The Voice: Winter 2001

The Voice

Short-term economic growth will jeopardize our future well-being

by John Visser

This Plumbline was written before the stock market took a downturn, but the issues remain important.

Now that both the Republicans and Democrats have had numerous opportunities this election year to take credit for the prosperity we enjoy as a nation, we should look a little deeper into the matter. More specifically, we need to investigate how that prosperity was achieved and whether it is likely to be sustained in the future. An important part of this is whether any economic boom that is rooted in the substitution of non-renewable resources for renewable resources and human effort is actually sustainable in the long run. But this question is far too big to deal with in a Plumbline, so I won't. Instead, I will focus on developments that have contributed to the nearly uninterrupted growth we've experienced for the last two decades and investigate the likelihood that these developments will continue in the future.

The amazing thing about our recent prosperity is that nearly everything that could boost an economy has happened. Billions of new buyers have entered the markets as communist countries have opened up and developing countries have liberalized their economies. Trade barriers have been reduced throughout the world. The U.S. dollar has remained strong in spite of persistent and growing trade deficits.

Our tax collections have increased massively, while government expenditures have been held more or less in check. Computer chip technology, which can be applied to nearly every product and service imaginable, has given a substantial boost to the automation and productivity of business and industry. It has also given consumers a good excuse to go out and buy new things or replace old ones. The internet has multiplied the availability of information, so buyers and sellers are finding each other more quickly and more often. Businesses have multiplied these communications advantages with steady increases in advertising. They have stayed open longer hours (often twenty-four) or more days each week (often seven). On the production side, they have achieved efficiencies by running additional shifts. They routinely work overtime, hold phone conversations while they drive, compose email messages at home or on airplanes, and respond to pagers as they stroll though the park. The result has been a steady increase in the amount of economic activity that people engage in both on and off the job.

The economy has also been boosted by the large number of baby boomers who reached their peak productivity and earning years, a demographic development that has bolstered productivity, consumption, and investment, and has helped drive the stock market to new heights. Significant numbers of highly qualified women and members of minority groups have entered the work force. Waves of wealthy and educated immigrants have poured into the country, filling high-tech positions and bolstering the financial markets. And businesses have engaged in a frenzy of mergers to achieve economies of scale. The list could go on, but it should already be clear that a remarkable confluence of factors has contributed to the growth that the American economy has experienced during the last twenty years. It should be equally clear that neither Republicans nor Democrats have the right to claim responsibility for many of these developments.

But there is a troubling thread that runs through these developments. Many of them are simply not sustainable. This is not to say that I believe, as some have suggested in the past, that the pace of innovation will slow down that just about everything that can be invented has been invented. I fully expect that the pace of innovation will continue to be rapid for some time. But we should not expect recent developments in revenue, profit, productivity, or GDP growth to continue at their current rates indefinitely into the future. Nor should we value shares of stock using growth projections tainted by rose-colored glasses.

The reason for this is that there are fundamentally three ways to develop: sustainably, temporarily, or at the expense of future development. Even if we ignore the depletion of natural resources, too much of our growth, it seems to me, is not sustainable. The transition of the formerly communist economies to markets can only occur once. We cannot continue to rely on decreases in defense spending to provide us with easy budget surpluses. Trade barriers can only be reduced so far before there are no longer tariffs and quotas to eliminate. And foreign capital will not always flow into the United States at the rate of $400 billion per year (the U.S.'s estimated trade deficit for the year 2000). Foreign investors could decide to take their money out at any time, causing a significant decline in the stock market and the international value of the dollar, an increase in interest rates, and a slowdown in the economy. Likewise, increases in time devoted to economic activity cannot increase indefinitely. There are only twenty-four hours in a day and seven days in a week, and it seems clear that not much more time can be squeezed out by either producers or consumers for economic activity. To be sure, there are still opportunities for members of some disadvantaged minority groups to increase their contribution to the economy, but most women are already working as many hours and sometimes more hours than they desire, so little additional stimulus is likely to come from this group. Many teenagers are also working so many hours that their education is being compromised.

As other countries around the world note the economic advantages to civil society and basic freedoms, there will be an increased tendency for educated foreigners to stay at home or even return home, taking their talent and their money with them. In addition, the stock market has been juiced by a number of developments which cannot be sustained. Decreases in capital gains taxes, deferred taxes on capital gains, the implementation of tax-free retirement savings vehicles, incentives for rewarding employees with stock options in lieu of wages, discussions about privatizing social security, investing social security surpluses in the stock market, and eliminating the estate tax have all bolstered the stock market in the short run. Unfortunately, this also means that these tools are no longer available as policy stimuli in the future, and if we are forced to reverse these benefits to investors we can expect to see at least a partial reversal of the stock market's fortunes.

There is also a limit to how many mergers can take place. Already more than forty percent of the groceries in the United States are sold by the top five chains. Similarly rapid consolidation has characterized many other industries. Most would agree that the number of mergers needs to stop well before we're down to one firm per industry. It also appears that our demographic shot in the arm may be about to end soon. The age distribution of the United States' population is about ten to fifteen years behind Japan's. Japan struggled economically throughout the nineties as the ratio of retirees to workers increased. We are approaching the same point, as can be seen by our persistent help wanted signs and increasing reliance on immigrants to fill positions.

In the Bible story, Joseph instructed the Egyptians to store surpluses from their seven years of prosperity to carry them through the seven lean years that followed. Unfortunately, not only have most Americans failed to save during our two decades of plenty, but our debt levels are higher than they have ever been. This might not be a problem if our income streams were secure and our assets constituted good collateral. Unfortunately, in many instances this is not the case. Our spending has gradually shifted to the point that it is now primarily on things we want, rather than things we need. An increasing share of the population earns its income producing things that are not really needed, which also makes us more vulnerable to an economic downturn, since people can quickly stop purchasing non-necessities if they become fearful about the future. We are also, unfortunately, in a position where a decrease in spending will have a greater negative impact on the profits of our companies than in the past, since we are increasingly a nation of big, highly automated, high fixed-cost organizations. Fixed costs, as we all know, don't go away when sales go down.

The purpose of this Plumbline is not to scare, but to highlight the dangers of seeking short term economic growth without regard to the sustainability of our actions. The best way to protect ourselves from such vulnerabilities is to concentrate on things that really create wealth rather than politically popular policies that do little more than increase the number of things we have today at the expense of our future well being. This includes carrying out our economic activity with an eye to people's needs. It also means teaching time-honored values such as honesty, patience, hard work, respect, love and service, and modeling these virtues in all areas of life. And it means cooperating with others to nurture a civil society, and just, efficient, and effective governing institutions at the local, state and national levels.

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