Postponing the End of Leadership

Jacques Attali
Attali is a top advisor to French President Mitterand and an economic historian. He is the author of A Man of Influence, the biography of Siegmund Warburg. We asked him to place the growing American debt in an historical context.

I. Debt: The Cost of Hegemony Lost
A great transfer of power is taking place in the world economy. The center of economic power is shifting away from America, much as it shifted from Bruges to Venice at the close of the 13th Century or from Great Britain to the United States in this century.

Each of these crises of transition has unfolded in three phases. First, debt builds up. Amortization follows. Finally, the crisis is resolved by the development of markets for new technologies. The country which dominates production of those technologies becomes the new center of power.

The Three Phases
''Socialization'' is phase one. In this phase, a society goes into debt to cover the escalating costs of organizing the society servicing infrastructure as well as the growth in institutions, bureaucracy and centralization commensurate with ever increasing affluence and security responsibilities. Such costs include transportation, communications, education, defense, health care and social welfare. The costs also include satisfaction of cultural demands, such as the mortgage tax exemption for the spacious housing of the American Dream.

As costs escalate beyond a society's ability to produce wealth, the rate of return for the whole society falls. With falling returns, there is not enough money to finance the future.

When this crisis sets in, people in the core society don't want to believe it. They'd rather go on living as before. In order to sustain their accustomed cultural preferences and standard of living, they go into debt.

The second phase is amortization. The realization sets in that so much debt has accumulated that it can't be paid. Historically, such debt has been cancelled by depression, bankruptcies or inflation.

The final phase of the crisis involves the development of new consumer demand for technological innovations - such as the use of electricity for light, heat and power, or later, the electric motor applied to consumer durables like the washing machine - which increase productivity. These innovations reduce the high cost of servicing the society.

Schematically speaking, the US has just finished the socialization, or debt accumulation stage. The American fiscal and trade deficit, as well as private debt, have grown so large because, as the core of world economy in the recent past, the United States has lived for decades as a predominantly consumer society.

By definition, a consumer society highly values the immediate present and places a low value on the long term and the future. This has meant that savings became very low and, with low savings, it is impossible to finance the crisis brought on by the escalating costs of servicing the society. In a nutshell, the debts of the US are linked to the low value of the future in American life.

Of course, a society can avoid debt through a planned commitment to productive investments in innovative, cost-reducing technologies and their infrastructure; by a readjustment of cultural demands that result in reducing consumption; or by a political consensus about fair distribution of short term sacrifices and the long term benefits of adjustment.

Historically, however, appropriate adjustment has never taken place, whether for the Netherlands at the end of the 17th Century or for Britain at the end of the 19th Century or for the US now at the end of the 20th Century. All have chosen to go into debt because it is a way of postponing the end of leadership.

Cuts: The US Deficit or European Defense?
The US predicament today illustrates the implications of debt for hegemonic leadership.

One way to reduce the US budget deficit is to increase taxes. But that poses some terrible dilemmas. Raising taxes now might hasten a recession, and raising taxes once a recession begins will be politically impossible. Then, the recession will further worsen the deficit and soon there will be a $3 trillion rather than a $1 trillion problem to deal with.

With these kinds of worsening dilemmas, some American presidential candidate is sure to point out that what the US spends for the defense of Japan and Europe is roughly equivalent to the $150 billion federal deficit. Deleting those defense allowances, the candidate might suggest, would bring the budget back into balance and allow America to respond to its own pressing needs for better education, more jobs, funds for the cities, Social Security and Medicare. He might add that America should turn its attention to security problems next door in Mexico. America, such a candidate may convincingly argue, must do exactly what Gorbachev is doing. In order to have a strong defense at the beginning of the next century, defense costs must be reduced now in order to strengthen the economy

Such a scenario is true to the historical pattern. When the core nation loses economic hegemony, it has to adjust the global security responsibilities it has assumed at the height of its dominance. This is what finally happened to Great Britain in 1967, but it took the 20 years from the end of World War 11 for them to finally conclude that they couldn't afford troops east of Aden.

II. Technology, New Markets and Reducing the Debt
The global economy has been in crisis for a decade now because innovative labor-saving, costreducing and capital efficient technologies of the future have been developed but commercially underexploited as consumer products.

We know how to use automation and robotics to improve the productivity of manufacturing old devices such as automobiles and washing machines, but real consumer market demand for new devices remains undeveloped, despite the fact that cultural receptivity and economic necessity are already present.

There is, for example, very strong potential demand for reducing overhead costs through decentralization of administration, reducing bureaucracy and creating more space for self-reliant individuals and smaller-scale organization. Such innovative labor-saving devices that someday will be as easy to use as the common telephone (like fully userfriendly computers for self-teaching, teleshopping and personalized in-the-home health monitoring) could cut overhead institutional costs and respond to the growing cultural demand for more autonomy from large-scale organization.

Commercial exploitation of this cultural demand requires investment opportunities with the immediate high returns that only a market for consumer goods can provide. And for consumer goods, new demand can only be created by new devices that have not already saturated the market.

