American Industry: What Ails It, How to Save It

THE Atlantic

FOUNDED IN 1857

by James Fallows

Sally Danforth had never been to Europe. In the autumn of 1977, one year after her husband, John, had been elected United States senator from Missouri, the Danforths went to Europe on vacation. “A real vacation,” Danforth says. “This was no junket.”

Everywhere they went, they encountered prosperous travelers from Japan. At the Louvre, there were busloads of Japanese tourists. In the shops, Japanese purchasers bought up the most expensive goods. “It was unbelievable,” Senator Danforth now says. “We went into the Gucci shop. There were Japanese people buying Gucci suitcases to carry home their new Gucci bags. We saw one Japanese family that had bought a big Gucci suitcase for each member of the family, to hold all the other items, One Japanese man was standing there with bags hanging all over his arms. I said to Sally, ‘Something’s going on!’ ”

John Danforth is not the only one to sense that something is going on. His flash of recognition in the Gucci shop is one of a number of signals that, more and more in the past twelve months, have intensified the impression that the American era of economic domination may be nearing its eclipse. Look in the stores for an American-made radio or tape recorder; you will not find one, for those industries no longer exist. One half of all the cars that leave California showrooms this year will be imports, mainly Japanese. On the West Coast docks, freighters load grapefruit and timber bound for the Orient; from their holds, they unload color TVs and calculators made in Japan. More than half of our exports to Japan are food, fuel, crude material. More than two thirds of our imports from Japan are finished, high-technology, manufactured goods. Until 1970, the United States had not run a deficit in foreign trade for fifty years. In 1978, our deficit with Japan alone was $13.5 billion.

One third of the 750,000 American auto workers are now on “indefinite” layoff. The United Auto Workers have long been the labor movement’s leading advocates of free trade. Last May, the union’s leader, Douglas Fraser, petitioned for government protection against imported cars. This was the short-term solution, Fraser said; in the long run, the answer was for Japanese companies to build their plants here. The American steel industry now employs 100,000 fewer workers than in 1969. In Youngstown, Ohio, 7500 steel workers have lost their jobs in the last eighteen months. “We built up the German and Japanese economies after the war to help keep them free,” says James Smith, an economist with the United Steel Workers in Pittsburgh. “Let me tell you this: there is less danger of communism today in Tokyo than in Youngstown.”

From our politicians comes talk of a “partnership” with business to “reindustrialize America”; from our editorialists, laments about the loss of America’s will and ability to produce. From economists come theoretical explications of a truth most people intuitively grasp: that without steady economic growth, there is no cushion to provide for rising incomes, “affirmative action,” brighter prospects for our children than for ourselves.

“It takes a long time to become aware of decline,” said Henry Rosovsky, the dean of the Harvard faculty, at a conference on competitiveness held at Harvard last April. “Most economic historians agree that Britain’s climacteric occurred about one hundred years ago, but this fact did not really become a matter of public concern until after World War I. ... In my opinion, the principal factors were internal and human, and therefore avoidable: British entrepreneurship had become flabby; growth industries and new technology were not pursued with sufficient vigor; technical education and science were lagging; the government-business relationship was not one of mutual support. When we look at our own country today in the perspective of history, the danger signals seem obvious.”

Perhaps the American climacteric has already occurred—perhaps ten years ago, when domestic production of oil began to fall, and when the government, through sleight-of-hand financing of the Vietnam War, ushered in the chronic inflation that, in the intervening years, has devastated the incentives to save and invest. In industrial offices, government ministries, financial centers, people are interpreting the signals of decline and proposing possible means of resurrection. My purpose here is to examine some of those signals, and to assess some of the suggestions that will command our attention through this presidential election and beyond. Over several months, I visited a number of industries that have done very well or very poorly in the face of foreign competition, to see what lessons a comparison might teach. I begin with a story of success.

Charles Sporck is a tall, moustachioed man in his middle forties, a policeman’s son from upstate New York who is now president of a high-technology firm with sales totaling $719 million last year. “This is the most important industry in the United States, period,” Sporck says. “It will be obviously the most important, even to the government, by the end of this decade.” He is talking about semiconductors, the miniaturized silicon “chips” that have laid the technical groundwork for the modern computer industry, made Sporck and others like him instant millionaires, and transformed the Santa Clara region, south of San Francisco, from a pleasant vale of plum trees and small towns into the booming “Silicon Valley.”

Between Highway 101 and El Camino Real, the main routes through the region, sit scores of long, low, modern buildings, many with tinted glass windows and tiled roofs. These are the homes of the semiconductor makers, companies with names such as Signetics, National Semiconductor, Zilog. Within, engineers draw up plans for ever more sophisticated integrated circuits, with ever more electronic capability packed into ever less space. These buildings also house dozens of related enterprises—computer companies, such as Digital Equipment, Hewlett-Packard, Apple; “software” firms that devise programs for computers; laser equipment companies and mask-making firms whose machinery is used to produce the chips. In the words of one man in the business (L. J. Sevin of the Mostek Corporation, based in Texas), these semiconductors will be the “crude oil of the 1980s.” Last year, the semiconductor companies brought in $2 billion in foreign sales; the entire computer and business machine industry added $4 billion to the U.S. balance of trade. The business, like any other, has its cycles, but the trend is clearly up.

This is not the place for a description of the technology underlying the economic achievement. In brief, the manufacturers are able, by introducing slight impurities into a wafer of pure silicon, and by etching microscopic patterns on its surface through complicated photographic processes that can involve lasers and electron beams, to reduce thousands and thousands of electrical circuits to a “chip" smaller than a dime. These chips barely existed ten years ago; fifteen years before that, a rudimentary computer filled a garage, drew 100,000 watts or more of power, and would function reliably only as long as its handsoldered connections and 19,000 vacuum tubes were all up to par. Now computer memory chips with more than 16,000 components (known as 16K) are a standard item, and work is moving ahead on the 64K and 256K models. People in the industry provide comparisons: if the aircraft industry had progressed at the same rate as semiconductors in the past few years, the Concorde would now hold 10,000 passengers and travel at 60,000 miles per hour, and a ticket would cost one cent. “This is the only anti-inflation industry in the country,”says Regis McKenna, whose public relations firm represents several of the major manufacturers in the area. “The prices have gone down about 30 percent a year. You put this industry, and all it means, outside of the U.S., and we’re in trouble.”

Of all the firms in Silicon Valley, one is most admired for combining scientific innovation with business success. Its name is Intel (for Integrated Electronics).

Intel was founded in 1968. Since that time, its sales have increased by an average of 30 percent each year. In 1977, they totaled $282 million. In 1978, they were $400 million; in 1979, $663 million, or a 65 percent increase in just one year. About 30 percent of that has come from foreign markets. Intel is not the biggest supplier in the business (it is number 4, after Texas Instruments, National Semiconductor, and Motorola), but it has been the fastest growing and consistently one of the most profitable. Its pretax profit rate runs between 20 and 25 percent, usually the best in the business; its stock price has increased 10,000 percent since the company’s founding. It puts more than 10 percent of its income into research and development, a higher rate than any of its competitors, and it brings in more than twice as much revenue per employee as the industry norm. Of its 14,000 employees, more than half have come to the company in the past two years.

