Does America Still Work?

CHAPTER I

"TWO DECADES OF SLOW GROWTH"


from the The End of Affluence
by Jeffrey Madrick
Random House


Like the clock that loses a second an hour, the American economy has lost ground so gradually over the past twenty years that we don't realize how far behind we have fallen. The economic expansion of the first half of the 1990s has made it even more difficult for Americans to judge how weak our economy has been over the past two decades compared with the rest of our industrial history. The main reasons for this decline are not inflation, government budget deficits, low levels of investment, faltering education, the irresponsibility of Democrats or Republicans, excessive spending on the military, the aged, or the poor--or the many other explanations for America's economic dilemma that we repeatedly hear. Rather, these presumed causes are themselves largely the consequences of a more persistent problem: a sharp slowdown in economic growth from our historical average of about 3.4 percent a year, and often higher, since the Civil War to a little more than 2 percent a year since 1973.1 Meanwhile, our economic expectations have not declined accordingly. For the most part, we and our government carry on as though our economy were still growing at its historical rate. The results are repeated disappointment in our personal lives,
waning confidence in long-standing institutions, and rising cynicism in our public life that threaten our best convictions as a nation.

To most of us, the apparently small decline in the annual rate of growth may not seem like much. We are, after all, a vast and rich economy, and we are still growing, even if more slowly. But the impact of slow growth, like the compound interest in a savings account, accumulates rapidly over time, and eventually makes a huge difference. During the mid-1970s, the loss of a percent a year in the rate of growth was on average a relatively small $100 billion a year. By 1993, however, the damage had grown enormously. In that year alone the gap between what the U.S. economy might have produced had we grown since 1973 at about our historical rate and what we actually did produce amounted to $1.2 trillion after inflation. This translates into approximately $4,600 of lost production for every American man, woman, and child. Over the twenty years since 1973 the accumulated losses in goods and services due to slow growth have come to nearly $12 trillion, or more than $40,000 a person.2

The stylized graph on the facing page shows how quickly the losses caused by reduced growth accumulate. Between 1870 and 1973, and despite the many ups and downs in good times and bad, the U.S. economy had grown, as noted, at an average rate of 3.4 percent a year, excluding the effects of inflation. But between 1973 and 1993 (the last year for which we have complete data) the average rate of growth flattened to 2.3 percent a year after inflation, even though the workforce was expanding rapidly. In the graph below, the cyclical ups and downs of the economy are smoothed into straight lines. The graph represents how the rate of growth of gross domestic product (GDP) has declined from its historic norm and how the gap between the norm and the actual performance of the economy since 1973 widens. The shaded area in between shows how an initially small loss in income and production expands over twenty years.

The enormity of the $12 trillion shortfall since 1973 can be envisioned in many ways. Twelve trillion dollars is more than enough to have bought each of America's homeowners a new house, or paid off all of our government, mortgage, and credit-card debt, or replaced all of our nation's factories, including capital equipment, with new ones.3 As the shaded portion grows over time, so does the cumulative damage, so that by the year 2013, the total shortfall, assuming the economy grows at about 1 percent a year less than our historical norm, will amount to more than $35 trillion of lost production since 1973. If the population grows from 260 million to 310 million as expected, this will amount to a loss of well over one hundred thousand dollars a person.

This graph, then, is the economic expression of why we feel the way we do today. In the shaded area lie our lost jobs, falling and stagnating wages, eroding markets, closed factories, rising level of poverty, insecure pensions, and reduced homeownership. Though we blame it on other things, the widening gap between what had been our normal rate of growth for a century and the actual performance of the economy is the main source of the American public's declining confidence, which has shown up in survey after survey since the early 1970s. It explains why, by the 1992 presidential election, most Americans believed the nation had turned down the wrong economic road, and why, by the elections of 1994, despite several years of a moderate economic expansion, they still felt the same way.

Another useful, if more technical, way of looking at the extent of our decline since 1973 is to see how sharply the rate of growth itself has fallen from its historical level. It is illustrated in Figure 1 in the Appendix, which shows that the rate of growth has dropped by almost a full third. To raise growth back to its former rate of more than 3 percent a year, the economy would have to grow over time almost half again as fast as it has actually grown since 1973. In round terms, as economist Herbert Stein says, "The difference between 2 percent and 3 percent growth is not 1 percent, it is 50 percent."4

Though economic growth remained subnormal on average between 1973 and 1993, there were periods when prosperity seemed to return. In fact, we were told that our economic problems were solved whenever the rate of growth temporarily quickened. As we can see in Figure 2 in the Appendix, in both the 1970s and 1980s there were stretches of several years in which the economy expanded at an average rate of nearly 5 percent a year. Yet the average rate of growth since 1973, as represented by the dark line, never rose higher than 2.5 percent a year. These spurts of growth were neither strong enough nor sustained enough to compensate sufficiently for the steep recessions that preceded them or the unusually slow growth over the remaining years of the two-decade period.

