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When U.S. Defense Dollars Cost a World of Consumers

AMERICA'S UPS AND DOWNS: This is author Robert Conot's third article on the new world economy; his next will consider future prospects.

December 13, 1987|Robert Conot

Mikhail S. Gorbachev has apparently concluded that the Soviet Union must make a choice between missiles and consumerism. The implicit message of Gramm-Rudman is the same for the United States. The Reagan Administration presumption that it would be possible to expand defense on the back of a surging economy disappeared like a vapor trail as American consumer production migrated instead to other nations. The subplot--the superpowers' new confrontation of economic realities--may be a more important aspect of last week's summit than the dramatized main event.

Since World War II, U.S. policy has been brilliantly successful from a politico-economic standpoint. With American support, industrial nations rebuilt their shattered economies and lesser-developed countries surged upward. Communism, once the apparent wave of the future--even in Western Europe--has been turned back as central planning lost its appeal. From China to Czechoslovakia, communist nations themselves are turning back toward a measure of individual enterprise.

But everything has its price; for the United States, it has been the erosion of capital to help build other nations' economies at the same time America assumed overwhelming responsibility for the West's defenses.

Before the 1950s, the United States produced about 55% of the world's oil, iron and steel and 35% of its coal. It was virtually the only industrial country with a favorable--and massive--balance of trade. It controlled the world's gold supply and international finance. Yet by the 1960s, the beginnings of the current economic problems were manifesting themselves. Those periods when U.S. industry was busiest fulfilling the needs of the federal government were the times when other nations enjoyed the greatest opportunity to move into the American consumer market.

Even before the '60s, the Korean War coincided with the inception of West German and Japanese revival. Then the periods of the "missile gap," the space race and Vietnam brought import-penetration to full flower; Japanese automotive, electronics and appliance manufacturers first made significant inroads. There was a major devaluation of the dollar and, in 1971, the United States ended the convertibility of gold. Finally, Reagan's defense buildup of the 1980s generated a stunningly swift U.S. reversal--from the world's most important creditor nation to world's biggest debtor.

While differentials in labor costs, high interest rates and budget deficits are primarily responsible for the now-chronic American trade and balance-of-payments gaps, the complexities of modern global competition defy simple explanations or generalized solutions. After all, the dollar has been falling now for more than three years without significantly affecting the balance of trade; this year the deficit will be the worst ever, approximately 10% higher than in 1986. There are multiple global cross-currents that in many ways make the workings of international industry more pivotal than those of a national economy. Meanwhile, the U.S. economy has been fragmented along geographic lines; what is bad for one region may be good for another and vice versa.

Conventional wisdom suggests that the 1973 creation of a cartel, the Organization of Petroleum Exporting Countries (OPEC), the driving up of petroleum prices and the inflation that followed was an economic negative. But for U.S. energy, mining, agriculture and ancillary industries--notably in the Southwest, Rocky Mountain states and parts of the Midwest--the oil crunch was a boon. The explosion of oil prices spurred U.S. exploration and production, depressed for years by cheap Middle East oil imports. The U.S. coal-mining industry, the Western world's largest, had been similarly declining but enjoyed a robust revival as coal became an attractive alternate energy source and utilities switched from oil to coal. Coal production increased by more than 50% between 1973 and 1986, and exports more than doubled between 1973 and 1981.

The dollars earned by oil-producing nations also created a development boom participated in by U.S. engineering and construction companies. Projects involving American firms began in oil countries themselves. Excess oil revenues were recycled by international banks into loans for less fortunate Third World nations. Those loans helped create historically high trade surpluses for American agricultural products. In the United States, land prices soared, farm machinery manufacturers prospered and the U.S. fertilizer industry--world dominant--operated at high capacity. The passage of the 1981 tax act, establishing in effect a subsidy for construction, fueled a commercial building boom. All these activities generated a worldwide demand for steel that masked for a time the aging plants, growing inefficiency and high costs of the U.S. steel industry.

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