Where We've Been and What's Ahead
Dallas Business Review
Spring 1996

There’s never any shortage of criticism of the performance of the American economy. In a sense, this is one of its most enduring achievements. Because the economy has performed so well, expectations are always high and, therefore, often frustrated. Since this is a presidential election year, the criticisms will be more frequent than usual as candidates attempt to paint the incumbent administration’s economic oversight as deficient—much the same as during the campaign four years ago. If we look beyond the rhetoric to the facts, and look also behind some of the statistics, what do we find about the state of our economy during the recent past, and what can we expect?

Since "the economy" is such a vast entity, I will focus my review to three trends that have received a good deal of attention lately, including in publications by the Federal Reserve Bank of Dallas. They are: (1) the role of technological change in our system and how it affects individuals, (2) the growing service sector and its effects on the prospects of labor, and (3) income distribution and the claim that, as the rich get richer and the poor get poorer, the middle class will disappear.

The Churn
Let me begin with the sweeping changes that technological innovations cause within a capitalist economic system. The one economist who most clearly saw the role of technology in the continual transformational upheavals within that system was Joseph Schumpeter. Free markets are one large laboratory for continual experimentation and rapid economic change. Change can be very frightening, especially if it means that your job, your place of employment or perhaps even your profession becomes obsolete. But that is precisely the type of "creative destruction" that Schumpeter theorized was the single most powerful force driving capitalist economic development and macroeconomic growth.

The fear of change is so pervasive, in fact, that most public policy can be viewed as an attempt to place this incredibly powerful capitalist machine, growing in unanticipated directions, within regulatory parameters that people hope will altogether stop—or blunt—the powerful effects of such change. Of course, all such regulation can only be a temporary restraint on so powerful an engine and, looking at the recent failure of the former Soviet Union, one can see that, as economies have moved from the primitive "heavy industry" phase into the modern, "information-driven" phase, the possibility of containing their technological growth paths is a task beyond the grasp even of a totalitarian state.

In America, we typically do not see neo-Luddite bands roaming the landscape attempting to stop changes as they occur. But there are romantic offshoots of this tradition, such as the group portrayed in Edward Abbey’s influential book The Monkey Wrench Gang, that destroys the tools of economic development on principle. It is much more usual in this country for our Luddism to take the form of gradually receding resistance, rather than outright prohibition of change.

We tend to allow adversely affected economic interests to be "bought off" over time so that technological improvements can occur. It’s probably good that we have taken this approach because it has brought us a standard of living that is the envy of most of the developed world, one that certainly is unequalled by any other nation with a population as diverse as America’s.

This continual change is something that economists call "the churn." There can be no resting on one’s accomplishments in a market system. Every hour of every day, potential competitors are gaining on you while inventors, and the entrepreneurs who put new inventions into practice, try to put you out of business entirely. In many cases, competitors wind up doing precisely that. Most of us know people who have lost their jobs to downsizing, relocations, reorganizations or bankruptcies. These things are so common that some people seem to think that America is in the middle of a "going out of business sale." We are not, as employment data can show us if we choose to look for it.

Headlines Obscure Reality
Daily papers present countless stories that seem to paint a deteriorating employment picture. In Dallas-Fort Worth, for example, one local newspaper carried these headlines during 1993–95: "Sears to cut 50,000 jobs, AT&T to cut 40,000 jobs, Lockheed to trim 1,200 jobs, GTE to cut 17,000 jobs, Halliburton cutting workforce by 1,200, EDS cut 1,358 jobs, Vought to trim 2,000 jobs, Mobil cutting 4,700 positions, MCI slashes 3,000 jobs" and "AMR will lay off 5,000 by end of 1994." These are typical morning headlines we swallow along with our coffee. It’s hardly surprising that, given time, we begin to feel a sense of economic woe, failure and even despair.