Despite the economic expansion of the 1990s, and the claims by some economists that the economy was now growing too fast, economic growth as of late 1994 was again not robust enough to raise the long-term rate more than marginally. As of the end of 1994 the rate of growth since the end of the moderate recession in the spring of 1991 averaged only about 3.5 percent a year (compared with nearly 5 percent a year at this stage in several previous expansions). As we know, the rate of growth over the twenty years that ended in 1993 was only 2.3 percent a year. The annual rate of growth reached 4 percent during 1994, but even so, the long-term rate of growth since 1973 would rise to only 2.4 percent a year.5

On the other hand, any serious slowdown or recession in coming years would again reduce this long-run average performance significantly. Such a slowdown became increasingly likely when the Federal Reserve raised interest rates several times in 1994. The Federal Reserve reasoned that given the slow growth of our productive capacity over the preceding decades the economy could not grow as quickly as it once did without risking substantially higher inflation. Too much demand would be chasing too little capacity. Although the Federal Reserve may have raised rates prematurely, as some critics maintain, financial markets might well have pushed interest rates to restrictive levels even if the central bank had not acted.6 For these and other reasons, which we will discuss later, a significant slowdown or even a recession was likely by 1995 or 1996, keeping our long-term economic performance far below our historical rate of growth.

How does such a slowdown in the rate of growth affect most of us? Let's look first at the impact on the federal deficit. Had the economy grown about 1 percent a year faster, federal tax revenues would have been roughly $2.4 trillion greater over twenty years than they actually were, assuming existing rates of taxation. Had all this income been retained by the government, the national debt of $4 trillion could have been cut by well over half. Alternatively, the government could have reduced taxes by some proportion of this additional revenue. Had the government committed this sum to debt reduction, however, it would probably have saved more than $1.2 trillion in interest payments over these years. In most years since 1973, the federal government would have run only a small annual deficit at worst had growth remained closer to its historical average, so that by the late 1980s there would have been no federal deficit at all. By fiscal year 1993 there would have been a substantial surplus in the budget. Federal tax revenues in 1993 would have been about $300 billion higher and interest expense much lower, even if interest rates remained as high as they were, not only eliminating altogether the 1993 federal deficit of about a quarter of a trillion dollars but creating a substantial surplus as well. In other words, had we grown about 1 percent a year faster since 1973 than we did, which would still have left us slightly below our historical rate of 3.4 percent a year, all other things being equal we could have easily afforded the rising cost of government and reduced taxes as well.

Now, let's consider the impact on jobs and incomes. A reasonable approximation is that slow growth since 1973 resulted in the loss of several million jobs, mostly among the already poor, less educated, and first-time job seekers, whose unemployment added billions to the cost of government. More significant for the economy as a whole, faster growth would have increased demand for, and the value of, labor in general, so that wages and salaries on average would have been higher. For the typical family, annual income would probably have been about $5,500 a year higher in 1993, and possibly more. Over twenty years, the typical family would conservatively have earned an additional $50,000 in total, assuming the same employment pattern as prevailed in the 1980s. The extra income would, among other things, have allowed many more young couples to buy a first home, many poor workers to buy health insurance, and the typical middle-class family to pay for housing and buy more of the goods and services it needed without requiring a spouse to go to work or the main breadwinner to take on a second job.

Let's also look at the level of investment in capital equipment, education, and physical infrastructure, one of our biggest concerns over these years. The money for such investment comes from business profits, individual savings, and the budgets of state and local governments. Had we grown at about our historic rate, a reasonable estimate of the additional capital available for investment from higher individual savings and corporate profits would have been about $700 billion over twenty years, without any increase in our savings rate or profit margins. State and local governments, which over these years have reduced services, failed to repair their roads and mass-transportation systems, and often cut spending on education, would have collected an additional $900 billion in income and corporate taxes. Local economies of course grow at various rates. But to take one example, had the economy of the state of Iowa grown by 1 percent more a year since 1973, it would have had approximately $3 billion more in tax revenues. Instead, it raised sales taxes twice, had to plug an annual budget deficit that had grown to nearly $500 million by 1993, and put a spending cap on social programs.

Our health-care expenditures, our fastest-growing major expense, would have been more affordable if we had continued to grow at the historic rate. About 14 percent of everything we spend now goes for health care, compared with 9 percent or 10 percent in other advanced nations. But had our economy grown at its historic rate, the same level of health expenditures would have been a more comfortable 11 percent to 12 percent. Similarly, presuming we borrowed no more, the burden of household and corporate debt that we took on would have been more manageable. With a far lower national debt, the federal government in turn might have been able to borrow enough money prudently to reform welfare and provide such social goods as day care and health insurance to the millions who couldn't afford it. It would also have been able to stimulate the economy more readily in times of recession by raising its level of spending. Because of the high level of debt, the use of such countercyclical policies to minimize the duration of recessions is now limited.7

To most of us, it may still defy common sense that so small a decline in the rate of growth can have such consequences. We generally presume, and are often told by the experts, that we have lived through worse times before. Some insist that in the last twenty years we have merely given back some of the unusual gains made in the twenty-five years after World War II when we easily dominated world markets and American workers enjoyed rapid gains in income.

