America’s Economic Strengths

By Staff Reports

Published: December 14, 2008

Americans have lost a great deal in recent months. Hundreds of thousands of jobs have disappeared. Retirement portfolios have imploded. Families worry about making next month's mortgage. Venerable names in banking and finance are no more. Automobile companies whose names evoke the sweep of history and the glory days of the American road now teeter on the edge of a knife. Billions in paper wealth have vanished like a puff of smoke in a strong wind. Hard times have fallen like a ton of bricks.

But have Americans lost their senses as well?

In some ways, in some places, yes. There is certainly no rhyme or reason in Washington's ad hoc response to the economic crisis. Apostles of free-market economics have begged Congress for government intervention. Congressmen and regulators who pinioned the banking industry with lending quotas that flew in the face of market discipline now blame a lack of market discipline for the troubles of the banking industry. The fate of entire economic sectors hangs on decisions that are being made on the basis of raw political calculation. Normally clear market signals have been drowned out to such an extent that many companies no longer can make decisions grounded in sound business practices. Does America really want to hand over the economic reins to Beltway "czars" who have demonstrated a willingness to speed up the ladling out of hundreds of billions of dollars -- with few checks and balances and even fewer requirements?

There is also a pervasive dread in the air as Americans wait, almost like Londoners during the Blitz, for the next big airburst of bad news. Where will it come from? Where will it fall? Who will take the hit? In late 1996 Alan Greenspan, the Fed chairman at the time, said the country was caught in the grip of "irrational exuberance." While no one should make light in any way of the sorrows of the economically afflicted, today the country seems in the grip of irrational despondency. If things are almost never quite so good as they seem, then they also are almost never quite so bad. The fundamentals of the American economy remain sound.

. . .

By "fundamentals," we do not refer to the unemployment rate, the Dow Jones industrial average, the orders for durable goods, or the inventory of unsold homes. Those are not the fundamentals; they are mere indices. They provide snapshots of a constantly moving target. And they capture only surface details -- not the powerful forces below.

Then what are the fundamentals? These:

(1) The capitalist consensus. Although Americans differ -- sometimes fiercely -- on the marginalia, everyone today agrees that the free market constitutes the best means of securing prosperity over the long term. The difference between a liberal Democrat and a conservative Republican today is the difference between, say, a 28-percent income tax rate and a 36-percent rate -- not, as once might have been the case, between a top tax rate of 80 percent and no income taxation at all.

A few excitable types have gotten carried away with their own rhetorical flourishes and pronounced the current crisis an epitaph for market economics. But nobody seriously argues that Washington ought to nationalize the economy, set wages and prices, establish Soviet-style production quotas for everything from aircraft engines to pencil erasers, and impose a dictatorship of the proletariat. To the contrary: The principal argument concerns how to make the free market work better -- not how to abolish it.

(2) The rule of law. No economy can thrive for long without an impartial system of laws to protect property, enforce contracts, and support the institutions that facilitate the free and peaceful trading of goods and services. America is blessed to have precisely a such a system. Even in Washington's corridors of power, there are none who dream of setting themselves up as kleptocrats along the lines of Mobutu Sese Seko in Zaire. Nor does the United States endure the fratricidal factionalism of the Middle East, or the murderous reign of narcoterrorism that afflicts parts of Latin America. The U.S. foundation of law and order provides a stable launching pad for economic growth that some other parts of the world can only wish for.

(3) Intellectual capital. Americans by and large believe in the adage that if something can be conceived, then it can be believed -- and achieved. And they continue to prove the maxim year after year. Since the days of Henry Ford, America has led the world in both pure research and applied technology -- and has profited greatly by doing so.

Many of the innovations are disruptive to existing industries. Ford is reported to have said that if he had asked his customers what they wanted, they would have answered: a faster horse. The "gales of creative destruction," as economist Joseph Schumpeter famously called them, can indeed wreak short-term havoc. But in the long run the results turn out for the better. Few today wish only for a faster horse, a quieter adding machine, or longer-lasting typewriter ribbons.

