Magazines: Why the Frowns?

One of the books I most enjoyed reading this summer was Richard Band's Contrary Investing for the '90s. In the book, Band describes one of his favorite "contrarian" indicators: See what Business Week predicts in its cover stories, then invest assuming the exact opposite will happen. When Business Week predicts a booming stock market, then it is time to sell short.

I went to the library to put Band's theory to the test. I found that Business Week doesn't do as many "trend" covers as it used to, perhaps because of silly predictions like the ones Band cites. But when it did a trend story in 1992, the message was the same: The recession will continue for a long time, and it isn't just a cyclical blip. On March 23, for example, Business Week's cover story was "Downward Mobility"; May 18, "The Economic Crisis of Urban America"; August 10, "The Global Economy: Who Gets Hurt."

As usual, Business Week is reflecting the conventional economic wisdom of the time. Current clichés about the economy can be summarized as follows: Deregulation ensured that the highfliers of the 1980s (the investment banker, the savings-and-loan executive, the corporate raider) created mountains of debt that led to the economy's current sorry state. Our basic industries are crippled; the barons of a once-mighty automobile industry groveled in Tokyo before the haughty Japanese. The greedy yuppies of the '80s will be punished for their conspicuous consumption in the '90s; they will have to trade their power suits for hairshirts, and their nightly feasts of Dom Perignon and caviar will be replaced by the beggar's banquet of gruel and cold carrion.

Symbolically, at least, the current recession is something deeper than just another change in the business cycle. Many Americans think that the recession reflects a more serious long-term decline in America's economic and social conditions. The question is why. As Wall Street Journal editor Robert Bartley observes in the August Commentary, the gloom that has fallen over America comes at an odd time. The Cold War has been won; the United States is the only superpower in the world. But the opinion leaders of America are preaching variations on a theme of defeat, despair, and moral exhaustion.

"How come decline is so much fun?" Bartley writes. "What roots make decline so precious that an attempt to bring good news results among some in an outpouring of ill-temper and even anger?"

One problem may be that people have an unduly gloomy picture of reality. A survey conducted by Brand Week and the New York advertising agency of Warwick, Baker, and Fiore (reported in the June 22 Future Scan) asked Americans to give their estimates of social and economic conditions.

When asked, "What percentage of people can be described this way?" respondents suggested that 48 percent of Americans use illegal drugs, 34 percent are homeless, 52 percent have been robbed, mugged, or burglarized, and 35 percent have spent time in jail—all numbers far higher than the actual statistics. (For example, no one knows how many homeless people there are, but even the homeless lobby has never claimed that more than 1 percent of the American population has no place to live.) "If the culture we believe we live in was actually the one we did inhabit," Brand Week commented, "we wouldn't need reformers, we'd need exterminators."

But, as Bartley suggests, this notion that America is finished is not just limited to the masses. It also enjoys rising popularity among the intellectuals. The March, May, and August issues of Commentary featured a debate on the topic "Is America on the Way Down?" Agreeing with this premise in the March issue was Edward N. Luttwak of the Center for Strategic and International Studies. Bartley disagreed.

To understand today's economic realities, Luttwak says, take two taxi rides from airports into the heart of major cities. The passenger who lands at Tokyo's Narita airport arrives in a gleaming, streamlined paradise, with efficient, happy workers eager to provide service. The traveler is then whisked downtown in a spotless taxicab driven by a "neatly dressed driver in white gloves." The passenger landing at New York's John F. Kennedy airport, in contrast, enters a dingy, decaying world full of dirty walls and surly, tip-hungry workers. He will then travel to Manhattan in a filthy bus or "a dirtier and more battered taxi, usually driven by an unkempt lout."

This hellish taxicab ride, says Luttwak, is emblematic of everything that is wrong with American commerce. Falling wages, foreign buyouts, trade deficits, and increasing productivity of European workers, says Luttwak, will ensure that America, by 2020, "will become Japan's Brazil, an amusing, sometimes unsettling country of vast expanses with a cheerful but impoverished third-world population."

For his part, Bartley believes that "the plain fact is that the United States is the wealthiest society in the history of mankind." Part of the reason people assume America is losing the economic race is that exchange rates falsely exaggerate the differences between national economies; what matters is the "purchasing-power parity"—the amount of goods a currency can buy. Judged by this standard, Americans, by being able to purchase more goods at lower costs, still have the world's highest standard of living; Germany ranks 10th and Japan 12th. Americans, for example, have one car for every 1.8 persons, compared to one car per 2.8 in France and one car per 4.2 in Japan.

