Risking the American Dream: Pointing Fingers Is Easier than Plotting Courses

The United States is becoming a Third World Country, and only aggressive industrial policy, reformed education and new uses of taxation can save it. In capsule, that provocative view is put forth by Edward Luttwak in The Endangered American Dream. Best known as an international security expert, Luttwak exhibits his usual high-octane candor in examining domestic issues. When it comes to remedies, however, he is often short on specificity and appropriateness.

Luttwak's list of American shortcomings is all-inclusive and accurate-trade and budget deficits, inadequate schools, huge income disparities and stagnating incomes. He attributes the relentless U.S. slide toward Third World status to the continued decline in per capita GNP, the deliberate undervaluation of the dollar since the 1985 Plaza Agreement and the misallocation of capital. He blames, in particular, the absence of "patient capital"-interests that don't seek short-term profits-and foreign takeovers of U.S. companies in the 1980s.

Luttwak points to what he describes as "self-inflicted wounds," such as huge budget deficits, financial deregulation, a collapsing public education system, too many lawyers and failing social programs. In harsh, populist terms he attributes the increase in crime and the decline in public education to the increasing concentration of wealth in fewer hands.

It is unfortunate that Luttwak paints these social and economic issues with such a broad brush. It is hard to find the causes of the ills he describes and to reconcile them with his suggested remedies. For instance, he claims that most of our economic ills are self-inflicted, yet he clearly attributes many of them to unfair foreign competition. He advocates higher pay and higher benefits, following the example of German economic success, yet recognizes that German factories are being transplanted to the United States because of these policies. He blames short-term speculation for many takeovers and LBOS without recognizing that some of the most egregious cases (such as RJR Nabisco) hinged on huge loan commitments from the very source of "patient capital," namely Japanese banks.

REMEDIES-REALISTIC AND OTHERWISE

Luttwak focuses his remedies on public education, taxation and industrial policy. He decries the bloated and corrupt bureaucracies of thousands of independent school boards, correctly identifies violence as one of the most corrosive influences on both teachers and students, and criticizes racial politics and multicultural education as profoundly destructive of educational standards.

He recommends shifting control from school districts to individual school boards in order to increase parental influence. To promote excellence, he proposes federal pay incentives for teachers who pass qualification exams set to demanding national standards. He favors much more emphasis on vocational training, possibly making it the "predominant form of secondary education for older teenagers." These are constructive proposals. Federal pay incentives for outstanding teachers and more emphasis on vocational training would be beneficial.

But the desperate condition of our public school system calls for greater boldness. Should federally financed infrastructure investments include computer hardware, software and teacher training in exchange for local reforms? Why not seize the opportunities of interactive technologies? (Computer-assisted instruction and educational television start in the lowest grades of European and Japanese education.)

If revolutionary change, as Luttwak correctly argues, is needed in the schools, the issue of school choice must be discussed. I support public-school choice, having witnessed the New York city public school system disintegrate over 20 years, despite large expenditures that currently total $7 billion annually, or $7,000 per student. Without some competition to reward excellence and penalize failure, turning over control to local school boards will not make things better.

It is also necessary to have schools address two of our greatest social tragedies: teenage births and aids. Sex education and the distribution of condoms are a minimum, but the departure of Chancellor Joseph Fernandez of the New York City School Board attests to the perils of such initiatives. The problems of the public schools cannot be separated from the problems of the big cities: drugs, guns, crime, broken families and crumbling housing. We cannot fix the schools without fixing the cities.

TAXES, INDUSTRIAL POLICY AND JOBS

Luttwak attributes the deterioration of America's public infrastructure, as well as the private sector's failure to offer sufficient amounts of well-paid employment, to a scarcity of domestic savings and capital. He recommends a phased replacement of the corporate income tax and the Social Security payroll tax with a federal sales tax or a European-style value added tax (vat), collected at each level of production. As part of such reform, all tax deductions and credits would be eliminated.

Luttwak's laudable tax and investment policies are implausible in today's political environment. The system will move in the direction he advocates only in smaller, discrete steps. For instance, in lieu of a broad-based vat (which incidentally would require readjusting all local sales taxes nationwide), a phased-in increase of gasoline taxes, tied to infrastructure investment, should be pursued. Instead of eliminating the corporate income tax, a good initial step would be the elimination of the double taxation on dividends, which would reduce the tax law's bias toward debt as opposed to equity securities. The negative economic impact of state and local taxes should also be addressed. Some assumption of local burdens by the federal government, conditioned on reductions in local sales and property taxes, is worthy of examination.