyond
proposal and the reason it should not be
Objective evidence does not tell
this valuable, even though negative, result,
adopted. The basic virtue of the proposal is
whether the surplus path or the deficit
the Moynihan proposal may lead to serious
that it may force some thinking, rather
path is superior, let alone choose among
consideration of the two real issues in-
than lip-reading, about taxes and the
volved. They are a) what the size of the
deficits or surpluses of different sizes. By
budget
their actions and the actions of their
deficit or surplus in the consolidated fed-
elected representatives in the 1980s the
eral budget (including Social Security)
A former chairman of the president's
American people have revealed a prefer-
should be and 1 how Social Security
Council of Economic Advisers, Mr. Stein is
ence for the 'deficit path: Mv own senti-
an American Enterprise Institute fellow.
Photo Copy Preservation
THE ATLANTIC MONTHLY
Analogies between the United States and post-imperial Britain are inaccurate and mischievous.
"Americans can afford both social and international security," the author argues
THE MISLEADING METAPHOR
OF DECLINE
BY JOSEPH S. NYE, JR.
HEN THE UNITED STATES EMERGED
W
from the Second World War with its ar-
dependence. Thus there is no virtue in either overstating
mies victorious and its dollar impregna-
or understating American strength. The former leads to
ble, Arnold Toynbee argued that it had
failure to adapt; the latter could lead to cures that de
more harm than the disease.
to succeed Britain as the leader of the
world. Comparisons to Britain are still being made, but
now they emphasize the negative rather than the posi-
The Vicissitudes of Decline
tive. According to one recent poll, nearly half the Ameri-
can public believes that the United States, like post-im-
perial Britain, is in "decline."
T
HE IDEA OF DECLINE HAS HAUNTED THE WEST
ern imagination since the fall of Rome, and
Some scholars have suggested that America's decline
long history exists of premature and mislead-
follows a pattern that has recurred throughout history. A
ing predictions of decline. Many eighteenth-
growing nation builds its military power to protect its ex-
century British statesmen, for example, lamented Brit-
panding economic interests, but eventually the cost of
ain's decline as a result of losing the American colonies.
sustaining such power saps its strength and another rising
Horace Walpole foresaw Britain's reduction "from a
economic power takes its place. The sociologist Imman-
mighty empire
[to] as insignificant a country as Den-
uel Wallerstein sees such imperial overstretch as a regular
mark or Sardinia!" Colored as they were by the eigh-
happening, with Venice starting to decline around 1500,
teenth-century view of colonial commerce, such prophe-
Holland around 1660, Britain around 1873, and America
cies could not foresee the new industrial base of power in
around 1967. Paul Kennedy, in the best-selling book The
the Victorian period which would give Britain a second
Rise and Fall of the Great Powers (which was previewed in
century at the top. Yet even then, at the height of Brit-
the August, 1987, Atlantic), writes that "the difficulties
ain's ascendancy, Matthew Arnold worried of "an immi-
experienced by contemporary societies which are mili-
nent danger of England losing immeasurably in all ways,
tarily top-heavy merely repeat those which, in their time,
declining into a sort of greater Holland."
affected Philip II's Spain, Nicholas II's Russia, and Hit-
Decline bundles together two quite different con-
ler's Germany."
cepts: a decrease in external power, and internal deterio-
Such historical analogies suggest that major foreign-
ration or decay. A country, though, may experience de-
policy changes are in order, but if the analogies are mis-
cline in one sense but not in the other. For example, the
leading, the diagnosis may be wrong. Retrenchment
Netherlands flourished internally in the seventeenth
could produce the very weakening of American power
century but declined in power relatively, because other
which it is supposed to avert. Withdrawal from interna-
nations became stronger. Spain, in contrast, lost external
tional commitments might reduce American influence
power in part because it suffered an absolute economic
overseas without strengthening the domestic economy.
decline from the 1620s to the 1680s.
In fact, the nations of the world have become so inex-
Obviously, internal deterioration can contribute to a
tricably intertwined that efforts to draw back would sure-
loss of external power. Even so, it is often difficult to
ly be frustrated.
identify which internal changes accounted for the loss of
Concern about decline would be good for the United
power and when they occurred. Scholars have advanced
States if it cut through complacency and prodded Ameri-
more than two hundred causes for the decline of Rome
cans to deal with serious domestic issues like savings and
and still disagree on dates. The Romans themselves of-
education. But polls suggest that excessive anxiety about
ten saw their world in despairing terms; in fact, prophe-
decline is turning American opinion toward nationalistic
cies of decline were heard as early as 154 B.C., six cen-
and protectionist policies that would constrain our ability
turies before the conventional date for the fall of Rome.
to cope with the realities of growing international inter-
In the prime years of decline-A.D. 300 to 450-the Ro-
man economy remained healthy.
86
ILLUSTRATIONS BY JOHN CRAIG
MARCH 1990
THE ATLANTIC MONTHLY
As one historian concludes, "The 'Rome' that 'de-
global power. But it chose a policy of isolationism that
clines' is thus not one single thing but many things and
made it a secondary player in world political events.
the search for any one cause across the board is futile. So,
American influence was less in 1928 than in 1918, but not
too, is the search for any one period in which all aspects
because America had lost power.
of Roman civilization were much changed." The eastern
half of the Roman Empire survived, under increasingly
What the Numbers Say
precarious conditions, for nearly a thousand years after
Roman armies could no longer protect the western prov-
HERE IS NO QUESTION THAT THE UNITED
inces. The Western Empire was not the victim of a rising
challenger state. It succumbed to the long-term pressure
T
States is less powerful at the end than it was in
the middle of the twentieth century. Even by
of invading migratory tribes. "In any straight fight they
conservative estimates, the U.S. share of glob-
could, and they usually did, defeat superior
al production has declined from more than a
numbers of Germans," one historian
third of the total after the Second World
writes. "What they could not do was
War to a little more than a fifth in
cope indefinitely with this kind
the 1980s. The United States was
of enemy."
strengthened by the war; the
Power is a relational con-
other great powers were dev-
cept. It depends partly on
astated. In that sense
what is happening at
American economic pre-
home, but even more on
ponderance in the 1950s
what is happening out-
was anomalous, like being
side. An empire may last
the boy on the block who
for a long time after as-
dominates while others
pects of its civilization
have the flu. American
begin to decay at home,
preponderance was
as long as outside chal-
bound to erode as other
lengers are weak. Al-
nations regained their
though civic corruption
economic health.
and a loss of administra-
Paul Kennedy argues
tive and military efficien-
that the U.S. decline has
cy may have allowed no-
been continuous: "The
madic tribes to sack
U.S. share of world GNP,
Rome, Rome's external
which declined naturally
challengers were weak.
since 1945, has declined
The "fall" in 476 came
THE AMERICAN SITUATION IS
much more quickly than
some two centuries after
it should have over the
the onset of major corrup-
tion in the government
DIFFERENT FROM THE MOST FREQUENTLY
last few years." The po-
litical scientist David
and deterioration in the
CITED CASE, THAT OF BRITAIN.
