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The Atlantic | January/February 2004 | America's Fortunes | Editors

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The Atlantic Monthly | January/February 2004

  STATE OF THE UNION

[ The Economy]

 A MERICA  MERICA 'S FORTUNES  In terms of personal pe rsonal prosperity most people are doing better than they think. But prospects for the unem unemployed ployed are only getting worse. And two big storm clouds loom over everything   BY  THE EDITORS  

.....  

t any given moment the state of any nation—and especially the state of any stable industrial democracy, where a measure of political calm and social order can generally be taken for granted—is determined largely by thechanges, state of its economy. relative military strength, terrorist terroris attacks, natural disasters, demographic social trends,Wars, election outcomes, even t he results the of tinternational sporting competitions, can all contribute significantly to a country's perception of its own well-being. At times, certainly, one or more of these factors can outweigh the economy in affecting the collective sense of how the country is faring. But as any presidential candidate will tell you, for the average American citizen the most  basic measur measuree of nation national al wel well-bein l-being g amo amounts unts o one ne wa way y or anoth another er to econo economics. mics. Is my incom incomee hig higher her o orr low lower er than it was last year? Is my job more or less secure? Across the spectrum of class or income i ncome well-being is measured to a considerable degree by the question "Can I afford ... ?" Can I afford to put the kids through college? Buy a house? Put my mother in a nursing home? Pay for day care? Put food on the table? Buy a vacation home? But as important as the economy is in determining the state of the union, it is also a problematic measure,  because  becau se the "real" state o off the econo economy my d does oes n not ot mat match ch ou ourr col collective lective perce perception ption of it. That is, alth although ough one could in theory deduce America's exact sense of its economic well-being at any given moment by extrapolating from each citizen's income and expenses a kind of aggregate national answer to the question "Can I afford to ... ?," that would provide only an indirect and backward-looking measure of the economy's real strength. The true condition of the t he economy is best seen not as a snapshot of individuals' circumstances  but as as the movem movement ent o off dee deeper per fforces orces throu through gh ti time; me; ec econom onomists ists lo look ok b back ack for for me measure asuress of what has aalread lready y happened, and then use various logical assumptions to project what will happen in the future. Obviously, the state of the economy is a somewhat relative thing; how we judge it depends greatly on what we use as a basis for comparison. Compared with 2001, for instance, last year was in some respects a good one for the economy. Compared with 1999, however, it was in many ways disappointing. And in fact the economy of 2003 was by several measures comparable to the economy of 1997. Does this mean the economy has regressed? Or that it has returned to its natural level after a period of aberration? And what, if anything, can these historical comparisons tell us about the coming years?

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Although the essays in "State of the Union" cover a wide variety of topics—from the long-term federal budget deficit to the changing nature of the middle class, from the health-care-cost conundrum to the rising level of anger in American society—all these topics are ultimately bound up with (either as influences on or as derivatives of) the state of the economy. In this opening essay we aim to establish the broader context that underlies all these issues, and to provide a balanced view of the U.S. economy—not just of how it's doing today, or this year, but of the deeper structural forces that will determine our prosperity over the long term. n retrospect, the late 1990s appear to have been a golden age produced in part by the serendipitous confluence of unsustainable factors such as the stock-market boom, the post-Cold War "peace dividend," and a consumer borrowing binge of historic proportions. (Today, three years after the stock-market bubble  burst,  burs t, we are st still ill su sufferin ffering g som something ething of a hang hangover over from the eexcesse xcessess of that g giddy iddy era.) But as acc accidenta identall as that brief golden age may in some ways have been, and as irrational as the exuberance that propelled it was, the underlying forces at work in the late 1990s were real, and they began to reshape the economy in fundamental ways. We can now begin to see the enduring effect of those forces. In the short term—let's say the next couple of years—the majority of Americans can expect to keep improving their economic lot; however, a significant minority—mainly the newly jobless in certain old-line industries—  will watch their already dim prospects darken even further. And over the longer term—let's say ten years or more—a much broader swath of the American population will have reason to be very concerned about the economic future. THE R EVERSE EVERSE-LOTTERY  E  ECONOMY 