But by the early 1990s the record of the prior two decades was clearly unusual by any standard in American history. Measures of our early economic growth as a nation are not as reliable as current data are, but they show that over no other peaceful twenty-year period since the Civil War, and possibly since the early 1800s, excepting the years that included the Great Depression, did the economy grow as consistently slowly as it has in the past twenty years. In fact, the economy grew as fast as it did only because baby boomers born after World War II entered the workforce in huge numbers, the number of workers expanding one and a half to two times faster than the total population. Had the economy been as robust as it was in the past, GDP per capita should have grown much faster in the 1970s and 1980s than its long-term average because a much higher proportion of the population was now working. But GDP per capita grew at only 1.3 percent a year, a full percent slower than it did between 1948 and 1973, and half a percent slower than its average growth rate of 1.8 percent a year since 1870.8 Had GDP per capita grown at only 1.8 percent a year since 1973, the combined increase in federal tax revenues and reduced interest payments would still have wiped out the entire federal deficit by 1993.

What is more, the rate of growth between 1948 and 1973 of nearly 4 percent a year, which some now maintain was unsustainably fast, was not unique in America's industrial history. As we have seen, we had been growing at 3.4 percent a year since 1870 after inflation. But if we go back to 1820, when our economy was first beginning to grow rapidly, the average rate of growth from this smaller base has been 3.7 percent a year after inflation. Between 1870 and 1910, when our industrialization was fully under way and the economy was already quite large, the rate of growth averaged 4 percent a year, and rapid growth persisted far longer than did the similarly rapid rate of growth after World War II.9 It was not the first two post-World War II decades, then, that were especially unusual compared with our historical record, it was the two decades of slow growth that began in 1973.

The foundation of economic growth is productivity, whose rate of growth has declined even more steeply than our overall economic growth since 1973. Growing productivity--the economy's output of goods and services per hour of work--is the reason the average person's standard of living rises. Conversely, without growing productivity, incomes typically stagnate. An economy would then grow only as fast as its working population grew.

Since a few years after the Civil War, productivity has grown at an average rate of about 2 percent a year (even including the Great Depression). In other words, workers produced an average of 2 percent more each year for every hour they worked. Beginning in the 1890s, the rate of productivity growth picked up to about 2.3 percent. At that point America had become the most productive country in the world, producing more per hour of work than any other country, and it retained its huge lead over most countries until well after World War II. In the immediate post-World War II period, the rate of productivity growth rose to 2.7 percent a year.10

But since 1973 the average annual growth of productivity has fallen to .9 percent a year--so far as we can tell, the worst twenty-year showing since the end of the Civil War (again excepting the first few years of the Great Depression).11 The widely heralded Reagan economic expansion did nothing to correct this fundamental problem. The growth of productivity remained about as slow during Reagan's two administrations as it had become in Ford's and Carter's. In fact, as we have seen, we would have grown even more slowly in the 1970s and 1980s had the workforce not expanded so rapidly. This performance stands in contrast to our past record when we both raised productivity and absorbed millions of new workers at the same time. For example, between 1870 and 1910, when the working-age population grew even more rapidly than it had in the 1970s and 1980s, our economy still produced gains in productivity of 2 percent a year.

Once adjusted for the ups and downs of the business cycle, productivity so far in the 1990s is again growing no faster than it did in the 1970s and 1980s. In fact, overall productivity has been growing at almost the identical rate over the course of the economic expansion since 1991 as it did over the expansive phases of the business cycle in the slow-growing seventies and eighties. Economic data are always subject to interpretation, of course, but claims that productivity is climbing strongly in the 1990s typically ignore or underestimate the cyclical nature of its growth. Moreover, revisions in the data are likely to reduce the productivity growth reported so far in the 1990s even further (see Chapter 6). "The real mystery of the post-1973 slowdown is the sharp deceleration of productivity growth in the . . . USA," writes the British economist Angus Maddison.12 To this mystery we shall soon return (see Figure 3 in the Appendix).

Also unprecedented over so long a period was the fall in average wages. Whatever changes had occurred in the economy in these two decades had clearly hit the American worker hardest. Slow-growing productivity inevitably dampens gains in salaries and wages because we don't produce as much in goods and services per worker, and therefore we don't produce as much income per worker, either. But most American workers since 1973 fared significantly worse than even slow productivity growth warranted. The highest proportion of new jobs over these years was created in low-paying service industries, where productivity gains were hard to attain, while many higher-paying manufacturing and related jobs were eliminated or filled by temporary or lower-wage workers, often in companies abroad or in low-wage regions of the United States.13 Workers no longer got nearly the wage increases over time that they had expected as they stayed on the job or rose through the ranks. Workers in each age group typically made less than those who came before them. A growing proportion of workers lost ground, incomes falling below the levels they attained when they were younger and less experienced. Overall, discounted for inflation, the average weekly wages of so-called non-supervisory workers, about 80 percent of the workforce, fell by 15 percent from 1973 to 1993 (see Figure 4). Even if we include the growth of pension, health, and other worker benefits over these years, the compensation of a typical worker today has fallen compared with what it was for the typical worker twenty years ago, after discounting for inflation, and it has fallen sharply on average for young, high school-educated, and minority workers.14