Calleo is even more alarm-
military.
EXPLAINING BRITAIN'S DE-
ist: "Thanks to economic
A nation may also de-
strain and mismanage-
cline relative to others
CLINE HAS BECOME ALMOST AN
ment, relative decline has
because it chooses not to
INDUSTRY IN ITSELF.
begun to turn absolute."
use the resources of pow-
But the figures do not
er at its disposal. For ex-
support the case for a
ample, France in the early eighteenth century allowed its
continuous decline in America's share of world product.
naval and fiscal resources to stagnate relative to Britain's;
Charles Wolf, of the Rand Corporation, points out that
but, unlike Spain's decline in the previous century, the
"if a more appropriate and representative base year is
French one was not permanent. The stagnation in French
used-say, the mid-1960s (or even a pre-World War II
war potential did not represent an absolute decline, as
year such as 1938)-the remarkable fact is that the U.S.
the subsequent military exuberance under Napoleon
economy's share of the global product was about the same
proved. Yet in terms of basic resources, the political sci-
'then' as it is 'now': about 22% to 24%."
entist Charles Doran writes, "France's ability to expand
Some estimates of the U.S. share of world product date
militarily was greater in 1750 than it would be in 1805."
the fading of what we might call the Second World War
To take a more modern example, the United States
effect somewhat later than Wolf does, but the result is
emerged from the First World War a potentially dominant
the same. For example, the economist Herbert Block es-
MARCH 1990
87
THE ATLANTIC MONTHLY
timates that the United States accounted for about a
The ratio of America's defense burden to its share of
quarter of world product at the beginning of the twenti-
world product was actually lower in the 1980s than in the
eth century, and about a third in 1950. The postwar U.S.
1950s. Indeed, contrary to the theory of imperial over-
share declined until 1974 and then stabilized. The
stretch, the U.S. defense burden today is lighter than it
American Council on Competitiveness similarly finds
was in the 1950s, and the political burdens of U.S. com-
that the U.S. share of world product has held constant at
mitment are lighter today than they were in the 1960s,
23 percent since the mid-1970s. The U.S. share of the
during the Vietnam War.
product of the major industrial democracies actually in-
This does not mean that the current defense budget is
creased slightly in the 1980s. The Central Intelligence
wisely constructed. On the contrary, the buildup of the
Agency, using numbers that reflect the purchasing power
1980s was hasty and enormously wasteful, and the gov-
of different currencies, shows the American share of
ernment has not made enough hard choices in cutting
world product increasing, from 25 percent in
back the procurement of unnecessary weap-
1975 to 26 percent in 1988.
ons systems. Given the changes in
Such numbers call into question
world politics, a strong case can be
the view that American decline
made for allocating more re-
has been either precipitous or
sources to international institu-
continuous. They suggest in-
tions, communications, and
stead that the Second World
assistance to critical coun-
War effect lasted about a
tries. If such expenditures
quarter century or so and
that the American posi-
are necessary, the country
can afford them. Unlike
tion thereafter stabilized.
Most of the decline had
the historical examples-
or the Soviet Union to-
worked its way through
day, where defense ex-
the system by the mid-
1970s.
penditures constitute
some 17 percent of
According to the over-
GNP-the United States
stretch theory, a great
does not fit the theory of
power is likely to find
imperial overstretch.
that it is spending much
more on defense than it
did two generations earli-
The Decline
er, yet its world is less se-
of British Power
cure. But American num-
OME CRITICS ARE
bers do not fit the theory.
Even after the Reagan
THE POPULAR BELIEF THAT
Administration buildup,
S
skeptical of such
aggregate mea-
the current U.S. defense
BRITAIN WAS SUFFERING FROM IMPERIAL
sures and prefer
outlay is about six per-
historical analogy. The
OVERSTRETCH PREVENTED BRITAIN
cent of GNP; in the late
American situation, how-
FROM INVESTING AS WELL AS IT MIGHT
ever, is different from the
1950s it was about 10
most frequently cited
percent.
HAVE IN THE RESOURCES OF POWER THAT
case, that of Britain. Ex-
Furthermore, the Unit-
ed States defense burden
COULD HAVE SLOWED DECLINE.
plaining Britain's decline
has become almost an in-
is not at all like those of
Spain and France in their last days of grandeur.
dustry in itself. A long list
of domestic causes has been adduced, and has been in
Philip II's Spain devoted three fourths of all
the making for a long time. As early as 1898 Henry Ad-
government expenditure to war and war debt.
The France of Louis XIV and the Russia of Peter
ams believed that "British industry is quite ruined." But
the Great appear to have devoted 75 and 85 percent re-
he also believed that "Germany has become a mere prov-
ince of Russia." In 1900 his brother Brooks Adams wrote
spectively of their revenues to war and the military estab-
lishment. In the United States today about 27 percent of
that since 1890 "an impression has gained ground that
England is relatively losing vitality, that the focus of en-
the federal budget is spent on defense (including veter-
ans' benefits). And unlike the historical examples,
ergy and wealth is shifting, and that, therefore, a period
America's overseas commitments do not involve the per-
of instability is pending." He blamed British lethargy and
high living, in part, and pointed to the Boer War as an in-
manent occupation and control of conquered territories.
dication that Britain was no longer willing to accept casu-
88
MARCH 1990
THE ATLANTIC MONTHLY
alties in war. Of course, that notion was soon disproved
the Atlantic and the Pacific was also shifting, because of
by the enormous British losses in the First World War.
the growing strength of both the United States and Ja-
In fact, the First World War showed Britain to be an
pan. By the turn of the century British planners felt they
impressive power. It had not only manpower but also in-
could no longer afford a navy that dominated the Pacific
dustry capable of being mobilized for war, overseas in-
and the Western Hemisphere as well as home waters.