Intel’s story is an advertisement for the classic ingredients in American business success: venture capital, initial risks, technical pioneering, plowing the profits back into the firm. The company was started, on the basis of $3 million in venture capital, by Robert Noyce and Gordon Moore, two scientists working for Fairchild Semiconductor in northern California. Like many other American industries, semiconductors entered their most creative phase when individual entrepreneurs broke away from a parent company to start their own firms. For a surprising number of firms in Silicon Valley, the parent was Fairchild. Noyce and Moore, Sporck of National Semiconductor, and Jerry Sanders of Advanced Micro Devices, a flashy man who buys his clothes in Beverly Hills and drives a Rolls Royce, were all at Fairchild at one time. “Fairchild has been kind of a model for the business, in a negative way,” says McKenna, himself a Fairchild veteran. The company was known for its technical strength but also for its bureaucratic immobility; its management, based on the East Coast, seemed not to appreciate the exciting technical developments on the West. “They had a reputation for not being able to deliver,” says McKenna, “so now you have the slogan ‘Intel Delivers.’ ” Noyce, when he was general manager at Fairchild, had already done some of the basic scientific work for the creation of the integrated circuit, the technological prerequisite for the semiconductor developments that followed. Moore was director of research and development, and Andrew Grove was an assistant director. Noyce and Moore raised the venture capital and broke away to found Intel; soon afterward they were joined by Grove.

“We could see that the potential was there,” says Grove, a dapper man in his forties with curly black hair and a well-trimmed goatee. On the day we spoke, he was wearing an open-necked white shirt with a gold chain underneath. He left Hungary after the uprising in 1956 and still speaks English with a Central European accent. “It was evident that technology had the capability to make useful [computer] memories. We thought we could get the jump on other people. We were most concerned about Texas Instruments, but they didn’t pay attention for five years. By then, we were a $200 million business.”

Several of Intel’s innovations have pushed back the frontiers of size, cost, and complexity that had previously limited computer applications. The company has developed “memory” chips with steadily larger capacities; it produced the “microprocessor,” the first product with all central computing circuits on one chip, and a “microcomputer,” which combined this processor with several other necessary circuits. According to Andrew Grove, its next giant step will be to steer the industry past another potential limit, the supply of people trained to program computers. If the computer business kept growing at its current rate, he says, by 1990 it would take one million programmers to provide computers with “software,” the machine-language instructions for carrying out their work. This is far more programmers than the nation is going to produce. Intel is now moving toward building the software—the programs themselves—into the chips. As computers become cheaper and the demand for programming soars, it will make economic sense to have computers designed for certain purposes—accounting, word-processing—which require no programming at all. A program can be designed once, etched in silicon, and then sold by the millions.

By continuing to invest more money than the competition does in research and development, and by attracting the kinds of people who can take advantage of that support, Intel has so far had the best of all worlds. Being first to the market with each new product, it can charge a premium price during the year or two it takes for its competitors to catch up. All the while, its production costs are falling, as it moves down the “learning curve” that cuts the cost of each item as more are made. “We’ve developed the markets that we’ve seen,” says Gordon Moore, a mild-mannered, bespectacled man in his early fifties. “Because we’re there first, we’re able to charge more, and at any given time, we’ve had more experience than our competitors and can bring our costs down.” “Profit is our lifeblood,” says Andrew Grove. “The idea that profit is necessary to us is broadly recognized. Thousands of people make daily individual decisions with that in mind.” Twelve years’ worth of profits have been plowed back into the company. Last year Intel put $67 million into research and development and $97 million into capital improvements. It has never paid a cent in dividends.

It does not take long for a visitor to Intel, or the other companies in the area, to sense an atmosphere different from that of the “mature” manufacturing industries. These companies seem more flexible, less concerned with the normal trappings of rank. Intel divides its leadership among Noyce, Grove, and Moore. Together, they are supposed to embody Peter Drucker’s concept of the Office of the President, with one outside man (Noyce), one thinker (Moore), and one organizer and man of action (Grove). Gordon Moore has the modest bearing of a junior high school principal, yet he is the chief executive officer, and he holds 1.5 million shares of Intel, worth $105 million at current prices. There is no suite of executive offices at Intel; each of the three founders has a corner in one of the open-floor layouts, each in a different building. Indeed, none of the Silicon Valley executives I saw in six companies seemed to have an “office” at all. Moore’s “office,” walled off from the main room by a couple of shoulder-high partitions, was identical to that of a copy editor at a magazine where I once worked.

Nearly every time I heard an employee of Intel or one of the other companies refer to the firm, it was as “we.” At Intel, employees have put $60 million of their own money into the company through a special stockpurchase plan. There are virtually no unions in this industry. There are complaints and problems; work in the wafer-fabrication plants is repetitive and tedious; one of the chip companies is known for ruthlessly dismissing people whenever the market takes a dip. Still, there is the air of cooperation that comes from being on a winning team. “My basic understanding,” says Mike Markkula of Apple Computers, another small firm that has had the right combination of luck and inventiveness to take off in the “personal computer” market, “is that if you took all the people out of the buildings, what you’d have is a bunch of buildings. The company’s worth nothing without these people.”

“The principal thing we have going for us is that we’ve never had a moment without competition,” says Andrew Grove. “Foreign competition is a problem for us, but it’s just another problem.” “This is really a whole lot of little companies, whose people are well motivated and rewarded,” Gordon Moore says. He smiles benignly: “It really has worked beautifully.”

Why hasn’t it worked beautifully elsewhere? Could the tire companies, the machine tool makers, the color TV industry, learn to work this way? There are three conventional perspectives on these questions, which are most conveniently described by the groups they blame. One view blames lazy workers and, to a lesser degree, indifferent management; a second blames government; and a third blames the very ethos of modern American life.

I. “You Lazy Bums”

To judge by newspaper editorials, opinion polls, and a number of assessments by our competitors, American business is caught in a trap of its own creation: American goods have not met the test of quality in the market, and American businessmen have not understood that the future belongs to those who sell to the world. If only business and labor would try for a change, they would enrich themselves and the nation.

As an assessment of symptoms, this view is not far wrong. Blessed for years with a large domestic market, many American firms have neglected to look overseas. If Swedish and Japanese businessmen have grown up thinking that the U.S. was the market they had to penetrate, why should American businessmen have believed anything else? Apart from a few exceptions—as diverse as the grain trade, aircraft construction, and Coca-Cola—American industry has adjusted only slowly to the need to understand foreign markets and sell abroad. Most of our competitors set up trading companies and information centers to make it easy for foreigners to buy their goods. The U.S. generally does not.

“The most comfortable seat in an American car is the driver’s seat,” Senator Danforth says. “People who know the Japanese market tell me that anybody who’s interested in a big car there is not going to be doing the driving himself.”

As for quality and productivity, the problems are even more acute. According to a report released last fall by the General Accounting Office, after a Japanese firm took over a Motorola color TV plant, the rate of defects dropped from 150-180 per 100 sets to 3-4. Officials in Detroit argue that the Japanese and German reputations for quality are exaggerated and that American workers can build equally fine cars. Almost no one contends that American workers are doing so now. “In fits and finishes, they’ve earned their reputation,” Lee iacocca, the chairman of Chrysler, says of the Japanese. David Ignatius of the Wall Street Journal has pointed out that, between 1964 and 1975, the Japanese dramatically increased the productivity of their steel industry, reducing the man-hours required to produce a ton of steel from 25.2 to 9.2. During those same years, American productivity improved only slightly, from 13.1 hours to 10.9.

