It’s become fashionable, during this remarkable era of uninterrupted economic growth, for a select group of commentators to argue that things aren’t quite as good as they might seem. They write books with ominous titles like The Age of Diminished Expectations, The Judas Economy, or America: Who Stole the Dream? They tell us that America is being slowly eroded by foreign trade, that there are declining numbers of good jobs, and that the country is increasingly divided between “winners” and “losers.” Jeffrey Madrick’s 1995 book The End of Affluence is a good example of the genre. To hear Madrick tell it: “Like the clock that loses a second an hour, the American economy has lost ground so gradually over the past 20 years that we don’t realize how far behind we have fallen.”
If you ever find yourself wondering whether Cassandras like Madrick are onto something, spend a few hours curled up with Myths of Rich & Poor. Armed with a seemingly endless supply of statistics and a free-market orientation that’s akin to the Wall Street Journal editorial page on steroids, Cox and Alm want you to know that America’s economy is better than ever. Indeed, they argue that in the course of just one generation, the vast majority of Americans have dramatically improved their standard of living.
The statistic cited most often by the declinists to make their case is the steady drop in real hourly wages. From 1953 to 1973, these wages increased 2 percent annually. After 1973, they remained stagnant for five years, and ever since they’ve declined 0.7 percent annually. Were these numbers the final word on the subject they would be quite troubling. But Cox and Alm show that hourly wages are a highly imprecise gauge of economic progress, thus reinforcing the old adage that statistics are like a bikini; what they reveal is suggestive, but what they conceal is vital.
A more telling measure of economic progress, according to the authors, is consumption. And here, there’s no doubt about the gains. The median household net worth was less than $28,000 in 1970; by 1995 it was nearly $60,000. The average size of a new home is now considerably larger than it was in 1970, and there’s more stuff in these new homes. Less than 1 percent of households had a microwave oven in 1970; today 90 percent do. And for those who think the extra consumption has been frivolous, the authors have a response: Per capita donations to charities were $402 in 1970, but $569 in 1996 (figures adjusted for inflation).
There’s another simple, yet frequently overlooked, shortcoming in the data on falling wages. They ignore the expansion of non-wage, “fringe” benefits. Thus even though companies routinely provide health insurance, retirement plans, and maternity leave, wage statistics don’t account for these benefits, even though nonwage benefits as a percentage of workers’ wages have increased by a third since 1970.
Conventional wisdom-busting nuggets like these are liberally sprinkled throughout Myths of Rich & Poor, and they’re what make the book so valuable. The authors take their cue from Mark Twain, who observed that “it isn’t what we don’t know that kills us, it’s everything we know that ain’t so.” Consider: Americans work more today than they did in the past, right? Wrong. The average work week is nearly three hours shorter today than it was in 1973, and the number of hours worked per year has dropped by 50 percent since 1870.
Misconceptions about the American economy are an outgrowth both of the economy’s size and of the volume of economic statistics that make it possible to support just about any argument. Exhibit A: Three years ago, in the midst of the ongoing economic boom, the unlikely duo of Pat Buchanan and the national news media helped stir up a frenzy over industrial layoffs, which came to be known as “downsizing.” Yet Cox and Alm, in a chapter entitled “The Upside of Downsizing,” show that the layoffs weren’t all they were cracked up to be. Yes, in the first half of the decade, nearly 3.4 million people working at companies with 5,000 or more employees were given pink slips. But during the same period, a whopping 11 million jobs were created at companies with fewer than 5,000 employees. This was all part of what the authors call “the churn,” the process by which new technologies and new ideas create new jobs, while rendering others unnecessary.
The temptation, of course, is for government to step in and try to limit downsizing. The authors show the folly in this by reprinting a letter the governor of New York, Martin van Buren, wrote to President Andrew Jackson in 1829: “The canal system of this country is being threatened by the spread of a new form of transportation known as ‘railroads.’ The federal government must preserve the canals . . . . If canal boats are supplanted by ‘railroads,’ serious unemployment will result.” Recent congressional votes to limit steel imports, in an attempt to “protect” American steelworkers from foreign competition, show just how little has changed.
Every book has its shortcomings, and this one has two. First, Cox, a vice president with the Federal Reserve Bank in Dallas, and Alm, a business reporter with the Dallas Morning News, seem intent on including every statistic they’ve ever come across to support their arguments. One-fifth of the book is taken up with footnotes. At first this is appreciated; halfway through the book it becomes annoying.
A more fundamental flaw with the book is the authors’ failure to acknowledge the potential threats to continued prosperity posed by Medicare and Social Security. With a declining birthrate, and a rapidly aging population that will soon be moving into retirement, the continued funding of these two entitlements at their current levels could mean returning to the high-tax days of yesteryear, which would undoubtedly put a crimp in America’s economic expansion. Perhaps the authors aren’t terribly worried about these looming liabilities. But ignoring them completely is a bit like writing an economic history of the 1920s that omits the stock market crash.
These shortcomings aside, Myths of Rich & Poor is a valuable contribution to the literature coming out of the “dismal science” of economics. The authors shatter economic myths the way Mark McGwire shatters home run records, and they do so in a way that’s accessible to economist and non-economist alike. Even those who disagree with the book’s conclusions cannot help but be persuaded that the country is in the middle of an economic boom that has benefited the vast majority of Americans. The challenge now lies in maintaining, and improving on, the policies that have made the boom a reality.
Matthew Rees is a contributing editor to Philanthropy.