By about 1987 slow economic growth had begun to put pressure on the salaries of better-paid white-collar workers as well. These wages fell in that year, and did so continually throughout the economic recovery that began in 1991. As a result of these factors, the average real income of families was only a few percentage points higher in 1993 than in 1973, and that largely because so many more spouses were working.15 There have been shorter periods when wages have fallen sharply, but as far as we can tell, there has been no other twenty-year period since 1820 when average real wages fell, with the possible exception of the years just before and after the Civil War.16

One result of these gradual, almost unnoticed changes was, of course, that as our incomes stopped growing, we saved less and borrowed more in the 1980s to maintain our standard of living. Meanwhile, as tax revenues grew more slowly, government also borrowed more to meet its own obligations. Having borrowed so much, we found ourselves without the expected amounts of money to invest in upgrading our public infrastructure and education. Moreover, with incomes stagnating for so long, we were less willing than ever to pay higher taxes. Thus, when President Clinton insisted early in his administration on the need to reduce our borrowing by spending less and taxing more while putting a little aside to invest in such areas as job training, business development in cities, and a youth service program, the public resisted anything more than modest changes. Even a $3 billion package of aid to victims of the 1993 summer flood in the Midwest met resistance. Five billion dollars for job retraining was hard to find. Small tax-hike proposals were fought tooth and nail. By 1994 even the popular crime bill was hard to pass mainly for lack of money, whereas in the past large tax increases were paid by the public from a significantly rising standard of living or to pay for a major war. In early 1995 Congress refused to pass a $40 billion loan guarantee for Mexico to stay a financial crisis there, a guarantee that probably would never have been called upon.

If we don't make up for our lost growth since 1973, and overall we continue to grow only between 2 percent and 2.5 percent a year for another twenty years rather than at our historical norm, the compounding effects will take a far bigger toll. In addition, we will no longer have the benefit of a rapidly growing workforce. Between 1993 and 2013, roughly another $24 trillion, or more than $75,000 a person in today's dollars, could be lost in addition to what has already been lost in the past twenty years because of a reduction of 1 percent a year in our rate of growth. In total, it would be as if everyone in America were to stop working for two or three years. The reduced tax revenue to the federal government would amount to more than $4 trillion over the next twenty years, or about two and a half years' worth of current government expenditures. In the year 2013 alone, the typical family could earn $11,000 less, about one third of what it earns annually today.17 Many economists believe we will not grow by more than 2.5 percent a year for the foreseeable future. Yet numbers like these change history.

Many factors help explain this decline in America's growth. The list is familiar. Success bred complacency. Old ways of doing business became encrusted and corporate bureaucracies discouraged change. Political and policy errors took their toll, from overexpanding the economy in the inflationary 1970s to taking on debt in the 1980s, which drove interest rates and therefore the dollar to debilitating heights. So did the costs of the Cold War, including the Vietnam war. American consumers saved too little and spent too much. Foreign nations, having had to rebuild from scratch after World War II, had more modern capital equipment than we did.

But the extent and abruptness of the slowdown since 1973 demand further explanation. Twenty years of slow growth is a long time--long enough to produce significant social and political consequences, and long enough so that we must now take seriously the possibility that we may be suffering not from a series of recessions from which we will eventually recover but from a substantial change in our fortunes that will not correct itself or respond to government policies. No one can say with confidence whether or not a new prosperous chapter in America's history will open soon, but it is possible that our slower economic growth is no longer simply cyclical or temporary but structural and permanent. We are not prepared for this. Americans are the only people in the world who take fast growth for granted as a natural consequence of their country's uniquely prosperous history. Our instinctive response to our problems, our sense of what is right and good, the means by which we earn our self-respect, and our view of our role in the world have been formed by a history of unusual economic advantage. Unlike most of our advanced rivals, we have had little experience with inherent limits to expansion.