Unfortunately, neither the Silicon Valley solution (innovate! grow!) nor the injunction to start working harder is likely to do much for these troubled firms. For one thing, there is an apparent ceiling on the benefits of innovation in “mature” industries. Since the introduction of the automatic transmission in 1948, the most important technical changes in the automobile industry have been on the production line, not in the product. More robot-welders may make the line run faster, with fewer defects; they do not create wholly new products, such as those the computer industry regularly turns out.

Moreover, most “mature” industries face a stagnant market. A fast-growing market enables producers to buy newer, more efficient equipment, and to keep their old machines running at their most efficient rate. It means a younger work force, faster promotions, an expanding base to support wages, pensions, investments. The market for aluminum, unlike that for steel, grows faster than the GNP. While steel has languished, the aluminum industry has built newer, more efficient plants. Since 1950, the amount of electricity required to produce a ton of aluminum has been cut almost in half. No matter how creative its management or aggressive its pricing, the American steel industry is not going to enjoy the fruits of that kind of growth.

“People buy steel for one reason, which is that they need it,” says one executive. “How many girders are you going to buy to put in your back yard just because I’m offering you a good deal?” The world’s steel plants compete, like deer during famine, for the limited forage available. European countries struggle to keep their mills open and their workers employed; according to American manufacturers, the British lose $2 million per day subsidizing British Steel. All the while, each Taiwan or Korea, eager to demonstrate its economic maturity, puts in a steel plant and tries to unload its tonnage on the world.

As if this were not enough, American firms have had trouble getting their share of the international market because the competition, especially the Japanese, has not played fair. Last fall, a GAO study with the classic government title “United States-Japan Trade: Problems and Issues” produced case studies of seven major industries and explained the Japanese tactics. The overall picture was one of a combined effort by business and government in Japan to “target” American industries for penetration, while using a variety of indirect tactics to shield their own market. For example, the report contained a chart showing the way Japanese “add-ons”—such as “commodity taxes,” higher dealer profits, and “homologation” expenses (for special equipment required in Japan)—can raise the price of a medium-sized Chevy from its $6600 retail in the U.S. to $12,000 in Japan. When the Japanese send their cars here, the main add-on is a 3 percent duty, by far the lowest any nation applies. (Germany applies a 14 percent duty to Japanese cars; France applies the same duty, and imposes an unofficial quota limiting Japan to 3 percent of the market.) “To the Japanese, Tree trade’ means access to the American market, period,” says Thomas Murphy, the chairman of General Motors.

“The most insidious kind of unfairness,” says Jerry Jasinowski, an assistant secretary of commerce, “is protecting certain industries until they become robust”—for example, Japan’s national telecommunications system, in which American high-technology industries could make a killing but have been subtly excluded from the bidding. “U.S. patents are a matter of public record,” said L. J. Sevin of Mostek; but “key Japanese research is carefully shielded from disclosure to foreigners on the basis that government funds contributed to the research. . . . When an American equipment manufacturer announced, three years ago, a new $1 million computer-based electron beam maskmaking system, three of the first five units were purchased by the Japanese.”

The real problem with the “trying harder” prescription is that it risks making a moral issue out of what is really straightforward economics. Yes, it may make a difference that Japanese workers do calisthenics at the factory while singing the company song, or that some American workers detest their tasks enough to wallop engine blocks with their wrenches, as I saw them do at one GM engine plant. The most productive American auto plants are those that have paid the most attention to fuzzing the class lines between management and labor. But when it comes to making steel, a good attitude is not as important as a basic-oxygen furnace. On the auto assembly line, no amount of team spirit will make a door fit more closely than its designed tolerance. When Japanese steel productivity soared during the 1970s, it could have been because workers and managers felt a personal commitment to the economic welfare of their nation. I’d bet it had more to do with the dozens of new mills—with continuous casters and electric furnaces—that the Japanese installed. “It’s as simple as two able, willing workers, one with a power saw, and one with a hand saw,” says Senator Lloyd Bentsen, a Democrat from Texas who has been releasing reports about productivity for the past ten years. “Which one do you think is going to turn out more work?”

In this homeland of modern capitalism, it should come as no surprise that “quality” and “productivity” rest on capital investment, but here are more examples:

*One of the generally accepted quality differences between Japanese and American cars is the exterior paint job. According to Douglas Fraser, Japanese assembly plants may have two paint shops per line, as opposed to one in the United States. The cars go through more slowly, there is a more careful paint job—but the capital cost is greater, and it is concentrated on productive equipment, rather than squandered on retooling for the largely cosmetic annual model changes.

*When Volkswagen of America opened its plant in Pennsylvania, it found that Rabbits made in America were just as good as the German ones. Was this work force different from those who turn out “low-quality” Pintos and Aspens? No—the workers are all UAW members. The difference is design, management (the quality control inspector reports back to Germany, and has the power to close down the plant), and newer equipment.

*Hewlett-Packard, a major computer company, shook up the semiconductor industry when it told Electronics magazine that the chips it bought from Japanese suppliers had a defect rate one tenth that of American-made chips. Will to work? Maybe. But more likely the difference is higher Japanese investment in automated assembly equipment. (The Americans send more of the chips to Hong Kong and Malaysia to have the final steps done by hand, while the Japanese spend more on automated plants.)

Morale and teamwork may be necessary conditions for productivity and quality, but they are not sufficient. Capital investment is the other necessary condition. The problem with many American businesses is that such investment has not been made. According to the GAO report, the average piece of equipment in the machine tool industry is twenty years old. The average open-hearth furnace in the American steel industry is thirty-three years old; the average equipment age for the whole industry is seventeen years. There are steelrolling mills in this country still powered by steam. A study by Arthur D. Little said that one quarter of the total American steel industry would barely be profitable, even if it were running at full capacity. The American Iron and Steel Institute itself says that, in the middle 1970s, the Japanese invested almost 50 percent more, per ton of capacity, than did American companies.

According to Ezra Vogel, a Harvard professor and author of the book Japan as Number One, the Japanese are investing as much money, in absolute terms, as the U.S. is—or about twice the rate per capita. As any recent reader of the newspapers knows, the Japanese save 20 to 25 percent of their total income, versus 5 or 6 percent in the United States.

In short, saying that American quality is poor and productivity stagnant does not answer a question. Instead, it raises one: Why has American capitalism forgotten the rules of its survival and success?

II. “Get the Government Off Our Backs”

For the businessman, it is but one step from the observation that lack of capital investment is the heart of our problem to the conclusion that the government is ultimately to blame. From this perspective, the government has undermined economic America through its pettifogging regulations, its tolerance of inflation, its indifference to the cost of environmental and social crusades, its failure to encourage investment through tax incentives, and its reluctance to cooperate with business if there’s the faintest hope of picking a fight. The remedies, advanced mainly by business groups and Republican spokesmen, follow naturally from the complaints; they include a more skeptical look at regulation, various tax incentives for investment, and a number of programs through which the government would act as partner to rather than tormentor of American business. (One example of this “partnership” would be to relax the antitrust laws when necessary in order to help American companies penetrate foreign markets.)