Recent media coverage of the economy has focused on the troubled state of the job market. We are told that  proportio  prop ortionally nally fewer adults are w workin orking g tod today ay th than an at any ttime ime in the p past ast te ten n yea years; rs; th that at no nott sin since ce the Great Depression have we failed to produce an increase in the number of jobs for such a long period of time; and that median household incomes have fallen. All this is true. Yet the overall picture that emerges from these facts is largely false. The "jobless recovery" has hardly been jobless: the unemployment rate—which stood at 5.9 percent in November—is lower than the average for the past thirty years, and is right at the threshold that most economists as recently as the mid-1990s  believed  believ ed w was as th thee low lowest est it could go w withou ithoutt trig triggerin gering g inf inflation lation.. Alth Although ough it is true true tthat hat ssome ome jo jobless bless peop people le have given up looking for work, and are therefore no longer even counted in official unemployment statistics, about half these people are teenagers, many of whom have forsaken the part-time-job market in order tto o focus on schoolwork—hardly the stuff of a national crisis. In fact only 5.4 percent of those who have left the work force fite the of "discouraged —people who have given up looking for work principally  becaus  because theydefinition don't believe they can fi find ndworkers" it. Those workers who have kept their jobs have for the most part prospered, despite the slackening of the job market. Real hourly-wage growth has continued through the recession and the recovery, albeit at a slower  pace than than in the late 1990 1990s. s. An And d wag wagee gro growth wth ha hass been broad broadly ly dis distribute tributed, d, mea meaning ning that mo most st wor workers, kers, including most of the middle class, have benefited. In fact, there is a wide gap between how most people feel the economy in general is faring (poorly) and how they feel they themselves are doing (quite well). A poll conducted by the Gallup Organization in August found that 75 percent of respondents rated the financial well being of "av "average erage A Americans mericans"" as "p "poor" oor" or "o "only nly fair fair," ," and that 89 percent conside considered red the employ employment ment situation specifically to be either "poor" or "only fair." (Nearly 50 percent rated it as downright "poor.") Yet when asked about their personal experiences, only 19 percent of those currently working said they were worried about being laid off, and even fewer worried about having their hours or wages reduced—the same  percen  percentage tageCenter, tha thatt feared th things ings 1997, when the eco economy nomy was bo booming. oming. Anoth Another er rece recent poll poll,, well by tthe he Pew Research foundthese that only 35inpercent of Americans disagreed with the statement "I'mntpretty http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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satisfied with the way things are going for me financially." The percentage of Americans disagreeing with that statement has been lower only three times out of twelve since Pew first began asking about it, in 1987. Similarly, the percentage of respondents agreeing with the statement "I often don't have enough money to make ends meet" has been lower only twice—in 2002 and in 1999.  None of th this is is to deny that th thee job market is weak weaker er tod today ay th than an it w was as in 1999 1999—and —and policy policymakers makers shoul should d be taking steps to strengthen it. But for most Americans things are still going pretty well. he real problem is neither flagging income for the unemployed nor the sheer number of workers laid off  but, rather, the eco economic nomic prosp prospects ects o off thos thosee wor workers kers who d do o lose their jobs. In Ju June ne the averag averagee dur duration ation of unemployment hit 20.1 weeks—the highest it's been since January of 1984. And 43 percent of workers who signed up for unemployment benefits in 2002 exhausted them. This may have been an unusually mild recession for most Americans, but it's been unusually harsh for those who have lost jobs. The problems facing recently laid-off workers—those who are still unemployed and also those who have found new jobs at reduced pay—are not likely to disappear as the economy picks up; these problems lie deeper than the business cycle. Over the past ten years, through boom and bust, unanticipated job loss has  becomee a mo  becom more re wr wrenchin enching g exp experienc eriencee for many work workers. ers. IIn n earl earlier ier de decades cades the un unemplo