But what’s really happened to Dallas–Fort Worth employment during this time? Total employment in Dallas has grown by 11.7 percent, and total employment in Dallas–Fort Worth has grown by 11 percent, 3.9 percent annually for Dallas and 3.65 percent annually for Dallas–Fort Worth. Over this same period, the nation’s total employment has grown by only 7 percent, or 2.33 percent annually. The dry data, not typically accessed by the average person, tell a story dramatically different from the headlines above the newspaper stories so many people read. In fact, we are growing nicely and steadily, not declining. And we have been doing so, on average, for a very long time.

Remarkable Stability
In our capitalist economy, churning continues on the microeconomic level even as macroeconomic activity remains remarkably stable. Nobel Prize-winning economist Robert Lucas put it this way in Arjo Klamer’s book Conversations With Economists:

"I think this economy is going to grow at three percent a year (long term) no matter what happens. Forever. [T]here’s an incredible amount of stability in the last 100 years of U.S. economic history… [T]hey (radicals) have to talk of imminent crisis; that’s their job. I don’t see it."

Our shared experience, then, has been an ongoing, powerful microeconomic churning accompanied by a relatively stable, positive-growth macroeconomic performance. We always need to recall, however, the potential fallacy of division implied by our picture of the workings of the economy: what’s good for the whole economy may well be bad for many of its individual parts, at least in the short run. Few people wish now to return to the horse and buggy, but buggy makers were devastated by the invention, mass production and mass distribution of automobiles.

From a materialist perspective, this constant tinkering with the production and distribution of goods and services that is the hallmark of the capitalist system has been overwhelmingly successful. It is hard today for people to remember that during the century between 1850 and 1950 prominent intellectuals and powerful political voices extolled the allegedly superior productive power of a planned, centrally directed economic system.

As it has now become apparent to all but the most ideologically blind that this argument was wrong, the charges against capitalism had to be changed. A newer, more popular charge is that it has overproduced while destroying too many natural resources. This charge is made, typically, by people who are prime beneficiaries of the very process they claim to detest. Never before in history has economic abundance allowed such a large class of intellectual social critics, who have both the income and leisure to spend their days in hostile criticism of the very system that houses, clothes and feeds them. Our friend Joseph Schumpeter saw all this a half century ago when he argued that capitalism was socially doomed not because it would fail, but because it would succeed so brilliantly and, in this process, threaten all established interests. He wrote in his Capitalism, Socialism and Democracy:

"[C]apitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success victorious defense can possibly produce is a change in the indictment."

Rush Limbaugh was fired from six stations before he finally accomplished his lifelong dream of becoming a famous radio personality. That’s a lot of disappointment. A lot of failure. But he kept at it and is now a multimillionaire. I’m told that Babe Ruth often led the league in strikeouts. The reason most people cannot work up love for capitalism is that they don’t like looking in the mirror and seeing, generally, the cause of most of their problems.

Hamburger Flipping?
As the churn played out over the past 150 years and Americans became more affluent and more able to afford conveniences, luxuries and ever-increasing periods of leisure, the nature of work and output in the economy changed. These changes contributed to the second trend I want to discuss, the rise of the service sector. Predictably, this change has produced its share of critics and handwringers. In this case, the shift from heavy manufacturing to a service-oriented economy has brought with it fears about Americans becoming low-paid hamburger flippers while the rest of the world increases its share of better paying manufacturing jobs. As usual, the source of this angst is political rhetoric, the charge being first used in an attempt to discredit the rapid expansion of economic activity during the 1980s. "What good are all these new jobs," critics complained, "when they are poor-paying substitutes for what used to be solid, blue-collar, unionized, manufacturing jobs?

But the growth of a service-oriented economy is a symptom not of economic decline, but of economic vigor, expansion and higher living standards. The critics have it exactly backward. When workers become wealthier, they more easily satisfy their requirement for basic necessities. In fact, wealthier societies are always moving toward a more service-oriented output mix. Most of the handwringing by critics concerns the job growth in services once performed in the home that people now can afford to farm out to others. It isn’t accurate or logical to say that "only the wealthy can do that." If that were the case, there would not be a large enough market for the very firms whose output the critics don’t want to exist in the first place.