No doubt the government has been a drag on business’s flexibility and its capital resources. Most of all, it has done so by building inflation into the economy. For fifteen years, Republicans and Democrats have stood united on such practices as cost-plus contracting, automatic cost-of-living increases in government spending, big deficits to fight recession, cheap dollars to pay for oil. Individually, some of these steps make sense. Together, they advance the ratchet of inflation notch by notch. With each new notch in the “underlying” inflation rate—from 4 percent to 6, from 6 percent to 8—another whole class of investments becomes unprofitable, and another share of the nation’s wealth is drawn toward Swiss francs, the gold market, or buying today the products that might cost more tomorrow.

Beyond that, General Motors claims that it now spends $1.9 billion a year to comply with government regulations, through such items as retooling for new safety equipment and emissions controls, reducing air and water pollution from its plants, and filling out innumerable forms. The American Iron and Steel Institute says that nearly one quarter of the steel industry’s investment in the last ten years was for pollution controls, and that further controls will cost about $600 million a year.

“If you had waited for my company and others to clean up Pittsburgh voluntarily, you’d still be waiting,” one steel executive said. “Everyone recognizes that the environmental protection and the safety laws have had a beneficial forcing effect. But when we’re having a crisis of capital formation, you have to ask about the balance of costs.” Businessmen are particularly galled by what they regard as an arbitrary imposition of standards upon them. Thomas Murphy of GM contends that “to this day, there has been no health data on what the desired level of clean air should be. They just picked numbers out of the air for the 1970 law and said you have to reduce it 90 percent from what it is now.”

While they don’t always come out and say so, many industrialists seem to feel that the government does not give a damn whether companies live or die. Officials at each of the three major auto firms mentioned, with unmistakable malice, that Joan Claybrook, the head of the National Highway Traffic Safety Agency and the main day-by-day regulator of their industry, drives a Volvo. “Can you imagine her counterpart in Japan driving a Chevy?” one auto man asked, rising from behind his desk. (Joan Claybrook points out that when she bought the car in 1969, it had shoulder-harness seat belts, head restraints, and other safety features the American makers did not offer, along with radial tires and fuel efficiency of 22 mpg, which would meet the 1981 standard for American cars. After eleven years, she says, it still runs line.) “I have had regulators come in here and say that cost is not one of their considerations, it’s not written into their charter,” Senator Bentsen says. “I think that’s a failure of their responsibilities, but also a failure on Congress’s part in writing the laws. I’m not talking about opening up the smokestacks and blackening the skies, but about setting standards and letting the industries reach them in the most cost-effective way.” “There are 35,000 lawyers involved in regulation, most of them here in D.C.” says Robert Reich, an official of the Federal Trade Commission. “They have an economic stake in prolonging conflict between business and government, and shaping it into as stark, square terms as they can. Most of the regulatory agencies have a lot of lawyers who expect eventually to go to the other side. Their opportunities for advancement are enhanced if they are seen as tough and aggressive in playing this game.”

The standard saying in the steel industry is, “The unions won’t let you win a short strike, and the government won’t let you win a long strike.” Steel companies feel that the government won’t let them raise prices when the market warrants or keep wages down to the level of productivity—and then complains that the industry is “inefficient.” Almost everyone agrees that the usual fourteen-year tax write-off period for equipment in the steel industry is too long; their Canadian competitors, for example, can write off most of their equipment in as little as two and a half years. The IRS could change the depreciation schedule, but it won’t. “The IRS offers all sorts of technical rebuttals,” David Ignatius says, “but they boil down to an argument that if depreciation rules were changed for steel, they would have to be changed for everybody. Which would be a nuisance.”

While antitrust lawyers may spring like bloodhounds onto the trail of domestic collusion (especially if it is between politically powerless firms), the impact on American competitiveness seems not to interest them at all. The tire industry is now in trouble, and two big manufacturers—Goodrich and Uniroyal—are trying to move out of that business and into others, such as chemicals. The two remaining big boys of the industry, Goodyear and Firestone, would probably be interested in taking over some of the more modern plants, but fear of the antitrust squad is one element that stands in their way.“So the plants close and put people out of work, and Goodyear builds a new plant and gets the same market share anyway,” says one government analyst of the industry. When Michelin, the French tire maker, bought a facility from the Gates Tire Company a few years ago, no one from the Justice Department complained.

Yet when all the grievances have been heard, it remains that neither capital shortage nor government obstruction is the main reason American industries are in trouble now. On the whole, major American industries have consistently been more profitable than those that bedevil them from abroad. (American steel companies averaged 6.7 percent profit between 1969 and 1977, compared to 1.7 percent for Japan. For all manufacturing industries, U.S. companies averaged an 8.6 percent pretax profit rate between 1974 and 1979, compared to 1.8 percent for Japan.) Rather than strict profitability, the problem has been one of perspective. Instead of blaming the government for their difficulties, the industries might better look at the way they have used their resources— and especially at their inability to plan for the long run. Another story from Silicon Valley illustrates the difference.

The Amdahl Corporation is a computer manufacturer based in Sunnyvale, California. Recently Amdahl has enjoyed a boom that is impressive even by the standards of this volatile industry. In 1976, its first full year in the market, Amdahl’s revenues were $92 million. In 1978, they were $320 million. Between the end of 1976 and the end of 1978 its employees increased in number from 770 to 3000.

As Amdahl’s sales of computers soared, so did its demand for semiconductor chips. Early on, it bought chips from two suppliers, Motorola and a firm called Advanced Memory Systems, or AMS. Amdahl required a custom-designed chip and tried to convince the suppliers that they would quickly recoup the cost of retooling for production. AMS chose instead to get out of the business, and Amdahl looked elsewhere for its second supplier. “If they had stayed with us,” said Gene White, the chairman of Amdahl, “our purchases from them would be equal to their entire sales at the time they left. But they couldn’t wait.” The new supplier that has enjoyed this surge in business? A Japanese firm.

If there is one central complaint made about the strategies of American business, it is that too many firms behave like AMS, and too few like their Japanese replacements. While the Japanese, the Germans, and even the Koreans are nipping at their heels, many American industries have shown a pathological inability to look toward their welfare in the long run. It is for this reason that the “government interference” argument is far too simple.

Exhibit A, of course, is the American automobile industry. In the past ten years, the market for small cars in this country has grown by nearly 900 percent. American manufacturers ceded this market to foreign makers. As a result, they have lost more money and laid off more men than at any time since the industry’s crash in 1974. Fewer cars will be made in America this year than in 1955.

People in Detroit and Washington can, and do, argue for hours about whether this disaster could—or should—have been foreseen. “I sometimes wonder why all these smart guys—in the government, writers—can remember back to yesterday with such absolute clarity, but to go back and examine the actual circumstances ten or fifteen years ago is more than anybody can do,” says Roger Smith, an executive vice president of General Motors who is generally assumed to be in line to succeed Thomas Murphy as chairman. Smith is a short man in his middle fifties who looks like a “downsized” version of Larry O’Brien, the basketball commissioner. “The carcasses along the road are the little cars—the Henry Js, the Willys, cars like the Tempest that we had to make bigger through evolution to get sales up. You can only sell what the market will buy. You just can’t move beyond your market. You have to move with your market, and we were moving with our market very well in the late 1970s.” The public was shortsighted, the auto men say. Americans didn’t take the energy crisis seriously; they insisted on cheap gas; they kept buying the LTDs and Cordobas until the shah of Iran was overthrown and gas lines developed on the East and West coasts. GM executives point out that they voluntarily decided to go ahead with a subcompact, the Chevette, and a smaller Cadillac, the Seville, after the 1973 oil boycott, and that they have improved their overall fleet fuel efficiency by 80 percent since then.

