Precarious Prosperity

Thousands of American companies traveled the path from the old order to the new. Stanley Works, a leading manufacturer of hand tools, including hammers, socket wrenches and pliers, was one. Well into the 1970s, its success seemed secure. Most production was located in the United States. If business softened, factory workers were fiirloughed by seniority. When sales revived, most workers were recalled. White-collar workers— managers, salesmen, secretaries—were rarely even fiirloughed. But in the late 1970s, the company suddenly faced Asian imports priced at a 40 percent discount. Costs had to be cut. The first CEOs made changes slowly. Having spent long careers at the company, they were torn between new pressures and old norms. White-collar jobs initially dropped by attrition. Factories were automated, leaving some (if fewer) jobs. Some work moved abroad. But in 1997, the firm's directors, dissatisfied with the company's lackluster stock price, hired an outsider as CEO. He closed forty-three of the remaining eighty-three plants—concentrated in the United States—and shifted more work abroad. "Layoffs and plant closings," he told the journalist Louis Uchitelle, "are not such rare events anymore that one generally makes a big deal out of them."1

Although the new economic order is superior to the old, it often doesn't seem that way. As the experiences of Stanley Works and other companies suggest, it has delivered a perplexing prosperity with manifest imperfections. Jobs are more plentiful—but less secure. Living standards are higher—but incomes are more unequal and less predictable. Business cycles are milder—but financial markets seem more erratic and unstable. Competition has inspired new technologies and products—but has also threatened companies and industries wedded to old technologies and products. The economic adaptability that we admire—the ability to make the most of change— seems to inflict the very insecurity that we deplore. "Hardly any company is too successful nowadays to consider a large-scale cutback in jobs," social critic James Lardner has written. Consider Intel, he said. Though consistently profitable, the giant computer-chip maker announced job cuts in early 2007 of 10,500, about 10 percent of its worldwide workforce, to make the company "more agile and efficient."2

It is easy to caricature the new order as the triumph of profit maximization, CEO enrichment and the culture of efficiency, and as such, it often seems a step backward. What good are higher incomes if, at any moment, they can be abruptly withdrawn? Economic progress, as the term was widely understood in the first decades after World War II, did not refer exclusively to more and more material possessions. It also meant enhanced economic security—mainly job security, but also protection against impoverishment from sickness, disability and old age. Peace of mind was part of the postwar living standard, and the new order seems to relegate it to a lowly place, if not ignore it altogether. The new order often seems obsessed with money to the exclusion of all other values. The old order, with its more protective corporations and greater emphasis on "fairness," seemed more humane and morally superior.

As with many caricatures, this one rings true up to a point, but it is also artificial and contrived. It treats the evolution of our economic system as a conscious choice, controlled by a selfish elite of investment managers and corporate executives who manipulated the system to increase profits and their own wealth. In this, their natural allies and fellow travelers were conservative politicians who idolized "the market" and were obsessed with lowering taxes and shrinking government. The reality was different. Government didn't shrink, and the rise of the new economic order was an unplanned and protracted process, largely a reaction to the crippling shortcomings of the old order. People now forget that in the 1970s the economy was becoming more inflation-prone, unstable and subject to rising unemployment. These developments were wildly unpopular. American firms were also less capable of generating higher living standards, even as they were losing markets to German, Japanese and other foreign companies. The old order was not, as popular lore now holds, deliberately discarded. Instead, it slowly succumbed under the weight of its own failures.

Its economic illusion—which explains its powerful, nostalgic appeal—was that we could create a virtually Utopian system that would marry all the advantages of an expanding economy (more jobs, technological advances, new products, higher living standards, and more personal choices) with all the advantages of a static economy (greater job security, more certainty, familiar technologies and business methods), without suffering the disadvantages of either. The central contradiction was that an economic system premised on change could simultaneously banish change. We would enjoy the gains and avoid the pain. The fact that the ideal seemed to have been realized briefly in the late 1960s, when American companies dominated the world and the U.S. economy was in the midst of a fabulous boom, created the myth—still cherished by some—that the old order was a practical possibility. In fact, this temporary triumph was mostly the result of the first intoxicating phase of inflationary economic policies (which created the initial boom) and the lingering aftereffects of World War II (which eliminated most international competition). In the 1970s, both props collapsed.

