These Are the Good Old Days
A Report on U.S. Living Standards

A Letter from the President Last year, our annual report essay was entitled "The Churn: The Paradox of Progress." It focused on the creative destruction taking place in the labor market. It showed how small net changes in the employment and unemployment numbers obscure the large-scale destruction of old jobs and the creation of new jobs. This churning renews and revitalizes our economy and keeps it competitive in a rapidly changing world. This year's essay might have been entitled "Churn II," because it shows the progress that society is able to reap if it allows the churn to happen. Instead, we are calling this essay "These Are the Good Old Days." It focuses on the dramatic changes that have taken place in our living standards that GNP figures fail to capture. While traditional measures may suggest the economy has been sluggish in recent years, in many respects, these are the good old days. Our point is not to deny the slowdown in productivity growth or the potential growth rate of real GNP over the past two decades. Annual growth of 2-and-a-half percent is not good enough. Our point is that wonderful changes are taking place in the way we live that should not be ignored in assessing trends in our standard of living. As you review developments you are already familiar with, I think the cumulative impact of the changes will astonish you. The Dallas Fed has had some recent churning of its own. Each year some of our directors move on and others take their place in a process of renewal. We just said goodbye to Clive Runnels from our Houston board, Diana Natalicio from the El Paso board and Javier Garza and Sam Sparks from our San Antonio board. They gave us freely the benefit of their knowledge and wisdom, and we will miss them all. At the Dallas Office we lost two very special friends and board members: Tom Frost and Leo Linbeck. It is often said that Texas lost nine out of its 10 largest banks. Tom runs the tenth. He is widely respected as the dean of Texas banking. He just completed six years as a director of the Dallas Fed, following earlier service as a member of our Federal Advisory Council. Tom is a gentleman and scholar. Better yet, a Texas gentleman and scholar. Our Bank has benefited greatly from Tom's wisdom, dedication and years of service. Leo Linbeck just completed his seventh year as a Board member, the last two as chairman. We drafted Leo for an extra year on the Board to enable him to complete our building project. Thanks, Leo. Thank you for our building and for your friendship. Thank you for all the work you do behind the scenes, without fanfare or recognition, for our country. As we work day to day and year to year, it's easy to lose sight of the small steps that lead to giant strides—both for the Dallas Fed and in the broader sense. As we reflect on progress in this annual report, we are challenged by the new year ahead and look forward to providing strong leadership in areas supporting free enterprise—the system that has enabled each generation of Americans to make the claim that "these are the good old days." — Robert D. McTeer, Jr.   President and Chief Executive Officer

These Are the Good Old Days
A Report on U.S. Living Standards

Rip Van Winkle wakes to a bright spring day in 1994 and, rubbing his eyes, quickly realizes the world around him has changed. He discovers almost 25 years have flown by since the start of his big sleep. Among his last memories before dozing off in 1970: watching George C. Scott portray Patton at a movie theater, seeing Rowan & Martin's Laugh-In on television and listening to the Beatles' Let It Be. President Richard Nixon had ordered U.S. troops into Cambodia to attack Viet Cong bases. New York's once-hapless Mets had become the "Miracle Mets," starting the 1970 season as World Series champions.

Events since 1970 seem world-shaking. The Soviet Union has fallen apart. The global village has grown together. Yet what amazes Rip the most is the tremendous economic progress the United States has made in just a quarter of a century.

Americans in the 1990s routinely withdraw money from automatic teller machines all over the world. We communicate on cellular phones, cook meals in minutes using microwave ovens, watch movies at home on videocassette players, listen to concert hall-quality music on compact discs and flash instant messages from one computer to another on a global grid called Internet. Americans figure checking-account balances on pocket calculators, use camcorders to film our children playing soccer, fight ulcers and depression with new wonder drugs, flick many things on and off by remote control. We have more cars, more household appliances, more vacation homes, more entertainment options and more free time than Americans two decades ago.

The contrast between American life then and now is astounding. Rip surveys the changes and concludes Americans never had it so good. He is puzzled, though, that so few people share his sense of wonderment. People seem glum about the U.S. economy of the 1990s and look back to the time Rip went to sleep—the late 1960s and early 1970s-as the apex of American prosperity. People reflect on that time as "the good old days" from which the U.S. standard of living has ebbed.

Americans of the 1990s point Rip to many signs of lost vitality in the U.S. economy. Growth is slowing to a crawl. Productivity is stagnating. Paychecks are getting smaller and, for many workers, less certain. Other countries are gaining on us, even as more American families earn two incomes. (See "Catching Up" at the end of this essay.) Worst of all, perhaps, some Americans worry that their country, for the first time in its history, will fail to provide today's children with living standards as high as their parents'. As if economic deterioration weren't enough, discouraging reports on crime, education, homelessness and other social ills plague the country in the 1990s.

The usual barometers of economic activity show cause for alarm. Inflation-adjusted manufacturing wages rose by 2 percent a year from 1950 to 1973, but they fell an average of 1.3 percent a year from 1973 to 1990. Inflation-adjusted median family income gained 3 percent a year from 1950 to 1973, but the annual increase ebbed to 0.1 percent in the past two decades. Productivity, a yardstick of the output from each hour of work, grew at an annual rate of 2.2 percent from 1870 to 1973, then slowed to 1 percent. The broadest measure of the economy's well-being—gross national product, or GNP—sends perhaps the most troubling signal of all. Even with the Great Depression of the 1930s, GNP expanded by an average of nearly 3.5 percent a year from 1870 to 1973. To the dismay of many Americans, the growth rate slipped to an annual average of less than 2.5 percent in the past two decades.