Still—what is most remarkable is how hard the industry tried to wish the small-car problem away. Seven years ago, when imported cars “soared” to 15 percent of the market (this year, they will be closer to 30 percent), the automobile officials said all the things they are saying now: We couldn’t have foreseen it; real Americans want big cars. “While everyone was crying, ‘The consumer has suddenly switched to smaller, better-mileage cars’ after the embargo hit, the records show that he had been switching since 1965,” John Z. DeLorean, a former executive of General Motors, is quoted as saying (in J. Patrick Wright’s “autobiography” of DeLorean, called On a Clear Day, You Can See General Motors). DeLorean points out that between 1965 and 1973, the total American market for cars grew by 25 percent, but the domestic manufacturers’ share grew by only 10 percent. Sales of imported cars—smaller, more fuel-efficient—rose by 122 percent in those same years. As late as 1978, the auto manufacturers were entreating the Congress to relax the mandatory mileage standards for 1980 and 1985 model cars, standards which are now moot because the market demands even more efficient cars.

Why this spectacular misreading of signals? Perhaps because every incentive in the business encouraged the manufacturers to milk the big cars for all they were worth. Alfred P. Sloan’s autobiography, My Years With General Motors, lays out the theory of a scale of GM products approximating the scale of American life. As a man moved from clerk to executive, so would he move from Chevrolet to Cadillac; and as he bore himself upward, he would also buoy GM. John DeLorean has said that, in his time at GM, it cost the company only $300 more to build a Cadillac Coupe DeVille than a Chevrolet Caprice, but the sticker price on the Cadillac was $3800 more. The difference was pure profit. Concentrating on the big-ticket items made GM the richest company in pre-OPEC history and established a standard that Ford and Chrysler thought they should imitate. The chief economist for Ford, John Deaver, explained the continuing application of this theory in the summer of 1978, when he answered Senator Frank Church’s questions about the small car, the Pinto, Ford had built to meet federal fuel-economy standards:

Church: “You are only producing as many Pintos as are required to make the average mileage for the entire fleet of cars, from Lincoln to the Pinto, comply with the law. Isn’t that correct?. . . . You really make your money on the big cars, don’t you?”

Deaver: “Yes; essentially.”

Church: “So, to keep those Lincolns out there, you have to produce a certain number of Pintos because of the mileage you get on the Lincoln.”

Deaver: “That’s correct.”

Deaver testified as part of the effort to get the fueleconomy standards loosened. The irony of such resistance to the regulations is that, eighteen months after Deaver’s appearance, the only cars selling were the kind required by the law. “They’ve been legislated into prosperity again,” says Andrew Court, who was for twenty-five years the General Motors staff economist. “If it hadn’t been for the regulations, there’d be no X-body cars [a new, more efficient GM model], no Omnis and Horizons,” says Douglas Fraser, listing the models that are providing such income as Detroit now enjoys.

The circumstances of an auto executive’s life heighten the tendency to look toward the short run. At the upper levels of GM, officials receive a comparatively modest base salary and large bonuses that depend on profits. For the chairman of the corporation, the base could be $350,000 and the bonus, in a good year, $600,000. In 1974, when the car business was in a trough very similar to this year’s, executives met to vote the bonuses for 1973. “In spite of creating a total disaster for themselves, they voted the biggest bonuses in history,” said a man involved in the process. “They had made terrible decisions the previous year, but it had been profitable, so they voted themselves these tremendous bonuses.”

The short-run mentality has wrought even greater devastation upon the tire industry. Like the car makers, American tire companies responded too slowly to a basic market change. In the tire industry’s case, the change was the coming of radial tires, which make a car more fuel-efficient than do bias-ply tires, and which last twice as long. The radial’s first trait made it popular when oil prices rose; the second means the overall demand for tires must fall. Foreign companies mastered the radial tire technology, and imports of “loose tires” increased 50-fold between 1961 and 1977, from $20 million to $1 billion. This does not include the tens of millions of foreignmade tires that come into the country mounted on imported cars.

Why was the American industry caught napping? Traditionally, “original equipment” has been one quarter of the total market for American tires, so the auto makers’ specifications largely determined what the tire companies would make. Radial tires had existed since the 1920s (when one of the Michelin brothers obtained a patent in France) and were the dominant style in Europe by the 1950s. But bias-plies were Detroit’s obvious choice. They gave a softer ride, their inferior fuel economy didn’t seem to matter, and most of all they were cheap. A set of radials costs several dollars more per tire than bias-plies. When you are talking about 10 million cars a year, designers will fight over a penny per car. No one thought radials were worth the cost.

After the 1973 oil embargo, radials suddenly looked like a better deal. American companies tried to change production too quickly and were burned in a dozen ways. Some came up with an unsatisfactory, bastard “bias-belted” tire; others pushed radials in advertisements before they had the capacity to turn them out, succeeding only in boosting demand for Michelins and Pirellis. The greatest fiasco of all was the Firestone 500, whose defects and safety questions have forced the company to recall some 5 million tires, at staggering cost. At least part of the problem, according to analysts in the industry, is that Firestone took a shortcut by trying to build radials on its old machines for bias-plies.

“The difference with the Japanese companies is that they do everything in the long run,” says Ira Davidson, an executive of Kaiser Aluminum. “If they have a market for one million tons, they build a plant for 4 million. Then they lose money until they hit the breakeven point, but eventually it pays off.”

To put it differently, as Lloyd Bentsen did last April at the Harvard conference on competitiveness, “part of our problem with competitiveness and productivity resides not in public policy, but right here at this seminar—in the corporate boardroom, in the way American business is managing its affairs.” Bentsen said that two kinds of incentives—for managers within a corporation, and for corporations within financial markets— encourage individuals and institutions to maximize short-term gains. For the executives, said Bentsen (himself once the president of a major insurance company), “the measure of achievement and the goals to be reached are as short-term as a politician’s next election. Bonuses, salaries, and promotions are too often dependent on this year’s increase of profits over last year.” When Elliot Estes, the current president of GM, became head of the Pontiac division in the early 1960s, Pontiac’s controller was a veteran with only one year to go before retirement. “He knew that his chances of getting a big bonus at the end would be improved by not spending any money,” says one man familiar with the story. “They made all sorts of stupid decisions that year to keep down expenses. They were piling machinery in the aisles rather than getting more space.”

“In a number of our biggest companies, you have men who have risen for years through the ranks, and then have a very short stewardship as chief executive officers,” says Julian Scheer, a senior vice president of the LTV Corporation. “They try to deal with longrange problems in the short term. They want to demonstrate to their directors, their stockholders, and the financial community that this year’s rate of growth is as projected, that they’ll meet this year’s targets this year. What gets lost is the strategy that will take the company over twenty-five or thirty years.”

The imperatives of the financial markets further intensify the short-run pressure. “Today’s financial measurements are biased against the long term,” Bentsen said at Harvard. “When you want to make this year’s annual report look as good as possible, why engage in market entry pricing in East Asia? Why accept losses for two or three years to build volume and brand recognition? I can assure you that our competition in the world of trade is more than ready to make market investments that may not pay off for a decade. They are willing to spend years positioning themselves to conquer global markets.”

