THE MISUNDERSTOOD AMERICAN ECONOMY 24

All of the meaningful jobs in this country are being outsourced to places such as India, mainland China, Taiwan, etc. Our manufacturing sector is diminishing faster than our waistlines are expanding. We will soon be left with only service jobs – hamburger flipping and the like. Real wages for the average family are going down, not up. Our economy is stagnating and the American Dream has become a nightmare for most folks.

If people believe the above dreck (What a wonderfully appropriate slang word which means worthless, junk, trash - and it is derived from the Yiddish word threkkr meaning excrement.) then they have been getting too much of their ‘information’ from such sources as the New York Times, Los Angeles Times, Washington Post, ABC, CBS, CNN, NBC, and, as it turns out, the Sunday supplement, PARADE magazine. The Washington D.C. presidential press corps would be proud of them for believing such nonsense.

I apologize up front for the length of this article, but there is simply too much information to cover by using fewer words while trying to be both informative and entertaining. Many of the data are derived from the book MYTHS OF RICH AND POOR: Why We are Better off than We Think by W. Michael Cox and Richard Alm. Michael Cox was the Senior Vice President and Chief Economist at the Federal Reserve Bank in Dallas and Richard Alm was business reporter for the Dallas Morning News so both are well credentialed.

Hourly wages rose an average annual 2%, adjusted for inflation, between 1953 and 1973. For the next 5 years wages were flat, and then fell by an average 0.7% per year through 1996. Case closed right? Living standards have been declining since 1973, apodictically. Well, not so fast. There is more to the story – much more.

A better indicator of how well Americans are doing is consumption, not a proxy such as wages or salaries. The statistics on consumption clearly reveal that Americans are better off now than at any time in history. No one doubts that Americans are better off materially, perhaps not spiritually, today than 100 years ago when people lived without electricity, telephones, refrigerators, indoor plumbing, automobiles, and disease fighting antibiotics among other things. How much better off are we than people were 30 years ago in the 1970’s? Consider this partial list from the Cox & Alm book:

ITEM 1970 Mid - 1990’s
Avg. size of new home (sq. ft.) 1500 2150
New homes w/central heat and A/C 34.0% 81.0%
Homes lacking a telephone 13.0% 6.3%
Households with computer 0.0% 41.0%
Households with no vehicle 20.4% 7.9%
Households with two or more vehicles 29.3% 61.9%
Households with color TV 34.0% 97.9%
Households with two or more TV’s 30.7% 72.8%
Households with cable TV 6.3% 63.4%
Households with answering machine 0.0% 6.5%
Households with cordless telephone 0.0% 66.0%
Households with computer printer 0.0% 38.0%
Households with CD player 0.0% 49.0%
Households with cellular telephone 0.0% 34.0%
Households with clothes washer 62.1% 83.2%
Households with clothes dryer 44.6% 75.0%
Households with a microwave <1% 89.5%
Households with outdoors gas grill <5% 28.5%
Households with frost-free refrigerator <25% 86.8%
Mean household net worth $86,095 $216,843
Median household net worth $27,938 $59,398

Additionally fewer than ½ the homes built in 1970 had two or more bathrooms; by 1997 nine out of ten did. In 1970 58% of new homes included garages – by 1997 87% of new homes had them. The garages like the homes have gotten bigger. In 1997 ¾ of the garages had space for two or more automobiles compared with a little more than 1/3 in the early 1970’s.

More up-to-date data on housing (the Cox and Alm book was published in 1999) are that in 1973 the median home had 1660 sq. ft. while in 2005 it was 2412 sq. ft. In 1973 23% of homes had 4+ bedrooms, in 2005 it was 37%; in 1973 12% had 3+ bathrooms, in 2005 24% did; in 1973 44% had fireplaces, in 2005 there were 55% of homes with fireplaces.

Americans are enjoying more luxuries than ever too. Adjusted for inflation, the average spent on jewelry and watches more than doubled from 1970 to 1996. On average 11 gallons of bottled water were consumed per person per year in 1996, up from one gallon in 1970. American spending on services has risen 83 % since the early 1970’s. Included are health clubs, financial advisors, landscapers, caterers, pest-control companies, dry cleaners, car detailing shops, and hundreds of other businesses that entertain, pamper, and save us time. Per capita donations to charities, adjusted for inflation, rose from $402 a year in 1970 to $569 a year in 1996. We eat out more often too. Adjusted for inflation and a growing population, spending on restaurant meals is up 45% from the early 1970’s to the middle 1990’s. We travel more often and to more exotic places. On a per capita basis, average annual miles on commercial flights have more than tripled in the past 25 years and we take nine times as many cruises. Per capita spending on overseas travel and tourism is nearly three times what it was in the 1970’s. In terms of consumption Americans are much better off now than in the 1970’s.