The two versions of reality could hardly be more at odds. One says the country continues to reap the ever-larger bounty promised by free enterprise; the other, that the increase in Americans' standard of living has slowed markedly in recent years. A loss of dynamism—if real—would challenge Americans' view of who we are. The notion of a falling living standard affronts the American dream, one of the ideals that hold the nation together. It challenges the ingenuity of those in power, confronting them with the task of getting America moving again. Most broadly, it threatens Americans' faith in the free enterprise system at the very moment of its historic triumph over communism.

GNP Is Not Standard of Living
As Rip learned, there are both bleak and bright views of America's economic progress. To unravel the conflict between them, we must understand how society's standard of living is measured. As a gauge of well-being, economists and policymakers usually rely on GNP, a simple sum of the market value of goods and services our nation churns out in a year. Every measure of how the economy is faring in some way derives from this aggregate. Growth is the percentage change in GNP, usually adjusted for inflation by a price index. Productivity divides the inflation-adjusted, or real, GNP by the total number of hours worked. Per capita income apportions an equal share of real GNP to each person.

At best, GNP offers only a crude measure of Americans' well-being. The meter for GNP is dollars and cents or, through the magic of a price index, real goods and services. The meter for standard of living is happiness, an elusive concept. Even without consulting a philosopher, it's clear they aren't the same.

By design, GNP counts only a fraction of what human beings might want in a better life. GNP figures ignore the contribution to people's lives of anything, good or bad, that's not explicitly bought and sold on the open market. For the most part, this is a practical matter: statisticians report what's measurable. Markets give objective, easily calculated monetary values to shoes, televisions, haircuts, trips to Hawaii—a whole panoply of goods and services.

By far, the largest omission in measured GNP is leisure—time for recreation, family, friends, entertainment, hobbies or just taking it easy. By the choices we make about work hours as incomes rise, Americans show we value leisure highly. Yet because time off from work isn't traded in the marketplace, a trend toward greater leisure in recent decades counts for nothing in the GNP measure of standard of living.

The GNP numbers also ignore the value of services produced and consumed in the home—cooking meals, doing laundry, mowing the lawn, washing the car and dozens more chores. Over time, many household tasks have been shifted toward the market, allowing families even more leisure. As families pay for household chores, GNP data reflect these transactions but can distort comparisons of GNP from one generation to the next.

Time also brings new and improved products that enhance our lives in ways unavailable to previous generations at any price. Each innovation—air conditioners that use less energy, cars that handle more safely, cable television companies that deliver new programs into the home, foods with lower cholesterol and fat—raises the value of these goods and services and lifts consumers' standards of living. Yet various studies suggest that the GNP statistics don't adequately account for improvements, over time, in product quality.

Nor does GNP track a host of other important, nonmarket components of a higher quality of life—longevity, health and safety, working conditions, the environment. These aspects of daily life vary greatly from place to place, from one person's experience to the next, but there's evidence that they've improved decade by decade for most Americans.

It's no easy task to translate much of what's not measured by GNP into dollars and cents. There are inherent difficulties in valuing leisure, home production, product quality, living conditions and whatever else might go into the true standard of living. Yet moving beyond narrow GNP to a broader notion of Americans' well-being will help provide a more accurate—and, to many, surprising—view of how well the nation is doing. There's no denying the country would be better off with a faster pace of economic expansion (See "Secrets of Growth" at the end of this essay.) The supposedly lackluster 2.5-percent GNP growth of recent decades, though, doesn't capture all the gains in living standards. The omissions and lapses suggest that GNP, as it comes out of the government's statistical mills, may understate the true income of Americans, perhaps by a large margin.

Time for Symphonies and Softball
Time is the ultimate scarce resource. Each day contains 24 hours. Each week consists of seven days. In a fast-paced, modern society, once work and chores are done, there almost always seems to be a shortage of time for what we enjoy. Many workers complain about haggard, sleep-deprived lifestyles. Yet, as hard as it may be for many Americans to believe, surveys show the country has never had as much leisure. What's more, evidence from spending patterns and elsewhere suggests that today's Americans are using their time off to squeeze more recreational activities into their lives.

Over the past four generations, the time an average U.S. employee devotes to on-the-job work decreased by nearly one-half. Looking at just the most recent two decades, when concerns about American living standards became more pronounced, work hours declined an additional 9.3 percent, the equivalent of 23 days a year.

Daily work hours aren't the end of what's happening to leisure. Americans are starting work later in life and, perhaps even more significant, they are enjoying longer periods of retirement. In the two decades after 1970, the age at which an average worker entered the labor force pushed forward by seven months. A typical retirement grew by more than four years. In addition, the average daily time devoted to household chores fell consistently-from 4 hours, 12 minutes in 1950, to 3 hours, 48 minutes in 1973, to an estimated 3 hours, 30 minutes in 1990. Over a year, 18 minutes a day aren't trifling: they add up to more than four extra days off.

