Taking Stock in America
Resiliency, Redundancy and Recovery in the U.S. Economy

A Resilient Economy

Every day, 135 million Americans report to work, striving to improve their living standards. Every day, 285 million U.S. consumers determine the pattern of employment and production through their spending on goods and services.

Americans make up just 5 percent of the world's population, but our $10 trillion economy accounts for a quarter of global output. We own, consume and make more of nearly everything—from cars and houses to movies and sports events. We're among the world's leaders in just about every cutting-edge technology. We're the world's greatest trading nation—the biggest importer and the top exporter.

U.S. industrial production is six times larger than in 1950. Total output has expanded more than fivefold. So has the capital stock—a measure of the economy's capacity to produce goods and services.

It's foolhardy to pick a fight with a rich nation. The greater the economic power, the more a nation can sacrifice to fight its enemies while still attending to the needs and wants of its population.

The U.S. economy had a per capita income of $34,996 in 2000. In the 1940s, the nation fought and won World War II, against a powerful, fully armed enemy, with just a third of today's economic power—$11,724 per person, as measured in constant dollars. (See Exhibit 1.) Fighting the war against terrorism will cost billions of dollars. But with its huge economy, the United States can afford the tab.

Annual defense spending per capita during World War II was an inflation-adjusted $3,381—or 29 percent of the nation's total production. Today, each American's share of the defense budget comes to $1,050, just 3 percent of our total output. Military spending will go up over the next few years, but the country will still live comfortably while confronting its enemies. One way to look at it: The nation could double its military budget with just one year's economic growth.

Throughout history, world powers have fallen because their economy couldn't support their military. The latest, of course, was the Soviet Union, whose inefficient socialist economy couldn't keep pace with the Cold War spending of the United States.

Guns or butter? Yesterday's economic lessons focused on the consumer hardship caused when military spending sapped production of civilian goods and services. As the wealthiest nation in history, we have the ability to produce both guns and butter.

The U.S. economy hasn't only grown larger. It's also become more diversified. In 1947, three sectors—manufacturing, retail trade and agriculture—made up nearly half the U.S. economy. Over the past half-century, those industries have shrunk to a quarter of output. At the same time, the economic pie has expanded with the birth of whole new industries—such as computers and biotechnology—that add more to the mix. (See Exhibit 2.) Transportation now makes up less than 3 percent of total output. The airline industry, one of the sectors hardest hit after the terrorist attacks, accounts for less than 1 percent of the economy.

America's employment base shows a similar increase in breadth. The 15 most common occupations, including farming and carpentry, made up two-thirds of all employment in 1900. Today, the top 15 jobs include computer operators and engineers, but together these jobs account for less than a third of all employment.

When it comes to personal investing, financial gurus preach diversification as a way to reduce risk. What's good for investors is good for nations as well. In today's economy, jobs are spread more evenly among a wide variety of industries, none of them overly dominant. Trouble in one or two sectors doesn't create waves that swamp the economy as a whole.

Exhibit 3

We Are the World

Foreign-Born Population in the United States

Our immigrant population has become more varied along with our economy. In 1900, during an earlier wave of newcomers, more than half the foreign-born came from two countries, the United Kingdom and Germany. Now, as then, America's prosperity, openness and freedom are magnets for people from other nations. But today's foreign-born population comes from almost every part of the globe. (See Exhibit 3.) We are the world.

Immigration opponents might worry that we're inviting potential enemies into the country. America, though, has grown rich and powerful as a nation of immigrants who create human bridges to other nations. People from other parts of the world can learn firsthand about us, and we can learn about them.

We're more decentralized as well as more diverse. With each decade, America's population has dispersed across the continent, evening out the distribution of economic activity and thereby making the country less vulnerable to disruption.

In 2000, the United States had 50 metropolitan statistical areas (MSAs) of more than 1 million. In 1950, we had just 12. The number of MSAs with 100,000 people rose from 119 to 260 over those five decades. The decentralization makes it harder to cripple the nation. (See Exhibit 4.)