Ultimately, the villain in this piece is the same system of equity capital—that is, the stock exchanges—whose flexibility and refinement are the envy of most of the world. It has long been a truism in American business that “equity”— selling shares of stock—is a good way to raise money, and “debt”—loans from a bank—is bad. Now businessmen have begun denouncing, as if it were a devious Oriental trick, the Japanese practice of heavy debt financing for crucial industries such as computers and steel. (They object even more strongly, and with better reason, to the fact that the Japanese government unofficially guarantees many of these loans, ensuring that its companies will not go out of business.)

The central difference between debt and equity, at least for mature businesses, is what the lenders can ask. If a bank gives a loan, what it wants is to have the money repaid. An equity share entitles the owner to something less—if the company goes down, he’s left with nothing—but also something more: the right to demand that the management maximize profits now. In the stockholder’s name, corporate directors know they have a fiduciary duty to keep the dividend rate up, and to protect the value of their shares on the stock exchange. There are quarterly earnings reports to be filed, price/earnings ratios to maintain. “The American steel companies were prisoners of Wall Street,” David Ignatius wrote in an excellent analysis of the steel industry in The Washington Monthly. “Unlike Japanese steelmakers, which are financed mostly by bank debt and thus don’t have to worry about stock market expectations, the stockholder-owned U.S. makers were expected by Wall Street to present neat, quarter-to-quarter increases in earnings. . . . It’s an unhappy truth that sometimes what is best for a company or an industry—for example, a long period of foregone earnings while the profits are plowed back into new facilities—is not always what keeps the stockholders happy.”

Companies that can convince the analysts that they are sure to “grow” can postpone these constraints of the equity market. Family management is another solution—although family decisions aren’t always right. Ford is the most family-dominated of the American car companies, and the one that may eventually be in the worst trouble, because five years ago Henry Ford II overruled Lee Iacocca’s decision to build a small, front-wheel drive car. But families, founders, original entrepreneurs, at least have a predisposition to identify their long-run interests with the company’s, something that is not built into the professional managerial class. Unfortunately, it’s not just the family firms and the fast-growth companies that need management and financing based on the long view; settled industries such as steel, tires, and autos also suffer when forced to keep the price/earnings ratio at the right level.

American banks have recently demonstrated that they understand this principle—at least as it applies to Japan. These banks get nervous about the soundness of an American company when its debt rises above 30 percent of its total capital. But, according to the United Steel Workers, American banks have continued to make loans to Japanese firms where the debt ratio is typically 80 percent or more. American banks have three times as much money on loan to Japanese steel companies as to American ones. There the money helps to buy the continuous casters, electric furnaces, and integrated mills that American firms cannot “afford.”

III. Paper Producers

“You want to know what’s wrong with America?” The speaker was Warren Davis, an official of the Semiconductor Industry Association, sitting in yet another low-lying office building near Cupertino City Hall. Davis had light, dry-look hair and modish glasses. The United Steel Workers office has imitation industrial girders on its windows, reminding people of their roots; this one looked as if it could use a hot tub in the hall. “I’ll tell you what’s wrong.” Davis walked to the blackboard, on which he had been producing schematic charts on the relation between finance and creativity and the evils of the Japanese trading system. He drew two lines at right angles, the axes of a graph, and then plotted one line angling sharply down, from upper left to lower right. “That’s our production of electrical engineers in the last ten years,” he said. “Down to 17,000 a year.” He drew a second line, sloping sharply upward. “That’s our production of lawyers. Now it’s about 33,000 a year.” He circled the point where the two lines crossed, in the early 1970s, and tapped the board with his chalk. “That’s where you see the trouble.” When the chart first appeared, in the Benjamin Rosen Electronics newsletter, the caption asked, in effect, Where are all the engineers? Probably in law school.

All across the country, people in business and government have been advancing a similar argument; that our industrial problems originate not in any one component of the economic system, but in its general cultural setting. They contend that, in this age when production matters and when our international affluence can no longer be taken for granted, our economic and social rewards have come unmoored from measures of true productivity.

This diagnosis includes envious and often simplistic references to Japan, happy land where every cultural force is supposed to push in the direction of economic efficiency. The bible for this analysis is Ezra Vogel’s book Japan as Number One; the choice of gospels depends on which group is speaking. American businessmen point out that labor and government are friends of industry in Japan; American labor leaders stress that Japanese companies undertake a lifetime commitment to keep their workers employed. All point out that the Japanese save more of their total income for reinvestment (although quirky factors help explain this. The required down payment for a home in Japan has traditionally been more than 50 percent of the total price. This tends to encourage savings, as does the practice of paying workers lump-sum bonuses twice a year).

The most mournful lament about our differences from Japan concerns the apparent success of their collective, “Japan Inc.” mentality. While the Japanese are thinking how to advance the fortunes of Dai Nippon, this theory goes, our productive abilities fall victim to an “adversary culture,” in which business, labor, and government are constantly at one another’s throats, in a formalized combat in which the lawyers feed the paranoia of all sides. “The adversary system may be a proper way to determine guilt and innocence,” says one businessman. “I am not sure it is the right way to develop a coherent, pragmatic economic policy.”

From the government’s point of view, this theory has generated much of the enthusiasm for a new “industrial policy,” a subject to which we will return. In labor-management relations, it is leading to more tangible changes. To readers of business publications, “Mahwah” and “Tarrytown” have become symbols of opposite approaches, as “Appomattox” and “Munich” might be in the realm of diplomacy. Mahwah, New Jersey, was one of Ford’s largest assembly plants (Harvey Swados’s workplace, described in his novel Out on the Line). Life at Mahwah was everything bad about old-style labor relations: contentious, full of mutual suspicion and resentment, tensions always ready to come to a boil. Last spring, Ford closed Mahwah for good. The GM plant at Tarrytown, New York, suffered from the same reputation, before the company began a “quality of work life” program six years ago. As union members were invited to provide more than brute labor, their innovations improved the quality of the product and their commitment transformed the atmosphere of the plant. Grievances against management fell from 2000 to 30, and absenteeism from 7 percent to 2.5. Now Tarrytown is one of GM’s success stories, its lines running full blast to produce the Xbody cars. Similar stories can be told in the aluminum, steel, and machine tool industries.

“I don’t feel that the process of relations among labor, management, and government is very well adapted to the world we live in now, as opposed to that of the 1930s and 1940s,” says James Smith of the Steel Workers, reflecting the thoughts going through many minds. “A great deal of the sloganized, adversarial relationship is built into our ways of thinking, is instituted in law and in our grievance procedures. It is based on a philosophy of a contest for splitting the pie between workers and owners. But we’ve shifted from a structure where the owners were the idle rich to one where they’re the idle old—through the pension funds. I’m not sure the old class war makes sense as we move toward an economy where the split is between the employed and the retired.”

Neither the industrial efforts to overcome the class war nor other efforts to emulate the Japanese seem likely to touch a deeper and finally more threatening cultural influence on economic strength. This is what could be called the “clean hands” society, in which those who invent, produce, and sell products gradually give way to those who manipulate and rearrange laws, assets, processes, and ideas.

I am not speaking here of the evolution of a “services” economy, which can be a natural, and mainly desirable, sign of economic growth. As a nation’s farms and factories grow more efficient, fewer of its people must work there, and more can teach and be taught, care for the sick, sustain the arts. The same development takes place even within an industry; the American auto industry has long employed more people in sales and distribution than in producing cars. Instead, I am discussing the disproportionate rewards that flow even within business to the class of “paper entrepreneurs.”