Interestingly, the value of work at home might not be declining along with the time spent doing chores. Microwave ovens, no-iron fabrics, self-cleaning ovens, frost-free refrigerators and dozens of other conveniences make household work lighter and faster. In effect, technology is boosting household efficiency by enabling us to accomplish more with the same or less effort.

Today, the typical employee spends less than a third of all waking hours working, either at home or on the job. When totaled, the results are mind-boggling: workers, on average, have added nearly five years of waking leisure to their lifetimes since 1973. A look back 120 years shows that an extended childhood, with more years of schooling, and a period of leisure after years of work are strictly modern expectations.

When jobs and work at home are combined, virtually all segments of society worked less in 1990 than they did two decades before. The gain in leisure was a minuscule few minutes a week for employed men. Thanks largely to labor-saving appliances and other helping hands, women who didn't work outside the home reaped 10 extra hours of leisure. Employed women saw a six-hour decline in total work. A trend toward more women taking jobs creates one caveat. Women who used to stay at home and now hold jobs may have increased their work—by about 13 hours a week. Inflexibility in the labor market typically requires them to put in a full week, and household chores await at the end of each day. Nevertheless, women with jobs spend less time on housework than their counterparts did 20 years ago, and they are compensated with higher incomes.

But does having more free time translate into higher living standards? Statistics from the government and trade groups indicate Americans are spending more time and more money on recreation. From 1970 to 1991, the number of Americans who play golf regularly doubled to 11 percent of the population. Even after adjusting for population growth, the number of adult softball teams jumped sixfold in two decades. In 1970, a quarter of Americans bowled; now, a third do. Ownership rates rose 50 percent for recreational boats and more than doubled for vacation homes. Pleasure trips per capita rose from 1.5 a year in 1980 to 1.8 in 1991. Average attendance at baseball games rose from 16,100 in 1973 to 31,377 in1992. Football, hockey, basketball, golf and car racing are drawing bigger crowds—in person and on television. Cultural activities haven't been short-changed. Per capita attendance at symphonies and operas doubled from 1970 to 1991. We're reading more books; annual sales rose from 6.6 per person in 1974 to 8.1 in 1991.

Money going to leisure activities has risen rapidly, too. From 1970 to 1990, spending rose from $1.2 billion to $4.1 billion for recreational vehicles, $2.7 billion to $7.6 billion for pleasure boats and $17 billion to $44 billion for sporting goods. Total recreational spending, adjusted for inflation, jumped from $91.3 billion in 1970 to $257.3 billion in 1990, an average annual gain of 9.1 percent that well outstrips population growth of 1 percent a year. In 20 years, the money consumers allocated to recreation increased from 5 percent of total spending to nearly 8 percent.

The fact that Americans cram their off-work hours with all these recreational activities suggests we're wealthier—financially better off to make use of the time off we've gained. Work hours and family budgets reveal what GNP numbers don't: an explosion of leisure is improving the American lifestyle.

The Lost Art of Canning Vegetables
One way critics put down the U.S. economy is to say, "We're becoming a nation of hamburger flippers." Truth is, however, somebody always flipped hamburgers, or at least did the equivalent in preparing daily meals, usually in the home. In fact, running a household requires a daunting list of chores—cooking, cleaning, gardening, child care, shopping, banking, ferrying family members to ballet lessons and soccer practice.

As Americans grow richer, many chores once done by family members are moving out of home production and into the market or, like gardening and canning, becoming hobbies rather than necessities. More so today than in the past, it's more efficient for workers to spend time earning money doing what they do best on the job, then pay others to perform at least some household tasks. In modern economies, market alternatives to home production are readily available. To the extent they can afford it, households hire professionals to cook, clean, paint, design landscapes, figure taxes and much more.

Americans, for example, are finding ways to ease the burden of cooking at home. In 1993, restaurants received 43 percent of the country's spending on food, a big gain from the 33 percent of 1972. Eating out, once an occasional luxury, has become a way of life. Even when we eat at home, we often rely more on market goods—heat-and-serve products, microwave meals and carry-out items. Usually, these shortcuts raise the cost of feeding a family, but as consumers become wealthier, they often opt to pay extra for ease and convenience. Entrepreneurs haven't missed the trend away from home production: nearly all businesses whose services replace home production have shown strong gains in employment and sales in recent years.

There's a paradox in the GNP method of accounting. If a person were to marry his or her doctor (gardener, plumber, hair dresser, tax accountant and so forth) and no longer pay for these services, measured economic activity would decline by the amount of the professional fee. The family's true standard of living, however, would remain unchanged. This distortion reveals that GNP understates living standards by the value of what's produced and consumed in the home. Estimates suggest home production, if properly accounted for, would have boosted America's 1992 GNP by about a third, or $2 trillion.

Failure to properly account for households' nonmarket production probably wouldn't skew growth rates if the proportion of home and market consumption remained stable over time. The data show, however, that home production fell steadily from 45 percent of GNP at the end of World War II to 33 percent in 1973. It then leveled off. What was the impact on measured growth? The transfer of household chores to the market added 1.3 percentage points to measured annual GNP growth prior to 1973, implying an underlying growth rate for the period of just 2.2 percent. Adjustments after 1973 are insignificant. Merely recognizing the contribution of household production could bring growth rates of the past two decades into line with those experienced in the 1950s and 1960s.

