38TH ANNUAL LECTURE TO ICAF

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000300050048-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 14
• Document Creation Date: December 20, 2016
• Sequence Number: 48
• Content Type: REPORT

Approved For Release 2007/05/10: CIA-RDP83MOO914R
30 August 1982
38TH ANNUAL LECTURE TO ICAF
by Leo Cherne
In a number of fundamental respects, the State of the Union is more
troubled than at any time, but two, over the period of 43 years since I
first addressed the able men and women who comprise the military and
civilian members of the class of the Industrial College of the Armed Forces.
The first such occasion began these lectures -- that was 1939. At
least the European shores of the civilized world were entering the shadows
from which the possibility of a continuation of western civilization as
we had known it might not again reenter what Winston Churchill called
"the sunlit uplands." In Nazi Germany and Mussolini's Italy, in Imperial
Japan and, in a less pronounced manner, in Franco's Spain, western life
and culture were under lethal challenge. Here in the U.S., I don't think
I put it too harshly when I say we were in isolationist flight from
responsibility and reality. We clung to the illusion of the safety of our
protecting oceans, intent on avoiding the corruption of muniitions makers,
war mongers, alliances, commitments and still antoher involvement in
Europe's troubles. Our military capability was slight, our preparation
for industrial mobilization in the event of war was required by law, but
unfunded by the Congress and frowned on by the Secretary of War.
Within the months that followed, England alone survived Hitler's
blitzkreig while we found ourselves progressively emotionally involved in
England's cause, yet determined to avoid full association. The world had
not seen, not even inn Napoleonic days, so invincible a military machine
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as that which had been assembled by the Nazis and hardly less true of
their Japanese allies in Asia. It is impossible to look back without
concluding that it could have gone either way for all of Europe, including
England, had not Hitler betrayed his Russian allies and had not Japan
assaulted Pearl Harbor.
A threat of profoundly different character occurred in the 1960s.
Stimulated by the war in Vietnam but encompassing a great deal more than a
native opposition to that war, the U.S. experienced the greatest challenge
to virtually every form of authority. The hammer blows of a revolutionary
generation of the young swept along with them perfectly respectable segments
of American political life. That convulsion, which approached its high
point beginning in 1965, climaxed in Chicago in 1968 and was not to subside
until a President had been driven from office and another President, who
presided over defeated withdrawal from Indochina, encouraged a morbid
assortment of behavior we lump together under the description of "Watergate".
I've, of necessity, vastly oversimplified both of these episodes as I
approach today's State of the Union. Our present state is a mixture of
strong and weak, favorable and threatening.
Today's State of the Union is the product of decades of increasingly
sterile policies. But it is much more than that. We are in the midst of a
profound change of the American econnnomy occurring within the context of
even larger change of economies overseas. I am delighted I am making this
tenuous assessment at this particular time if only because there appears to
be incresing evidence that we are safely past one threshold -- in some ways,
the most far reaching, economic distress since the Great Depression. The
economic seers cluster on the bridge searching for the fist signs of recovery.
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If they are right, and I join them, the long, sought shore appears to be
visible in the distance. Few expect a dramatic landfall. The exit out of
the recession is expected to be slow and unimpressive. Indeed, the most
notable change in economic expectation which has occurred within recent
weeks is that the fear that the recession would develop into a full blown
depression now seems to have faded.
Dramatic and favorable changes have occurred within the last 12 months.
What is most notable is that these favorable changes do not appear, as
normally would be expected, to be a harbinger of a period of great promise
immediately ahead. The first of those changes, a 33% drop in the prime
interest rate from a 21% peak to 13-1/2% and heading lower, is massive.
Related yet separate, the reduction in the rate of inflation almost in half,
from 11% to this year's likely annual average of 6%, should by itself induce
a striking economic response. A gathering of some of the most distinguished
economists, representing a wide spectrum of views at a meeting of the
American Assembly two years ago, agreed that if inflation were brought down
to 7% it would have been brought down to that level at which the public
perception of a continuing inflationary threat would no longer encumber the
economy.