As queried ironically by Cox and Alm, Americans could be paying for a fin-de-siécle spending spree by depleting their assets. Yet this is not borne out by the data. The above list shows that U.S.A. households had inflation adjusted average net worth of $216,843 in 1995 compared to $86,095 in 1970 and half of American families had a net worth of at least $59,398 in 1995, more than double the median net worth in 1970. As a proportion of net financial assets, average consumer debt in 1997 was approximately what it was in 1970 at roughly 5%.

How then to explain the seeming antilogy, without falling into a paralogistic trap, that while real wages declined by nearly 15% from the 1970’s to the 1990’s the living standards for Americans increased significantly by all measurements? A straightforward alternative to real wages is inflation adjusted per capita personal income. Its virtue is that it captures all sources of income – not just wages but interest, dividends, rent, and profits. The statistics on real wages suffer a glaring omission: fringe benefits. Over the past quarter of a century, as tax rates grew steeper and incomes rose, the country witnessed a surge in non-wage benefits. Another factor in increased prosperity not measured by wages is that there are many more small entrepreneurs now than three decades ago or so. In fact much of the hiring is now done by small businesses with work forces of fewer than a dozen to a few hundred employees. Not all of the small enterprises are successful of course, but many are and people with an entrepreneurial spirit are not easily dissuaded, trying again in the same business or a different one after initially failing.

In the view of most people on the political left, the rich get all of the breaks, take advantage of, or otherwise benefit at the expense of the poor. I would like to offer a contrary interpretation. In nurturing infant industries and product lines, the rich pay most of the new industries’ early fixed costs – including research, plant and equipment, and market development. According to Cox and Alm, a three minute telephone call from New York to San Francisco cost $20.70 when first available in 1915. A three minute coast-to-coast call cost less than 50 cents in 1997.

Without the rich, fewer new goods and services would find their way to the rest of us. Over the years wealthy Americans financed the emergence of the automobile, airplane travel, color television sets, computers, and many other products now readily available to the masses in America. As goods and services filter down to the less affluent, prices more nearly reflect companies’ variable cost, including labor and raw materials. The ratio of fixed to variable costs differs from one product to another. That dichotomy helps to explain why some goods and services show quick, steep price reductions, while others go through the process more gradually. Big declines usually occur when fixed costs are high – computers, electronics, pharmaceuticals, for example. Where fixed costs are not overwhelming, companies start out charging prices closer to variable cost. The low-fixed-cost pattern fits food and personal services.

The critics of capitalism fret that the economy works to the benefit of the wealthy at the expense of the poor. Nothing could be more wrong. Economic progress actually emerges from a system of price discrimination – against the wealthy not the masses. Still not empathetic toward the rich – neither am I, yet I am biased towards the truth, wherever it leads.

Remember when……when the economy of the Land of the Rising Sun (Japan) rising from the ashes of WWII like the proverbial Phoenix was considered by the middle of the 1980’s to be an unstoppable juggernaut? The Japanese were going to own the entire world according to some alarmists at that time. They even bought Rockefeller Center in New York City for heaven sake. That’s sake (sāk) not sake (säkē), although I’m sure they had a large amount of that too. Something seemed to go a bit wrong before total ownership eventuated. The vaunted co-operation and putative synergy between corporations and the Japanese government, so trumpeted by the West’s socialist leaning economists and journalists, lost its economic magic. The Japanese economy went into a funk for the next 15 years or so, only recovering a bit in the 21st century. And they ended up selling Rockefeller Center along with other properties.

The tocsins of today tout the quondam Red Menace, mainland China, as the next industrial giant that will dominate the world economically. These people seem unfamiliar with the philosopher, George Santayana: “People who do not know history are deemed to repeat its mistakes.” Not withstanding the extremely low probability that China will be the lone superpower in the next half century, the forecast of Ben J. Wattenberg in his 2004 book Fewer, does not sound irrational when he claims that by 2050 there may be three economic super powers in the world: The United States, China, and India. China, however, is facing major problems in the next several decades, not the least will be a growing demand from the increasingly prosperous middle and upper classes for more social and political freedom. There is also the looming quandary from the current ratio of 150/100 boys to girls being allowed to be born. One can imagine the social turmoil and dissatisfaction which will result in a generation from now. The nimiety of young Chinese men can not be rectified by all becoming interior decorators or hairdressers.

