US Still Leads the Pack; Only Japan Closes Gap

Despite poor image, US is tops in productivity and living standards

THE United States economy will be "much more dynamic" in the 1990s than the economies of Western Europe or Japan.

Thus, predicts economist Edward Wolff, the sizable US lead over Germany, France, and Britain in productivity and standard-of-living will expand. And Japan will not catch up by much.

"The Japanese have big structural problems that are going to hinder them," the New York University (NYU) professor says.

The prevalent public image of the US economy is hardly one of strength. The recovery only now is showing signs of vigor, though national output officially emerged from a recession in March 1991. The charts presidential candidate Ross Perot displayed for millions of television viewers last fall showed an economy in deep trouble. Lamentations over the huge federal budget deficit often suggest the country is headed for rack and ruin.

Yet two recent studies indicate that the US still runs the world's greatest economic powerhouse.

"We are in a far better position than superficial views would suggest," says William Baumol, director of NYU's C. V. Starr Center for Applied Economics. "But we are in no way guaranteed to keep in that position if we rest on our oars."

A report by Mr. Baumol and Professor Wolff concludes: "All in all, the data indicate that the American economy's long-term performance is far better than it is generally believed to be, and that there is little evidence that it is about to get worse."

A study by the McKinsey Global Institute finds that in 1990, US per capita output (gross domestic product per person) was 16 percent greater than in West Germany, 22 percent larger than in Japan, 23 percent greater than in France, and 37 percent more than in Britain. (These numbers are based on purchasing power parity. The conversion of foreign currencies into US dollars is not simply based on foreign exchange market rates but on what it costs to buy a standard basket of goods and services in other count ries relative to how much the same basket costs in the US.)

"Somewhat surprisingly," the McKinsey study says, "we see no trend towards the European economies converging to the US level. There has been some convergence by Japan, but at a rather slow rate." Dual-income families

A primary reason for the higher living standards in the US is that more people, particularly women, work for pay. The two-earner family is commonplace.

Even taking this factor into account, average labor productivity remains higher in the US than elsewhere. Measured in GDP per person employed, it amounts to $49,600 in 1990 dollars. France is close behind at $47,000, the McKinsey study finds. West German productivity is about 10 percent behind, at $44,200. That number prompted some disagreement in Germany when it was first published last fall. The gap with Japan and Britain is 20 percent. (See charts)

In manufacturing, Japan and Germany have only about 80 percent of the productivity of US manufacturers, France 76 percent, and Britain 61 percent. Japanese productivity in machinery, electrical engineering, and transport equipment is ahead of the comparable industries in the US. But the growth rate in manufacturing productivity in Germany has fallen behind that of the US in recent years and the rate in Japan is now "almost neck and neck" with the US, according to Baumol and Wolff.

To William Lewis, director of the McKinsey Global Institute, these studies indicate that the US should not attempt to copy any other economic model, including that of Japan. "The issue is primarily one of making this [US] model work better," he says.

The prime advantage of the US model is seen to be the high amount of competition. "Competitive intensity powerfully influences management behavior," the McKinsey study says. That study looks especially at several service industries - airlines, banking, restaurants, retailing, and telecommunications - where government ownership, regulation, and policy have restrained freedom of entry and price competition, resulting in poorer productivity than in the US. Kent Hughes, president of the nonprofit Council on Competitiveness in Washington, comments on the study: "If you take a snapshot today, there is a lot to be pleased with if you look at the overall standing of the US. But there are a lot of warning signs we ought to be concerned about."

US capital investment low

One of them is that there is relatively less investment in plant and equipment in the US than in its competitors. From 1972 to 1991, Japanese investment grew almost 3.5 times as much in real terms as in the US, the council notes. Of all the other major industrial powers, only France has had slower investment growth over the past 20 years.

Another factor, Mr. Hughes says, is that US spending on civilian research and development is relatively less at 1.8 percent of national output than that of Germany at 2.8 percent and Japan at 3 percent. (If defense R&D is included, the US total becomes 3 percent.) However, in absolute dollar terms, the US still spends more than twice as many current dollars on civilian R&D than any other country because the US economy is so huge.

Evaluating the US position, the council notes: "Inflation is low; housing is on average (relatively) affordable and spacious; food is inexpensive. Opportunity, defined by cultural, social, and political freedoms, is great.

America continues to be a worldclass scientific and social innovator and carries the mantle of major world power. On the other hand, there are some negative aspects of the US quality of life: Violent crime and social unrest are major problems. Our educational system is turning out too many ill-prepared workers. US core infrastructure is undermaintained and sometimes inadequate ... Healthcare is expensive compared with other countries and not always available to many individuals."

Hughes hopes the Clinton administration will refocus the nation's efforts on the civilian problems, developing a long-term strategy and including reduction in the federal deficit.

Two other points made by Baumol and Wolff include:

* The US is becoming increasingly a service economy, but other major industrial countries are moving in that direction even faster. Just as a rapid increase in agricultural productivity shifted employment out of farming into industry in the past, rapid growth in the productivity of manufacturing today is reducing the share of the labor force needed to meet demands for manufactured goods, and so driving workers to the services. "And predominantly to the burgeoning information industries, not to mere hambu rger flipping and dishwashing." World industrial jobs

* The US share of world industrial employment has actually grown quite steadily over the postwar period. "It has grown almost as quickly as that of Japan, which, of course, started from a far lower base. It is, clearly, the European economies that have lost out in terms of share of world industrial jobs."

Wolff forecasts a 2 percent a year increase in US productivity in the 1990s. That would be an improvement on the 1.5 percent a year gain in the 1980s, but less than the 3 to 3.5 percent annual rise in the 1950s and 1960s.

Cumulatively, that would mean an 8 to 9 percent rise in the standard of living on average in this decade. But he does wonder if the increasing inequity in the distribution of income that prevailed in the 1980s will continue in the 1990s. In the 1980s, the rich got richer and those with high-school education or less saw their incomes shrink. While those with a college education enjoyed a good increase in their standard of living.

"The main political problem is income distribution," Wolff says. "That is not going to be easily remedied."