The American Dream Economy
As the American economy powers ahead on its growth spree, the whole world is watching in awe. Hyperventilating high-tech enthusiasts and stock-market gurus talk about a “new economy” and a “new paradigm,” jubilantly asserting that the American economy is breaking all the old rules.
Wrong. What we’ve actually got now is an old economy--an economy performing at traditional U.S. levels. From 1800 to the present, the U.S. economy grew an average of 3.77% per year. By historic standards, it was only the last 25 years that were out of line. The fact is that the U.S. economy has almost always been exuberant.
It was when this “new economy” first appeared that darkness loomed. By the early 1980s, average growth fell to below 2.5%, and economists, always ready to find a cloud behind every silver lining, predicted more slowing ahead. Unemployment rose, wages fell, Dad’s salary could no longer pay the bills, so all across America, Mom went to work. As steel mills closed and McDonald’s and Kinko’s stands mushroomed, two generations of Americans--the baby boomers and the Xers--scaled down their expectations. Americans used to assume that children would live almost twice as well as their parents, but many boomers and Xers came to believe downward mobility was the only thing they could expect.
They may have been wrong. The U.S. economy, now in the 112th month of the longest-running expansion in U.S. history, shows no sign of slowing. Other than a brief and mild recession in 1991-92, the U.S. economy has been growing steadily since the first quarter of 1982--18 years of almost uninterrupted growth. In 1999, gross domestic product growth hit 4.2%; the average annual growth since 1995 has been 4.15%. Family incomes are up; real interest rates are low; and the unemployment rate is the lowest it’s been in a generation. Vast and towering budget deficits, which only eight years ago seemed to stretch out as far as the eye can see, have turned into huge and friendly surpluses.
The expansion has been far more resilient than almost anyone expected. The Asian economic crisis, the worst global crisis since the Great Depression of the 1930s, only led the Federal Reserve Bank to lower interest rates, throwing more fuel on the U.S. economy. Oil prices have tripled since the end of 1998--something that would have led to an inflationary catastrophe in the 1970s. The Energizer Bunny economy just took the price hikes in stride.
Bitter boomers and alienated Xers will point out that it isn’t all skittles and beer. Income inequality is way above historic levels; child poverty is alarmingly high; the minimum wage is way too low; and many workers will never regain the income levels they lost as manufacturing jobs closed down.
This is all true today--but it won’t be true tomorrow if the growth holds up. We’ve had long-term slowdowns before--notably in the 1880s and 1890s and again in the 1930s. But after both of those earlier pauses, the U.S. economy regained its balance and returned to its long-term growth pattern.
This may, just may, be what we are seeing today. An economy’s long term growth depends on two factors: growth in the work force and growth in productivity. During the last generation, productivity growth nose-dived, even briefly turning negative in the early 1970s. Looking at those gloomy numbers and projecting declining growth in the work force, as well, economists lowered estimates of future economic growth. The Social Security Administration, which must predict long-term growth rates to estimate future revenues and expenses, scaled back its long-term-growth forecast to 1.5% in 1996.
That matters. Assuming 1.5% economic growth through 2050, in today’s dollars, the GDP in 2050 would be $19.6 trillion. At 3.77% growth, the historical average, GDP would hit $63.7 trillion. The difference between those projections is roughly twice the size of the total world GDP for 1999. Under the Social Security Administration assumptions, and assuming no change in income distribution, median family income would barely rise between today and 2050. But if the economy gets back on the historic growth path, median income would grow to $98,234 from today’s level of $38,900--and that’s adjusted for inflation.
This may sound like the kind of forecast that economists make after smoking too much pixie dust, but it’s exactly the kind of growth our ancestors took for granted. This sort of progress is what they meant by the American dream, and it is this kind of progress that the American economy has delivered over most of the last 200 years.
Productivity is driving us back to those long-term growth levels. In the second quarter of this year, productivity rose at an annual rate of 5.3%, so that even as wages rose, unit-labor costs--what employers have to pay workers per unit of output--fell. This, fundamentally, is why the Federal Reserve has not slammed the brakes to the floor: the belief that rising productivity is holding inflation in check despite high rates of growth.
Given that the work force is expected to increase at about 1.2% per year, we can match our historic rate of growth with productivity growth of only 2.57%--well below current levels. While life offers few certainties, the accelerating pace of technological change makes long-term productivity growth look likely. If so, then the long-term outlook is far brighter than most boomers and Xers dare hope.
Just as faster economic growth cured federal budget deficits--a problem that only a few years ago was driving pundits, politicians and the public to something like despair--so growth is likely to cure many of the other problems we face today.
Take inequality. During the last generation, income inequality increased in the United States as blue-collar workers saw their incomes decline even as professionals and investors reaped large gains. The underlying reason was simple: During the bad years, blue-collar unemployment was high, pushing down wages. Low wages and high unemployment pushed many wives into the work force--one wage earner could no longer support a family. That set up a vicious cycle: Falling wages drew more workers into the labor market, increasing the supply of labor and pushing wages down even farther.
As a result, companies were in a strong position. Workers could always be replaced--and manufacturing companies could always move overseas. Increasingly, however, the shoe is on the other foot. With qualified workers scarce, individual workers and unions now have more bargaining power. A series of high-profile labor victories against companies like Verizon and United Parcel Service, and the unionization of home health-care workers in Los Angeles underlines labor’s new clout.
Not only are workers harder to get today; it is harder for companies to move overseas. Many of the obvious candidates for job flight--textile and shoe companies, for example--are long gone. Today the U.S. has an increasingly service-based economy--and UPS cannot send delivery jobs overseas.
The result is workers will capture a higher share of the new productivity. Investors, on the other hand, could get less. Higher labor costs will put pressure on the profits of many companies, leading to lower earnings and, in time, to pressure on stock prices. At the same time, white-collar workers will feel new pressures as cost-cutting companies use computers to automate “brain work.” A return to traditional levels of high growth is therefore likely to return the U.S. to historic levels of egalitarian income distribution.
High growth will also save Social Security. Those terrifying predictions of trillions of dollars in unfunded Social Security pensions melt away like the budget deficit if the growth rate goes up. With 3.77% average growth, Social Security’s soundness simply isn’t an issue.
Boomers and Xers, hard-wired as all of us are by the memories of hard times, talk cynically about “rosy scenarios” when new-economy enthusiasts babble about the good times ahead. We shouldn’t give this up completely; prudence tells us to prepare for bad times while hoping for good. But cynicism and worry about the economy shouldn’t blind us to the big picture. The last generation of slow growth and blighted hopes was the exception, and America now seems to be returning to the rule.
Could happy days really be here again? Watch productivity numbers. If they hold up another couple of years, then the good old paradigm might actually be back.