Except for the efforts to compensate for years of cumulative neglect of
our military capability, the size and reach of the federal government has
undergone the first reversal in the peace time portion of the last 40 years.
Tax incentives have been put into place and they remain essentially unchanged
by the tax revision recently passed which provide substantial incentives for
business growth and somewhat less incentive for an increase in savings. Yet
business does not grow, nor have savings in any significant way been increasing.
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We face the debilitating fact of a 10% rate of unemployment with little
likelihood that we will see an early reduction in that figure or the much
more painful level of unemployment among America's minorities and, in
particular, those who are young and, for the most part, uneducated and
untrained.
Yet, these are not the truly troubling signs. Those troubling signs
are what leads me to include this period among the three occasions in more
than 40 years which significantly challenged our society. What concerns me
is that we will clearly have emerged from this recession at some point in
the coming months, but that we will continue to find intransigent certain
structural changes in our economy. I am especially concerned that we will
almost certainly see more clearly, when the recession is over, that critical
segments of basic industry are in crisis. Almost all of manufacture could be
included in this generalization, but I am concerned in particular about four
segments that have in the past been fundamental to the health of this country,
to our economic power, to the overseas reach of our industry, and to the
generation of vast employment, including employment opportunities for the
highly skilled but less educated. Those areas are automobiles, housing,
steel and machine tools. Of these, it is likely that a significant reduction
in home mortgage rates will fuel a great recovery in home building. It is at
least, the most sheltered among these four major industries from the effects
of overseas competition.
But much more than interest rates are involved in the prospects for the
other industries I have mentioned. Automobiles, steel and machine tools are
very much the object of international competition, aggravated by the welter
of trade barriers, tariff and non tariff, of preferences, subsidies, the
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availability of cheaper capital and the increasing ability throughout the
many industrialized nations to manufacture goods of comparable or even
higher quality more profitably and at lower cost.
Strip away all of the unfair barriers. Imagine the freest exchange of
trade and we are still left with the remorseless operation of what economists
always reason as the Law of Comparative Advantage. That advantage is not
enjoyed by us. Change is, of course, always painful to industries whose
unchallenged eminence has come and gone. It is more than painful, it is
tragic to the great number of those who have been employed in those industries,
who can neither readily tear up roots nor find alternative occupations for
which they are equipped. Such change may even, in the most fundamental sense,
be beneficial -- an inevitable consequence of progress and evidence that the
U.S. has learned to do other things better.
It is difficult for a nation to bemoan the decline of its manufacture
some 20 years after it was already first evident that we are now becoming
a service society and with, depending on what is included, between 55% and
70% of our employment now generated by the host of services which make up
our national economy. There is a poignant irrationality to our welcoming the
stature and ease of the white collar occupations while bemoaning the decline
of the grimy and physically demanding occupations. Yet, there are nagging
anxieties about this change, one of them of particular moment to you.
If our service society were providing nearly full employment, we, never-
theless, face the painful knowledge that national power, including the civilian
base for vital military capacity, requires industrial strength.
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Within the last month, at a time when we were at the bottom of our
recession, new imported cars took more than a 30% share of our domestic
market. For us it was the worst of times, for Japan, recession or not,
it was the best of times. In just two months, imported cars into the U.S.
had risen from 24% to 30.6%, while domestic automakers saw their inventories
of unsold cars rise from a 52 days supply on May 31st to a 79 day supply in
the middle of July. Of those imports, more than 80% were Japanese. Meanwhile
more U.S. companies have failed within the last months than in 50 years.
A change which will ultimately be of far greater magnitude than our crisis
of manufacture is the very real threat to the eminence the U.S. has long
enjoyed in high technology. In some respects, the Japanese threat to existing
industries, dramatic as it is, is dwarfed by its achievement in several high
technology areas.