America is moving to an output mix that will, increasingly, involve growth in personal, household and information services. This is not a trend to deplore, but one to be embraced by those who desire rising productivity and affluence in the nation. If you doubt this, look at the exhibit titled "Progress and Poverty," which compares goods owned in 1971 with today. Can you continue to believe that America is poorer now than in 1971? It just isn’t true.

Has the American Dream Vanished?
This brings me to my third concern, income distribution. Is it not the case, as newspapers, television, movies and books have repeated over and over throughout the past two decades, that "the rich are richer and the poor are poorer?" Is it also true that "America is no longer a land of opportunity" and the "middle class is shrinking" as it falls behind, "running faster and faster just to stand in place?" These claims suggest that opportunity is a thing of the past.

Is the American Dream just a memory? Is it something today’s children will miss as they fail to achieve their parents’ standard of living, just as today’s adults, according to this view, failed to achieve the standard of living of their parents? The very good news is that the American Dream is alive and well, and today’s children may well surpass the standard of living their parents now enjoy. It is true, however, that the rich are getting richer and the size of the middle class is shrinking. Let me explain why I view both trends as positive, rather than as signs of trouble on the economic horizon.

The perceptions routinely put forth by some are of a stagnant, declining economy that is losing jobs to other nations as the ranks and incomes of the middle class shrink. I cannot overemphasize that this view is just flat wrong. Whenever you encounter an argument based on statistics, it is wise to remember the economists’ adage, "If you torture the data long enough, it will confess." These discussions, typically, compare apples and oranges over time. The fact is, using consistent measures of income and such concepts as family, Americans today are far better off—and getting even better off—than their parents and grandparents were. It’s not even a close call.

Of course, I am referring to "pre-tax income," and the tax burden has risen dramatically in recent decades. It’s not failing economic performance that is causing the problems American workers face today. In fact, today’s so-called baby boomers have 55 percent larger real pre-tax incomes than their parents had just 30 years ago. They own a remarkably large number of things their parents did not have and, despite the higher tax burden, they live much better than their parents did. Even the lowest fifth of today’s income distribution now routinely consumes more goods and services than households did in the 1950s. That is progress. It is a fact, and positive trends continue, regardless of contrary claims by social critics.

Another very positive sign is that income mobility remains high in our society. Carefully designed tracking studies of cross-sectional, representative samples of American workers show that the opportunity for moving from low- to high-income positions has never been better. When we see snapshots of income classes over various time periods, we are lulled into thinking that the same people are in the same places. That might be true without mobility and, were it so, the American Dream would indeed be a myth. Happily, it isn’t true, even for the bottom fifth of the distribution. In fact, one of the better tracking studies showed that, over a period of 20 years, only 5 percent of those in the bottom fifth of the distribution remained there. In other words, 95 percent of the poorest had moved up into higher income categories, some rising all the way into the top 20 percent of all income earners.

As long as the door remains open for people to walk through to a better future, we needn’t worry about the death of the American Dream. And since so many are walking thought that door and into the highest income categories, it appears as though the middle is shrinking. It is, and we should celebrate this fact, as well as the fact that the poor have been getting wealthier faster than the rich.

What About the Future?
Predicting the future is never easy, and the economic landscape has always been littered with silly and false prognostications. Undeterred, I will go out on a limb anyway and state that just as the performance of the American economy has been steady and strong for the previous few decades, so it will continue to be strong in the future. We have steady growth with only mild inflation, rising equity values (even after adjusting for inflation), fairly low real interest rates that are trending even lower and much economic opportunity. Why people are so negative during these relatively good times is a function not of reality, but of the ever-expanding market for cynicism, criticism and dissatisfaction. Don’t buy into it.

Exhibits

Creative Destruction over the Past Century

Millions of American workers today earn their living in occupations that did not exist at the beginning of the 20th century.