It cannot be said strongly enough that the economy we have come to take for granted has been remarkable. By the 1880s, the size of the U.S. economy had surpassed Britain's, whose lead was thought insurmountable. We were more productive than Britain--we produced more goods and services per hour of work--by sometime in the 1890s.18 A comparison with Germany's nineteenth-century economy is especially instructive. Germany's powerful industrial revolution did not get fully started until 1870. By that time America's industrial revolution had been well under way. Starting from a much lower base, therefore, Germany's rate of growth would have been expected to exceed America's, at least for a while. Yet despite Germany's takeoff (the fastest of a major European nation over these years), the American economy continued to grow faster. In 1870 America's per capita GDP was $2,247. In terms of dollars, Germany's was only $1,300. By 1913 America's GDP per person more than doubled to $4,850 while Germany's didn't quite double to $2,606. All this time, America was providing jobs for tens of millions of immigrants.19

America's fast growth continued until the early 1970s, though the rate of growth was tested time and again by severe recessions and financial collapses. There were nine significant recessions between 1870 and 1913, three of which were especially severe. The depression of the 1870s, for example, was almost as lengthy as the Great Depression of the 1930s. In the 1890s production fell by more than 15 percent and the unemployment rate remained above 15 percent for four years. The recession of the early 1900s was almost as steep. But after each setback, the economy recovered and resumed its fast pace of growth. Because both productivity and the population were growing strongly over this period, the average rate of annual growth remained around 4 percent a year.20

During the early years of the Great Depression, production fell by more than 30 percent. The economy crawled back only to plunge again in the second half of the decade. But so powerful was the underlying strength of the economy that the lost production was entirely made up soon after our entrance into World War II. After the war, recessions were milder.
Production rarely dropped by more than a few percent partly because of government guarantees, including so-called automatic stabilizers, such as unemployment insurance, and financial safeguards, such as insurance on bank deposits, as well as management of the economy through fiscal and monetary stimulus. Only after 1973 did the economy expand less vigorously than it had in the past, while recessions themselves had steepened compared with the early post-World War II period.21

According to the calculations of Angus Maddison, who has compiled the historical growth rates of the world's leading nations, the American economy grew on average by 3.7 percent a year between 1820 and 1989, as we have noted, over which time America's GDP rose by 450 times. No other country came close. Germany grew by 2.5 percent a year, its GDP rising by only sixty times over the same period, and Japan grew by 2.8 percent a year, its GDP rising by about one hundred times. Britain was the notable laggard. While its lead was enormous in 1820, it grew at only 2 percent a year on average since then, so that by 1989 Britain's GDP had risen by only twenty-seven times since 1820. Such is the damage done by consistently slow growth. Since the early 1800s, America's population grew by more than 2 percent a year while the populations of the other nations grew far more slowly. Yet even measured in terms of growth per capita, the American economy outpaced that of every other major nation until after World War II.

Where do we now stand in our economic history? The answer to this question will occupy the next few chapters. But we should begin by examining just what sustained America's unusual rate of growth over so long a period and what actually happened to change it. The most influential nineteenth-century interpretation of America's economic expansion was made by Frederick Jackson Turner in 1893. The young historian was trying to make sense of disturbing changes in the American economy as the agrarian economy gave way to an industrial one--changes that confused us then as much as current changes do today.

Turner argued that the American experience was formed largely by our vast and open frontier, where the ratio of people to land, so high in Europe, was for us uniquely low. This economic advantage had provided ample opportunity for Americans to acquire fertile, cheap, often free land, enabling the majority to become economically independent. But when the Census of 1890 reported that the frontier had been at last filled up, Turner believed America's distinctive advantage had been lost. "Never again will such free gifts of land offer themselves," he said. "The frontier is gone and with its going has closed the first period of American history."23 He worried that after nearly a century of economic opportunity America might have reached a turning point, and believed that we would have to look outside our boundaries to find sources of new growth. Turner's gloomy thesis was consistent with the imperial longings that gripped many Americans at the turn of the century.

Turner was wrong, of course. Even as he wrote, industrialization was providing a second, even more potent frontier of renewed economic opportunity to new generations of Americans. But despite his oversimplifications, Turner articulated something essential about what held us together as a nation. His was the first broad economic interpretation of America's history. He understood that unusual, even abnormal economic opportunity had been the one long unbroken strand in American experience, which had created America's distinctive characteristics, including its optimism. "Since the days when the fleet of Columbus sailed into the waters of the New World, America had been another name for opportunity," Turner said. "So long as free land exists, the opportunity for a competency exists."24 What Turner could not imagine was that there would be any other basis for this opportunity than access to land, and he was deeply concerned about what would happen to us without it.

If Turner underestimated the benefits of commerce and industrialization, he was right about the powerful appeal of the frontier in our early years. From the beginning, cheap, fertile land provided unusual economic opportunity and attracted migrants in remarkable numbers. Western New York filled rapidly after the Revolution, the state's population quadrupling in only two decades. Between 1780 and 1800 the population of Tennessee grew by ten times. Only a generation after it was settled in 1820 Ohio had a population of five hundred thousand people, making it the fifth-largest state in the union. The acquisition of new territory kept pace. The Louisiana Purchase of 1803 alone doubled America's territory.25 Eventually, the United States would nearly double in size again. Acquiring new territory was one of the most important of presidential priorities in our first half century or so. Thomas Jefferson assured the public in his first inaugural address that land would be available "to the hundredth and thousandth generation."26