The Japanese accomplishment in the field of consumer electronics has
been simply astonishing. Bear in mind, whether we talk of citizens band
radios, color TV sets, or the mushrooming market for video tape recorders,
that the technology involved was only recently our virtual monopoly. Search,
if you will, today for a TV set or video tape recorder, whatever the trade
name it carries, which wasn't "Made in Japan". The markets are large, but
the consequences of this market loss are limited.
That is not true, however, of the critical areas now under challenge -
micro-electronics, robotics, aerospace, biogenetics, telecommunications,
including fiber optics, and, ultimately of greatest importance, the advanced
computer. Even now, one of the nightmares of military planners is the
possibility that by the end of this decade, command and control will depend
on communications equipment made in Japan.
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I cannot, in the course of this overview of the State of our Nation,
satisfactorily summarize the enormity of the advantages enjoyed by Japanese
industry. Export and survival are synonomous in the Japanese economic
culture. The competion between the two of us would be infinitely easier if
American industry had at its disposal the funds for investment which are
available in Japan at the rate of interest they pay. The relationship between
U.S. industry and government is historically, and in the best of circumstances,
adversary. There is no parallel in the U.S. for the coordinating, cooperating,
planning, stimulating and supporting role played by MITI - the Ministry of
International Trade & Investment.
One interesting sidelight better illustrates this difference between
our economics than alost any other I know. It describes the chasm between a
cooperating society and one which depends on a host of adversarial protections.
In Japan, there is approximately one attorney for every 10,000 people. In the
U.S., one attorney serves 450 people. The Japanese culture abhors litigation.
Last year more lawsuits were filed in California than in.all of Japan. There
are more lawyers in Los Angeles than in all of Japan.
I can recall to this day the profound surprise when I was assigned the
task, by General Douglas MacArthur, of revising the Japanese tax structure.
I learned that the imposition of Japanese taxes involved individual
negotiations between members of the tax collecters union and the taxpayers
from whom they sought tax payment.
The strength of our democracy rests to a great extent on the vital concept
of countervailing power. Virtually all of Japanese life and, most of all, the
management of its industries, rests on dialogue, consensus, compromise and inter-
action. But these are no longer exotic cultural peculiarities. There is a
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sizeable question now openly expressed by the heads of America's major semi-
conductor fabricators -- can our kind of a competitive system successfully
contest state economies? Japan Incorporated is not just a figure of speech.
Only in contrast does the economic structure of Germany, France, Italy,
and Belgium seem unstructured and free.
Several months ago, in order to more effectively stave off Japanese competi-
tion, the manufacturers of semi-conductors announced plans to expand university
research contributions by the industry to 20 million dollars over the next two
years. Only last December, five million dollars seemed adequate. Let me
suggest that the 20 million dollars won't solve the problem, not when Japan
each year, with half the population, graduates more engineers than we do. Even
that number is still not adequate to meet the Japanese requirement. Engineering
need has begun to sink into the consciousness of our career seeking young. There
is even some question whether we may not now be attracting a sufficient number
of engineering students. But that does not obscure the fact that we do not have
an adequate engineering faculty nor do we have adequate university laboratories
and equipment. And 40% of our engineering students are foreign nationals.
The recession we have been through will do much to reduce the lethargy,
the complacency of our competitie thrust. However, one additional fact,
when it seeps through, may do more to excite an adequate U.S. competitive
response. The U.S. world standing in per capita GNP continues to fall,
slipping from first place 10 years ago to 14th place by 1980-81. Ten years
ago the U.S. still stood way out in front with the largest GNP. By 1977,
the U.S. had fallen to fifth place in per capita GNP. That placed it behind
Kuwait, Switzerland, Sweden and Denmark.