(4) Character. This is, admittedly, a hazy term. We mean it here to include the American temperament of industry and optimism -- epitomized by a couple featured in a news story just the other day. John Rhoades and his wife, Priscilla, moved from Florida to Arkansas a year ago. In just eight months, they have started three businesses: a general store, a restaurant, and a coffee-and-ice-cream shop. They now employ 20 people. "Nothing ventured, nothing gained," is Priscilla Rhoades' motto -- and, for all intents and purposes, the nation's, ever since the first colonists ventured forth in boats that hardly look seaworthy by today's standards. The Rhoadeses of the world don't make many headlines, but they do make the world go 'round.

Americans lured in recent years by easy credit are dusting off older virtues as well -- such as thrift. Running away from banks and stores is an extreme act of desperation -- both unnecessary and helpful. But sensible notions, such as layaway plans (in which stores hold items for customers who pay for them in installments before taking them home), are welcome. Economists fret about the slowdown in consumer spending, but after a period during which the national savings rate dipped below zero, it represents a return to frugality -- if not simple common sense.

Americans may also be rediscovering another virtue: fortitude. A sizable percentage of today's workforce never has lived through a serious recession. Only about one American in 10 has any meaningful recollection of the Great Depression. We would not go so far as to say America has gotten soft, but there is truth to the adage that hard times build psychic muscle. The current economic downturn may be a refiner's fire that purges impurities and strengthens the country, reminding people that the things that matter most can't be bought.

. . .

If the American character has a fault, it is a lack of perspective. Go back again to 1996, the year of Greenspan's lament. On the day he made his remarks to the American Enterprise Institute, the Dow closed at 6,381 -- well below where it stands even now. It says a great deal about public expectations that a level of prosperity then considered deleriously high is now taken as a sign of impending doom. Ask yourself: Was the nation in dire economic straits in 1996? If not, then why should a level of prosperity that is still much higher now than it was then be viewed as a world-historical emergency?

Here is some more perspective: The next year, the Federal Reserve Bank of Dallas released a study titled Time Well Spent: The Declining Real Cost of Living in America. It noted, among other things: "A pair of stockings cost just 25 cents a century ago. This sounds wonderful until we learn that a worker of the era earned only 14.8 cents an hour. So paying for the stockings took 1 hour [and] 41 minutes of work. Today a better pair requires only about 18 minutes of work . . . .If modern Americans had to work as hard as their forebears did for everyday products, they'd be in a continual state of sticker shock -- $67 scissors, $913 baby carriages, $2,222 bicycles, $1,202 telephones." The most common indices of American prosperity at any given moment -- unemployment, housing inventory, and so on -- never seem to take into account very real progress such as that.

Or this: From 1998 to 2007, notes economist Robert Samuelson (whose columns appear regularly on the facing page), total non-farm payroll employment rose 12 million, despite the loss of 4 million factory jobs. Big layoffs make national news; big hirings don't. Also despite those lost factory jobs, U.S. manufacturing output rose 22 percent -- during a period many refer to as a post-industrial era, thanks partly to a cyberspace revolution that has transformed nearly every aspect of American life.

To get a sense of the scope of that transformation, consider this as well: The year Greenspan was lamenting irrational exuberance, a couple of young men in their early 20s named Larry Page and Sergey Brin -- grad students in computer science at Stanford -- began collaborating on an Internet search engine. At the time, they were calling it BackRub. You know it today as Google. Google didn't incorporate until September 1998. It now has a market capitalization of roughly $100 billion. YouTube, to take another example, was created in February 2005. In October 2006, Google bought it -- for $1.56 billion.

. . .

We bring up Google and YouTube because they epitomize a point that cannot be emphasized enough. One often hears social scientists talk about "the causes of poverty." But poverty does not need to be caused by any act of volition; it exists ab initio. Two hundred years ago, everyone was desperately poor by today's standards. What does not exist ab initio is wealth; wealth must be created by sustained human effort.

The conditions that permit the creation of wealth -- the conditions that created the wealth of the past century, and the wealth of Google and YouTube; the conditions that will create wealth in the future from innovations that will be thought of tomorrow, or next week -- are those outlined above: free markets, the rule of law, intellectual capital, industry, and optimism. Those fundamentals haven't changed. They are as strong as ever.

The road ahead may be a long one, with deep valleys. But if Americans work within the fundamentals, they will see their way through the valleys and find that eventually, it will lead upward once again.

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