The new economic order is indeed inferior to the imagined and romanticized version of the old order. But it's superior to the old order as it actually operated. Still, the new order's defining characteristics sometimes seem a series of paradoxes. Consider:

First: Although the economy became more stable—with fewer and milder recessions—individual workers and companies faced more insecurities and uncertainties about jobs, wages, fringe benefits and the very survival offirms.

Business cycles became gentler. The two brief recessions between

1982 and 2007 (those of 1990-91 and 2001) lasted only sixteen months combined.* Otherwise, the economy has generally expanded. Economists call this smoothing "the Great Moderation." Its causes are still unclear, but some of the improvement surely comes from disinflation. Lower inflation meant that efforts to control it were less disruptive. But the benefits for individual workers often seemed illusory. Because companies resorted more quickly to layoffs and dismissals, career jobs became less reliable. In 1983, the median job tenure of men age forty-five to fifty-four was nearly thirteen years, meaning that half of these men had been with the same employer for at least thirteen years. By 2006, that figure had dropped to eight years.t3

Moreover, job insecurity moved up the income scale. In the early post—World War II decades, layoffs afflicted mostly blue-collar factory, construction and service workers. White-collar middle managers and professionals (accountants, engineers, analysts) have now become almost equally vulnerable. From 1981 to 1983, the share of high school graduates losing their jobs (14 percent) was double the rate for college graduates (7 percent). By 2001-03, the figures were virtually identical, 12 percent and 10 percent. Older workers were also increasingly affected, and once people lost their jobs, finding new ones was harder, according to studies by Robert G. Valletta of

* As previously noted, the U.S. economy may have entered another recession in late 2007 or 2008.

+ In theory, declining job tenure might reflect more voluntary decisions by workers to quit and get something better. There is little evidence of that.

the Federal Reserve Bank of San Francisco. In 2004, about a fifth of the jobless had been unemployed for more than half a year—about the same proportion as in 1983 even though the unemployment rate then (9.6 percent) was much higher than in 2004 (5.5 percent).

Second: Although the economy became more productive—and Americans much wealthier—economic inequality increased dramatically. The economic pie got larger, but those at the top received much bigger pieces.

It is not true (though often asserted) that only the very wealthy have advanced materially. Since 1980, most households have experienced substantial income gains. Vast numbers of Americans enjoy gadgets and conveniences that didn't exist then or barely existed (computers, cell phones, flat-screen TVs). Homes got larger. Poverty rates fell. In the 1970s and 1980s, a third or more of blacks routinely had incomes beneath the government's official poverty line. By 2001, that had dropped to 22.7 percent (by 2005, it had risen to 24.7 percent). The idea that typical living standards have stagnated over any meaningful period (say, ten to fifteen years) is preposterous. But the broad advance has also been skewed. It's not just that corporate chief executives, investment bankers, sports stars and celebrities benefited more than most. The gap between college and high school graduates widened. In 1979, college graduates earned on average 21 percent more than high school graduates; by 2002, the difference was 44 percent.4

Pay systems increasingly emphasized greater skills. In 1980, fulltime male workers at the ninetieth percentile of earnings (those with wages and salaries higher than nine-tenths of all workers) made more than four times the earnings of workers at the tenth percentile; by 2005, the advantage was six to one. Weaker unions and eroding manufacturing employment hurt those in the middle. More immigration, feeding the supply of both poorly and highly skilled workers, widened the polarization of wages and salaries. So did mushrooming of "winner-take-all" contests: These are competitions whose victors—whether top executives, lawyers, athletes or doctors— reaped fabulous rewards, far greater than did the runner-ups.5

Third: The expansion of domestic and international finance—the greater availability of credit and investment funds from stocks, bonds and other securities—invigorated economic growth. But it also became a large source of actual and potential economic instability.

