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The American Dream Economy

Since 1800, economic growth in America has almost always been exuberant. So this vaunted 'new economy' is old hat.

August 27, 2000|Walter Russell Mead | Walter Russell Mead, a contributing editor to Opinion, is a senior fellow at the Council on Foreign Relations. He is the author of "Mortal Splendor: The American Empire in Transition."

NEW YORK — As the American economy powers ahead on its growth spree, the whole world is watching in awe. Hyperventilating high-tech enthusiasts and stock-market gurus talk about a "new economy" and a "new paradigm," jubilantly asserting that the American economy is breaking all the old rules.

Wrong. What we've actually got now is an old economy--an economy performing at traditional U.S. levels. From 1800 to the present, the U.S. economy grew an average of 3.77% per year. By historic standards, it was only the last 25 years that were out of line. The fact is that the U.S. economy has almost always been exuberant.

It was when this "new economy" first appeared that darkness loomed. By the early 1980s, average growth fell to below 2.5%, and economists, always ready to find a cloud behind every silver lining, predicted more slowing ahead. Unemployment rose, wages fell, Dad's salary could no longer pay the bills, so all across America, Mom went to work. As steel mills closed and McDonald's and Kinko's stands mushroomed, two generations of Americans--the baby boomers and the Xers--scaled down their expectations. Americans used to assume that children would live almost twice as well as their parents, but many boomers and Xers came to believe downward mobility was the only thing they could expect.

They may have been wrong. The U.S. economy, now in the 112th month of the longest-running expansion in U.S. history, shows no sign of slowing. Other than a brief and mild recession in 1991-92, the U.S. economy has been growing steadily since the first quarter of 1982--18 years of almost uninterrupted growth. In 1999, gross domestic product growth hit 4.2%; the average annual growth since 1995 has been 4.15%. Family incomes are up; real interest rates are low; and the unemployment rate is the lowest it's been in a generation. Vast and towering budget deficits, which only eight years ago seemed to stretch out as far as the eye can see, have turned into huge and friendly surpluses.

The expansion has been far more resilient than almost anyone expected. The Asian economic crisis, the worst global crisis since the Great Depression of the 1930s, only led the Federal Reserve Bank to lower interest rates, throwing more fuel on the U.S. economy. Oil prices have tripled since the end of 1998--something that would have led to an inflationary catastrophe in the 1970s. The Energizer Bunny economy just took the price hikes in stride.

Bitter boomers and alienated Xers will point out that it isn't all skittles and beer. Income inequality is way above historic levels; child poverty is alarmingly high; the minimum wage is way too low; and many workers will never regain the income levels they lost as manufacturing jobs closed down.

This is all true today--but it won't be true tomorrow if the growth holds up. We've had long-term slowdowns before--notably in the 1880s and 1890s and again in the 1930s. But after both of those earlier pauses, the U.S. economy regained its balance and returned to its long-term growth pattern.

This may, just may, be what we are seeing today. An economy's long term growth depends on two factors: growth in the work force and growth in productivity. During the last generation, productivity growth nose-dived, even briefly turning negative in the early 1970s. Looking at those gloomy numbers and projecting declining growth in the work force, as well, economists lowered estimates of future economic growth. The Social Security Administration, which must predict long-term growth rates to estimate future revenues and expenses, scaled back its long-term-growth forecast to 1.5% in 1996.

That matters. Assuming 1.5% economic growth through 2050, in today's dollars, the GDP in 2050 would be $19.6 trillion. At 3.77% growth, the historical average, GDP would hit $63.7 trillion. The difference between those projections is roughly twice the size of the total world GDP for 1999. Under the Social Security Administration assumptions, and assuming no change in income distribution, median family income would barely rise between today and 2050. But if the economy gets back on the historic growth path, median income would grow to $98,234 from today's level of $38,900--and that's adjusted for inflation.

This may sound like the kind of forecast that economists make after smoking too much pixie dust, but it's exactly the kind of growth our ancestors took for granted. This sort of progress is what they meant by the American dream, and it is this kind of progress that the American economy has delivered over most of the last 200 years.

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