Defense Convert

The Endangered American Dream: How to Stop the United States from Becoming a Third-World Country and How to Win the Geo-Economic Struggle for Industrial Supremacy, by Edward N. Luttwak, New York: Simon & Schuster, 365 pages, $24.00

In a market economy, when an industrial sector declines, those working in it must decide whether to fight for one of the remaining niches or to seek opportunities in other, growing sectors. The demise of Soviet communism has forced this choice on aerospace engineers, shipbuilders, soldiers, and sailors, occasioning much hand wringing in the business pages of our newspapers and in the public pronouncements of our elected officials. There is one subsector of the Cold War establishment, however, whose fate has been ignored: the defense intellectuals and strategists who circulated through and around the U.S. national-security apparatus.

Edward Luttwak has been our nation's most prominent "bad boy" writer on strategy and military affairs, puncturing with equal relish the fatuities of arms controllers, politicians, and generals. Beyond his wit and his unusual willingness to annoy almost every constituency in the diplomatic and military world, Luttwak is distinctive for having developed, in his earlier book Strategy: The Logic of War and Peace, general principles of international strategy that may someday be required reading at military academies. (See "The Paradoxes of War," July 1988.) His decision to migrate out of the imploding defense-wonk industry and into the realm of economics and trade, marked by the publication of The Endangered American Dream, is a good indication of the promise and peril that "defense conversion" will have for our economy and culture.

Judging from this work, the peril dominates the promise. The book is an unstable mixture of cocktail-party declinism (complaints about foreign-born taxi drivers and the sluggishness of customs inspectors at Kennedy Airport), hackneyed business journalism, Kevin Phillips-style lamentations about economic inequality, partly digested economic theory, and a variety of rants and tirades on other subjects (many of which seem well taken but irrelevant).

What used to be Luttwak's virtues when he knew what he was talking about—nuance, subtlety, an appreciation of the limits of particular forms of reasoning—have become grotesque defects in The Endangered American Dream. The book is a thicket of self-contradictory polemics, with previously rejected arguments deployed opportunistically whenever the mood strikes. Each page is larded with so many qualifications, to-be-sures, and in-any-cases that the reader soon feels like a pinball, pinging and bouncing from one argument to another, never knowing when some obscure rule will convert a previously impassable barrier into an open gate.

Perhaps the most striking example of these defects is the rat's nest made of productivity, capital availability, competitiveness, and wages. Supposedly, the United States suffers from a shortage of long-term, "patient" capital, which leads to underinvestment in plant and equipment, which leads to low labor productivity, which leads to low wages, which leads to our impending "Third-Worldization" as other nations surpass our standard of living. Leave aside for a moment the amateurish mingling together of interest rates and maturities implied by the vague adjective patient, the failure to consider worldwide excess capacity in a number of industries as a deterrent to investment, the unsupported assumption that those who invest more in R&D or machinery are always right (Luttwak seems unaware of General Motors' 1980s debacle in wasting literally billions of dollars on unproductive factory automation), and a number of other factual problems with these assertions. The book's own facts contradict its scenario.

In a section called "Productivity Myths," Luttwak notes that U.S. manufacturing productivity in 1980-88, starting from a much higher base, actually grew at the same rate as Japan's and about three times as fast as Germany's. So the whole chain of reasoning described above, endlessly repeated throughout the book, and even used to attack the North American Free Trade Agreement (it would result in too much unskilled labor chasing too little "patient" capital and so drive down wages), must be wrong. But why the obsession with wages and, by implication, with the standard of living? Elsewhere, after all, Luttwak argues that smart industrial policy is bad for consumers and has nothing to do with a country's standard of living; rather, the aim is to recapture the "dignity" of meaningful employment and the "deep satisfactions of working in an exacting industry."

In any case, the supposed dearth of outside capital in the United States can't really be the main problem, since Ford Motor Company gets an extended thrashing (only partly justified) for failing to "properly" reinvest its profits from the initial success of the Taurus/Sable. Luttwak even refers to this episode as an example of "the cultural disease that ravages American industry." If this charge is just, why are the poor investors of America taking the rap for insufficient "patience"? Should they be entrusting their retirement nest eggs to culturally diseased incompetents?

While it is impossible in a short essay to thoroughly rehearse all of the internal inconsistencies and economic solecisms in The Endangered American Dream, the anti-free-trade screed contained in the early part of the book warrants a brief look because it exemplifies the pseudo-sophisticated reasoning endemic among our industrial-policy mandarins. It begins with the standard rhetorical ploy, equating anti-protectionist views with a religious belief taken on faith and impervious to evidence, then bemoans the supposed stranglehold of this blind ideology on our trade and commercial policies.

Now, there are few images more fantastic than the United States as a bastion of purist, unilateral free trade. There is no need to substantiate this point in detail by citing the vast array of American quotas, tariffs, subsidies, and other devices of market intervention; Luttwak himself cites them to argue that, since we're already impure, we ought to systematize our interventions. Neo-mercantilists who believe, against all evidence, that government bureaucrats are good at directing investment are in a poor position to accuse others of ideological blindness.

Luttwak's claim that industrial policy could be implemented competently and free of political favoritism involves a leap of faith wherein the believer actually looks for contrary evidence so as to cling to his doctrine more purely. Thus, he admits that under U.S. conditions Japanese-style policy won't work (page 111). He even admits that Japanese bureaucrats have screwed up frequently and spectacularly, misallocating resources and harassing upstart firms with good ideas (page 107); that the system of trade protections often works to the benefit of Japanese big business and not Japanese society as a whole (pages 91-92); and, most amazingly, that the Japanese probably have a lower standard of living as a result of industrial interventions, although he hedges here (page 110). Despite Luttwak's fuming at free-traders, the pragmatic case against increasing government promotion of selected industries is left undamaged and even reinforced by these blustery equivocations.