vestments that could finance the purchase of U.S. tech-
Thus Britain signed an alliance with Japan and appeased
nology and war supplies, and a navy large enough to
the United States with a number of conciliatory mea-
ensure control of the Atlantic. Britain could also call upon
sures, including accession to the Panama Canal, which
the resources of its empire. Of the 8.6 million members
further enhanced American naval strength by allowing
of the British forces in the First World War, nearly a third
the United States to shift its fleet quickly between
came from overseas (though four fifths of the expendi-
two oceans. Henceforth, as Aaron Friedberg, a political
ture was British). By 1918 Britain had the world's largest
scientist at Princeton, has shown, Britain applied its
air force and navy, and the empire had reached its maxi-
traditional two-power naval standard-having a navy
mum size. In 1921 both popular and informed opinion in
equal to those of the next two contenders-only to home
Britain agreed with General Jan Smuts, of South Africa,
waters.
that the British empire had "emerged from the War quite
A final external cause of the decline of British power
the greatest power in the world."
was the rise of nationalism, which helped to transform
Yet the war-or, more precisely, the thirty-year strug-
the empire from an asset into a liability. In 1914 London
gle with Germany-did more to hasten British decline
declared war on Germany on behalf of the entire empire.
than any other factor. Competing with Germany, rather
But long before post-Second World War anti-colonial na-
than possessing an empire, is what drove up defense
tionalism stripped away Britain's Asian and African colo-
spending. It is perhaps too simple to say, along with
nies, the "white" dominions of Canada, Australia, and
Woody Allen in Zelig, that "Britain owned the world and
New Zealand were resisting rule from London. By the
Germany wanted it." But if Bismarck and his successors
time of the Chanak crisis with Turkey, in 1922, London
had not unified the German states into a single Continen-
had discovered that it could not count on automatic
tal force after 1870 (with a population larger than Brit-
support from the empire. After 1926 British military
ain's), the British era might have lasted longer. It was
planners no longer considered the British Common-
Germany, not the pre-1914 empire, that overstretched
wealth to be a reliable basis for military plans. Common-
Britain.
wealth forces were at best a possible bonus. Yet, as the
British historian Corelli Barnett points out, in wartime
the continued existence of the empire "would pump
O
F COURSE, THE BRITISH ERA WOULD NOT HAVE
away from England the military resources she needed for
lasted forever. Nothing does. Early in the nine-
her own war in Europe." American Lend-Lease in 1941
teenth century Alexis de Tocqueville pointed out
provided those resources, but by 1945 "British power had
the enormous potential of the United States and Russia.
quietly vanished amidst the stupendous events of the
In 1835 the English statesman Richard Cobden declared
Second World War."
that "our only chance of national prosperity lies in the
timely remodeling of our system, so as to put it as nearly
as possible upon an equality with the improved manage-
T
HERE WERE ALSO IMPORTANT INTERNAL CAUSES
ment of the Americans." In 1883 the Cambridge histori-
of the decline of British power. Among the most
an Sir John Seeley argued that federation of the empire
important were the failure to maintain the pro-
was the only way that Britain would be able to compete
ductivity of British industry, particularly in new sectors,
with Russia and the United States, which were "on an al-
and to improve the nature and level of education. The
together different scale of magnitude." In 1878 the for-
two factors were related. British governing-class educa-
mer (and future) Prime Minister William Gladstone wor-
tion was really appropriate to a moment in history that
ried that America "can, and probably will, wrest from us
had already vanished, according to the economist An-
[our] commercial superiority."
drew Tylecote. Britons hardly thought at all of British
In short, Britain's relative power was bound to decline,
power in terms of industrial competitiveness, science,
because of a number of external factors. The spread of
technology, or strategy. The nation found the imperial al-
industrialization raised new economic and military com-
ternative "more attractive than the 'industrial' one, be-
petitors. The growing strength of Germany meant that
cause its upper class was dominated by a landowning aris-
Britain would no longer have a free ride on the Continen-
tocracy which set the tone for the rest."
tal balance of power. The spread of railways meant that
While Britain continued to produce entrepreneurs who
Britain would no longer have as much time to raise inter-
responded to market incentives, they focused on the sta-
ventionary forces and transport them to the Continent.
ples of textiles, shipbuilding, and light industry rather
The distribution of power in the regional balances of
than the new science-based industries. Britain failed to
MARCH 1990
89
THE ATLANTIC MONTHLY
invest in the latest technology in such critical new indus-
tries as chemicals, electricity, and precision engineering.
commodities because this now required a scientific bas
As the British writer David Marquand has argued, "The
which did not accord with her humanistic snobbery. S
most sophisticated sectors of the late-nineteenth and ear-
instead she invested her savings abroad; the economy de
ly-twentieth centuries depended far more on applied sci-
celerated, the average level of unemployment increase
ence.
... It was in exports from these that Britain was
and her young people emigrated."
most conspicuously outclassed." In 1913 Britain con-
Finally, Britain's domestic political process did not a
trolled two thirds of world exports of manufactures in de-
low the full transformation of Britain's potential resource
clining sectors (like textiles), but only one fifth of world
of power into effective influence. Aaron Friedberg COI
exports in expanding sectors (like chemicals). Until 1902
vincingly shows that the problem was not complacency
Britain had no public secondary-school system, despite
concern about decline was widespread. At the turn of th
public awareness of German educational superiority.
century the press expressed concern that England lagge
Britain had seven universities, to compare with twenty-
in scientific organization, applied technology, and work
two in Germany and nearly 700 colleges and technical
training. But the debate was confused, with little agree
schools in the United States.
ment about what measures would be useful or what re
The increasing economic importance of overseas in-
sponses appropriate. While a return to primacy was in
vestment was transforming Britain into a rentier society,
possible after 1900, and Britain did seek out new allie
in which financial interests maintained an overvalued
after the Boer War, the British elites could have don
currency detrimental to British industry. Overseas invest-
more to preserve Britain's position and to prepare fc
ment rose from 0.2 percent to 5.2 percent of GNP from
coming challenges.
1870 to 1913. By 1900 eighty percent of the capital issues
British Conservatives, however, believed that Britai
on the London market were for overseas investment. By
was financially stretched to its limit, and feared the ecc
1914 Britain owned 43 percent of the world stock of in-
nomic effects of raising income taxes. They failed to in
vestment overseas. As the Nobel laureate Sir W. Arthur
vest in the forces needed to maintain global naval su
Lewis put it, "She could not pioneer in developing new
premacy, and disguised that fact from the public b
keeping the old slogans. Thus the empire became de
THE TONE
It wasn't a bell, it was a steady tone.
We folded our papers and closed our books.
instructed to sit Indian-style on the floor.
Raised the wood lids of our metal desks.
To press our faces into our open, knitted hands.
To keep eyes closed. To wait.
Books placed inside, pens lined neatly in the tray.