People Employed Destruction Today Yesterday Year Railroad employees 231,000 2,076,000 1920 Carriage and harness makers * 109,000 1900 Telegraph operators 8,000 75,000 1920 Boilermakers * 74,000 1920   Milliners * 100,000 1910   Cobblers 25,000 102,000 1900   Blacksmiths * 238,000 1910   Watchmakers * 101,000 1920   Switchboard operators 213,000 421,000 1970   Farm workers 851,000 11,533,000 1910   Creation Today Yesterday Year   Airline pilots and mechanics 232,000 0 1900   Medical technicians 1,379,000 0 1910   Engineers 1,846,000 38,000 1900   Computer programmers/operators 1,287,000 * 1960   Fax machine workers 699,000 0 1980   Auto mechanics 864,000 0 1900   Truck, bus and taxi drivers 3,328,000 0 1900   Professional athletes 77,000 * 1920   TV and radio announcers 60,000 * 1930   Electricians/electronic repairers 711,000 51,000 1900   Optometrists 62,000 * 1910

*Less than 5,000

DATA SOURCE: U.S. Bureau of the Census

Technological Unemployment

Unemployment is a common, though typically only temporary, result of technological progress. As entrepreneurs invent new products, old jobs often give way to new ones.

New Product Labor Needed Old Product Labor Released Automobile Assemblers Designers Road builders Petrochemists Mechanics Truck drivers Horse/carriage Train Boats Blacksmiths Wainwrights Drovers Teamsters RR workers Canalmen Airplane Pilots Mechanics Flight attendants Travel agents Train Ocean liner RR workers Sawyers Mechanics Ship hands Boilermakers Plastics Petrochemists Steel Aluminum Barrels/tubs Pottery/glass Miners Founders Metalworkers Coopers Potters Colliers Television Electronic engineer Actors Reporters Electricians Newspaper Theater Movies Radio Reporters Actors   Computer Programmers Computer engineers Electrical engineers Software designers Adding machine Slide rule Filing cabinets Paper Assemblers Millwrights Clerks Tinsmiths Lumberjacks   Fax machine Programmers Electricians Software designers Express mail Teletype Mail sorters Truck drivers Typists   Telephone Electronic engineers Operators Optical engineers Cellular technicians Mail Telegraph Overnight coach Postal workers Telegraph operators Coach drivers   Polio vaccine Chemists Lab technicians Pharmacists Iron lung Manufacturers Attendants

DATA SOURCE: U.S. Bureau of the Census

Progress and Poverty

Historically, economic growth, not welfare, has been the remedy for poverty. An expanding economy pays its dividends in rising incomes, lower prices and better products, all of which enable families to satisfy their basic needs with smaller and smaller portions of their income. For households in the bottom income quintile, spending on food, clothing and shelter was 45 percent of consumption in 1993, compared with 52 percent two decades earlier, 57 percent in 1950 and 75 percent in 1920. As a result, today’s poorest households have more discretionary income than ever before. That helps explain why today’s poorer households are more likely than those of a decade ago to own appliances and motor vehicles. Their consumption of these modern-day conveniences even compares favorably with that of all American households as recently as 1971.

Poor households* All households Percent of households with 1984 1994 1971 Washing machine 58.2 71.7 71.3 Clothes dryer 35.6 50.2 44.5 Dishwasher 13.6 19.6 18.8   Refrigerator 95.8 97.9 83.3   Freezer 29.2 28.6 32.2   Stove 97.7 95.2 78.0   Microwave 12.5 60.0 <1.0   Color television 70.3 92.5 43.3   VCR 3.4 59.7 0   Personal computer 2.9 7.4 0   Telephone 71.0 76.7 93.0   Air conditioner 42.5 49.6 31.8   One or more cars 64.5 71.8 79.5

*At or below the poverty line, as defined by the U.S. Bureau of the Census.

As consumption patterns show, many of today’s poorest households have more than yesterday’s, and more even than the general population had two decades ago. By today’s consumption standards, the majority of Americans were once poor.

About the Author McTeer is president and CEO at the Federal Reserve Bank of Dallas.