Not Just More, But Better, Too
In judging whether Americans are better off, what should matter most are goods and services that bring enjoyment, provide convenience or reduce discomfort. In other words, the focus ought to be on consumption—the bulk, but not all, of GNP. Artifacts of everyday life provide proof of rising consumption during the past quarter century. The average number of televisions in a household rose from 1.4 in 1970 to 2.1 in 1990. Among those 15 years and older, passenger vehicles per 100,000 people increased from 61,400 in 1970 to 73,000 in 1991. Americans are enjoying more luxuries, too. The average amount spent on jewelry and watches, after adjusting for higher prices, more than doubled from 1970 to 1991.

Many Americans live in bigger and better houses. From 1970 to 1992, an average new home increased in size by the equivalent of two 15-foot by 20-foot rooms. New houses are much more likely to have central air conditioning and garages. What about stories that fewer U.S. residents can afford the essential piece of the American dream—a home of their own? The data don't support it. The rate of home ownership has held steady at around 65 percent of the population since 1970, and there's overwhelming evidence that today's houses are stocked with more appliances and gadgets than ever.

Microwave ovens, color televisions, videocassette recorders, answering machines, food processors, camcorders and exercise equipment are all now standard in many American homes. Three-quarters of U.S. homes had a clothes washer in 1990, up from less than two-thirds in 1970. At the same time, ownership of dryers jumped from 45 percent of households to almost 70 percent. About 45 percent of homes had dishwashers, up from 26 percent two decades ago. Between 1970 and 1990, the typical U.S. household gained 4.5 times more audio and video products, more than twice as much gear for sports and hobbies, 50 percent more in kitchen appliances and 30 percent more in furniture. In short, most Americans consume far more than previous generations.

Of course, we could be paying for our consumption by depleting our savings. The evidence, however, says it isn't so. Although Americans may not set aside as much as people in many other countries, the average American still has managed to gain net worth. The stock of real wealth per capita rose by 2 percent a year from 1970 to 1990. The nation has had the best of two worlds: consuming more in the present and setting aside more for the future—not a bad standard for "better off."

The news gets even better. As consumers, Americans can now possess products that didn't even exist for past generations. Twenty years ago, only a lucky few could show movies at home. Today, two of every three U.S. households own videocassette recorders. When Elvis was king of rock 'n' roll, many of his records succumbed to warps and scratches. Today's compact discs give us concert hall-quality sound. A decade ago, most motorists had to search out a pay telephone to make a call. Today, cellular technology has put a phone in millions of cars. Companies served 11 million subscribers in 1992, up from a mere 92,000 in 1984. The past 20 years also brought many important medical breakthroughs—new drugs, new treatments and new diagnostic tools—to enhance and prolong our lives.

We hardly notice many innovations that improve service. Fiber-optic cables greatly expand the capacity of telephone lines. Lasers on cash registers help speed us through check-out lines by scanning bar codes. Airbags await to cushion us from the impact of traffic accidents. Microprocessors guide pilots and air-traffic controllers. Doppler radar makes weather forecasts more reliable. These and a host of other products, many embedded with tiny silicon brains of their own, make our lives safer, easier, more convenient or just plain more fun.

Few facets of life are untouched by the arrival of new and better products, and GNP's measurement of consumption can easily fall short of properly accounting for improvements in quality. The traditional measures of standard of living—real per capita income, for example—use an index to compensate for rising prices. Statisticians can calculate exactly what Americans pay for cars, clothing, computers and clocks and occasionally try to adjust for better quality, but even their best efforts aren't likely to keep pace with the dizzying blitz of new products and features in a dynamic global economy.

Price indexes, too, are apt to understate gains in product longevity, new features or better performance. The price of a tire, for example, rose from $13 in the mid-1930s to about $70 in early 1994, entering into a price index for tires as an increase of about 1.5 percent a year. However, today's steel-belted radials last more than 10 times longer than the old four-ply cotton tires. Based on cost per 1,000 miles, tires now actually sell for less than half what they did 50 years ago. Even more astounding, an average worker in the 1930s worked almost four hours to buy those 1,000 miles. Today, the cost is less than five minutes. The benefits don't stop there: drivers in safer cars are better off because they have fewer accidents, reducing the amount of time and money spent on repairs. Safer highways may lower GNP, but they raise the standard of living.

Quirks of this sort permeate the price indexes. Modern fabrics last longer and require less care, adding to the value of clothing and linens. Frost-free refrigerators make the messy chore of defrosting a fading memory. In just the past decade, computers and the software to run them improved in speed, memory and ease of use by leaps and bounds. The rapidly rising cost of health care is a major national issue, but at least part of the increase in hospital fees and drug prices is the result of better quality. Car lovers may wax nostalgic about the Corvettes and Mustangs of yesteryear, but today's cars go farther on a gallon of gas. What's more, they've been improved with antilock brakes, fuel injectors, turbochargers, cruise control and sound systems that outperform even the home stereos of 1970. Today's cars, with as many as 25 tiny microprocessors aboard, require less maintenance, too.