Lunches taken out, necks of the brown bags
And the mindless way we executed our submissio
not running as we fled down corridors
rolled and sweaty in our fists. Mrs. Flint
blowing the whistle that hung always around her neck.
for our lives, not wriggling, not poking
Lining, in alphabetical order according to surname,
each other, not spitting or talking or committing
first name in the case of there being two Smiths,
small crimes of recess mayhem, not rehearsing our
along the east wall, away from the windows.
willful farts, not wadding our sandwiches into balls
Us reciting our names, her checking the roster.
and winging them against the cinderblock, not
Her opening the classroom door and us waiting
asking to be let upstairs to pee or what to do
for her to step to head the line. Shuffling forward
when the flash came that would reveal to us
like a many-legged worm. Peter Zeigler delegated
the bones in our hands through our downed eyelid
to close the door and shut the lights. Merging
not asking what comes later not asking anything
behind homerooms 212 and 214, single file against
of proof or purpose beyond the insistent tone.
both sides of the hallway, using banisters
as we carefully descended the stairs. One flight
-Lucia Perillo
then the next, turning into a basement corridor
and a room without window or light. Each class
90
MARCH 199(
THE ATLANTIC MONTHLY
pendent on the good will of the new regional powers, the
come on armaments in 1914, while Germany spent 4.6
United States and Japan. Henceforth Britain had to avoid
percent, France 4.8 percent, and Russia 6.3 percent.
embroilment with more than one first-class power in
Other estimates place Britain ahead of Germany but be-
more than one region of the world at a time. Further-
hind France in its military burden.
more, Britain did not implement conscription (as the oth-
So why did Britain decide that it could not afford to
er major European powers had done by 1872) or pay for
maintain naval supremacy or an adequate Continental
an adequate army to help maintain the balance on the
expeditionary force? In large part because the adherents
Continent in the new age of rail mobilization. The 1906
of the prevailing economic orthodoxy believed in the
plan for 120,000 men to assist France proved woefully in-
negative effects of government spending, and they par-
adequate in 1914.
ticularly opposed raising income taxes. The popular be-
The British debate over trade was phrased in terms of
lief that Britain was suffering from imperial overstretch-
the polar extremes of protectionism and free
despite the lightness of Britain's defense
trade. Little attention was given to tem-
burden, at three percent of GNP-pre-
porarily protecting critical sectors or
vented Britain from investing as
forcing reciprocity on foreign
well as it might have in the do-
markets. Colonial Secretary Jo-
mestic and external resources
seph Chamberlain tried to
of power which could have
rouse his Conservative col-
slowed decline.
leagues to a more coherent
MASSACHUSETTS
Even if its leaders had
response, but his protec-
played their domestic
tionist scheme would
cards perfectly, however,
have made things worse.
Britain would have seen a
Not surprisingly, it at-
significant decline in its
tracted the support of the
power in the twentieth
least competitive ele-
century. A.J.P. Taylor
ments of British industry.
speculates that the im-
In any event, he wound
pressive growth of Ger-
up splitting his party.
man industry would have
Prime Minister Arthur
brought Germany to the
Balfour's moderate sug-
mastery of Europe if it
gestion of selective retali-
had not been for the First
atory tariffs to force for-
World War. The industri-
eign markets open was
alization of America,
lost in the ideological
Russia, and Japan was
crossfire over free trade,
bound to shrink Britain's
and little attention was
N
OT ONLY IS THE UNITED
influence. Moreover, na-
paid to the security impli-
tionalism was soon to
cations of the British lag
STATES MORE POWERFUL IN MORE WAYS
erode the empire. In a
in the most modern sec-
THAN BRITAIN WAS BUT THERE
sense, Britain rose to its
tors of industry.
ARE DIFFERENCES OF SCALE THAT
leading position because
Joseph Chamberlain
it was on the first wave of
was no more successful
SUGGEST THAT ITS
the Industrial Revolution
elsewhere in the security
POWER MAY PERSIST LONGER.
in a pre-nationalist era.
area. At a 1902 colonial
But it has always been re-
conference he failed to
markable that such a small
persuade the colonies to share the burden of naval costs.
country in Europe could control a quarter of the world's
His plaint that "the Weary Titan staggers under the too
people in the largest Western empire since Roman times.
vast orb of its fate" did not pry forth new resources. Nor
could he convince his colleagues that Britain's burdens
How the United States Is Different
were relatively light. In fact, the entire government bud-
get was only 15 percent of GNP (in modern Britain it is
HERE ARE AT LEAST FOUR MAJOR DIFFERENCES
nearly 45 percent). And although the Boer War created a
T
in the positions of power held by Victorian
deficit from 1899 to 1903, the budget was in surplus
Britain and modern America. The first is the
thereafter; the national debt in 1907 was not much higher
degree of predominance. Britain's resources of
than it had been in the 1880s. The historian A.J.P. Taylor
power in the mid-nineteenth century were most impres-
estimates that Britain spent 3.4 percent of its national in-
sive in naval force and manufacturing production. As the
MARCH 1990
91
THE ATLANTIC MONTHLY
Harvard political scientist Robert Keohane has written,
"Britain had never been as superior in productivity to the
most of the manpower, or as an act of American generos-
rest of the world as the United States was after 1945."
ity, it is hard to see our alliances constituting a similar
Nor is the twentieth-century United States as dependent
drain, particularly since the withdrawal of American
on foreign trade and investment as nineteenth-century
troops to home bases would save money only if the units
Britain was. Even during its heyday, around 1875, Britain
were also disbanded. Unlike Edwardian Britain, which
ranked third in military expenditure. Not only is the
had to leave its isolation and cast about for allies at the
United States more powerful in more ways than Britain
beginning of the century, the United States at the end of
was but there are differences of scale that suggest that its
the century must transform and update the successful
alliances with the great industrial democracies which
power may persist longer. Today it requires a united Eu-
rope, not just a united Germany, to challenge the United
have been critical to the global balance of power for the
past forty years.