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Today not only the oil-rich, people-poor nations supercede us, but also
the highly developed countries in Europe, including allies. Forgetting the
oil rich countries, immediately below them and well above us is the country
of the troubled clock makers, Switzerland, with a per capita income of
$16,400; Germany with $13,600; socialist Sweden with $13,500 and both France
and The Netherlands above our per capita income of $11,360. Our per capita
GNPP of $11, 360 is only a bit bigger than Iceland's.
I have said that our State of the Union now is a troubled one. I will
quickly sketch some of the major additional troubles. How undramatic it
sounds to say we have a banking problem. In fact, we have several banking
problems. Three is a crisis of the Savings and Loan institutions which have
been carrying massive numbers of mortgages owned by homemakers who incurred
their debts at a time happier for them but not for the banks. We have the
shock of the Penn Square disaster. But of far greater consequence, is the
enormity of American banking loans which have been made to the less developed
world. We are deeply involved in the more than 80 billion dollars owed by
the Government of Mexico. The European banks are equally deeply involved
in the economic mess that is now Central Europe which also has an 80 billion
dollar debt. And the international banking system is inseperable. Damage
one of us and we are all in crisis. An aphorism youu have surely heard which
is worth repeating -- if you owe a bank $10,000, the bank owns you. If you
owe a bank $1,000,000, you own the bank.
The crisis of liquidity is not limited to banking institutions. For the
first time, social security will have to borrow up to seven billion dollars
before the end of the year to meet its obligations. The pessimism expressed
in the following bit of data is almost certainly warranted, but it is not
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unimportant. "Seventy percent of the American people do not believe social
security will still be here when they retire." As the Social Security
Commissioner remarked: "It is that same group of people whom we are going
to have to rely upon for payments to keep the system going."
The national psyche is not elevated by lerning as it did on July 20th
that our nation now enjoys the highest rate of poverty in some 15 years --
one person in every seven. But the growth in poverty is mirrored by another
kind of poverty which affects all of us. The alarming decay in the nation's
infrastructure, its roads and bridges, sewers, transportation systems. The
U.S. Steel Corporation contends in Pittsburg that it is paying at least one
million dollars a year to detour its trucks 26 miles around a major bridge
that the state of Pennsylvania closed tow years ago for lack of repair.
In the city of which it used to be said that its money had not yet been
counted -- Houston -- Texas Monthly reports at least that it HAS counted
one and a half million potholes. I have the doubtful privilege of living
in a city in which its water is brought in an underground aqueduct constructed
more than 100 years ago. That aqueduct has been crumbling. When New York
faced bankrupcy some years ago, repairs which had begun were discontinued.
Do I plan to leave you with this catalogue of misfortune, unbuffered
by appropriate doses of valium? What, in fact, was my plan beyond this
assignment I have performed annually for a period that runneth longer than
the memory of man? Quite candidly, as I said at the very beginning, I do
not believe one can describe today's State of the Union without dealing with
the shocking fact that we have let years slip by while our productivity
declined -- our manufactures became increasingly less profitable or moved
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overseas - our social services ran rampant -- the excellence of our educa-
tional institutions declined in almost exact proportion to the increase of
the students seeking that education.
No single dramatic event damaged our competitive thrust. No single circum-
stance produced the progressive reduction of our share of world trade. It is
bizarre to think that the most heroic of measures would, in the space of two
years, arrest this decay let alone reverse it. If there is ever a time when
it is urgent that the meaning of all this bite in, it is when things seem
bleakest, before the euphoria of the biggest week in the stock market's
history begins to cloud our vision and dull the sense of urgency. The aware-
ness of our reality must be deeply rooted before the recovery in our economy,
which will come, will quiet the ache and obscure the challenge.
Let me confess that there are a host of promising bits of data, harbingers
of a better day. After all our GNP did in the last quarter rise by 11/3%;
personal income was up by 1% in July; new housing starts in July surged
to the highest annual rate since April 1981, a 33% increase in just one month.