Price indexes are also slow to incorporate the myriad of new products coming into common use. Pocket calculators entered the U.S. consumer price index in 1978—only after the prices for these smaller, more powerful models fell by 98 percent from those of the electromechanical desktop devices they replaced. Statisticians missed 99 percent of the price decrease in penicillin. The list could go on: quality improvements are widespread in an age of advanced technology, with new products coming to the market just about every week.

Any failure to properly account for better quality makes price indexes exaggerate increases in the cost of living. Economists frequently debate the extent of upward bias in inflation, but some studies suggest the bias might be significant—from a low of a third of a percentage point a year to as much as 2 percentage points over the past two decades. When price indexes overcompensate for inflation, they make GNP growth seem smaller than it actually is.

Price-index problems have always existed. New products have been introduced and improvements in quality have taken place in previous eras, but there's reason to believe they are greater now, during rapidly expanding technology and trade. Companies face intensifying competition and shrinking product cycles: the latest breakthroughs and updated models seem to be coming faster and faster. Record players reigned for decades before cassette tapes. The time between cassettes and compact discs was much shorter. Now, digital audio tape and recordable CDs are arriving. New models of computer chips once came out every few years. Now, it's nearly an annual event. Accelerated technical progress makes it harder for the statisticians to accurately measure GNP and harder for GNP to serve as a proxy for living standards.

Some Other Rays of Light
More leisure and higher consumption aren't the only ways people's lives have improved. Especially as societies become richer, citizens tend to put greater importance on nonmaterial factors that affect living standards: better health, safety, more pleasant working conditions, a cleaner environment. All of us could add other considerations we value. "The good life" becomes harder to measure when we move beyond the dollars and cents accounting of GNP data. Even so, there is evidence to counter fears that U.S. living standards are getting worse.

Longevity may be the most important measure of well-being in a modern society. The data show that an average American's life expectancy at birth has increased each decade during the past century. As might be expected, the biggest gains came in the first half of the 20th century, but the upward trend continues. In the past decade, the life span rose by more than one year and eight months.

What's more, the population generally sees itself as healthier. Surveys by the U.S. Department of Health and Human Services show a steady drop in the proportion of Americans who rate their health as "fair or poor," from 12.2 percent in 1975 to 9.3 percent in 1991. Infant mortality rates fell from 20 deaths per 1,000 live births in 1970 to less than nine in 1991. The death rate from natural causes fell by 27 percent from 1970 to 1990, with the most progress coming in diseases of the heart. Cancer death rates are up slightly, but modern medical science provides treatments that prolong life. The portion of the adult population with high cholesterol fell sharply over the past two decades. What once was fatal can in many cases now be treated. Heart, liver and lung transplants, almost unheard of in the early 1970s, are common today.

The country isn't just healthier; it's also safer in some respects. Accidental deaths have declined in every category, especially since 1970. Homes are safer. The workplace is safer. In 1991, 88,000 Americans died in accidents, the lowest figure since 1924. Highway deaths totaled 43,500 in 1991, the lowest they've been since 1962. Even more encouraging, the death rate per 100 million miles traveled on the nation's roads fell from three in 1975 to 1.8 in 1990. At the higher rate, an additional 25,000 people would have died in 1990. The incidence of death from crashes of scheduled airliners has decreased to just a fraction of what it was 20 years ago.

When it comes to time at work, improvement in the quality of life continues, at least for most Americans. The trend toward service employment has rescued many Americans from the daily grind of the manufacturing assembly line. And in manufacturing, modern robots assist worker effort, meaning less wear and tear on the human body. Observers also find greater workplace flexibility in the form of breaks, exercising and socializing. Properly understood, this time isn't shirking. It goes for rest, birthday parties, fitness classes and awards ceremonies that employers support as tools to improve morale and efficiency.

What's more, trends point toward greater flexibility of scheduling to reduce stress involved in meeting family responsibilities. The number of people with flexible job hours rose from 9.1 million in 1985 to 12.1 million in 1991. New technologies—modems, E-mail, fax machines, digital networks—create opportunities for unheard of freedom from the confines of yesterday's 8-to-5 straitjacket. The ranks of white-collar telecommuters, for example, swelled to 6.6 million in 1992, saving at least some employees the bumper-to-bumper grind of an old-style commute. Imagine the possibilities: a lucky worker can type a report into a laptop computer while sitting in a beach chair in Maui, then send it to the office in Dallas via cellular circuits. With improving battery technology, there's no need for even an extension cord.

Safety at work has gotten better, too. Accidental deaths at work have declined consistently since at least 1945. Injuries on the job haven't declined in recent years, but they are well below the levels of previous decades. If the hot, unsavory sweat shop symbolized the workplace of a bygone era, today's standard might be the air-conditioned office and, at an increasing number of firms, employee cafeterias, day-care centers, break rooms and exercise facilities.

Some data show that wages fell over the past 20 years. Yet those statistical series ignore the rapid growth of fringe benefits: with high tax rates, workers often prefer to take their higher pay in the form of additional health care, contributions to retirement funds or employee assistance programs. Figures on total compensation, which include extras employers pay for, don't show a decline. Some workers are finding their benefits packages becoming leaner, but many others are getting new perks. Overall, nonpay compensation as a percentage of payroll is up a third since 1970. Compared with a generation ago, more employers are offering eye care, dental plans, paid maternity leave and stock-purchase plans. Today's most progressive companies are starting to offer day care and paternity leave. It's impossible to prove whether workplace abuses are declining. Even so, workers today have greater redress for unfair dismissal, sexual harassment and other problems.