States for global leadership. Britain, an is-
land about the size of Oregon, ruled a
A fourth major difference lies in the geopo-
quarter of the world. But, as we
litical challenges that the two nations
have seen, the empire quickly
face. Most important, in 1900 Brit-
fell victim to nationalism and
ain faced rising contenders in
ceased to be a reliable basis
Germany, the United States,
for British military plans.
and Russia. The nearest of
Second, at least since
those contenders, Germany,
1865 the United States has
had not only surpassed
been a single, con-
Britain in economic
tinental-scale economy
strength but also was be-
immune to national-
coming militarily domi-
ist disintegration. Today
nant and a threat to Brit-
American imports ac-
ain's supremacy on the
count for only 12 percent
Continent. America's ex-
of GNP, in contrast to the
ternal situation today is
British figure of 25 per-
different. Its principal
cent in 1914. At the peak
military adversary, the
of its power, in the 1870s,
Soviet Union, is the pow-
Britain's economy was
er with a bad case of over-
only the third largest in
stretch. Not only is the
the world, and it fell to
USSR confronted with an
fourth place in 1914.
unstable Eastern Europe-
However, the American
an empire, but the Soviet
GNP today is much larger
W
economy has suffered a
than those of the nearest
ILL THE UNITED STATES
serious deceleration of the
competitor states. One
COPE BOTH WITH ITS INTERNATIONAL
growth that previously al-
should keep such differ-
lowed expansion. In ad-
ences of scale in mind
COMMITMENTS AS THE NATION
dition, Soviet defense is
when considering theo-
THAT OTHER NATIONS LOOK TO FOR
often estimated to cost 15
ries of overstretch.
percent of GNP, and some
Third, for all the loose
LEADERSHIP AND WITH ITS
estimates place the costs
talk (and looser defini-
NEED FOR DOMESTIC REFORMS?
of defense and empire at
tions) of an American em-
more than 20 percent of
pire, there are important differences between Britain's
GNP-about three times
territorial empire and America's areas of influence.
as high as the relative burden on the U.S. economy. The
Americans have more choice about types and levels of
British analogy would be apt if Kaiser Wilhelm II's Ger-
defense commitments than Britons had. There are more
many, rather than passing Britain in economic and mili-
degrees of freedom for all parties. American trade is not
tary strength, had been declining and looking for the
drawn in the same degree to unsophisticated markets. By
chance to take a breathing spell from its military buildup.
1913 two thirds of British exports were going to semi-in-
None of the other major world powers is now overtak-
dustrial and nonindustrial countries. Some modern histo-
ing the United States in both military and economic
rians argue that the territorial empire became a net drain
strength. Although Western Europe has a skilled popula-
on Britain. Whether one looks at NATO as a forward de-
tion, a robust GNP, and the improved Common Market
fense of American borders, in which Europeans provide
coming in 1992, few observers think that European inte-
gration will progress soon to a single government or a sin-
92
MARCH 1990
THE ATLANTIC MONTHLY
gle security policy. Similarly, China might be a potential
Leadership
rival of the United States' over a much longer term, but
China's human and technological infrastructure is much
VEN A STRONG ECONOMY WILL NOT PREVENT
less developed than that of the United States or even the
Soviet Union. And while many Americans believe that
E
the United States from following foolish poli-
cies. Political leadership is necessary to explain
Japanese economic strength is a greater challenge than
why certain policies-whether these are bud-
Soviet military power, economic competition is not a
get deficits, protectionist measures, or the curtailment of
zero-sum game, where one country's gain is its competi-
foreign aid-can lead to self-inflicted wounds. Effective
tor's loss. Thus far Japan has chosen the strategy of a
influence requires a willingness to spend on foreign af-
trading state rather than of a military power. There is no
fairs. Despite a doubling of the national economy from
current analogue to the Kaiser's Germany. Even a reunit-
1960 to 1980, by the latter year the United States was
ed Germany would possess an economy only one-fifth
spending less in real terms on elements of the budget di-
the size of that of the United States.
rectly concerned with foreign affairs: defense, foreign
aid, information, and representation. Defense expendi-
tures increased in the 1980s, but American outlays for
T
HE MORE INTERESTING COMPARISONS BETWEEN
other aspects of international affairs declined from $12.7
Britain and America lie in the domestic realm.
billion in 1981 to $10.5 billion in 1988. This reduction
Here there are legitimate causes for concern. Pro-
flies in the face of the growing importance of economic,
ductivity growth in the American economy has fallen to
information, and institutional resources in maintaining or
an annual rate of 1.4 percent from an average annual rate
creating national power. Some might ask why we should
of 2.7 percent in the first two postwar decades. In the
invest in power. Why not simply consume happily, like
1980s net national savings fell to an all-time low of 2.0
the Swiss or the Swedes? The answer, of course, is that
percent, and gross investment, at 17 percent of GNP,
the United States is too large to take a free ride in the in-
was at only about half the Japanese level of 30 percent.
ternational system. It is in this country's interest to exer-
Civilian research and development accounted for 1.8
cise an influence in the world commensurate with its size
percent of GNP, while in Germany and Japan it account-
and its stake in the spread of open societies-which is to
ed for 2.6 and 2.8 percent. Foreign inventors received al-
say, those that respect human rights-and open econo-
most half the U.S. patents granted in 1987, as compared
mies. It is important to emphasize that such leadership is
with a third a decade earlier.
a function primarily of size, not of America's hegemonic
Even here one should be wary of too simple compari-
mission to lead the world. Leadership is not hegemony.
sons to Britain. Whereas Britain fell behind in the leading
It means taking responsibility for one's long-term politi-
sectors of chemicals and electricity at the turn of the cen-
cal and economic interests.
tury, the United States remains one of the leaders in such
"We can't afford it" is the typical argument in a time of
critical new sectors as information processing and bio-
budget deficits, whether it is aid to Poland, investment in
technology. The United States attracts capital from the
education, or fighting drugs. But if the United States
rest of the world; Britain exported it. Further, whereas
were to follow policies that cut domestic consumption by
emigration drained talented Britons from their home-
the two percent of GNP by which it rose in the past dec-
land, immigration continually infuses the United States
ade, the richest country in the world could afford both
with new labor and energy.
better education at home and the international influence
Perhaps the most interesting domestic comparison,
that comes from an effective aid and information program
however, is political. Will the United States cope both
abroad. What is needed is increased investment in "soft
with its international commitments as the nation that
power," the complex machinery of interdependence,
other nations look to for leadership and with its need for
rather than in "hard power"-that is, expensive new
domestic reforms? The British experience suggests cau-
weapons systems. As the Republican economist Herbert
tion. The political processes of Victorian democracy
Stein remarks, "It is time to ask the 86 percent of the
tended to fragment the national debate. Conservative
American people who are not poor to give up some small
politicians failed to invest adequately in the future.
part of the increase in their consumption in order to forti-
There was a widespread reluctance to raise the level of
fy the national security, to provide more adequately for
taxation, which was low. Here the analogy with modern
the future growth of the national income, to improve the
America becomes more apt: the United States is the
lot of the poor among us."
world's richest country, but it acts poor. Although Amer-
ica is one of the most lightly taxed of the industrial coun-
At home, leadership means pointing out that the
American economy can easily afford to invest in interna-
tries, the American public seems unwilling to invest ade-
tional affairs-by paying our dues to international institu-
quately in the future, and political leaders have done
little to stem the flow of resources from investment to
tions, by providing aid to critical countries like Poland,
and by maintaining open international markets-if
consumption in the 1980s.