employment yment rate an and d the average number of weeks unemployed tended to move in tandem: out-of-work people had a harder time finding jobs during recessions and an easier time during recoveries. But by the early 1990s [see chart above] many unemployed workers had trouble finding new work even in a strong job market. In 1997, with the unemployment rate down to 4.7 percent, the t he average duration of unemployment stood at about sixteen weeks—higher than it had been in all but three years during the 1980s, when unemployment was much higher. When unemployed workers did find new jobs during the 1980s and 1990s, they had to settle for wages that were on average 14 percent lower than those in their previous jobs. A 14 percent pay cut is financially painful enough—but it's even more painful when it occurs amid a widespread expectation of steadily rising income. And since the mid-1990s the situation has been getting worse. In fact, a 2003 analysis by Henry Farber, an economist at Princeton University, reveals that when workers who lost their jobs finally found new ones, the gap between their new wages and the wages they would have earned (had they been able to stay in their old  jobs) was n nearly early triple what it would have been almost a deca decade de ago ago.. The gap iiss grea greatest test fo forr hig highly hly ed educated ucated workers. According to Farber's analysis of the most recent Displaced Workers Survey from the Bureau of Labor Statistics, covering 1999 through 2001, shows that workers with more than sixteen years of education saw an average reduction in income of roughly 23 percent upon finding new jobs; in the mid-1990s the reduction averaged only 12 percent. he worsening plight of the unemployed is closely related to changes in American business practice. As  productiv  prod uctivity ity h has as in increase creased d an and d glo global bal ccompe ompetition tition has inten intensified sified,, fir firms ms ha have ve co continu ntinually ally rrestru estructure ctured d their operations—not just by laying off workers in response to temporary downturns in demand but by eliminating positions, even whole classes of positions, altogether. The share of jobs lost owing to the abolition of positions rather than to slack work, plant closings, or other reasons has doubled since the early 1980s. Erica Groshen and Simon Potter, economists at the Federal Reserve Bank of New York, argue that the main reason higher unemployment has lingered so long into the current recovery is that most lost jobs have  been restru restructured ctured out o off exi existence stence.. Wor Workers kers whose jobs have been elimin eliminated ated o outrig utright ht of often ten ca cannot nnot find anything directly comparable, either because the work they do has become obsolete or because their skills are company- or industry-specific, and not easily transferable elsewhere. These displacements are still not exceedingly common, but they are quite damaging to individuals when they occur. In short, we have entered what might be called a "reverse-lottery economy." The broad majority of American http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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workers continue to do well; yet in any given year—even in boom times—a few workers hit the negative  jackpot  jackp ot an and d mu must st acce accept pt len lengthy gthy or ev even en pe permane rmanent nt re reducti ductions ons iin n livi living ng sstandar tandards. ds. IIncrea ncreasingly singly,, the these se unfortunates hail from a variety of educational backgrounds and occupations. (One recent study found that U.S. financial-service firms are planning to t o move more than 500,000 jobs—or eight percent of the total work force in that sector—offshore within the next five years. These relocations will include higher-status, higherincome jobs than such transfers have typically included in the past; jobs j obs in financial analysis, research, accounting, and graphic design are among those expected to be moved offshore.) In a society where many people buy on credit, counting on ever expanding good fortune, the decline in income from job displacement is especially hard to bear financially. It is hard to bear psychologically as well. As the anthropologist Katherine Newman observed in Falling From Grace: Downward Mobility in the Age of  Affluence  Afflue nce (1988), the downwardly mobile family "jealously guards its public face, even if this means that everyone must eat a dreary diet so that the children can have some stylish clothes for school." Displays of desperation by these families are presumably kept within the walls of homes they can no longer afford. THE MIRACLE OF A MERICAN MERICAN PRODUCTIVITY 