Finance looms large in any economic history of the past quarter century. The greater availability of credit and investment money promoted economic expansion. Venture capital and the rising stock market lubricated the tech boom of the 1990s. The great real estate boom of the early twenty-first century derived largely from easier housing credit provided by the widespread "securitization" of home mortgages. Developing countries benefited from the mushrooming of cross-border money flows. But financial collapses also loomed larger, starting with the 1987 stock market crash, when the Dow Jones Industrial Average dropped 508 points, or 22.6 percent, in a single day. Then came the 1997-98 Asian financial crisis, when many developing countries defaulted—or came close—on international credits. In 2000, the "tech bubble" burst, and the economy went into recession. In 2007 and 2008, the "real estate bubble" burst. Although the economy had not yet reverted to the violent boom-bust cycles of the pre—World War II era, that no longer seems impossible.

On reflection, some connections become clear. Greater insecu rity for individual workers and firms often contributes to overall economic stability. As we've seen, competition and uncertainty restrain price and wage increases, helping to muffle inflation and, thereby, promoting longer expansions and milder recessions. Economists Diego Comin and Thomas Philippon contend there's another connection: Intensified competition desynchronizes the cycles of individual industries from the overall business cycle. Driven by separate competitive pressures, the ups of some industries (say, computers and autos) may cancel the downs of others (say, airlines and housing). Because layoffs and business closings are not all bunched together during recessions—they're spread across the business cycle—the recessions become less brutal but the expansions involve more angst. Anxiety and uncertainty became both more permanent and more democratic.6

Similarly, greater inequality may partly explain higher productivity. Companies altered pay practices to get better results. Compensation systems deemphasized "fairness" and seniority and directed rewards to workers considered the most productive or valuable— those who had special knowledge or who had mastered new technologies. Gaps widened between the less and the more skilled, between jobs that seemed more and less crucial. Companies resorted more to commissions, bonuses and incentives to motivate workers. A survey of 1,056 large firms by Hewitt Associates, a consulting company, found that in 2005 almost 11 percent of payroll was distributed by these various incentives, up from 4 percent in 1990. These changes contributed to widening wage inequality and also made year-to-year incomes less stable and predictable. By one study, about a quarter of the increase in wage inequality between the late

1970s and early 1990s stemmed from the growing use of individual incentives. Whether they always achieved their intended results is unclear, but they reflected a new moral code. In the old order, inequality existed, but it was rarely applauded and advertised. In the new, it was often flaunted as a badge of success.7

That explains the new order's moral ambiguity. Are its most visible rewards justified by superior performance? Or do they merely rationalize greed and self-interest? The questions cluster most conspicuously around CEO pay, which has soared. In the old order, unspoken inhibitions imposed self-restraint. If all in a corporation benefited from the organization s performance and owed a basic allegiance to it, then CEOs could justify higher pay (they had greater responsibilities) but not disproportionately larger gains. If those at the bottom got 5 percent increases, so would those at the top. And that's what happened. From the late 1940s to the 1970s, pay for a typical CEO at a major firm went from about $900,000 (in inflation-adjusted 2000 dollars) to $1.17 million—an increase proportional to what lower-paid workers received. But in the new order, CEOs were awarded lavish stock options that supposedly "aligned" their interests with shareholder interests. The CEO's job was to get the stock price up. By 2000—05, average CEO pay in similar firms had exploded to $9 million. Management may have improved, but some of the gain was a disinflation windfall, as lower inflation and interest rates boosted stock prices. Some observers (including me) believe that many CEOs manipulated the compensation process in their favor and were richly rewarded for, at best, adequate performance. Their personal bonanzas reflected privileged positions in the corporate hierarchy more than exceptional skills.8

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