This phrase belongs to Robert Reich, himself a lawyer and self-described “paper entrepreneur,” who is the director of the Office of Policy Planning at the Federal Trade Commission. His theory is that economic life has yielded more and more of its prizes to those who can work the legal and financial angles or can guess right in speculation, rather than those who work at improving a product or making a sale.

“Paper entrepreneurs—trained in law, finance, accountancy—manipulate complex systems of rules and numbers,” Reich has written. “They innovate by using the system in novel ways; establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, ‘white knights’ to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quotas, price supports, bailouts; going private, going public, going bankrupt.”

Such paper entrepreneurs, Reich says, provide the necessary grease for the wheels of the capital system, but do not by themselves add to production. Nonetheless, he says, “paper entrepreneurialism is on the rise.” The government is dominated by lawyers; financiers rise to the top of the largest corporations; many of the best students are drawn into law and business schools, and from there into consulting, accounting, lobbying, rather than production itself. Of the 1000 largest corporations in the country, one quarter are run by people from the finance staffs. “Out of every 10.000 citizens in Japan, only one is a lawyer and three are accountants,” Reich told the Senate Small Business Committee in June. “Out of every 10,000 citizens in the United Stales, twenty are lawyers and forty are accountants.” Of the same group, he said, Japan has 400 engineers and scientists; the United States has seventy. “Paper entrepreneurialism promises the best financial rewards, the greatest employment security, and the highest social status in our economy,” he said. “As a result, the ‘brain drain’ from product entrepreneurialism—from genuine innovation in production, marketing, distribution, and sales—to paper continues unabated.”

For the nation’s large companies, the rewards of manipulating rules and rearranging assets can far exceed those of improved productivity. The Wall Street Journal recently reported on the way a change in accounting rules produced an enormous paper profit for several corporations. Changes in the tax law can mean millions in profit gained or lost. Roger Smith of General Motors said that part of the satisfaction of working for such a large corporation was “the challenge—a lot of things that don’t impact other people very much are big things to us. When the SEC is considering new rules, the first people they hear from are us.” Five years ago, Kaiser Aluminum had two people in its Washington office. Now it has ten, “and that is only the tip of the iceberg,” Thomas Singer, a Kaiser vice president, said. One of its officials has made fifty trips to Washington from Kaiser headquarters in Oakland in the last two years.

The commodity futures market, Reich says, represents profit based on pure speculation, rather than on production. In the last ten years, the activity of that market has increased 458 percent. (Stock market activity increased by only 174 percent in the same time.) Since 1977, $ 100 billion in corporate cash assets has been used for tender offers to acquire other companies. This “asset-rearranging” drains resources that might otherwise be used for productive investment, Reich says. More damaging still, it draws some of the brightest minds to the legal, accounting, and financial services that support this speculative trade. “If you can’t modernize,” says Julian Scheer of LTV, “you can pick up a small company that already has a balance sheet that you know about and is performing well. If you’re in the oil business and you want sucker rods, it’s easier to add a sucker rod company in an exchange of paper than to add a sucker rod division on your own. [A sucker rod is part of the system used to pump oil from a well.] This has led to the acquisition boom and the demise of a lot of small businesses.”

As corporations have learned the lessons of paper entrepreneurship, so too have unions and executives. “Perhaps you can explain these figures to me,” said Hajime Ohta, a Japanese businessman spending a year at the U.S.-Japan Trade Council in Washington. “I see that the highest industrial wages over the last ten years have been for steel workers. Their industry is doing very badly. The second highest are the auto workers. I do not understand how they enjoy that advantage when their industries are suffering. I do not feel quite comfortable looking at figures like these.”

The unions’ first reply is based on class war principles: they are defending the heights for all of labor, setting a standard that protects textile workers and those who clean motels for the minimum wage. They can also look up the ladder within the corporations and see that others have worked out even sweeter deals. The day after I spoke with Roger Smith, I saw a little item in the Wall Street Journal about executive pay at GM. In accord with President Carter’s anti-inflation program, the company was going to hold down executive compensation. Roger Smith’s total pay for 1979 would be $801,667; Thomas Murphy’s, $941,667. Mr. Ohta says that the chairman of the board of Nissan, which makes Datsun, is paid about $140,000.

(Each country suspects the other’s executives of padding their salaries with hidden perks; but the Japanese contend that the difference between bluecollar and executive salaries in the typical Japanese company is about one third as great as in the U.S.)

Perhaps more significant is the way the executives are compensated. Many companies follow the practice of the auto industry, in which executives are given substantial bonuses in profitable years. In theory, the bonuses reward those who have been pulling their weight. “You have to understand the way these bonuses really work,” says Andrew Court. “So much of the business is done internally that the profit and loss for each division depends mainly on the ‘transfer prices.’ The financial staff sets the transfer prices, and those determine everyone’s bonuses. That is why the financial staff has become so dominant, especially at GM.” Several years back, two GM plants were producing virtually identical automatic transmissions. The Chevrolet transmission plant “sold” directly to the Chevrolet division; the Hydramatic plant sold to Oldsmobile, Cadillac, and other divisions including Chevy. The transfer price for the Chevy transmission was $130; Hydramatic’s was $185. Actual production costs at the Chevrolet plant were $7 less per transmission than at Hydramatic, but the way the financial staff allocated the profits meant astronomical bonuses for the Hydramatic officials. One year, Hydramatic’s manager received $250,000 in salary and bonuses. The manager of the Chevrolet plant got $80,000—for doing exactly the same thing, and doing it more efficiently.

Future business leaders can read these straws in the wind. I asked the MBA office at the Harvard Business School about the most attractive careers for its graduates. “Clearly, consulting,” one official there said. “Before that, it was investment banking, and before that, consumer products. Right now the consulting companies have reasonably glamorous starting offers”—in the $40,000-$50,000 range—“and reasonably glamorous prospects for spending your time. There’s also a lot of peer pressure. The consulting companies are looking for the most competitive students, so everyone wants to be one of those interviewed and offered a job.” And what is the least attractive area? “Oh, manufacturing. It’s not glamorous. Getting out there on the floor is not the idea most people have of the way they want to spend their time.”

The most poignant expression of this trend came indirectly, in an off-the-record interview, the identifying details of which I have altered. I was speaking with a middle-management official in one of the country’s most important manufacturing firms. The man was rough-spoken, craggy-featured, with an “ethnic” name. His father, an immigrant, had been a manual laborer in the industry his son now helped direct. We talked about the problems of the industry, the way it was misunderstood by government and academics, the tough, hard-nosed problems it had to confront. Then, as we strolled away from the downtown club where the man had waved confidently to all his associates, he spoke about one of his own children—so talented, so bright. Could he take the risk that the public schools would be good enough? Shouldn’t he go for a private school right away? After all, he wanted only the best for his child, who might grow up to be a doctor, a lawyer, hold a position of respect. A future in his own industry was not discussed.

Yes, there are glimmers of light. Of all the industrialized nations, the U.S. is the only one to have increased employment in manufacturing industries since the Arab oil boycott in 1973. (This is also a subtle reminder of lagging productivity; the Japanese have increased output, we have increased jobs.) The U.S., which had further to go, has gone further than anyone else in reducing oil consumption in those years (though the amount we spend for foreign oil is still stupendous). The current wave of introspection about our competitive position is potentially the most cheering development, if it leads to the same reconsideration of fundamentals that transformed “Made in Japan" from shorthand for everything shoddy and cheap to the symbol of high-class production in less than twenty-five years.