Americans have the political will to do it. Without such
MARCH 1990
93
THE ATLANTIC MONTHLY
leadership the American ability to convert potential pow-
er into actual influence is correspondingly diminished. A
diture might merely increase domestic consumption rath-
er than investment.
leader who wishes to maintain American power at the
Although the next decade will require Americans to
turn of the century must follow a strategy that rebuilds
the domestic bases of American strength while also in-
cope with the debts of the 1980s, there is no reason why
vesting resources to maintain international influence.
the world's wealthiest country cannot pay for its interna-
tional commitments and its domestic investments.
Both elements are necessary.
Americans can afford both social security and internation-
Although the United States faces major social, eco-
al security. The ultimate irony would be for Americans to
nomic, and political problems, it has faced equal or larger
perceive their country's short-term problems as indica-
problems in the past. One key to coping successfully
with these problems is to remain open to the outside
tors of long-term decline and respond in a way that cut
them off from the sources of their international influence.
world and adaptable to change. Social flexi-
bility, class fluidity, and economic
As has happened many times before, the mix
of resources that produces international
openness are advantages that Amer-
ica has over Europe and Japan. It
power is changing. What is unprec-
would be ironic if fears of de-
edented is that the cycle of hege-
cline led to policies of protec-
monic conflict, with its atten-
tionism, resistance to for-
dant world wars, may not
eign investment, and
repeat itself. The United
curtailment of immigra-
STATE
States at the end of the
tion. Though there are
century retains more tradi-
few signs of long-term
tional resources of power
economic sclerosis so far,
than any other country
such policies could help
has. It also has the ideo-
to bring it on. Then
logical and institutional
again, if the anxiety over
resources to retain its
competitiveness leads to
leadership in the new do-
mains of transnational in-
new policies on saving,
research and develop-
terdependence. In that
ment, and education
sense the U.S. situation
which are addressed to
at the end of the twenti-
the higher standards re-
eth century is totally dif-
quired by an information-
ferent from that of Britain
based economy, Ameri-
at the century's begin-
ca's capacity to reinvent
ning. The problem for
itself may again prove a
American power today is
hidden strength.
F THE ANXIETY OVER COMPETI-
not new challengers for
TIVENESS LEADS TO NEW POLICIES ON
hegemony; it is the new
challenge of transnational
MERICANS
SAVING, RESEARCH AND DEVELOPMENT,
interdependence.
A
ARE
right to be con-
AND EDUCATION, AMERICA'S
A post-Cold War strat-
cerned about the
CAPACITY TO REINVENT ITSELF MAY AGAIN
egy for managing the
changing role of the Unit-
transition to complex in-
ed States in the world.
PROVE A HIDDEN STRENGTH.
terdependence over the
However, seeing the
next decades will require
problem as American decline and drawing analogies to
that the United States
Britain is misleading, for this directs attention away from
commit sufficient resources to sustain the geopolitical
the real problems arising out of long-term changes in
balance, maintain an open attitude toward the rest of the
world politics and suggests remedies that would weaken
world, develop new international institutions, and re-
rather than strengthen America's standing. Withdrawal
store the domestic sources of American strength through
from international commitments would reduce U.S. in-
major reforms and large-scale investments. The twin
fluence without necessarily strengthening the domestic
dangers Americans face are complacency about the do-
economy. Indeed, recent experience suggests that what
mestic agenda and an unwillingness to pay whatever is
the United States thereby saved in international expen-
necessary to maintain their capacity for international
leadership. Neither attitude is warranted.
94
MARCH 1990
Remarks by Michael J. Boskin
at the City Club Forum
Wednesday, March 7, 1990
Thank you for that kind introduction, Elizabeth. It is
indeed a pleasure to be here at the City Club of Cleveland. It's
something we've been trying to arrange for a several years. I'm
delighted to be here and I thank you for your gracious
hospitality. The City Club of Cleveland, as I understand it, has
been providing a public speaking forum free speech and expression
for more than three quarters of a century. You are to be
commended for that impressive achievement, and when I look down
the list of people who have spoken here, it is enormously
impressive. Among your previous speakers is my boss, the
President of the United States, who has spoken here on five
separate occasions. Your Director, Alan Davis, tells me that he
was not only a classmate of President Bush at Yale, but played on
the same baseball team. The only thing I've not managed to learn
is what Alan's batting average was at Yale. (comment from the
audience "It was better than the President's") I won't repeat
that when I go back to Washington. So it's a pleasure to be here
and see some old friends and make some new ones. I have learned
a lot about Cleveland. It's the home of the Rock and Roll Hall
of Fame. It is also the home of a terrific football team which
almost made it to the SuperBowl. And I suppose the Denver
Broncos wished that the Browns had made it to the SuperBowl.
Let me try to do three separate things that are closely
related. First, give you my perspective-- as the President's
2
economic adviser--about where the United States economy is, how
it got there, and where it's going. Second, give you some
perspective on what the Administration is trying to accomplish--
the goals and principles of economic policy to promote an
improved standard of living for Americans. And third, let me
share with you some experiences, some intellectual excitement and
just some plain wonder at the events of the last year,
particularly those in Eastern Europe.
Let me begin there. The Berlin Wall is coming down, and
freedom is rising up. Eighteen months ago I was a professor
teaching principles of economics the beginning economics course-
-to freshmen at Stanford University. Now I find myself teaching
principles of economics to Prime Ministers and Finance Ministers
from Eastern European countries, whose newly emerging societies
are trying to make the painful and important steps to market-
oriented economies, bringing the hope of a better economic life
to their citizens. What has happened is simply extraordinary
what has happened--on a personal, societal, and global scale.
But I want to begin by making some very simple statements of
fact about the American economy. I wish to do so because we hear
an amazing amount of negative news and information, and I think
we have to just set the record straight.
First the American economy is the largest, most productive
alved
economy in the world. With less than 5 percent of the world's
population, we produced well over a quarter of the total output,
speed
in
GNP, in the world.
most aling in
3
Our economy is 2-1/2 times the size of the next largest
economy, which is Japan.
The average standard of living of Americans-- GNP per
capita-- - is far above that of those in other major industrialized
economies fully one-third higher than that in West Germany or
Japan. We start from a position of great strength.
Second, we're in the 87th month of the longest peacetime
expansion in the entire history of the United States. (To be a
little more accurate, the data only go back to 1854 economic
historians tell me it's unlikely we had this long an expansion
between 1776 or 1789 and 1854.) Some people say that because an
expansion is long, it must end soon. There is no economic theory
and no empirical evidence for that view. Economic expansions do
not come with a pre-set expiration date. The economy has been
growing more slowly starting in late 1989, but we expect it to
improve as this year progresses.