An example given by Cox and Alm of the static nature of jobs and professions in the past are the surnames of families: Farmer, Hunter, Fisher, Fowler, Archer, Wheeler, Dyer, Gardner, Glover, Carter, Hooper, Shoemaker, Taylor, Carter, Crocker, Cook, Carpenter, Baker, Weaver, Miner, Mason, Miller, Sawyer, Collier, Chandler, Porter, Planter, Potter, Shepherd, Shearer, Spinner, Fuller, Wright, and Smith. Nobody today is named Charley Computer, Tammy Telephone, or Harold Harddrive except in a failed attempt at levity. Some of the professions were unknown when people now were born and new professions will arise when the next generation comes of age. All of which is a way of saying that with our modern rapidly evolving economy there are bound to be dislocations in the labor market effecting tens of thousands, if not hundreds of thousands of people with layoffs each year and the necessity of retraining. It is temporarily tough on the people being laid off, or downsized if you will, but would it be preferable if the job market and therefore the economy were as static as it was in the past? A good example of an economic success and dynamic job market is Wal-Mart. In his 2006 book, The Wal-Mart Effect, Charles Fishman details how 90% of Americans live within 15 miles of a Wal-Mart and over 50% are within 5 miles. Wal-Mart which was founded in 1962 by Sam Walton, the same year as Kmart and Target, now sells approximately ¼ of all the groceries, apparel, and pharmaceuticals in the United States. There are more than 4000 Wal-Mart stores in the USA (almost 5000 worldwide) with 1.3 million employees. Astonishingly about 650,000 or ½ of the employees quit each year thereby causing Wal-Mart to have to hire 12,500 new employees each week just to stay even. One would think that it would be a sound financial decision for Wal-Mart to reduce the expense of hiring and training by attempting to retain more of its employees with more generous salaries and benefits. Wal-Mart may very well double in size in the next ten years, but the growth will have to come from overseas because how many more stores would be economically profitable for Wal-Mart to build here? Mainland China has about 45 Wal-Mart stores and India zero. As you can well imagine Wal-Mart is lobbying these countries heavily to increase market share in China and get established in India. Incidentally although Fishman declares that it is a morally neutral position for corporations, unknown to most people Wal-Mart is the largest contributor to charity in gross amount of all businesses in this country.

In a capitalistic economy, people, whether individually or in groups called companies or corporations, act on the powerful motive of making oneself better off economically. Call it the profit motive, self-interest, or pejoratively, greed; it is what make the economy tick. Through relentless turmoil, the economy re-creates itself, shifting labor resources to where they are needed, replacing old jobs with new ones. A descriptive shorthand term for this process used by Cox and Alm is “the churn.” Whereas the expression “downsizing” focuses solely on the discomfiture side of economic change, the image of the churn captures the whole process – the jobs that are created as well as the ones lost. The churn isn’t new. Through out history each generation of jobs has given way to the next although at a slower pace in the past than now. And there has always been resistance to this change because of the jobs lost. There is a letter reproduced in the Cox and Alm book which illustrates this point. The complainant, the governor of New York, was beseeching the president of the United States to protect the canal system from the newfangled mode of conveyance, the railroads. He claimed captains, cooks, drivers, hostlers, repairmen, and tenders would be left without a means of livelihood, not to mention the numerous farmers employed in growing hay for the horses; additionally boat builders would suffer and tow-line, whip and harness makers would be left destitute. Another point he made, apparently seriously, was that canal boats were absolutely essential to the “defence” [sic] of the United States. Further he wrote that “railroad carriages are pulled at the enormous speed of 15 miles per hour by ‘engines’ which, in addition to endangering life and limb of passengers, roar and snort their way through the countryside, setting fire to crops, scaring the livestock and frightening women and children.” This letter was written to President Andrew Jackson by Governor Martin Van Buren in 1829. No, I did not make this up or exaggerate it – it is on page 134 of the Cox and Alm book. The problems envisioned by Van Buren seem comical now, but the joke is on us – these are the same types of concerns in modern dress that people come up with now. Not in this book but in a 2006 book titled Martin Van Buren by Edward L. Widmer and as a matter of interest, Martin Van Buren of Kinderhook in upstate New York went on to become the 8th president of the United States from 1836-40. He was the vice-president in the second term of Andrew Jackson from 1832-36 and was the last vice-president to become president, without having filled the job before being elected to it before George H.W. Bush did so in 1988-92 (Theodore Roosevelt, Calvin Coolidge, Harry Truman, and Lyndon Johnson were vice-presidents who were elected president, but were sitting presidents when elected, having assumed the office after the elected presidents died or were assassinated – McKinley [Roosevelt]; Warren Harding [Calvin Coolidge]; Franklin Roosevelt [Harry Truman]; John Kennedy [Lyndon Johnson]). Van Buren was the only president of the United States who’s first learned language was not English (it was Dutch). Having been defeated for reelection by William Henry Harrison, Van Buren toured the country in 1842 becoming the first politician to do so, in an unsuccessful bid to win the next election. After leaving Chicago (he was the first president or ex-president to visit that city) his carriage broke down so he was put up overnight with a family near Springfield, Illinois. In order to entertain a former president of the United States the family summoned a young lawyer who lived near by. Van Buren and the young man stayed up until the early hours telling each other stories. Van Buren later wrote that he laughed until his sides hurt at the stories of his companion. That young lawyer was Abraham Lincoln. Much later a reporter for the San Francisco Chronicle wanted to write an advice column, but was told by the editor that her name was ‘too ethnic’ – meaning too Jewish. She took the surname of a former president and titled her byline: Abigail Van Buren. The irony is that Van Buren was considered an ethnic name in his time.

