American Dream Is Still Kicking
We have lived through the best of times. Our children will not fare as well. Housing has become unaffordable. The rich are getting richer, and the poor are getting poorer. The United States has become a second-rate nation unable to compete with foreigners. America as a nation or a civilization is in decline. The American dream is either dead or in need of respiration.
These cliches and others are the litany of politics. They gain some credibility from repetition so, in this political season, we can expect to hear them repeated by politicians eager to sell their remedies. Overstatement is their business.
The claims are not half-truths. They are untrue. The past 40 years have been years of unprecedented growth in the world’s free market economies, including ours. More people in more countries have experienced increases in their standard of living than in any previous time. And it is not just that there are more people. Since the end of World War II, people in all the market economies have increased their wealth and income many times.
True, growth rates are below their peaks in many parts of the world. For example, in the 1960s Japan’s income and output rose at an extraordinary average rate, more than 11% a year. Growth at that rate could not be sustained. For the past five years, Japanese output has grown at an average rate of 3.8%. In Western Europe, growth rates for the past five years have declined to half the rates achieved in the 1960s.
U.S. experience is a bit different. We did not enjoy the early postwar surge in growth to the same degree as Europe and Japan, and our growth has not slowed as much. In the 1960s output and income rose here at an average rate of 4.6%; the average for the last five years is 3.8%. That rate is equal to Japan’s and well above the European average.
Nor is it true that we have lost our industrial strength and our ability to compete. In the last five years, U.S. industrial production has increased 26%, about the same as Japan and faster than in the other major countries--Canada, West Germany, France, Britain and Italy. This year, a widely used measure of the size of the manufacturing sector will be at its highest in a generation. Our competitive position is strong. Exports to the rest of the world continue to grow at 20% or more per year.
It is strange, but true, that at just the time that U.S. output and manufacturing are growing about as fast as in any developed industrial economy, and faster than most, popular and political discussions are full of gloom. Prospects for the future are bright, not dim. If we avoid the pressures for more protection, higher tax rates and another round of government mandated spending for income redistribution, we can continue to prosper.
It is not true that only the rich and super rich benefited. A generation ago, half the families in the U.S. had incomes (adjusted for inflation) of $16,000 or more. By 1986, half the families had incomes of $30,000 or more. Per capita consumption of goods and services also doubled in this generation. And with more vacations, more paid holidays and increased flexibility, people work less to earn their higher incomes.
So much for the past and the present. What can we expect for the future? Will our children be poorer?
Almost certainly not. We may not sustain the 2.9% growth of per capita income of the recent past but per capita income has grown an average 2% a year for more than 100 years. Although there are periods of sustained growth above and below this average, there are very few five-year periods in which per capita income has not increased. Most of the exceptions came in the Great Depression of the 1930s.
Critics point out that, as a nation, we have increased consumption faster than production recently and have borrowed abroad. True, some of the borrowing financed consumption, but some financed investment in productive assets that increase our capacity to produce in the future. Many of the lenders are foreigners who willingly invested in the United States to earn higher returns after allowing for taxes and risk.
To pay the interest on our debt to foreigners, we will have to hold the future growth of spending below the growth of output. This process should be familiar to everyone. It is similar to what a family does when it borrows to finance the purchase of a house. The family spends more than it earns in the year it buys a house and pays interest for many years in the future on the debt it incurred. The interest is the cost to the family of enjoying the house now, just as the interest on our foreign debt is the price we pay to get cars, cameras and consumer goods--and investment--sooner.
I am often asked: “How will our children be able to buy a house?” This is an odd question. In a growing economy, like ours, with rising per capita incomes, our children and grandchildren will be richer--not poorer--than we are, just as we on average, are richer than our parents. With only average performance, 2% growth, half the population a generation from now will have incomes of $54,000 or more. They will also have greater wealth because they will inherit the wealth that we leave behind, including the houses in which we, or our parents, now live.
In an average year, 1.5 million new houses are built, so 45 million new housing units have been added to the housing stock in a generation. Some replace houses that are torn down, but the number of housing units continues to grow as the population grows.
Some worry that housing prices will rise faster than incomes so that housing will become unaffordable. If that happened, some of the existing houses would remain empty and home prices would fall. Of course, some areas that are fashionable or especially desirable may become so costly that people move elsewhere. This process is, in fact, well under way. Population has moved to the south, the inland west and other areas that in the past were less heavily populated. In some areas, rents are controlled. Rent control destroys incentives to build affordable rental units and gives strong incentives to replace existing rentals with condominiums or offices.
If we avoid protectionist trade policies, excessive regulation and high tax rates that lower efficiency or reduce incentives to work, save and invest, we can expect the future to be not very different from the past. There will be recessions from time to time in the future, as in the past, but the economy will grow and living standards will rise. There will be serious problems like crime and drugs, but they are not caused by our decline as a nation.
In this election year, some may offer a new game plan or a new strategy. When you hear these claims and complaints, remember that average growth of output for the past five years has been the best we have had since the 1960s. Inflation has fallen, and manufacturing productivity growth has increased after many years in the doldrums.
We should not be satisfied. Inflation should be reduced gradually until price stability is restored. If we want to keep our growth rate high, we should encourage saving and capital information. We should join with other free market economies to reduce protection and barriers to trade. We should ignore the remedies proposed by the prophets of gloom and despair.