Americans are also making progress in improving the environment. Levels of such major pollutants as particulate matter, sulfur oxides, volatile organic compounds, carbon monoxide and lead were their highest in 1970 or before. Levels of nitrogen oxides peaked in 1980. Overall, air quality is better now than at any time since data collection in 1940. Water quality has improved since the 1960s, when authorities banned fishing in Lake Erie and fires erupted on the polluted Cuyahoga River near Cleveland. The U.S. Geological Survey, examining trends since 1980, found that fecal coliform bacteria and phosphorous have decreased substantially in many parts of the country. Other traditional indicators of water quality—dissolved oxygen, dissolved solids, nitrate and suspended sediments—have shown little change.

Despite such gains, we live in a complex world, and it would be surprising if by every measure the country's life were getting better. The general gains in health are clouded by the AIDS epidemic. Air and water may be getting cleaner, but they still aren't pristine. Environmentalists warn of global warming, deforestation, hazardous waste dumping and endangered species. Working conditions may have become more pleasant for most Americans, but some workers displaced by downsizing may have new jobs that aren't as good as the ones they lost, or they may have no job at all. Even among the 120 million employed in the United States, reports of widespread layoffs cause anxiety about job security.

We are even more anxious about the increasing incidence of crime and violence. In polls taken in early 1994, crime ranked first among Americans' worries. The data indicate why. Crime worsened in the 1970s and remains high. But even here there's some encouraging news. Figures for the first half of 1993 show that crime rates are ebbing—by 3 percent in violent offenses. Clearly, Americans' well-being will improve if the country can sustain a trend toward less crime.

Diseases, pollution, unemployment and crime are but a few of the threats to our living standards, but we should not let them overshadow two decades of progress.

A Last Look at Standards of Living
Rising living standards may be the ultimate test of an economic system. The very notion of economic progress depends in large measure on the potential for most people to become increasingly better off. Successful economies make their citizens richer and happier. Failing ones leave them poorer.

Americans may question whether we're becoming better off. By historical standards, the past two decades' 2.5-percent growth in GNP just doesn't measure up. But GNP does not tell the whole story. A more careful look at leisure, home production, new products, quality improvements and noneconomic indicators casts doubt on claims that the U.S. economy's rate of progress peaked a generation ago. If nothing else, this broader view proves the concept of standard of living cannot be captured by one or two numbers. By broadening our view, we find evidence that Americans are still building a better life. When all's said and done, the gains in recent years probably aren't too different from what they were a generation ago, when capitalism's capacity for progress was hardly questioned.

Why, then, do so many people seem to feel the country has lost its momentum? The question defies an easy answer. Part of the reason may be that many people aren't aware of the quiet improvement in so many areas of their lives—from more leisure to bigger houses and better health. They are, on the other hand, tuned into ills around them on a daily basis—AIDs, global warming and crime, to cite just three examples. And rightly so: these are problems that need attention.

Furthermore, there's a normal human tendency to romanticize the past. Looking back at the high-growth years from 1960 to 1973, for example, the nostalgic may gloss over many unsettling events. The country wrestled with the real possibility of nuclear annihilation, an unpopular war in Vietnam, racial strife that erupted in rioting, assassinations, political scandal and high rates of poverty. Many later problems—inflation in the 1970s, toxic waste dumps that needed cleaning up in the 1980s—trace their origins back to those "good old days."

History books can tell us about how Americans once lived. For the grandparents or great-grandparents of today's workers, life really was a struggle. Hours of work stretched from dawn to well after dusk. Workplaces were often dimly lit, dirty and dangerous. Houses were hot in the summer, cold in the winter. At home, the daily chores were unending and backbreaking. Death came early. The social critics of the time attributed much of the harshness of everyday life to the failings of capitalism.

Looking backward over a century or more, though, it's obvious that the free enterprise system works—and works well, so long as private profit incentives are unfettered by government taxes, regulation, debt, policy instability or other burdens. Herein lies the secret to growth. If we let the system work, then every successive generation ought to be able to claim that "these are the good old days." Few Americans would fail to recognize that living standards have improved by leaps and bounds over the long sweep of time. Our Rip Van Winkle, his eyes not blinded by nostalgia or negativism, sees quite clearly that it's still true today. His fresh perspective affirms the promise of even higher living standards in the future-as long as we allow the free enterprise system to work.