It may be that industrial salvation depends more on the thousands of daily decisions made in countless factories and offices than on any one step the government can take. Nonetheless, the government is sure to do something, and the proposals for “reindustrializing" America have already sorted out along predictable political lines. The Republicans and the business groups will be pushing changes in the tax laws to help business raise more money; Democrats and academic theorists spin their plans for an “industrial policy.”

Reports on the way the American tax code discourages investment sit six feet high. Most of all, the laws discourage investment in new, innovative firms that actually create new products, rather than rearranging assets in a financial shell game. The IRS depreciation schedules are particularly wrongheaded in highly inflationary times, since the machine tool that cost $40,000 ten years ago may cost $200,000 to replace now. Senator Danforth, among others, has proposed technical changes in the tax laws to offset these distortions. Senator Bentsen, as chairman of the Joint Economic Committee, will release this fall a thoroughgoing report on tax changes and other “industrial policies,”intended to serve as a guide to economic sanity for our next President. The slogan “10-5-3" is sure to ring through Republican speeches during this election and next year. It signifies a flat depreciation schedule of ten years for all industrial buildings, five years for almost all machinery, and three years for “light" items such as trucks.

Some of these steps arc clearly necessary, especially adjusting rules for depreciation. The difficulty is matching the incentive to the desired goal. Lloyd Bentsen recalls that, when the same issues were argued two years ago, all the big industries pushed for a cut in the rate of corporate tax, rather than a change in the depreciation schedules. “Of course they preferred the rate cut,”Bentsen says. “They could use that for anything—acquiring other companies, paying dividends— while with depreciation, they only get the benefit if they invest.” The flaw in the 10-5-3 plan, according to some economists, is that it gives a disproportionate incentive for new construction, which for the moment is the least urgently needed form of investment to improve our productivity. The answer might be a 155-3 plan, or one on the German model, in which industries can write off their investment at any rate they choose. Another proposal to increase investment—the small saver’s favorite, exempting the first $100 or $200 of interest earnings from federal income tax—might prove futile. Through roundabout economic calculations, it can be demonstrated that, after the government has borrowed money in the bond markets to make up for the tax revenue lost through this scheme, the nation would end up with a lower total savings rate than without this “savings incentive.”

The assorted “industrial policies" have virtues and limitations similar to those of the tax cut schemes. For the past six months, the government has undergone one of its periodic “philosophical” debates about whether it can intelligently “pick winners" among industries while letting the “losers” wither on the vine. In theory, this is like the wartime practice of triage, in which medics concentrate their attention where it will make a difference and ignore those who are certain to die. In practice, it reflects the desire to emulate Japan’s successes in massing the nation’s resources behind the fastest-growing industries, and to avoid the British disaster of pouring scarce funds down bottomless holes. From the Commerce Department to Labor, from the Treasury to the Council of Economic Advisers, debate has raged about whether such schemes would ever work. The optimists have proposed “industrial boards" that would coordinate aid to promising industries, regional development programs, more ambitious schemes to retrain laid-off auto workers for careers in biomedical engineering. Arnold Packer of the Labor Department contends that “early, certain markets” are what new industries need to get off the ground, and he has proposed four areas where government support could make a difference: energy-saving and -producing equipment; agricultural equipment; medical services; and training and education. (The U.S. has an edge in these areas, Packer says; they have high growth potential; and the more they succeed, the more inflationary pressure they will remove from worldwide markets for food and fuel.)

One difficulty with an industrial policy is that you can’t let such “losers” as the steel industry run all the way down-even though some “modern” steel managers, especially at U.S. Steel, are cutting the industry down to its more productive plants. In the depths of Detroit’s agonies, the Carter Administration did what any administration would have done—not declare the auto industry a “loser,” but look for ways to shore it up. Another problem is that, while the chaos of current programs for industry looks to some people like a great opportunity for rational reorganization, it convinces others that state management of the economy will always be jumbled and ad hoc. Charles Schultze, the chairman of the Council of Economic Advisers, points out that 80 percent of the people in this country live in places eligible for “distressed area assistance.” “I have a great suspicion,” he says, “not of the government’s ability to do anything, but its ability to do anything aimed at precise targets.” Schultze recently obtained a list of the twenty products and industries that grew fastest during the 1970s—the “winners.” Of those twenty, perhaps five look “predictable” in retrospect: various forms of plastics, oil and gas drilling equipment, semiconductors, small cars. (The car makers, of course, say this last item was unforeseeable, even though it was the fastest growing product on the list.) But what about “utility vehicles,” number 2 on the list? Vacuum cleaners (9)? Construction glass (13)? Cheese and tufted carpets (18 and 19)? “And where have you had the highest productivity increase in the past generation?” Schultze asks. “Poultry and turkey rearing. Who was going to pick that as a ‘winner’?”

This is not even to mention the larger sources of misery—oil, inflation, the world’s limited resources— that have made burlesques out of the most nicely crafted economic plans. The $ 10 or $20 billion it might cost to build a whole new steel industry sounds like a lot, until one thinks of the $100 billion the U.S. will send out of the country this year to pay for foreign oil. Some of those dollars may eventually come back home, but largely as foreign ownership of American assets. Even if OPEC never raises its prices a penny more, at current rates it will collect enough money to buy all the shares of all the companies on the New York Stock Exchange in the next eight years. There is a piquant chicken-and-egg side to these phenomena. Because inflation is so bad, businesses can’t raise money to invest. Because they don’t invest, productivity doesn’t rise. Because productivity is bad, inflation gets worse. Because inflation is worse, the dollar is weaker. Because the dollar is weak, OPEC (which is paid in dollars) raises its prices. Because oil prices go up, so does inflation. And because they want to be re-elected, presidents pump up the economy every four years and move inflation up to a new plateau.

Politicians bear the blame for many of these problems; managers, consumers, labor, for many more. But I ended these journeys thinking that what we need least is the reflexive resort to catch phrases such as “overregulation” or “incompetent management” as the causes of our problems. To ask steel managers why their industry is in trouble and hear, “Black lung laws”; to ask a federal regulator about the auto industry and hear, “A bunch of whiners”; to talk to union leaders and hear, “They’re just trying to set American workers against Japanese workers,” is to conclude that we have far to go before any side will move past clichés to look at these issues afresh.

What we may be dealing with is another fundamental American system whose internal incentives have become perverse. As with education and defense, perhaps even our means of choosing political leaders, many people sense that something has gone wrong with our industrial base. In none of these areas are the cliches useful. When the decline of public education is blamed on “integration” or “lazy teachers,” that postpones attention to the mechanics of teaching. When defense is argued as a question of “less” or “more,” there is no careful thought about “what.” When economic solutions are sought in apportionments of the blame among government, business, and labor, we postpone the mixed, practical solutions that in the long run are probably most useful: some government steps to deal more reasonably with business; an effort to persuade the Japanese to open their markets, without retreating ourselves into protectionism; unions—and managers—recognizing that their rewards must ultimately be tied to production; a greater emphasis on production in the pantheon of social values.

In looking for solutions to our industrial disease, we may have an advantage denied in the realm of defense, where tests against the standard of reality are so infrequent that folly may continue for years and be detected only when the opportunity for correction is past. The test of reality is at hand each day in international commerce; the results are here for us to read.