In this expansion--which started at the end of 1982--we've
created 21.6 million jobs in the United States. That's far more
than the jobs created in all the advanced economies of Western
Europe, Canada, and Japan combined, despite the fact that they
have combined a much larger population than do we.
Personal incomes--after adjusting for inflation and taxes--
have risen substantially.
The unemployment rate has fallen substantially. Exports,
which were a major problem the earlier part of this decade, have
risen. Productivity growth, which had been virtually nonexistent
maturials
4
in the 1970s has rebounded partway to the robust levels of the
1950s and 60s, especially in manufacturing. And we've set the
stage in a long expansion by preventing inflation from
accelerating for the first time in any expansion since World War
II for better times ahead for continuing this expansion and a
better decade in the 1990s.
Let's take a look at 1989, a year in which economic growth
slowed to around 2.5 percent from more rapid growth in 1987 and
1988. We added another 2.5 million jobs.
Exports rose to an all time high--$589 billion. The United
States once again became the world's leading
exporter.
Real disposable income, income after taxes and inflation,
rose 3.6 percent last year.
The unemployment rate averaged for all of 1989 5.3 percent.
It also ended the year at that level and is at that level today--
a rate we hadn't seen since the early 1970s. And those job
opportunities have spread widely. The unemployment rate for
blacks is the lowest since the early 1970s; for teenagers, the
lowest since the early 1970s; for Hispanics, the lowest since we
started keeping separate data for Hispanics in 1980--and
undoubtedly for a considerably longer span of time than that.
Women have made major economic progress in the last six or seven
years. The unemployment rate for women has been no higher than
the unemployment rate for men for the first time since World War
II. And at a time when many more women entered the labor force,
5
and were able to find jobs, about a quarter of the pay gap
between men and women was eliminated.
Those are impressive achievements. That's a strong economy
growing stronger. I'll come back to the short-term and longer-
term prospects and what we need to do to keep our economy growing
to provide rising living standards for our population in a
moment. But I want you all to mull those facts, because somehow
in the general discussion of where we are in the United States,
they're not getting out there.
We cannot, however, take continued economic growth for
granted. We cannot become complacent. The Administration's
foremost priority is to sustain the highest possible rate of
economic growth. That isn't just an abstraction. Economic
growth requires movement on many fronts, but it makes action on
many more social and private goals attainable. Economic growth
is how we create rising standards of living for the bulk of the
population. How we develop the resources to uplift those most in
need. How we provide economic and social mobility to our
citizens. How we leave a better legacy to our children. And how
we maintain America's leadership in the world.
Thus, our primary
priority is to make sure we achieve the highest possible
sustainable rate of growth of the economy's potential output and
make sure the economy operates at its potential, not below it.
We've establish some principles that we use in the Administration
to try to achieve these goals. In our system of checks and
balances and divided system of government, it is not just the
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Executive Branch that sets economic policy. Congress has a major
say in a variety of areas. We have an independent Federal
Reserve, and so on. But let me just say a word or two about our
principles with some examples. Our principles for monetary,
fiscal, trade and regulatory policy are designed to make sure
that the private sector of the economy--the engine that drives
growth--will continue to create jobs, expand opportunities,
increase productivity and provide greater opportunities for
Americans.
We support a monetary policy by the Federal Reserve that
sustains growth, while predictably controlling inflation.
Our budget policy is directed to turn the tide, to take the
Federal Government which for too long now has been a chronic
borrower draining the Nation's scarce saving pool, thereby
raising interest rates and the cost of capital to our businesses,
dampening investment and detracting from economic growth, into a
supplier of capital to the U.S. capital market by protecting the
integrity of the projected social security surpluses, moving
toward a balanced budget outside the social security system, and
freeing up resources with those projected social security
surpluses to reduce the national debt, lower interest rates,
expand investment, spur economic growth and a raise standards of
living.
It's not just the size of the deficit that determines the
fiscal contribution to economic growth. It's also how we tax,
and how wisely and well we spend. And there we have some
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principles as well. We believe we need a tax system that gets
out of the business of distorting incentives to the private
sector of the economy; make sure that we maintain incentives to
invest, to innovate, to save and to work. We support the
principle of low tax rates on a broad base that was enacted in
1981 and extended in the tax reform of 1986. We see some
problems with our tax code, in particular on some of the capital
formation issues. We have a research and experimentation tax
credit which is renewed every year by the Congress. Research and
development is a long-term process and if you're going to get an
idea, innovate, develop a product, bring it to market, it's going
to take a lot more than one year's tax credit to get you to do
that innovation. We want to make that R & D tax credit
permanent. We believe that a capital gains rate reduction
restoring a differential for capital gains will spur
entrepreneurial activity, increase risk-taking, and investment,
spur economic growth, create new industries, new jobs, and help
revitalize important sectors of our economy. There are those who
argue that this is a tax break for the rich. That's a silly way
to look at it. This is not a rich/poor issue; it's an America
issue. It's investing in the growth of our economy.
We've proposed an innovative new tax incentive for family
saving for pre-retirement objectives that respects the need not
to worsen the budget deficit.
We also believe in carefully targeted tax incentives to help
people in need. For example, in day care. There are those who
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propose a vast new middle class bureaucracy-controlled, state-run
or mandated day care system with no flexibility or choice for
parents. We think that's unwise. We think the role of the
Federal Government should be to target those funds to the people
at the bottom, those most in need to provide them the opportunity
to enter the marketplace successfully, earn a living, get on that
ladder of opportunity, and we want to do so in a manner that
gives them dignity and choice about how to do it.
On the spending side, its not also just how much the Federal
Government spends (and it does spend a lot--$1-1/4 trillion is
what we propose for next year). We're being criticized for not
proposing enough. Yet, that's more than the entire GNP of all
but a few countries. We're trying to tilt that spending more
toward investing in the future. The Federal Government must
finance basic research and development because no private firm
has an incentive to undertake research which would be broadly
applicable, as all the returns would not be privately
appropriable. So we propose a record high R & D budget of $70
billion.
We think we should be spending a lot more on preparing
disadvantaged children for effective learning and have proposed a
$500 million expansion of Head Start. We think we should be
spending more on improving aviation infrastructure and have so
proposed, and I can go on and on.
But we don't think we ought just to spend money on problems.