But here's the rub: the force that has produced deepening problems for reverse-lottery winners is the t he same as the force that has produced good fortune for many more Americans: the sudden and continuing acceleration of labor-productivity growth over the past eight years. Rising productivity is driving much of the change in American society. Yet its role is often misunderstood. As the economy has pushed through its second year of jobless recovery, the media have mistakenly cast rapid  productiv  prod uctivity ity g growt rowth h as the v villain illain in a simpl simplistic istic ccontes ontestt bet between ween peop people le an and d tec technol hnology. ogy. If produ productivity ctivity rises, this story goes, fewer people can generate the same output, and (all else being equal) unemployment will go up; if four workers can produce as much as five could only eight years ago, why hire the fifth? In the short term this is true; rising productivity has almost certainly helped to suppress new hiring after the recession. But  beyond  beyo nd tthe he sh short ort te term rm th this is sto story ry is simp simply ly wr wrong ong.. An And d it misses the b bigger igger pictu picture re en entirely tirely.. Productivity growth is the bedrock of a healthy economy over time. In fact, continued rapid growth in  productiv  prod uctivity ity is certai certainly nly tthe he be best—an st—and d arg arguably uably the m most ost im importa portant—fe nt—feature ature of th thee U.S U.S.. eco economy nomy today today.. It is no accident that past eras of high productivity growth (such as the 1920s and the 1950s) coincided with a national climate of energy and optimism. An annual productivity growth rate of 1.4 percent (roughly the average from 1973 to 1995) causes real national income i ncome to double every fifty years; increase the rate to 2.8  percentt (ro  percen (roughly ughly the av average erage in the 1950 1950ss and 1960 1960s), s), an and d real nation national al inco income me will doub double le in just tw twentyenty-six six years, and nearly quadruple in fifty fiftfastest y years. Throughout the second half of gains. the t he twentieth unemployment was lowest and real wages grew during eras of rapid productivity In somecentury individual years, of course, high productivity growth coincided with high unemployment or low wage growth; but over a longer  period  perio d of time—sa time—say, y, ffive ive ye years ars o orr mo more—hig re—high h pr product oductivity ivity grow growth th ha hass con consistent sistently ly bu buoyed oyed both incom incomes es an and d employment. Since the sudden acceleration in productivity growth eight years ago, economists have worried that it might  provee eph  prov ephemera emeral, l, or even illuso illusory—th ry—thee resu result lt of either a sho short-liv rt-lived ed te techno chnology logy boom or an excep exceptional tionally ly strong (and unsustainable) increase in demand. But these concerns have diminished markedly over the past three years: demand has cooled, and the high-tech bubble has burst, yet productivity growth has continued unabated. In fact, from 1995 to 2002 labor productivity grew at an average rate of 2.8 percent a year, matching the rate of the post-World War II "golden era" that lasted from 1948 to 1973. That's almost double the rate of growth from 1973 to 1995, and nearly one percentage point more than the annual average for the twentieth century as a whole. There growth may be continuing to accelerate; from 2001 through the first half is ofeven 2003evidence (a periodthat thatproductivity included a recession, which typically slows productivity http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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growth) it averaged an annual rate of about 4.1 percent. In 2002, the most recent year for which complete data are available, productivity grew by 4.8 percent—the highest annual increase since 1950. (One must be careful in interpreting these last figures: productivity growth typically accelerates in the early stages of economic recovery, and figures are often revised downward over time, as more-extensive data become available.  Nonetheles  None theless, s, at an ab absolut solutee min minimum imum there is no sign of a fallof fallofff in grow growth.) th.) he lesson here is that the New Economy is real. Most economists now believe that productivity—and living standards—will continue to rise rapidly over the next five to ten years (according to many of the estimates productivity will rise by two to three percent a year). The advances in information technology—particularly in computer processing power—that helped launch the boom have not slowed. Meanwhile, productivity growth in nontechnological industries, which remained low through much of the mid1990s, has accelerated, as managers begin to t o integrate cheaper, more powerful information technology into their businesses. (Indeed, the real exemplar of the New Economy may be not Kozmo.com—the Internet courier that burned through $280 million in venture capital before going bust—but Wal-Mart, the t he ubiquitous discount chain that has pioneered ways of using information-technology advances advances to cut costs.) Interestingly, the pattern we are now witnessing—productivity growth rippling from industry to industry after the initial acceleration in computer production—is similar to the pattern that followed the development of another "transformative technology": technology": the electric generator. In this case the resulting boom in productivity lasted well over a decade. High productivity growth in recent years has also allowed most Americans to enjoy wage growth even as unemployment has risen. And relatively high employment levels and continued wage growth most likely contributed to relatively strong consumer demand througho t hroughout ut the recession, mitigating its effects. Over the longer term broad-based productivity gains should mean not only higher incomes for most Americans  but also also ch cheaper eaper produ products cts and moremore-compe competitive titive U U.S. .S. in industri dustries. es. Th Thee wid widesprea espread d diff diffusion usion of ne new w tech technolog nology y will probably continue to give rise to products and services that would have been neither technologically feasible nor widely affordable just a few years ago. (Recent examples of such products include cell phones and iPods.) The combination of higher incomes and new products should spur both demand and production—and over the long run these will produce new jobs. Theoretically it's possible to conceive of a future in which  productivity  produ ctivity gains yield no ne new, w, wid widely ely ad adopted opted prod products; ucts; in which consu consumer mer co confiden nfidence ce and consu consumer mer demand never rise despite rising incomes; and in which employment therefore remains stagnant or even in decline. But history suggests that such a future is i s quite unlikely.  W INNERS INNERS  AND  AND LOSERS

