What Soviet Economic Collapse Can, Yes, Teach US Managers

THE economic lessons of the end of the cold war have been smothered in ideology. True, the free market has been vindicated. But Americans' self-congratulation obscures what the Soviet economic collapse can teach us about our own economic woes.In recent years, the Soviet Union has been a superpower in military, but not economic, terms. But for most of the postwar era, the United States had grounds to fear Soviet economic might as well. Until the 1970s, there was reason to respect Nikita Khrushchev's claim that the Soviet Union would "bury" us economically. In the quarter-century after World War II, the Soviet economy outgrew that of the US. By 1970 - about the time that Leonid Brezhnev had consolidated power after pushing Khrushchev out - the Soviet economic malaise had begun. The Soviet Union had succeeded in industrializing its economy in the space of two generations, only to find that further economic growth depended on the successful use of high technology. As we have known since Sputnik shocked us in 1956, the Soviets can develop extremely advanced technologies. Their problem has been putting these improvements to work in civilian production lines. Before Mikhail Gorbachev, Soviet factory managers were judged on the basis of monthly production quotas. If a quota were missed, even by 1 percent, managers would lose much of their earnings and perhaps their jobs. Because Soviet managers had to pay such close attention to the short term, they were strongly disc ouraged from temporarily shutting down their factories to install better equipment. Brezhnev hoped to offset this systemic defect by importing technology. In the 1970s, European and Japanese factories sprang up across the Soviet Union. Meanwhile, Brezhnev spent more each year on the military, the sector of the Soviet economy that has made the best use of technology. Ultimately, however, the strategy failed. The Soviet experience may shed light on its own economic weaknesses. Too often, technologies perfected in the US - like semiconductors - are manufactured most efficiently in Japan or elsewhere. Like the Soviets, we have been slow to use the technology we discover (except in the military). Soviets complain that their factories are 10 years behind America's - and 20 years behind Japan's. In market economies, private firms discover most technological innovations. But researching, developing, and installing new production techniques require a steady supply of money over a period of years. Unfortunately, American long-term investment in capital stock has been shrinking; recently, spending on research and development has slowed. Japan, a country half our size, now invests more in absolute terms than we do. American CEOs face the same perverse incentives about technology that Soviet managers did. To undertake a research project, a US executive must have the confidence to spend now in order to reap benefits later. Yet doing so may reduce the company's profits in the short term, which will draw investment dollars away from the firm. Stock analysts are notoriously uninterested in R&D; stock traders are drawn to firms that focus on maximizing short-term profits. The American company's quarterly report acts like the Soviet monthly quota. Like the Soviet manager, the American executive must sacrifice tomorrow's improvements for today's demands. Fortunately, whereas the Soviet political economy could not survive without its quotas, ours is more amenable to change. There are ways to reverse the trend away from long-term investment. Tax policy, for instance. Conservatives know that the current tax environment stifles investment, and offer a policy of tax cuts on capital gains as a remedy. But their proposal does not distinguish between short-term and long-term investment: Profits made after a day would be taxed the same as profits made after a decade. It would not promote the kind of investment needed to develop technology. It is a break for those who profit by trading stocks, but not much good for the economy. A capital-gains tax cut that helps the economy must tax profits from long-term investment at a lower rate than profits made by short-term trading. Such a policy would encourage long-term private investment, and help give American executives the breathing space they need to make intelligent choices about new technologies. Tax policy is only one way that we might apply the lesson of Soviet economic failure - that getting technology into civilian production lines quickly is crucial to prosperity. Precisely because the two economic systems were so different, it is easy to miss what the Soviet failure might teach us. We stand where the Soviets did a generation ago: militarily ascendant but falling behind our international rivals in technology. But we can learn from the Soviet experience in time to change.