—W. Michael Cox and Richard Alm

Catching Up In the past two decades, Americans worried not only about the country's ability to keep pace with its own past performance but also about a failure to grow as fast as many other countries. The numbers are fairly familiar. From 1973 to 1990, per capita GNP in the United States grew by an average 1.5 percent a year. By contrast, average annual economic gains were 3.1 percent for Japan and 2 percent for Germany. While the United States seemed to crawl forward, such developing countries as Korea, Taiwan, Thailand and, most recently, China managed to get their economies moving briskly. About GNP growth, Americans often ask, why are other nations doing so much better? The answer lies in a notion called convergence. Envision an explorer wielding a machete to cut a path through a dense jungle. He goes slowly, hacking his way forward, destination not really known. Those who come behind him have a much easier time of it. They see the path. They know where they're going. They can move faster, gaining ground on the trailblazer. That's just about what happens with economies. Using the sharp saber of free enterprise, the most advanced nations open the pathway for others by developing markets, technology, business systems and infrastructure—in effect, creating a successful model. Less developed countries can quickly adopt what works and exploit existing markets, and it shows up in faster rates of growth. In short, catching up takes less effort. Some nations don't emulate successful examples. Those that do tend to converge with the leaders in economic performance. Without question, other nations are catching up to the United States. Per capita output in Japan rose from 50 percent of the U.S. average in 1970 to 72 percent in 1992. Germany moved up from 63 percent to 70 percent. Even so, the United States still hasn't lost its lead—and it's not likely to do so. As other countries move closer to the U.S. level of development, their growth rates slow and converge toward the U.S. performance. Take Japan, for example. Its average annual growth rate outdid that of the United States by 6.9 percentage points in the 1960s, by 2.3 percentage points in the 1970s and by 1.7 percentage points in the 1980s. At the end of the latest decade, some predicted Japan would overtake the United States as the world's biggest economy. In the 1990s, however, both countries are likely to grow at about the same rate. Unless Japan experiences a renewed spurt of growth, it will not catch the United States. To some Americans, faster growth abroad is a threat. Nothing could be further from the truth. The United States doesn't benefit when other countries stumble economically. Quite to the contrary, strong growth abroad provides opportunities for U.S. exports and business deals. All countries will move faster if they travel together.

Secrets of Growth Even if Americans' living standards aren't slipping, the U.S. economy can do better. Boosting the rate of GNP growth would make Americans even better off and help solve some of the country's problems—unemployment, poverty and budget deficits, to name just a few. The U.S. economy has expanded by an average of 2.5 percent a year since 1973. Present and future generations of Americans would end up with much higher living standards if the economy could jump back to the 3.5-percent standard set in the century before 1973. The mathematics of it are straightforward but the results eye-opening: at the end of an average lifetime, the economy would be twice as large with the addition of just one percentage point a year to growth. Inquiry into what makes economies grow dates back at least as far as Adam Smith's Wealth of Nations, published in 1776. In the past decade, with growth slowing in many parts of the world, the question has experienced a revival of interest, becoming one of economists' hottest research topics. The latest thinking recognizes that growth doesn't just happen. Instead, it arises out of the economic environment itself. The key is a stable framework of rights, freedoms and incentives that will spur individuals to work, businesses to produce and entrepreneurs to innovate. In a free enterprise system, growth is a natural and continuous process, but it must be nurtured by the correct policies. The following are the basic secrets of growth. Establish and preserve property rights. Private ownership of the means of production allows individuals to reap the rewards from economic activity, thus encouraging efficient use of resources to satisfy consumer wants. People produce more when working in their own self-interest: altruism is a weak motive when compared with the incentive for profit and personal material gain. Create market-friendly institutions. Markets won't function properly without an appropriate legal code. Contracts need to be enforced. Property rights need to be upheld. Monopoly needs to be controlled. Institutions should facilitate economic activity and complement innovation. Maintain stable government policies. Households and businesses can pursue their economic interests only if government honors all promises—implicit and explicit. Frequent changes in tax laws or other government policies create uncertainty and instability that can make a mockery of long-range planning. Avoid protecting existing jobs, industries or businesses. The natural forces of creative destruction continuously regenerate the economy, but protection from failure prevents new, better or cheaper products from replacing older ones. By rejecting a paternalistic role for government, decision-making and responsibility stay in citizens' hands, where they can be best used to make the hard choices that new opportunities bring. Keep taxes low and simple. People will work harder and invest more when they can keep a larger share of what they earn. Taxes that don't discourage work or investment—such as user fees or levies on consumption—are less harmful to the economy. Loopholes and special favors divert resources to less efficient uses. Abstain from excessive regulation. Licenses, permits, fees and other burdens of operating businesses provide the same disincentives as taxes. Efforts to deregulate and privatize will pay off by increasing the rewards of going into business and hiring new employees. Invest in infrastructure. Government spending on transportation facilities and other investment-type projects can enhance the efficiency of the private sector and facilitate commerce. Maintain stable prices. Gyrations in the general price level wreak havoc on decision-making by businesses, households and governments. Steady, sensible control of the supply of money is the key to maintaining the currency's purchasing power. Low inflation will facilitate the efficient exchange of goods and services. Nurture business credit, particularly for entrepreneurs. Keeping government debt low will conserve credit for use by private business. It's tempting to try to legislate away credit risk with government guarantees, but such programs distort the allocation of investment funds and supplant the natural discipline of failure in the marketplace. Focus unemployment outlays on retraining. The bulk of unemployment funds should be used to prepare displaced workers for new jobs and provide incentives to work. Only a minimum payment should go for passive unemployment. Make education a priority. A better educated work force is more productive, and it speeds the introduction of new technology. Tax laws ought to treat education as a depreciable capital good, equal to, if not more important than, physical capital. Allowing choice in schools will foster competition and improve quality. Promote free trade. Tariffs, quotas and other trade barriers decrease competition and deny an economy the full advantage of the production efficiencies offered throughout the world. Free trade makes all nations wealthier.