For all the good that rapid productivity growth has yielded, its benefits have not been felt equally by all Americans—even among those who have managed to avoid layoffs. Nor is productivity growth by any means the only factor shaping our fortunes; other forces, more sweeping and just as fundamental, have pushed and  pulled  pulle d the vario various us so socioeco cioeconomi nomicc clas classes ses in diffe different rent direc directions tions.. Wh Which ich o off the these se fo forces rces prev prevails ails will will go a lon long g way toward determining the depth of class division in the United States in the coming years. Viewed through the lens of class politics, politic s, one of the most striking elements of the past quarter century has been what Gary Burtless, an economist at the Brookings Institution, calls "the slow erosion of bargaining power" among low-income and middle-income workers. Better information technology and more-sophisticated robotics have significantly reduced job opportunities for many types of "routine" laborers, such as factory workers and middle managers, especially as globalized production has allowed U.S. companies to move many  jobs—partic  jobs— particularly ularly low- and middle middle-skill -skilled ed jo jobs—to bs—to coun countries tries where wages are lo lower. wer. Incr Increased eased glob global al competitionincreased and the aggressive expectations of quarter) the financial (mainly inmanagerial the form ofnotions shareholders demanding earnings per share every have markets eroded traditional of "fairness" http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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in setting wages and benefits and replaced them with a relentless focus on reducing cost; many companies now refuse to pay workers more than their immediate ability to contribute justifies, regardless of how old they are, how long they've worked for the company, or how much they've earned in the past. On top of all this, increased immigration of low-skilled workers since 1970 has disproportionately increased the labor supply at the lower end of the economy, probably depressing wages for less skilled workers. This story—told repeatedly in recent years—is clearly reflected in the numbers. Between 1973 and 1995, while real wages for the top five percent of Americans rose (and while total income for the top five percent of American households increased by about 30 percent), the bottom half of the American work force experienced an outright decline in real wages. Median hourly wages declined from $12.54 to $10.44 per hour. But the numbers—and the story they reflect—changed in the mid-1990s. Since then, the upward pressure on wages associated with rapid productivity growth has been stronger than the downward pressure on the pay of many low- and middle-skilled workers that automation and the decline of benign corporate paternalism generates. Thus even socioeconomic classes that should be made worse off by the fact of technological changes (because technology displaces them from their jobs) may be left better off by the rapid pace of it (because wages rise and the job market tightens). This is basically the story of the late 1990s. Despite technological advances, continual corporate restructurings, and heavy job churning, the wages and incomes of workers of every socioeconomic status and education level increased, while the growth in income inequality slowed down. Globalization, immigration, and the substitution of machinery for labor have not stopped exerting powerful forces on the economy since 1995—but the effects of rapid productivity and economic growth have been even more powerful. The poor have done well, relatively speaking, in this economic environment. Jobs in such sectors as retail sales, hotel services, and basic health-care provision have proved tough to automate, and so haven't been substituted out of existence. Moreover, because jobs in the service sector—where the most low-skilled jobs have been created in recent years—are less affected by recession than are jobs in manufacturing, employment has been remarkably stable for the poor. And real wages for "McJobs," though still low in absolute terms, rose during the late 1990s as rapid economic growth tightened the labor market. Job growth and wage growth at the lower end of the economy—along with welfare reform—helped lift millions of people out of poverty since the mid-1990s; and a large portion of them have stayed out, even