For instance, the most important and fastest growing industry in America today, in terms of value-added, is the production of medical devices that improve the quality of patient care and reduce the heavy overhead costs of institutional health care. Another example of such a technology, in this case controlled by Japan, is the video cassette recorder which enables the selforganization of leisure and learning in the home.

Although not adequately reflected in the overall growth statistics, these markets are advancing rapidly. The rate of investment is very strong, but mass demand on the order of the automobile or washing machine during the height of the postwar era is not yet here. It may take ten years.

These technologies are exactly at the same point of market development as cars in the beginning of this century. The auto industry waited 20 years for mass demand. The technological innovation was there, but the capacity for commercial exploitation did not exist until other factors were set in place. For example, the highway, bridge and road 'infrastructure had to be sufficiently developed through public investment to enable the growth of automobile transportation.

The same was true with the washing machine. The electric motor linked to a washing device was developed in the early 1920s. By 1929, even as the depression descended on the global economy, the rate of growth of the washing machine industry was tremendous. But then it was a small market growing rapidly and couldn't help forestall the Great Depression. It was too tiny. But it was there. It took 20 years, and a war, to fully develop the potential.

Additionally, the diffusion of the washing machine to a mass market was also only possible when a cluster of enabling technologies and infrastructure were set in place - the development of small and cheap electric motors had to be accompanied by new materials for insulation and isolating the water from electric heating elements. Simple electromagnetic control mechanisms and the ability to hook the household up to electricity, a water supply and drainage systems was also necessary.

So, while the new technologies are here and their growth is rapid, demand for them is still too small as a part of the overall economy to affect stagnating growth and compensate for rising debt. This is the nature of the crisis.

Saturated Markets, Underexploited Technology and Speculation. I Since the new technologies are not yet sufficiently exploitable, private capital continues to pour into the mature technologies, like autos, that have saturated the market. Overcapacity has already begun to feel the pinch of underconsumption, causing layoffs and high rates of unemployment. Because returns are falling, the need for debt is accelerated to keep operations going. Investors then begin searching elsewhere for higher returns.

Simultaneously, infrastructure like roads and electric power stations. which enabled the development of older technologies whose markets are now saturated, are very costly and must be repaired and maintained by going ever deeper into debt.

As the British sociologist Johnathan Gershuny has noted, by 1975 the demand for domestic electrical goods in Great Britain was virtually saturated. But, power stations and roads still had to be built because the old ones were in disrepair. Funds, either raised from tax revenues or borrowed through the bond market are utilized to maintain this old infrastructure even though it does not open up new markets This may even delay the emergence of the new technologies by soaking up capital and diverting it from investment in new enabling infrastructure like optic fiber cabling.

The debt will continue to grow until mass consumer demand provides investment returns sufficient to cover social costs. At the moment between two phases - [he end of amortization and the beginning of the new demand phase - much higher returns on capital can be made in speculation instead of productive investment. Finance capitalism - money chasing money, speculation in the stock or real estate markets, ''paper entrepreneurialism,'' mergers and acquisitions - marks the last step of amortization.

III. The Insufficiency of Keynes
The classic problem of recession and stagnating growth - underconsumption - to which Keynes addressed his counter-cyclical policies, is only part of the problem. Both the internationalization of the economy and technological transition undercut the effectiveness of Keynes.

One problem with Keynesian demand stimulation as a policy tool in a global economy is that it often stimulates international rather than national production. Such a policy can end up exporting jobs, flooding a country with imports and causing trade imbalances and currency instability. Keynesian policies may also have the effect of not creating demand for the new cost-reducing technologies, but instead increasing the demand for the benefits of education, health care and social benefits without reducing their cost to society

The crisis of the system going deeper 'into debt is not resolved by the consumption of existing goods. Only biased consumption of capital efficient, cost-reducing new devices will promote value-added industry that can overcome mounting debt. We are not merely experiencing another turn of the business cycle during the Industrial Era. We arc experiencing a longer-term cycle of stagnating growth in old technologies and nascent growth in the new.

Keynesian policies will once again be valuable when the cost of social organization can be decreased with a takeoff in new markets for costreducing technologies. Then demand stimulation policies will accelerate the cost-savings of the whole society.

The promotion of cost-reducing innovations is a central aspect of the social democratic response to the present crisis of the global economy The only other solution is very rough: cutting costs by decreasing wages and reducing the level and quality of social services.

IV. International Division of Labor
Looking into the future, the resolution of America's debt problems and the development of new consumer markets for innovative technologies will change the world order, The primary global core of financial and cultural elites, built around the highest concentration of high-value production of the new technologies will probably be in Tokyo. Japan's strongest markets will be China and the adjacent newly industrializing nations like Korea and Singapore. It is likely that Japan will dominate the military/security organization in that region.

Because of the cultural openness, sanctified individualism, relative youth of industrial plant and strong high-technology base, the high-value added center of the United States will likely be in the Southwest, with America's security responsibilities and markets primarily in Latin America. Europe's 320 million people will develop a greater integration of their own markets and those of Africa. And an independent set of Europeancentered security responsibilities will undoubtedly accompany this new identity.

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