Even later in the century, during the first stages of industrialization, the search for economic opportunity at the frontier remained a way of life for many. The population of Boston, for example, grew by only 387,000 people between 1830 and 1890, yet well over 3 million people had lived there at one time or another over these years before moving west.27 "We are a rapidly--I was about to say fearfully--growing country," said John Calhoun early in the century, when the U.S. population was young, vigorous, and expanding by nearly 40 percent a decade. As late as 1820 only 5 percent of Americans lived in cities, compared with nearly one third of En-gland's population.28

On the farms early Americans lived with what would be considered today a bare minimum of necessities. "A majority of free Americans lived in a distinctive subsistence culture remote from river navigation and the market world," writes historian Charles Sellers.29 But compared with Europe, the average standard of living in colonial America was enviable. In England, three fourths of the land was owned by the gentry, but most of those who worked the land in America owned their piece of it. Throughout the new nation, poverty was not onerous and famine not a serious concern as it was throughout Europe.30 This is the "best poor man's country in the world," said one colonial observer, provided of course that you were white.31 Economic historians have concluded that the average standard of living in the United States was
rising only modestly in the colonial and immediate post-
Revolutionary years. But access to land was so ample that it allowed the overwhelming number of new Americans to acquire a minimal standard of living and a significant degree of economic independence.32

America's optimistic, individualistic, and self-reliant ideology was emboldened by the economic success on the frontier. "These free lands promoted individualism, economic equality, the freedom to rise, democracy," wrote Turner.33 What was clear was that in the early years, when these "distinctly American" characteristics, to use Turner's description, were applied to the task of eking out a living, they seemed to work. One result was that Americans developed a special intolerance for poverty. Though there were almshouses before the Revolution, when the common wisdom ascribed poverty to divine will, by the nineteenth century poverty was regarded as a matter of individual responsibility. You could always go far enough west to find cheap land and feed yourself. Even when poverty increased later in the nineteenth century, Americans did not readily accept it. "This is a country of self-made men, and the idle, lazy, poor man gets little pity in his poverty," wrote the Reverend Calvin Colton.34 As industrialization spread, many Americans refused to believe that hundreds of thousands of workers could be unemployed through no fault of their own. The Protestant ethic preached that hard work invariably led to material success and that material well-being was a sign of spiritual grace, a doctrine later expanded of course by social Darwinists who claimed that survival of the economically fittest was nothing less than a law of nature. Those who did not succeed might be pitied but should not be helped, a principle reemphasized by Herbert Hoover in the first years of the Great Depression. In a country where most citizens did better themselves, such an ideology easily took hold.35 Mistrust of government and a stubborn sense of equality, Turner argued, had their roots in the frontier, where hard work, self-reliance, and optimism paid off.

Turner would cite Daniel Boone as the archetypal frontiersman who could maintain his independence by always moving farther west, keeping one step beyond civilization. It was a story that Americans not only relished but also adopted as part of their folklore. In the 1760s, Boone led his large family and a community of followers into Kentucky, where they cleared land, farmed for themselves, and hunted for game. Despite the well-known forays of Native Americans, Boonesborough, with only three hundred settlers, could support itself on what it hunted and what it farmed.36 But after the Revolutionary War, Kentucky was the site of a land rush. From scarcely a soul when Boone got there, the population of Kentucky Territory grew to 20,000 people by the early 1780s. By 1800 there were more than 220,000 settlers in Kentucky.37

Boone was never clever enough to profit from the land rush, though recent research suggests that he tried to do so.38 Disillusioned, he settled in Missouri Territory, on the other side of the Mississippi. There he and his family were again able to hunt and farm to support themselves. His complaints about the encroachment of civilization and government grew legendary, spread by the newspapers and idealized in a best-selling biography that was long on lore and soft on facts. His popularity tells us much about how we want to see ourselves. As his exploits were publicly romanticized, Boone seemed to isolate himself further. In his eighties, broke from speculating in land, he was still farming and hunting, and he remained our quintessential free, independent, self-reliant American man, a model for our literature and popular culture ever after.39

The economic age that depended on access to land ended long before Turner's lecture in 1893, however. Even when Boone died in 1820, a market economy, with a growing volume of trade dominated by rising towns and cities, had begun contributing to economic growth. By then, with the recent lifting of the embargo on trade with Britain, the American economy was on its way to dominate the world.40

Many farmers had become small businessmen themselves in these years, often selling their surplus crops both domestically and overseas. Agrarian exports were soaring, leading one observer to state that America was the "granary of Europe."41 One study found that the distance wheat could be transported profitably doubled to one hundred miles in the forty years following the Revolution, so that by the early nineteenth century the wheat-export belt of America extended from Connecticut to Virginia and inland to the Shenandoah Valley. Cotton production, made especially competitive by cheap slave labor, had also moved farther inland.42 The image of the simple farmer attached forever to his land is a romantically exaggerated one. Farmers widely speculated in land as the commercial boom sent prices up. They often settled on their farms for only a few years, sold out at a handsome profit, and moved farther west in the expectation of making another killing.43