By contrast, one of the strongest arguments for free trade requires no knowledge of refined economic theory, although Luttwak casually denies it. Protected firms are less productive than those exposed to vigorous foreign competition. This explains why the U.S. auto industry, by its own admission and the experience of millions of consumers, made enormous strides in product quality only after the onslaught from Toyota, Nissan, and Honda. It explains why Japanese food-processing workers, highly protected, produce about one-third as much per hour as their more-challenged American counterparts, according to a McKinsey Global Institute study, which found similar patterns in a number of manufacturing industries.

Especially painful to read are Luttwak's sallies into trade theory. Here, infant-industry and increasing-returns arguments are deployed to slay, in the time-honored way, the dreaded doctrine of comparative advantage. Every time Luttwak mentions it, unfortunately, he confuses comparative advantage with absolute advantage, an elementary error economists try hard to beat out of their undergraduates. This is no minor technical point; it is the bedrock of the "religious" free-trade theory that is supposedly being subjected to searching criticism by the brave, iconoclastic defense strategist.

The theory says that even a nation that is less efficient in every industry will achieve gains from trade, and so will a nation that is more efficient at everything. A common textbook analogy is that a doctor will use a secretary to do her typing, even if she is a better typist as well as a better doctor than her secretary. But Luttwak repeatedly frames the issue in terms of a country having a comparative advantage in a given industry only when it is more efficient in a head-to-head comparison with other nations. A blunder of this magnitude is all too common to be shocking, but it is as though an economist writing about modern military affairs thought that armored cavalry brigades rode horses and carried lances.

In the midst of all this dross, there glimmers one interesting nugget. Not surprisingly, this idea has been mined from a quarry Luttwak's previous career equips him to work: international politics and strategy. His basic premise is that the end of the Cold War marks the beginning of a new era in which advanced nations no longer consider warfare with one another thinkable. But, he argues, the political legitimacy of nation-states depends on the presence of external threats. In addition, bureaucrats in the now-outmoded diplomatic and military institutions will be unwilling to abandon either their careers in government or their ambitions to orchestrate their countries' fates.

The natural result of these pressures will be to refocus bureaucratic ambitions on what is commonly termed "industrial policy" but Luttwak calls "geo-economic" strategy. Here the goal is to capture high-wage, high-tech, glamorous jobs for one's own country through the offensive and defensive use of research subsidies, preferential access to credit, protection against imports, and the rest of the familiar mercantilist arsenal that the current chairperson of the President's Council of Economic Advisers loves.

Luttwak compares today's obsession with international statistical comparisons of little meaning to the territorial obsessions of the 1870-1914 period, in which leaders and peoples expended blood, treasure, and security on useless colonial acquisitions. For example, the French sent an expedition to claim territory in the remote Sudan desert, intending to prevent the British from building a fantasy railway between "Cairo and the Cape"; Argentina struggled with Chile to control "useless Andean steppe and Patagonian waste." In those days, people stared at maps and brooded if some other nation's color seemed to be gaining ground, even though most such acquisitions had no implications for security; nowadays we brood over trade deficits with no implications for our prosperity.

One might think from this description that The Endangered American Dream is a powerful attack on interventionist trade policy, but of course nothing could be further from the truth. Indeed, a defense intellectual trying to make an impression in the Washington trade-policy wars would get nowhere with a free-trade perspective, since lots of other, more experienced and skilled people already take that view. Moreover, legislators, ambitious bureaucrats, and interest groups are already annoyed by the persistence of anti-intervention sentiment among economists and trade experts; a ready audience exists for someone with an intellectual reputation who will bash free-traders. But how can Luttwak meet this demand and still retain his compelling analogy with the delusion of territorialism?

The answer is simple. Just as some territorial acquisitions by Germany could indeed geo-politically threaten France or Great Britain, so allegedly do some foreign industrial successes threaten the United States "geo-economically." Luttwak projects great confidence in his ability to distinguish real from phantom threats in the territorial competition of the 1870-1914 period, but, in an astonishing intellectual abdication for a strategist, he develops no principles at all for making these distinctions in the "geo-economic" arena. Maybe he wants his consulting fees up front.

After much heated rhetoric and alarmed poring over statistics, The Endangered American Dream is surprisingly modest in its recommendations for the future: a small White House office for industrial policy with budgetary control over some other agencies and departments; a shift to consumption taxes; some national tests for public-school teachers and students, with teachers who pass receiving supplemental checks from the federal government. These ideas are put forward rather tepidly, and almost no effort is made to prove that they would solve the problems they are supposed to, that they would not have bad side effects, or that they would be politically viable in the long term.

In this, as in the tenor and nature of its criticism of current policy, Luttwak's book is representative of the genre of economic jeremiad which has overstuffed our bookstores and Sunday supplements. Its only distinctive asset relative to the flock of tomes by better-established pundits comes from its author's reputation for creative analytical and critical thought on strategic issues, derived from his days as a defense intellectual.

Ultimately, that asset will not be enough. Like all the other Americans caught up in the painful process of converting to the civilian economy, defense intellectuals will find that there are no shortcuts; they will need to develop new competencies relevant to their new environment.

Steven R. Postrel is an assistant professor of policy and organization at the UCLA Anderson Graduate School of Management.