FORTY YEARS OF NONSENSE

By GEORGE J. CHURCH

A short time ago, a Swiss-based international research organization found the U.S. once again had the world's most competitive economy, having ended Japan's eight-year hold on first place. It figures, because-not although, because-so many sages had been assuring us so recently that we could never meet Japanese competition unless we turned ourselves into imitation Japanese. Connoisseurs of economic nonsense will be surprised only that this bit of dogma was refuted so quickly. It usually takes somewhat longer for a universal belief about the economy to be exposed as false and to mutate into another that, alas, will usually be just as wrong.

Sooner or later, though, it happens, or has throughout the more than 40 years that I have been writing about American business. Every decade has its characteristic folly, but the basic cause is the same: people persist in believing that what has happened in the recent past will go on happening into the indefinite future, even while the ground is shifting under their feet.

To begin somewhat before the beginning: when I was a child during World War II, most of the adults I knew assumed that depression had become the normal state of the U.S. economy; the war had only interrupted a slump that would resume as soon as the shooting stopped. Even after the economy had taken off in a gigantic postwar boom, it seemed too good to last. Every time the economy turned down-in 1949, 1953, even as late as 1958-there were widespread fears that the drop was no mere recession but the start of a spiral back down into depression. In between, inflation and unemployment rates might be low (unbelievably so by today's standards) but so was the growth rate, at least by comparison with the Soviet Union. Maybe the U.S.S.R. really would "bury" us economically-a Nikita Khrushchev boast that was taken more seriously by Americans than it ever was by Khrushchev.

By the early- to mid-1960s, though, the persistence of prosperity finally became too blatant to ignore, and one prominent economist proclaimed that we had one foot through the door of a Golden Age. Recessions, if any, would be short and mild; John Maynard Keynes had shown us how to stop them. Lyndon Johnson never doubted that a growing economy would generate enough revenues to finance wars against communists in Vietnam and poverty at home-simultaneously. Civil-rights crusaders never considered the possibility that blacks would be educated and trained for good jobs that would fail to appear. Even hippies assumed they could drop out of an economy that would nonetheless go on supporting them in comfort, through some alchemy-usually spelled p-a-r-e-n-t-s.

What remained of that mindless optimism-inflation had already eroded it badly-was exploded by the Arab oil embargo and energy crisis of 1973. Almost overnight, opinion swung to the blackest pessimism: the industrial West would be permanently crippled by oil shortages, while Middle Eastern sheiks and emirs raked in -well, just about all the money in the world. One economist, who has since become one of the most respected and powerful in the country, prophesied that in a few years motorists on the New Jersey Turnpike would see oil refineries adorned with signs written in Arabic and pictures of the King of Saudi Arabia proclaiming their new ownership. Oil shocks did help trigger raging inflation that even into the early 1980s seemed endless. I recall one of my journalism colleagues (no, we aren't immune to this kind of folly) asking a high financial official whether he could foresee price increases and interest rates ever falling below 10%-and expressing shocked disbelief when the official answered yes. I wonder if my colleague remembered that exchange when CD rates dropped below 3% a bit more than a year ago.

From here on, the memories cut too close to be laughed at with such insouciance. Take the weird belief of the 1980s in mergers for their own sake, irrespective of what was being merged-and even if the merger could be accomplished only by borrowing so many billions as to crush the merged company under a mountain of debt. We are still living with the consequences. The need to undo some mergers helped launch the downsizing mania that has spawned a crazy credo: companies exist not for the purpose of producing goods and services, nor even maximizing profits, but in order to reduce their work forces.

And, sadly, one can see the old cycle of folly repeating itself. The Federal Reserve seems to believe that if industries start using more than 85% of their theoretical capacity, or the unemployment rate falls much below 6%, inflation will strike. Why? Pro-Fed economists monotonously intone that that is the lesson of history. But suppose the economy has changed so much-because of international competition and changes in the composition of the work force-that the old relationships no longer hold? We have insufficient data to quantify that possibility, reply the defenders of the conventional view. In other words, the assumption that the future will be the past writ larger has now been programmed into the computers, and only an earthquake can dislodge it. God help us all.