By 1820 small-scale industrialization had also spread far more widely than was generally realized. A quarter of the working population of New England, for example, was employed in small textile and shoe factories by then. Many others worked at home. Adam Smith's specialization of labor was already raising productivity. Tasks were efficiently divided among those who made only shoe "uppers," for example, or others who sewed only the cuffs on garments. Farmers too took in textile work and had begun to manufacture some items, such as rudimentary iron tools. Even Jefferson, who once believed America would and should remain a nation of farmers, eventually admitted that manufactures were good for the country. Between 1790 and the beginning of Jefferson's trade embargo in 1807, American agricultural and manufacturing exports rose from about $20 million a year to more than $108 million. Tariffs were imposed on imports, and would mostly be kept high for the rest of the century in order to protect America's infant manufacturing industries.44

In these years the building of roads and canals became a national passion. Trade had risen by thirteen times on the Erie Canal between 1824 and the 1850s, and by twelve times on the Mississippi over the same period.45 The first short railroad lines were put in during the 1830s and 1840s. Overall, despite several sharp depressions, the economy grew more quickly since the early 1800s than it ever had before, stimulated not solely by the swelling population but by something new in America: rising productivity. The best evidence is that between 1800 and 1850 the economy grew between 1 percent and 1.3 percent per person compared with less than .5 percent per person before that. Access to land still mattered, but less so; prosperity was now also being created by increasing agricultural and industrial productivity.46

By the 1850s the size of markets was growing dramatically. "Manifest destiny" was on everyone's lips and the nation's territory was expanded to the Pacific. Long rail lines were being laid for the first time that connected large cities in all the country's regions. Steamship lines grew rapidly as well. In all, goods that once took months to reach their destination now frequently got there in less than a week.47 Domestic trade became a key to growth. The huge American market was an unparalleled free-trade zone, so to speak, where farmers and businesses could specialize in the production of what they did best. It was a diverse, thriving marketplace, where Adam Smith's assertions about the advantages of specialization and the division of labor could come to their fullest fruition.

The Civil War had interrupted the nation's growth. But once the nation was united again, the economy was spurred on by an industrial revolution whose strength no one could have anticipated. Manufacturing replaced trade as the focus of dozens of fast-growing cities. By 1900, 30 million Americans were in the workforce, some 10 million of whom worked in manufacturing. Millions more worked in the transportation, trade, and service businesses that supplied them. By then, nearly 40 percent of the population lived in the cities. Millions also worked in the increasingly valuable mines. This was America's second frontier.48

Modern research shows what Turner probably could not have known at the time of his lecture. In the 1880s, the nation manufactured as much in dollar volume of industrial goods as it had produced in wheat, corn, beef, poultry, and all other agricultural products. Even before Turner's lecture, the United States produced more goods and services than Great Britain, and several times as much as the next largest economy, Germany. Driven by the spread of mass production, American products were now typically cheaper than those manufactured in other nations. As noted, total output per hour of work exceeded Britain's sometime in the late 1890s, making the United States the most productive large nation in the world.49

By the time of Turner's lecture the importance of the geographical frontier that he had so romanticized had long since begun to decline. By 1900 there were about 75 million people living in the United States, the large majority of them making a better living than they ever had before. As a result, America did not rebel, lose its direction, or renounce its basic ideology. To a large degree, though Americans were by no means as independent as they once were, now often working in highly regimented factories and living in dense cities, they believed that the characteristics that had propelled the economy in its earliest years continued to do so long after the industrial revolution had begun to make the first frontier less important. Economic opportunity still provided "competency" in America, and Americans still believed the true sources of their unique success were self-reliance, individualism, and hard work.

Industrialization brought with it a set of new problems. Unemployment became pronounced during industrial depressions. Over the century the distribution of income became more unequal, and the rising fortunes of the ostentatious robber barons in the 1880s and 1890s stood in sharp contrast to growing pockets of poverty and squalor in the cities. Work had been less hard on the farms than the often sixteen-hour workdays, six days a week in the cities. Labor strikes brought on by these conditions were thwarted by the courts or put down violently by employers, apparently without serious protest from the citizenry, even though many strikes did succeed in raising wages and improving conditions for their workers.50

However much the American ideology denied it, poverty now existed and it was palpable. In the slums of New York, Boston, and Chicago, workers often lived six in a room. A strong strain of pessimism crept into the American culture. Writers like Frank Norris and Upton Sinclair captured the rising discontent with a new moneyed culture. Respected intellectuals like Henry and Brooks Adams saw little hope for America's future. Populism, which flourished especially in southern and agricultural states, became a powerful political movement that demanded significant reforms and accused the big-city bankers of nailing Americans to a cross of gold.51

