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The Next Priority

While small businesses continue to create jobs, the national standard of living has not risen since 1973.

Why it's not enough to create jobs

The New Economy that's been emerging over the past 15 years -- an economy in which growing companies play an ever-greater role -- deserves two healthy cheers. Since 1974 it has provided us with a whopping 29 million new jobs, thereby absorbing the huge baby-boom generation into the labor force. For the past decade or so, it has stimulated massive industrial restructuring, thereby enabling U.S. companies to compete on a global scale once more.

What this economy hasn't done, so far, is improve our standard of living.

Harsh words? Nope. Despite the efforts of Fortune magazine and others to put a rosy glow on the situation (see "Lies, Damn Lies, and Statistics," page 2), the facts are hard to dispute. All you have to do is browse through the latest Economic Report of the President and compare some fundamental figures for recent years with those for the early 1970s.

It's an eye-opening exercise. Median family income in 1987: $30,853. Median family income in 1973 (expressed in 1987 dollars): $30,820. Average hourly wages in 1987: $8.98. Average hourly wages in 1973: $9.66. We have been going nowhere fast for a decade and a half.

The news isn't totally bleak. A bigger fraction of the population works outside the home now, and nonwage income such as Social Security is up. That's why family income has stayed level while wages have declined. Income per person -- as opposed to per family -- is up too, partly because average family size is shrinking. Still, nobody doubts the underlying trend. "Family income grew very fast from the end of the Second World War to the first oil price shock, in 1973," says the University of Maryland's Frank Levy, a specialist in the subject. "It hasn't really grown since then. And wages, on average, have been stagnant.'

Levy, whose book Dollars and Dreams has just been issued in paperback, argues that the stagnation in income levels has grim social consequences. In the 1950s and 1960s, as now, some groups in the population were always doing better than others; relative gains and losses are a part of any free-enterprise economy. But back then, the pie as a whole was expanding every year. So nearly everyone could count on an eventual improvement in their lot.

Today a bigger piece for one group over time means a smaller piece for someone else. Since 1973, for example, women's overall earnings have grown, and the earnings of college-educated women over 35 have grown the most. But young, male workers with no college have seen corresponding losses. "Back in the early 1970s the average 30-year-old guy with a high-school diploma was making $24,000 in today's dollars," Levy explains. "Today a similar guy is making about $18,000.'

Nor can people necessarily count on a brighter future for their children. In 1969 the typical blue-collar worker was making more, in real terms, than an executive made 20 years earlier. So working-class parents could feel reasonably good about the prospects of sons and daughters who chose to pursue blue-collar careers. Today no one -- not even economists such as Levy -- can count on better times for his or her offspring. "I really don't know if my son will outearn me," he says.

Underlying the stagnant income figures is another, more puzzling number. Changes in productivity, or output per worker, show how we as a nation are doing, relative both to our own past and to other countries; in the long run, rising productivity is the only ticket to a rising standard of living for all. During the fat years -- the 1950s and 1960s -- productivity rose at better than a 3% annual clip, or 70% over the course of two decades. Since the early 1970s productivity growth has been sporadic, averaging 1% or so a year.

Economists can't yet offer us a comprehensive explanation of the productivity slowdown; what they can do is point to factors that undoubtedly contributed to it, such as the dramatic hike in oil prices during the 1970s and the sharp recession of 1981-82. One significant factor was simply the huge influx of new workers into the labor force. The baby boom alone would have flooded the economy with millions of new job seekers; the rising proportion of women working outside the home added to the number. As most business owners can testify, this influx of young and inexperienced workers lowered the average skill level of the labor force; it also tended to decrease the amount of capital equipment at each employee's disposal. Overall output, of course, rose. But output per employee grew much more slowly than it had in the past.

You can look back on the economy of the past 15 years and argue that its major task, so to speak, was to provide jobs for all those new workers. Our system accomplished the task well, even though the nation's largest manufacturers were cutting back their employment. We would have had an economic disaster in the 1980s but for the enormous number of jobs generated by growing companies.

That achievement, however, shouldn't blind us to the stagnation in living standards during this period. Should the slowdown continue, we'll lose ground relative to nations (such as Japan) that are experiencing regular produc-tivity gains. And voters on the losing side of the averages will rightly begin to wonder about an economy that provides a lot of jobs -- but not much hope.

* * *


Much has improved over the past 15 years, but not our standard of living.

Median family income (1987 dollars)
1960 $21,567 1980 $28,996

1965 25,060 1985 29,302

1970 28,880 1987 30,853

1975 28,970

Source: Economic Report of the President (1989); Statistical Abstract of the United States (1986)


Fortune's rose-colored glasses

For reasons best known to its editorial board, Fortune seems to want to persuade us that things have never been better. "Do We Live as Well as We Used To?" asked a cover story in late 1987 (answer: "vastly better'). "Are You Better Off Than in 1980?" wondered an article published a year later (answer: almost certainly).

It's reminiscent of the dictum, variously attributed to Mark Twain and Benjamin Disraeli: "There are three kinds of lies -- lies, damn lies, and statistics." The problem isn't that the numbers aren't true, it's that you can make them say whatever you want to.

Sylvia Nasar's 1987 article, for example, compared family income levels in 1986 with what they were in 1960. Surprise! They're "half again as high." What the author doesn't mention is that all that growth took place between 1960 and 1973. Since 1973, median income has dropped, risen, dropped again, and risen again, leaving it right back where it began. Those fluctuations, in turn, made Louis S. Richman's job in the 1988 article easier. "Median family income . . . is well above its 1981 level," he wrote. True: it went up 10% from 1981 to 1987. But in 1981 it was slightly below the level of 1968.

In a fast-changing economy like ours, there will always be winners and losers, and the two groups will have dramatically different perspectives on how well "everyone" is faring. But the bottom line for an economic system is its participants' average standard of living. By that measure, our fortune hasn't been so good.

Last updated: May 1, 1989

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