ESSAY WE CAN STAY ON TOP

Today the U.S. has the world's highest standard of living, but we
will not retain that No. 1 position forever if we become complacent.
Left unattended, four worrisome domestic problems -- our low savings
rate, declining productivity, inadequate investment in research and
development, and mediocre public educational system -- will eat into
our prosperity like termites boring into the woodwork of a solid
house, weakening its structure. Fortunately, nations are unlike human
bodies; they can regenerate. The U.S. is especially able to make a
new start because we have incomparable resources in science and
technology, a deeply rooted entrepreneurial tradition and
well-developed capital markets to finance innovative ventures. For
these reasons, both foreign investors and immigrants are still
attracted to the U.S. For us to stay in first place in the
increasingly rigorous global competition, however, we must achieve
these important goals:

-- We must save more so we can increase investment in both
technology and in our work force. In the 1970s, America saved nearly
8% of its gross domestic product (the value of all goods and services
produced within a country). Then the federal deficit ballooned, and
our net national savings rate -- which takes into account household,
business and government savings -- averaged only 3.6% a year during
the 1980s. By contrast, Japan's net national savings rate averaged
18% over the same period. Consequently, last year the Japanese
invested almost twice as much in plant and equipment as a proportion
of their GDP as we did (23.4% vs. 12.6%). It's also no wonder that
from 1979 to 1989, Japan's GDP grew at an annualized rate of 4.1%,
compared with 2.8% for the U.S.
To solve this investment deficit, we must stop eating so much of
our seed corn. Americans must consume a little less and save a lot
more in the short run so we can live better in the long run.
Fortunately, demographic changes alone should help to boost our
personal savings rate. Baby boomers' earnings -- and savings --
figure to climb as they move into middle age.
Our national savings rate, however, will be considerably more
difficult to increase. Quite simply, the federal government must stop
spending more than it collects in taxes. Unfortunately, spending cuts
alone will not suffice, because three-quarters of the federal budget
is earmarked for previous commitments, such as interest on the
national debt and Social Security payments. The solution, alas, is
politically unpopular: to eliminate the federal deficit by 1995, we
must start by increasing taxes and cutting federal spending by a
total of $150 billion next year.

-- We must become more productive. A nation's standard of living
is inextricably linked to its work force's productivity. When
productivity increases, businesses can pay higher wages without
boosting inflation. That is the way standards of living improve. In
absolute terms of output per factory worker, the U.S. still leads the
world, but our advantage has been shrinking. In 1972, the average
Japanese worker was 63% as productive as his American counterpart; by
1988, he was 80% as productive. A contracting lead is not so
worrisome by itself; productivity growth rates tend to converge as
countries that were late to industrialize, such as Japan and South
Korea, catch up. Of greater concern is the fact that our productivity
growth rate has fallen from 2.8% a year in the 1950s and 1960s to
an annual average of only 1.3% since 1970.
Economists are not sure why this happened, but one cause may have
been the growth of the service sector to about 70% of our economy. In
the 1980s, manufacturing's productivity growth increased by a healthy
3.5% per year, compared with service's mere 0.2% rate. But that 0.2%
may be underestimated, because it takes time for economies to absorb
major innovations, like computerization. Economic historian Paul
David of Stanford University notes that manufacturing productivity
actually declined when electricity was first introduced in U.S.
factories early in this century, until the plants were reorganized to
use the new power source effectively in the 1920s. By analogy, the
computer's full effect on service industry productivity may not be
seen until office workers learn to rely less on paper and on
secretaries. Nevertheless, we must take steps today to raise our
workers' productivity by increasing our investment in new technology,
factories and employee education. To accomplish those goals, we must
bring our annual net national savings rate back up to its 1970s level
of about 8%.

-- We must spend more on research and development. The U.S. is no
technological laggard. According to the Institute for Scientific
Information in Philadelphia, the average American scientific paper
written in the past five years was cited 3.5 times in scholarly
journals worldwide, vs. 2.7 and 2.4 times for German and Japanese
papers, respectively. On the other hand, Japan has been successful in
harnessing new technology to speed the commercialization of
innovations such as VCRs.
The U.S. must do better, because technological advances are an
important contributor to productivity growth. In 1989, the most
recent year for which statistics are available, both Japan and
Germany spent higher portions of their gross national products (3%
and 2.9%, respectively) on research and development than the U.S.
(2.7%). The comparison is even more damning for the U.S. if you look
at civilian R&D alone, thereby subtracting the roughly $4.6 billion
of federal research dollars we used in 1989 to develop weapons. By
that measure, the U.S. devoted a scant 1.9% of its GNP to R&D, vs. 3%
in Japan and 2.8% in Germany.
The end of the cold war -- punctuated by this summer's failure of
the anti- Gorbachev coup in Moscow -- offers us the opportunity to
shift 10% to 20% more of our federal research spending to nonmilitary
technologies. Our government should also increase investment tax
credits for private research and development in all technical fields.
At the same time, the federal government should increase the
approximately $335 million that two of its agencies, the National
Institute of Standards and Technology and the National Science
Foundation, spend on programs that seek to improve manufacturing
efficiency.

-- We must hold our students to higher standards. The U.S. spends
a higher proportion of its GDP (6.8%) on education than Germany
(4.6%) or Japan (6.5%). Yet we do not seem to be getting an adequate
return on our investment. According to the Educational Testing
Service, a mere 7% of our 17-year-olds are prepared for college-level
science courses.
The first step toward improving U.S. public education must be to
change public attitudes. President Bush, who has used the bully
pulpit of his office to call attention to our educational
shortcomings, seems to be getting his message across. When the Gallup
Organization asked Americans last April to compare our educational
system with that of other major western countries, barely a third
rated it strong, whereas 63% described it as weak or very weak.
Unfortunately, there is not yet a consensus among citizens or even
educators about what should be done to fix the system. The answer may
be that no single silver bullet could cure the problem in such a
diverse country. Still, longer hours in the classroom, clearer
national standards and more parental involvement and parental choice
among schools seem like fruitful ideas to me.
Although the domestic problems I have described are quite serious,
the U.S. has faced and triumphed over even more daunting challenges
in the past. The key to conquering today's problems lies in utilizing
the advantages we hold over Europe and Japan, namely our ability to
relocate in search of career opportunities, our less rigid class
structure and our openness to immigrants. It would be ironic indeed
if fear of decline leads us to enact protectionist legislation that
rejects foreign investment and overly restricts immigration. That
would mean turning our backs on the very characteristics that carried
us to where we are today. Instead, Americans must maintain their
confidence that our country's capacity to reinvent itself will once
again prove to be our hidden strength.

BOX:

THE POOREST 20% OF JAPAN'S POPULATION RECEIVE 9% OF ALL INCOME; IN
THE U.S., THE POOREST 20% GET 5%

THE U.S. SPENDS 6.8% OF ITS GDP ON EDUCATION, VS. 4.6% IN GERMANY
AND 6.5% IN JAPAN, YET 63% OF AMERICANS SAY THAT OUR PUBLIC
EDUCATIONAL SYSTEM IS WEAK