An Economy Pushed Along by Boomers

In the good old days of the early 1960s to which everyone seems to be looking back these days, mortgages were cheaper and the rich took a bit less of the income pie--although the old and the young were relatively poor.

Yet ignorance was bliss perhaps because Americans in those days were much younger--41% of the population was under 21--less educated and more isolated than today.

Then everything changed. Interest rates on 30-year mortgages that stood at 5.47% in 1965 rose to 8%, comparable to today’s rates, by 1969. Behind that leap was the war in Vietnam.

The escalation of U.S. involvement in Vietnam started an inflation that was to rage for a decade and a half, years after the war ended in 1973.

Today, all is different. The people are older on average--the median age is over 34, only 28% are under 21--and better educated. The percentage of high school graduates is up 60% from the 1960s, that of college graduates has more than doubled.

The world has become a market rather than a battleground and the name “Vietnam,” happily, means trade potential. Right now, a delegation from the Commerce Department, the state of California is there to look for business in construction, environmental services, telecommunications and other fields.

That’s a good idea because the U.S. economy depends on international commerce for 24% of its total output these days--and probably a whole lot more if information, entertainment and finance were counted accurately--up from 10% in 1965.

Such reflections on the last 30 years are pertinent to a consideration of today’s U.S. economy. They tell us that this era has been governed by the shift in population called the baby boom and by unspoken conflicts between old and young. Other, more visible events such as the growth of foreign commerce and the acceleration of technology occurred against that demographic backdrop.

And, if we understand that, we can get an idea of where the economy is going and some relief from today’s widespread anxiety and confusion.

First came inflation as the youngsters born in the decade and a half after World War II sought jobs in the 1970s and the economy inflated to accommodate them.

Yes, inflation is an illusion--there only seems to be more money around. But that illusion prevents hard confrontations over limited resources.

Inflation is hard on the elderly who live on fixed incomes, however, so the government in the 1970s deregulated interest rates, allowing money market funds to pay more on deposits. Elderly savers got relief, but the day of cheap mortgages for the young vanished forever.

Inflation got out of hand and was stopped in the 1980s by a recession and Federal Reserve Board Chairman Paul Volcker, who was succeeded by the current inflation fighter, Alan Greenspan.

But then came restructuring, shifting older workers out of jobs and opening places for the young.

Technology gained apace and the young adapted. It’s no mystery why more people went to college and stayed for advanced degrees. Education pays off in the new economy.

Indeed, the much-discussed income gap, in which the top 20% of income earners--those who make more than $69,998 a year--get relatively more of the economy’s total wages than they did 30 years ago, might be seen as an education gap. The more educated are getting richer while the less educated fall behind.

But education is no longer limited to traditional patterns. Community college training for manufacturing workers is a major factor in creating jobs in poor rural areas.

In that, the world market has proved a ready employer because of foreign investment in the United States and U.S. investment abroad. Direct investment by overseas companies in plants and equipment in the United States now totals almost $500 billion. In 1965, it was less than $9 billion.

What did such investment do? It made us a cosmopolitan nation. Thirty years ago, Greenville, S.C., was poor and rural. Today it is the thriving heartland of German investment in automobile and machinery plants.

Similarly, years ago the term “multinational” referred to giant corporations, but now practically every business is a multinational. The companies on this week’s Commerce Department tour of Thailand and Vietnam include a wireless communications provider from San Jose, a metal building supplier from Lake Elsinore, an English-language teaching firm from Fresno and a maker of blood test kits from Cypress.

Note that what they’re all selling is knowledge--not metal buildings, but new ways of designing and building them quickly; not just blood test kits but new, efficient ways of treating patients.

That’s the information economy that “is accelerating,” a key government economist said recently. And that only contributes to an emerging trend of the next few years, a shortage of skilled workers.

Indeed, such a shortage is already occurring among manufacturing firms in the Midwest and Christian & Timbers, a consulting firm in Cleveland, predicts that knowledge workers will remain in short supply through the year 2000.

That’s one of two indicators that wages on average may begin to rise again, a trend the bond market is already anticipating.

One factor will be foreign trade. The merchandise trade deficits--another whopper was reported Friday--are becoming politically embarrassing, especially as they’re unnecessary. The deficits are not rising because U.S. firms are noncompetitive but because the economies of Japan, Western Europe and Latin America are in recession or stagnation. The pressure is on those foreign economies to expand and buy more U.S. goods. And as they do, price and wage levels will tend to rise worldwide.

At the same time, skilled workers in the U.S. economy will demand and get higher wages in both union and nonunion companies, as they did recently at Boeing and IBM.

Count on it, downsizing is a spent force. The next trend will be expansive--”upsizing” perhaps--because the large, now-graying generation called the baby boom wants it that way. And as we’ve seen for over 30 years, that’s all you need to know.

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How the Smart Get Richer

AS the percentage of college-educated Americans has risen past 20%, so has the share of income earned by the top 20% of households. The richest 20% of U.S. households now earn close to half of all personal income. Percentage of total income earned by each of five equal-size groups (quintiles) of all households, and income level for each group.

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Top 20% 1965 40.9% (over $10,000) Top 20% 1994 46.9% (over $69,998) 2nd 1965 23.9% (up to $10,800) 2nd 1994 23.3% (up to $69,998) 3rd 1965 17.8% (up to $7,910) 3rd 1994 15.7% (up to $47,000) 4th 1965 12.2% (up to $5,863) 4th 1994 10.0% (up to $31,300) 5th 1965 5.2% (under $3,500) 5th 1994 4.2% (under $17,940)

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Sources: Census Bureau, Commerce Department