Tuesday, July 8, 2008

How Are We Doing?

From the July/August 2008 Issue

The American economy is in a rough patch. But the long-term trends are good—and there is a price to economic pessimism.

When a presidential election year collides with iffy economic times, the public’s view of the U.S. economy turns gloomy. Perspective shrinks in favor of short-term assessments that focus on such unpleasant realities as falling job counts, sluggish GDP growth, uncertain incomes, rising oil and food prices, subprime mortgage woes, and wobbly financial markets.

Fig 1- Spread of Products into American Households.jpgTaken together, it’s enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective— getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress. Once we do that, we see the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

Figure 2- Now Even the Poor Have More.jpgFor starters, it has been remarkably stable and productive. Since 1982, the United States has been in recession for a mere 16 months, the present slowdown notwithstanding. Over that period, the country more than doubled its inflation-adjusted output of goods and services and created jobs for an additional 50 million workers.

Figure 3- What Work Buys.jpgIncome and wages are often used as gauges of progress, but consumption is the best measure of rising living standards. Products that began as luxuries only the rich could afford in time came within the means of just about all U.S. households (Fig. 1). In previous generations, telephones, cars, electricity, household appliances, and televisions made life better for the average American. In our times it has been computers, cell phones, Internet access, VCR/ DVD players, digital cameras, and more.

Figure 4- Work- Greater Rewards for Less Effort.jpgAll segments of society have shared in the material progress. Over the past two decades, ownership of cars, color televisions, and household appliances has risen among poor households (Fig. 2). A quarter of poor households have computers. Two in five own their homes. For many goods, ownership rates are higher for today’s poor households than for the general population of the early 1970s.

As Americans know, today’s rising food and energy prices are crimping household budgets. But there are other ways to understand the relative size of the rise of food and energy costs. For example, in terms of time worked at the average pay rate, the real cost of a 12-item basket of basic foods has hardly budged. And while the work-time price of gasoline doubled in recent years, a gallon of gasoline still goes for less than 11 minutes of work (Fig. 3). At 20 miles per gallon, an hour of work will get you 110 miles down the road; at 30 mpg, you can go 165 miles.Fig 5- Fig 6.jpg

When it comes to how hard we have to work for food and fuel, we still face far lower burdens than our grandparents did. Living standards rise on the ability to use productive resources to churn out more goods and services—that is, to advance productivity. As the economy has become more productive decade by decade, Americans have reaped the gains, first and foremost by consuming more.

Fig 7- Less Work, More Leisure-final.jpgThere’s more to the good life than goods and services, however, and we’ve taken some of our added productivity in other ways. We’ve gained more leisure time, improved our working conditions, enhanced safety and security, and added variety to our choice set. All of these benefits become increasingly important as we climb up the income ladder.

The lament-filled anecdotes about long hours and low pay just don’t stand up to the test of hard data. Real total compensation—wages plus fringe benefits, both adjusted for inflation—has been rising steadily for several generations (Fig. 4). Over time, the fringes have become a larger share of the rewards for work, dampening the statistics on wage increases. At the same time, we’re spending less time at work. An average workweek has fallen from 39.8 hours in 1950 to 36.9 hours in 1973 to 33.8 hours today.

Fig 8- Safer at Work and Home-final.jpgNot all those hours are spent on actual work. Human resources experts estimate that 1.6 hours a day go to non-work activities; employees themselves say it’s more than two hours. What are workers doing? Most of them are using the Internet for personal business or socializing with coworkers (Fig. 5). It’s no coincidence that the busiest times for online auctions come during the hours when most Americans are supposed to be hard at work (Fig. 6).

Fig 9- Transportation Safety.jpgWe’re not only working less on the job. We’re also taking less time for household chores. Since 1950, the annual hours devoted to work at home has fallen from 1,544 to 1,278. Working less means we have more time for ourselves. The hustle and bustle of everyday life conceals the fact that a typical American has more free time than ever. We start work later in life and live longer and healthier lives, enjoying added years of retirement. All told, only about a quarter of our waking hours are consumed with work, down from 45 percent in 1950 and 35 percent in 1973 (Fig. 7).

Workplaces are getting safer, too. Accident and death rates have been on long declines, partly because the economy has evolved toward services jobs, which are inherently less risky than mining, construction, and manufacturing (Fig. 8). However, factory safety has improved, too. In fact, we’re safer at work than at home. In the early 1990s, the on-the-job death rate fell below home mortality for the first time. Since then, the home has become riskier, while safety gains have continued at work.

Fig 10- Lessening Diseases’ Death Toll.jpgOur lives have become safer and more secure in other ways. We’re moving from place to place more than ever—in itself a sign of rising living standards—but deaths per billion miles driven and flown are both at all-time lows (Fig. 9). Medical advances have brought down death rates for many diseases (Fig. 10). Gains have been made against heart disease and cancer in recent decades. Death rates from disease aren’t the only sign that Americans have benefited from rising healthcare spending. Since 1960, life expectancy has risen by seven years for men and six years for women. At a time when so many Americans are vexed by the high cost of healthcare, these gains suggest the country may be getting something for its money (Fig. 11).

Fig 11- Fig 12.jpg

Fig 13- Take Two- All Around the World.jpgIncreasing globalization and trade has many citizens wondering: Can America still compete? Record merchandise trade deficits create some anxiety, but they’re a product of our imports of cheap manufacturing goods and energy. The world economy is moving toward producing and consuming more services—and that’s where the United States shines. Our foreign sales of services totaled $488.5 billion in 2007, topping the combined total of Britain and Germany, the second and third most successful services exporters.

Fig 14- The Price of Pessimism.jpgU.S. exports exceed imports in 15 of the Commerce Department’s 20 broad categories of services trade, often by large margins (Fig. 12). This trade supports well-paying jobs in industrial engineering, medicine, construction, information technology, and law. Film and television distribution demonstrate how the world market can boost services. Half of the top 15 biggest budget movies weren’t profitable until they went into the international market (Fig. 13).

So many data points add up to steady, continuing progress for average Americans—and there’s no reason not to expect the future will bring further progress. Bad news will pop up from time to time, just as it has in every decade of American history. Some people will take the negatives—the hiccups on the long road to progress—for harbingers of worse times to come.

But there’s a price for pessimism. In the early 1980s, the U.S. economy had big problems, including slow growth and high inflation. A rational response for pessimists might have been to put their money into the safe havens of gold or Treasury bills. A $10,000 initial investment in gold would now be worth $22,525; the same amount in T-Bills would be worth $37,778 (Fig. 14). Early 1980s optimists might have bet on U.S. economic progress by investing in the Dow stocks. Their initial $10,000 would now be worth $288,163—even after the financial market troubles of recent months.

W. Michael Cox is the senior vice president and chief economist at the Federal Reserve Bank of Dallas, and Richard Alm is the bank’s senior economics writer.

Illustrations by Brucie Rosch.

Figure Sources: Fig.1: authors’ calculations; Fig.2: Census Bureau, Energy Information Administration; Figs. 3 and 4: Bureau of Labor Statistics; Fig.5: America Online and Salary.com; Fig.6: Yahoo; Fig.7: authors; Fig.8: National Safety Council, BLS; Fig.9: Federal Highway Administration, National Transportation Safety Board, Air Transport Association; Fig.10: Centers for Disease Control and Prevention; Fig.12: Bureau of Economic Analysis; Fig.13: Nash Information Services; Fig. 14: authors.

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