Moreover, Bartley argues, trade deficits are no measure of the health of an economy; thriving 19th-century America routinely had trade deficits, while the Smoot-Hawley tariff of 1930 helped bring on the Great Depression—and trade surpluses. America in the 1990s, Bartley contends, should use free trade to lead the free world and pay little attention to "the gloomy apostles of decline, alarmed because goods and services move across lines someone drew on maps, trying to manufacture conflict out of the peaceful and mutually beneficial intercourse among peoples."

The May Commentary includes nine responses from think tankers about Luttwak and Bartley's articles. Eight agree with Bartley; only Francis Fukuyama sides with Luttwak. Boston University sociologist Peter L. Berger notes that the preference of most immigrants for the United States shows America's strength, not its decline. He notes that "people don't fall all over themselves in order to clamber aboard a sinking ship."

The American Enterprise Institute's Irwin M. Stelzer reminds Luttwak that New York (thankfully) is not America, and a traveler landing in Orlando, Dallas, or Phoenix would have a more pleasant experience. Moreover, Stelzer observes, the low prices resulting from deregulation and competition ensure that American airports are packed with customers; cartels and state ownership ensure that, for most Europeans, air travel is a luxury limited to the well-to-do. Stelzer's colleague, Ben J. Wattenberg, points out to Luttwak that the cab drivers in New York are not "louts" but entrepreneurs following the American tradition of working hard to make sure their children can climb the social ladder.

The people who side with Bartley in the Commentary debate are persuasive. A close examination of economic statistics shows that America has a far sounder economy than proponents of decline claim.

In the April 27 New Republic, James J. Cramer shows that American manufacturing is in much better shape than critics believe. Only two parts of the manufacturing sector are in trouble, says Cramer: automobiles and VCRs. The automobile companies, protected by quotas from competition, failed to close obsolete plants and spent far too much money expanding into questionable markets and buying back stock to artificially inflate share prices.

The U.S. electronics industry has shifted from making low-profit items to making high-profit ones; the Japanese and South Koreans may dominate the world television and VCR markets, but such export-oriented U.S. electronics firms as Hewlett-Packard, Intel, and Sun Microsystems make billions selling Europeans and Japanese workstations and microprocessors.

Moreover, American firms dominate other markets: chemicals, wood, paper, pharmaceuticals. Ronald Reagan and Paul Volcker, says Cramer, are responsible for increasing America's economic muscle: Reagan's 1981 crushing of the air-traffic controllers union cleared the way for corporate giants to close uncompetitive plants and eliminate thousands of unproductive middle-management positions. And the devalued dollar let American firms undercut European rivals, enabling Monsanto and DuPont to sell Germans nylon and rayon at a price lower than the German chemical industry could offer.

This competitive edge, says Cramer, gave many American corporations the chance to become global giants and ensures that American industries are far stronger than most pundits claim. "As a stockpicker who bets on the fortunes of American companies," says Cramer, "I can tell you that fears about an uncompetitive America exist more in print than in the marketplace."

American labor, observes Paul Starobin in the April 16 National Journal, shows similar unheralded strengths. The Urban Institute reports that the rich in America in 1990 were not the same as those in 1980; people in the United States climb and fall on the income ladder much faster than their European counterparts. In short, observes the Urban Institute's Isabel Sawhill, the cliché that the rich got richer and the poor got poorer in the 1980s is doubly false; the correct notion is that "the poor tend to get richer, and the rich tend to get poorer."

Nor are Americans necessarily overworked. They are able to retire earlier than in the past. In 1950, half of all American men over age 65 were in the labor force; today, under 20 percent are. And while the average number of hours each American works each year is increasing, the increase is "not because people are spending more time on the job, but solely because more women are now working at paid jobs."

Certainly, the American economy is in transition. The middle managers whose jobs consist of conveying information between low and high levels of bureaucracy are no longer necessary. Many big corporations, such as General Electric and Bethlehem Steel, discovered long ago that a lean corporate structure meant increased profits—or, in Bethlehem Steel's case, made the difference between survival and bankruptcy.

But the recession's fundamental lesson is that traditional American values matter. The old virtues of hard work, self-reliance, and independence are still true; the millions of laid-off workers who are forced to become entrepreneurs may well learn that working for yourself makes you happier—and, in some cases, wealthier—than working for someone else.

The recession will end soon. And when it does, we will once again learn that the dynamic, resilient nature of American capitalism ensures that the United States, despite all its problems, remains the most fruitful and productive nation on Earth.

Contributing Editor Martin Morse Wooster is a self-employed writer, editor, and researcher in Silver Spring, Maryland.