Acknowledgment "These Are The Good Old Days: A Report on U.S. Living Standards" was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by W. Michael Cox, vice president and economic advisor, Federal Reserve Bank of Dallas. Selected Bibliography Atack, Jeremy, and Fred Bateman, "How Long Was the Average Workday in 1880?" Journal of Economic History, March 1992. Balke, Nathan, and Robert J. Gordon, "Prewar Gross National Product," Journal of Political Economy, February 1989. Desmond, Kevin, A Timetable of Inventions and Discoveries (New York: M. Evans and Co., 1986). Eisner, Robert, The Total Incomes Systems of Accounts (Chicago: University of Chicago Press, 1989). Federal Reserve Bulletin, January 1992 and December 1984. Gordon, Robert J., The Measurement of Durable Goods Prices (Chicago: University of Chicago Press, 1990). Greis, Theresa Diss, The Decline of Annual Hours Worked in the United States Since 1947, Manpower and Human Resources Studies, no. 10, The Wharton School (Philadelphia: University of Philadelphia, 1984). Lund, Robert L., "Truth About the American Productive System," in collaboration with Earl Reeves in Truth About the New Deal (New York: Longmans, Green and Co., 1936). Maddison, Angus, Dynamic Forces in Capitalist Development (New York: Oxford University Press, 1991) and Economic Growth in the West (New York: The Twentieth Century Fund, 1964). National Safety Council, Accident Facts, 1992. Statistical Abstract of the United States, various issues. U.S. Department of Commerce, Bureau of the Census, Current Population Reports, series P-65; Computer Use in the United States: 1989, series P-23, no. 171; and Historical Statistics of the United States: Colonial Times to 1970. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, January 1992. U.S. Department of Energy, Office of Energy Markets and End Use, U.S. Residential Energy Consumption Survey, Housing Characteristics, annual, 1990 and various issues. U.S. Department of Health and Human Services, Public Health Services, National Center for Health Statistics, Vital Statistics of the United States, 1984 and annual; and Health United States 1992 and Healthy People 2000 Review, August 1993. U.S. Department of Justice, Federal Bureau of Investigation, Uniform Crime Reports for the United States, 1975, Table 1, Index of Crime, United States, 1960-75; and Uniform Crime Reports for the United States, 1993, Table 1, Index of Crime, United States, 1973-1992. U.S. Department of Labor, Bureau of Labor Statistics, Bulletin 2434, Employment Cost Index and Levels, 1975–93 (September 1993 and earlier years); Bulletin 2422, Employee Benefits in Medium and Small Establishments, 1991 (May 1993); Bulletin 2370, Employment, Hours, and Earnings, United States, 1909–90, Volume I (March 1991); Employment and Earnings, monthly (Table A-4: "Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race," 1993 and earlier years); Monthly Labor Review, "Trends in Retirement Age by Sex, 1950–2005" (July 1992), "Time-off Benefits in Small Establishments" (March 1992), "Variations in Holidays, Vacations, and Area Pay Levels" (February 1989) and "Absence from Work—Measuring the Hours Lost" (October 1977). Data Sources for Figures Page 4 The World Through Rip's Eyes Eisner, Federal Reserve Bulletin (1992 and 1984), National Safety Council, Statistical Abstract of the United States, U.S. Department of Commerce (Current Population Reports and Survey of Current Business), U.S. Department of Energy, U.S. Department of Health and Human Services, U.S. Department of Justice, U.S. Department of Labor (Bulletins 2434, 2422 and 2370; Employment and Earnings; and Monthly Labor Review—March and July 1992 and 1977). Growth of U.S. Gross National Product, 1870–1990 Balke and Gordon and U.S. Department of Commerce (Current Population Reports, Historical Statistics of the United States and Survey of Current Business). Page 7 Work Time Atack and Bateman, Eisner, Greis, Maddison (1991 and 1964), U.S. Department of Commerce (Survey of Current Business) and U.S. Department of Labor (Bulletin 2370 and Monthly Labor Review—March and July 1992 and 1977). Page 8 Less Work, More Leisure and Three Profiles of a Lifetime U.S. Department of Commerce (Historical Statistics of the United States), U.S. Department of Health and Human Services (Vital Statistics of the United States); see also page 7 sources. Page 16 Quality of Life U.S. Department of Commerce (Current Population Reports), National Safety Council, Statistical Abstract of the United States, U.S. Department of Justice. Page 22 A High Standard Maddison (1991). About the Dallas Fed The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States. Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve System and function as the nation's central bank. The System's basic purpose is to provide a flow of money and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks supervise banks and bank holding companies and provide certain financial services to the banking industry, the federal government and the public. Since 1914, the Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District. The Eleventh District encompasses 350,000 square miles and comprises the state of Texas, northern Louisiana and southern New Mexico. The three branch offices of the Federal Reserve Bank of Dallas are in El Paso, Houston and San Antonio. Federal Reserve Bank of Dallas 2200 North Pearl Street Dallas, Texas 75201 (214) 922-6000 El Paso Branch 301 East Main Street El Paso, Texas 79901 (915) 544-4730 Houston Branch 1701 San Jacinto Street Houston, Texas 77002 (713) 659-4433 San Antonio Branch 126 East Nueva Street San Antonio, Texas 78204 (210) 978-1200