We believe that many national problems do not require Federal
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spending, but may require Federal leadership to galvanize the
nation. A very good example is our elementary and secondary
education systems. This is an immensely important concern for
the future of our economy, as well as the simple decency of
quality education for our children. We face an increasingly
competitive world economy--an economy where in the future our
workers are going to need more skills and the ability to learn
new skills throughout their lifetimes. And yet we see
international comparisons on test after test that the performance
of the kids in our elementary and secondary schools is not
stacking up. The United States total spending per pupil on K
through 12 education is more than any other industrialized
country except Switzerland. We are not getting our money's
worth. We need to change the focus from how much we spend to
what we get out--to the performance of our kids Now there may
be times where spending more is necessary, whether at the Federal
level, for example for Head Start to prepare disadvantaged
children for effective learning, or at the state and local level,
but that should not detract from the more fundamental issue: we
need a fundamental restructuring of our education system.
We simply cannot remain a great nation, a growing, vital
world leader, with a second-class elementary and secondary
education system.
So the President--for only the third time in
the history of the United States--called the nation's Governors
together last September in Charlottesville to work to establish
national performance goals for education. And these were
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announced last week in Washington by the President and the
Nation's Governors. A bipartisan effort--a fiscally Federal
effort, the Federal Government and the Nation's Governors, and we
are going to turn now to galvanizing the Nation to achieve these
goals--every student, every family, every school district, every
PTA, every Principal, every teacher, every parent, every school
board, every mayor and every Governor, as well as the Federal
Government.
In regulatory, legal policy, trade policy and the like, we
have similar goals. In regulatory policy, we want to avoid
unnecessary regulation, and deregulate where possible, for
example, natural gas at the well-head which we did last year.
But there are some areas where regulation is necessary--the
environment, for example. And there we try to achieve a sensible
balance between the need for a healthy environment and the
prerequisite of a sound, growing economy. There are those who
argue that a healthy environment and a sound economy are
incompatible. Extremists on both sides of that equation do not
believe that we can reconcile the needs of an improved
environment and a strong economy. I reject that notion. It will
be costly to clean up the environment. There is no free lunch.
But it can be done in a way that is cost-effective, that gives
workers and firms flexibility in achieving those improvements,
that does not force plants to shut down and workers to lose their
jobs because some bureaucrat in Washington sets a silly rule that
isn't applicable to a local situation. And we are working very
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aggressively with Congress to try to achieve landmark Clean Air
legislation that accords to these principles; a strong move
toward a healthier environment, but in a way that provides
maximum flexibility to firms and workers to minimize economic
costs to achieve those standards.
In trade policy, much attention has focussed recently on
trade frictions the United States has with various countries, but
especially Japan. The world's economic growth-that of the
United States, that of Japan, and most importantly, that of the
newly developing economies--has benefitted more than anything
else from the move toward an open liberalized world trading
system since World War II. It would be shortsighted and foolish
at best, dangerous at worst, if we don't press forward to open
markets everywhere and instead turn to closing them. We cannot
become more competitive by choosing not to compete. We need to
open markets, not close them. We need to press forward to lead
the world to freer and fairer trade, and we ask all other nations
to join us in that effort. Our primary objective, through the
Uruguay Round of the General Agreement on Tariffs and Trade, is
to bring fifteen areas which are not currently well covered by
our rule-based international trade system into that system, to
decrease those frictions and open markets world-wide.
Those are our principles. We believe that with those
principles, we fashion an important growth agenda. That growth
agenda means that we must invest more and more wisely. I've
mentioned at some of those kinds of investments, but let me just
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summarize. We must invest more in intellectual capital, in
research and development. That means more Federal spending, as
we have proposed on those basic scientific breakthroughs that no
single firm could hope to finance and generate enough return from
because the benefits will accrue so widely. It means a better
environment for private entrepreneurial and innovative activity
with the capital gains tax rate cut and the permanent R & D
credit and other legal and regulatory reforms such as a better-
balanced system of product liability laws.
We need to invest more in tangible capital-- in our
factories--in machines--and we must to make sure they are up to
date and equip our labor force with the best quality available.
And we need to invest more in our human capital. I've
stressed elementary and secondary education. We are also working
in innovative ways to try to eliminate adult functional
illiteracy.
It is only by attacking all those determinants of our long-
term growth that we have the best chance of making sure that our
economy continues to grow, providing a rising standard of living
for our population, retaining the flexibility and dynamism that
are its hallmarks, the foundation to continued economic
leadership.
Let me return finally to say a word or two about the
remarkable changes in Eastern Europe. We have seen a movement to
pluralism and democracy and toward a market-oriented economy in
many of the countries of Eastern Europe. Yet there is a lot of
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variation among them-some are further along; some have not made
many decisions, some are in the process of making them. This is
one of the most remarkable events of our time. I said before I
had been teaching principles of economics at Stanford. And in
that course, it is standard to spend a few days talking about the
centrally-planned, so-called command economies of the Soviet-type
in which Commisars, bureaucrats centrally plan what is produced,
and who works where. Instead of the economy producing what
people want, the people get what the central planners want them
to have. And in economics courses all throughout the country,
our students are taught how that system not only supresses
freedom of choice and opportunity, but that it just can't deliver
the goods. Well, I admit like everybody else, that I was
surprised by how rapidly these changes occurred. I always
thought they would, and I am delighted they have. We have made
a commitment, in conjunction with our allies, to provide some
assistance, some food aid, some financial assistance, some
technical assistance, but it's going to be a while before those
economies straighten themselves out. Many of those countries
haven't decided exactly what model they would like to follow.
Whether they want to become as market-oriented as the United
States, or far less market-oriented is still being decided. All
those economies start after four decades of repressive central
planning from very low standards of living, and while the great
hope they have is that with the freeing up of resources and the
market orientation that they are adopting they can get onto a
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highway to prosperity, they are going to be navigating bumpy
congested city roads while they get there. And so I think we
need to have not only a perspective of hope, optimism and support
for the peoples of Eastern Europe, but we also must temper it
with a proper sense of perspective. For example if Poland
achieves 4 percent real growth, it would take close to a half
century to catch up to where the United States is today. So they
have a long way to go. They are very bravely beginning to
adopt some remarkable changes, but precious few of the citizens
of these countries have experience or expertise--at the most
fundamental level--about working, producing or consuming in a
market-oriented economy. We need by example, by interchange, by
good will as well as financial support, to provide them an
opportunity to make that difficult transition.
I've laid out some of our principles, some of our policies,
some of our perspectives. I hope you will let us know when you
think we are doing a good job in achieving them. I hope you will
let us know when you disagree with them. And I hope you will a
special effort to keep me informed of how things are going here
and how you see the kind of job we are doing in Washington to try
to guarantee that our economy continues to grow and prosper.