The rise of new population centers has been accompanied by a dispersal of economic activity. In 1950, a narrow swath of the country—from New England through the Great Lakes—produced 55 percent of the nation's income. By 2000, the region was down to 41 percent. Over the past 50 years, jobs and businesses spread south and west, with the sprawling Sunbelt rising from 36 percent of income to 53 percent.

Decentralization isn't only a matter of geography. Our transportation assets are widely distributed, with interstate highways crisscrossing the country, north to south, east to west. The number of interstate highway miles jumped from 32,000 in 1970 to 46,000 today. All told, we have nearly 4 million miles of roads.

Seeing interstates as security as well as economic assets isn't new. The system, designed in the 1950s, gave us a way to move military personnel and equipment and evacuate cities. It even provided a place for emergency aircraft landings. Just over a decade later, national security gave the impetus to what would become the Internet, a worldwide information network that's everywhere, with no central location.

Like diversification, decentralization strengthens the economy by making it less vulnerable to major disruptions. Even with much of New York, a key financial center, hobbled after September 11, only a tiny portion of America's economic assets were out of commission. Most disruptions were brief. We benefited not only from backup and emergency systems but also from the know-how to get commerce up and running again.

As it turned out, we received an unintended dividend from the intensive preparations for Y2K, when, many experts warned, a software glitch could shut down computers at the start of the new millennium. Valuable knowledge, once acquired, wasn't lost. Our open, competitive system put it to good use in reducing the economy's vulnerability to shock.

Financial markets functioned well in a time of crisis, providing a virtually uninterrupted flow of money and credit. The Federal Reserve did its part by settling accounts and bolstering confidence, keeping the payments system working smoothly. (See "The Fed's Response.")

Our banking system found strength in redundancy. Commerce is less likely to grind to a halt in a crisis because we've developed ready alternatives to trips to the bank. The nation now operates 273,000 automated-teller machines, offering access to cash 24 hours a day. In 1970, the main office of Chemical Bank in New York had the country's only ATM, so customers of other banks had to conduct their business during office hours. (See Exhibit 5.)

We can continue spending with less cash in our pockets. Just 16 percent of American families had a general-purpose credit card in 1970. Today, nearly 70 percent do. On top of that, the number of point-of-sale terminals, which process transactions without cash, jumped to nearly 2.4 million in 2000, up from 53,000 a decade ago.

All across the economy, we have more than the bare minimum of what we need.

Until the early 1970s, delivering messages usually involved one of two means of communication—a telephone monopoly or the U.S. Postal Service. In today's economy, the channels are proliferating. In the past two decades, an innovative marketplace has added fax machines, electronic mail, Internet chat rooms and wireless handheld devices. We have a multitude of choices for telecommunications services. Business is booming for private alternatives to the post office—such as FedEx Corp.—that provide door-to-door service.

Television also employs a growing variety of delivery systems. In addition to the traditional broadcasting towers, signals arrive in our homes via cable, satellite and computer modem. Satellite radio, introduced in 2001, offers listeners myriad news, weather, sports and music stations and reliable service no matter where they travel.

Capital stock per person

A telephone in the pocket or purse has become an everyday convenience, with 128 million Americans owning cell phones. The number is continuing to rise rapidly as many of us seek the peace of mind that comes with portable communications. A cell phone is no longer a pricey luxury. The average bill fell from an inflation-adjusted $160 a month in 1985 to $46 in 2001.

With landlines in parts of Manhattan out of commission or inaccessible, cell phones gave those affected by the World Trade Center attack a way to reach out to family and friends. Many New York City firms turned exclusively to mobile communications to conduct business.

Overlapping and competing systems provide the protection of redundancy. If one method or location fails, substitutes can keep the wheels of commerce turning.

Our infrastructure runs deeper and broader than ever. Since 1970, the miles of natural gas pipelines have nearly doubled, as has the number of electric utility companies. The number of airports has nearly doubled since 1970 to 19,098, with more flights providing options for travelers. Nearly 40 million miles of fiber-optic cable stitch the nation together. In the heavens above, 700 U.S. satellites provide a mobile communications infrastructure impervious to attack from all but the most advanced nations.

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