The fall in consumer loan rates beginning to occur, it will speed up. The U.S.
government has announced the second reduction in two weeks of its interest rate
ceiling on federal home loans. Even new orders for durable goods rose by more
than 3% last month. The Defense Department acknowledged last week that it has
begun a five year, 100 billion dollar program to enhance the ability of the armed
forces to sustain themselves in combat. We now have an estimated 30 day combat
supply.
Can you imagine the liquidity, the sheer volume of available money that is
lying in wait when you realize that 450 million shares of stock were sold in one
week! Foreign capitol is well aware of our potential and safety. Foreign invest-
ments in the U.S. grew by a record 31% last year.
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It is not for nothing that the IMF pleads with us and all the nations of
the West not to relent in our continuing struggle against inflation, warning
that a further reduction is essential despite the high human and economic
cost attached to inflation-fighting policies. In some degree, even the
disarray among our allies is less a reflection of our behavior and policies
than of their distress. As George Will recently said, "Our allies love us.
We are their floating alibi." Here's one day's headline this week on a
newspaper's financial page: "A World On The Brink Seeks The Dollar".
If we need any balancing sense of promise to mitigate the catalogue
of difficulty I place before you, let us now recall that American output is
35% of the industrial world's total production -- that 80% of the world's
foreign exchange reserves are held in U.S. dollars. The unbelievable gross
amount of 1.7 trillion Euro-dollars account for three quarters of the total
credit of the Euro-market and commands virtually the same interest rates as
U.S. dollars.
Meanwhile, our adversaries have far greater problems. They have given
us a hard time but htey have a harder time of it by far. The Polish debt is
unpayable; Rumania is hardly better; East Germany is facing its most severe
economic distress; the Soviet Union is stripped of her hard currency -- hence
the importance of the income from its Siberian gas. Less than a month ago,
Castro found it necessary to warn the Cuban people in his annual ceremony
reserved for heroics at the July 26th celebration of the revolution -- to warn
that they were going to have difficulties in the coming years and the
difficulties could be major. He blamed, of course, the capitalist crisis.
He told his people they might have to face shorter work weeks and lower salaries.
In a story bylined Ho Chi Minh city, a copy of the governmental report prepared
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by the IMF ws leaked in which the Fund expressed its doubt whether that
country could possibly meet this year's schedule of payments on its external
debt. Vietnamese reserves of foreign exchange, which were 98 million dollars
at the end of 1980, were 16 million at the end of last year and, according
to the report, completely exhausted by February. That what's known as "broke".
It is not quite clear who won in Lebanon. It is, however, clear that the
Soviet Union lost. In primitive Afhanistan, the Soviet Union has been losing
to the inadequately armed and almost totally disunited rebels, the force,
brave and determined myahadeen. These rebels cannot drive the Soviets from
their country -- but each month it is clearer that neither can the Soviets
prevail. No more than martial law has suceeded in housebreaking Poland.
Regrettably the one area of success for Soviet orbjectives is the most
important to them and to us -- disunion and growing distemper in the Western
Alliance. The Finlandization of Western Europe has been the most constant
purpose toward which the Kremlin has aimed since 1946.
The State of the Union -- ours at home is now truly unseperable from
growing crisis within NATO, Zenophobia in Canada, anarchy in Central America
and the most acute danger in Mexico in 50 years.
I have turned to others for appropriate words of wisdom to conclude this
incomplete review of our present danger and opportunity. Winston Churchill
offers some words of comfort, "If there is anything worse than going to war
with allies -- it is going to war without them". Frederick the Great makes
an observation singularly appropriate for the simple minded clamor for nuclear
cercease, "Diplomacy without arms is like music without instruments".
Alexander Haig pronounces a delphic conclusion which I leave to your
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interpretation, "There is a lack of definiti in the sina qua non area".
But the ultimate caution comes ffffrom one of our neglected political
philosophers Warren G. Hardy, "Don't drop the anchor til you are out of
the woods".