The United States has not run a foreign trade surplus since the Nixon administration which has caused much hand wringing among people who are prone to that sort of thing. Over the years we have had large trade deficits with Japan and now even larger ones with China. Do we have cause for concern? The short answer is no. Here’s why: (1.) The deficit reflects only merchandise trade, not services. In 1997 the nation’s positive balance in services was almost $88 billion and has been positive ever year since. (2.) According to Cox and Alm the trade deficit is a red herring (I would not have used a cliché that goes back to the Truman administration). The trade deficit and capital surplus are two sides of the same coin. Other countries’ surpluses earn them dollars to purchase more of our services and invest in America. If we don’t buy from foreigners, they can’t buy from us and invest with us. The long-running furor of the merchandise-trade deficit can be turned on its head. What it really signifies is that the United States remains the best place to invest – by a large margin. Again according to Cox and Alm, in the mid 1990’s direct investment from overseas in the United States was more than double that in any other country. Japan’s trade surpluses reflect the opposite. The Japanese economy, where profits and interest rates are low and prices are high, hasn’t been a good place to invest. (3.) When corporations set up manufacturing plants and service and distribution centers outside their original countries, as many do - the so-called multi-nationals, then how can imports and exports be meaningfully differentiated?

The Sunday supplement PARADE magazine ran a front page story on April 23, 2006 questioning whether the American Dream was still possible. The first clue that the story was a politically correct bit of propaganda was the three families shown on the cover. There was an Anglo childless couple, another Anglo family sans father, and a black family with father intact. If a black family had been shown without a father present you know that, to use a synecdoche, the magazine would have been accused of perpetrating racial stereotypes, yet the probability of a black family missing a father is much greater than a white family. Some of the claims in the article bear scrutiny: (1.) “The real median [the number above and below this figure being equal] household income declined 3% from 2000 to 2004.” (2.) “The percentage of households earning $25,000 to $99,999 shrank 1.5% from 2000 to 2004.” (3.) “Credit –card debt is at an all-time high, averaging $9,312 per household.” (4.) “The average cost per year of a public school college (in state) is $12,127, a 25% increase since 2001.”

(1.) & (2.) Three years of the five chosen years (2000-20004) were severe corrections in the equity markets after the “irrational” share price appreciations in the 1990’s as expressed by Federal Reserve Chairman, Allen Greenspan at that time. In fact, the tech heavy NASDAQ declined from over 5000 to under 2000 from 2000 to 2002. (3.) The credit-card debt amount although high is not corrected for inflation so the comparison is meaningless. (4.) Costs for education are certainly going up faster than inflation, still people are not helpless in dealing with it as is implied by the article. Every state has a program where parents can pay into it either as a lump sum or over a number of years in advance to cover future college costs for their children thereby locking in inflation protected prices. Many states even have reciprocal agreements with other states that cover costs for out-of-state students.

Three of the four families quoted in the article believe the American Dream is out of reach for them, yet in a survey of “more than 2200 Americans” 80% say that the American Dream is still possible. The families profiled are not representative of the broader sampling and do you think that was inadvertent?

Cox and Alm quote Ralph Waldo Emerson’s maxim: “Build a better mouse trap and the world will beat a path to your door” and point out the fallacy in it, mistaking what customers want. “People don’t want better mousetraps, they want dead mice. People don’t want cars, trains, airplanes, boats, or bicycles – they want transportation from one place to another; they don’t want daily newspapers, magazines, TV news channels, or the internet – they want information; they don’t want records, tapes, or CD’s – they want music. Our needs and wants are insatiable, but the ways of realizing them are limited only by our ingenuity and imagination. In a dynamic economy there’s a relentless quest for new, better, or cheaper ways to give people what they want.” The reason free enterprise economies outperform command economies such as socialistic or communistic ones is that consumers determine what will be produced or supplied for the market not bureaucrats. Yet there are unceasing calls for government to intercede in the supply and demand marketplace to the detriment of both consumers and producers. The battle continues.