But time and again, rapid economic growth provided enough opportunity to appease most of America's rebels and doubters, even during politically turbulent times. Surging economic growth in the 1830s cemented Andrew Jackson's democratic reforms, just as it calmed populist discontent once the depression of the 1890s had ended. For all the political reforms, it was a rising real wage over time that was the great palliative. Despite "sweated" labor and occasionally severe depressions, real wages for most Americans rose rapidly between the 1870s and early 1900s. Overall, real wages, though they fluctuated widely, rose by about 1 percent a year on average over the entire century. The typical American was earning roughly three times as much after inflation in 1900 as in 1800.52 Despite the arrival of so many millions of immigrants, the average American wage was still 50 percent higher at the start of World War I, measured in terms of purchasing power, than the average wage earned by a British worker.53

In the twentieth century, production and wages again rose dramatically. The second frontier turned out to have been only in its early stages. After a steep recession following World War I, the American economy again took off in the 1920s, up by 18 percent in 1922 alone. The use of electricity spread widely. The Model T had come to market a few years before the war and was a great success. Other new products included radios, gas ovens, and refrigerators, all selling at prices that made them affordable to a new mass market of American consumers. Productivity rose on average by 4 percent a year between 1922 and 1928.

The Great Depression was a major challenge to the new industrial economy, and to our political stability as well. Unemployment soared to about 25 percent of the labor force. It took the arms buildup before World War II, and ultimately the war itself, to get America back on its feet. While some prominent economists believed the economy could stagnate indefinitely, in fact the war merely demonstrated how powerful America's economic potential was. Production rose above its 1929 peak by 1940. Incomes rose to pre-Depression levels by 1942. Productivity was again on a fast track. Unemployment virtually disappeared.54

After World War II most analysts thought a return to recession, or even a severe depression, was all but inevitable. The sharp recession after World War I and the Great Depression were still fresh memories. But the second frontier proved far more durable than its critics supposed. After a brief recession the economy again expanded rapidly and the forecasts of long unemployment lines never materialized.

The fast growth after World War II was aided by the destruction of Europe and Japan during the war; the United States had the world market mostly to itself well into the 1950s. Returning veterans went to college in great numbers, financed by the GI Bill of Rights, and the emphasis on education spread throughout the nation. Wartime technological breakthroughs spilled over to profitable commercial uses. With government help, for example, Bell Labs developed the transistor in 1948. Timex produced a cheap watch based on government research. High military expenditures may also have promoted growth in the short run, though over time they eroded resources in a way that would dampen future growth.

The annual rate of economic growth of nearly 4 percent a year between 1947 and the early 1970s rivaled in pace, though not duration, the fast growth of the latter third of the nineteenth century. Family income after inflation doubled in this period. In the mid-sixties, the unemployment rate was only about 4 percent, yet inflation was inconsequential.

This second frontier was the answer to Turner's understandable concerns. For all its ups and downs, it produced the fastest, broadest-based economic growth and rising living standards a major economy had ever seen. There is not one forecast on record that suggested it might not last. One celebrated forecaster in the 1960s claimed that productivity would grow at a rate of 4 percent a year until the turn of the century.55 America had no reason to doubt itself, or to challenge the validity of its original frontier ideology. Because of rapid economic growth, its confidence in itself had never been higher.

But the pace of growth was about to slow dramatically. There were several signs of this as early as the mid-1960s. Corporate profits as a percentage of sales began to decline rapidly, falling from about 14 percent of sales after taxes in 1965 to only 8 percent by 1970. The growth of productivity had also tapered off significantly to a rate of 2 percent a year from a rate of about 3 percent a year, even though capital investment was high.56 Economists believed that at worst it was a temporary stall.

Only after the oil crisis in 1973, when the OPEC countries raised prices threefold, did we have the first serious recession of the post-World War II period. The economy did not begin to recover until mid-1975. Over the next seven years we experienced an inflationary spiral and the two other recessions we discussed earlier. The 1982 recession was even more severe than the OPEC-induced recession in 1974 and 1975. In sum, we suffered three recessions in the ten years between 1973 and 1982, two of which were the worst in the post-
World War II period.

The Reagan expansion between 1983 and 1988 temporarily muted economic criticism. When the expansion petered out in 1989, however, the economy was only slightly ahead of its 1979 peak by most per capita measures, and most important, as we noted, the growth of productivity continued to lag badly for the second decade in a row. The Reagan expansion was followed by the four years of slow economic growth under President Bush, which included the recession in 1990 and part of 1991. The economic expansion that began in 1991 was only a moderate one, unable to reverse even modestly the damage done over the preceding twenty years. As of the fall of 1994 the average real wage had been falling for more than two decades, the rate of growth in productivity was still historically low, the poverty rate had risen significantly, and America could no longer invest adequately in its future without a significant sacrifice in current standards of living. Americans would say in survey after survey that they were beginning to feel that something had changed, but nevertheless they had continued to underestimate the impact that slow economic growth was having on their lives. This may have been only natural. Americans had never had to deal with an indefinite period of slow economic growth before, and most of us could not figure out exactly what had changed. Here our politicians, recalling how voters rejected Carter and Mondale for their candor about some of our economic problems, chose not to repeat their mistake. The media, which had learned the same lesson, were no better. Doom and gloom, to use the catchword of the times, did not sell. But President Reagan's optimism did.



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