through the recent recession. The middle class, too, has done well recently. And although the New Economy has eliminated certain kinds of middle-class jobs, it has created others. Manufacturing, for instance, continues its slow decline, but construction work and other high-paying blue-collar fields have grown significantly since 1995; and technologically driven "job destruction" in middle management is outweighed by strong growth overall in white-collar fields. In short, concerns about an emerging job market in which some jobs pay six figures, many  jobs pay pay min minimum imum w wages, ages, aand nd a ffew ew job jobss exist in betw between een ap appear pear o overwro verwrought. ught. As un unemploy employment ment b began egan to rise in 2000, real median incomes did falter somewhat—but at the end of 2002 they were still six percent higher than in 1995, and 21 percent higher than in 1970. The contradictory forces that pull the t he middle-class and the poor up while simultaneously pushing them down have tended to push the wealthy and well-educated in only one direction: upward. Advances in information technology have complemented the skills of workers in analytic occupations (such as management consultants, financial analysts, and marketing executives), hence raising these workers' value. Globalization has almost certainly created more opportunities for this class of workers than it has eliminated; el iminated; white-collar U.S. workers are now able to manage, advise, or provide analysis for a growing number of international plants and  businesses.  busin esses. The sh shift ift tow toward ard a "winn "winner-tak er-take-all" e-all" society has p produ roduced ced rapid rapid p pay ay inc increases reases for eexecutiv xecutives es and high-end professionals. (And large reductions in the upper tax brackets have allowed high earners to keep more of their pay.) http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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Though growth in inequality slowed in the late 1990s, it did not stop; while incomes rose at every socioeconomic level, they rose fastest for the workers who were already earning the most money. Without significant policy shifts—toward much higher marginal income-tax rates for high earners, for example, or an immigration policy that strongly favors skilled immigrants over unskilled ones—the rich are likely to continue to pull away economically (and perhaps culturally and socially, as well) from the rest of society. At the moment it appears to be an open question whether in the coming years the middle class and the poor will advance quickly (as they did in the late 1990s) or stagnate (as they did throughout much of the 1970s and 1980s). We're poised on the cusp between broad-based wealth creation and stagnation: while productivity growth has helped keep wages rising for the employed, immigration and the continued movement of jobs to offshore locations weakens the labor market and depresses wages. Given the continuing rapid pace of innovation and productivity growth, it appears likely that broad-based income gains will eventually resume, and that the prevailing conditions of the next several years will more closely resemble those of the late 1990s than those of the 1970s. But for that to be assured of happening, unemployment will need to drop significantly  below six p percen ercent. t. An And d ho however wever much the ty typical pical middl middlee- or work working-c ing-class lass ffamily amily sees it itss inco income me ris risee on an absolute basis, the incomes of the richest families will likely improve even faster. SMOOTHING C API  APITAL TALISM ISM'S R OUGH OUGH EDGES

Whether or not the fortunes of the various socioeconomic strata rise or fall together in the future, the fortunes of individuals—regardless of what class they hail from—are more volatile today. t oday. For some workers rapid improvements in income and socioeconomic status may be punctuated by sudden and painful declines in both. This volatility has become one of the defining attributes of the economy. The flexibility of the American labor market—its ability to shift workers quickly from fading companies or industries to growing ones—is among the U.S. economy's greatest assets; but such rapid shifts are often bad for individual workers, at least temporarily. t emporarily. (For older workers, or for people who lack geographic mobility, these negative reversals are more likely to be permanent. A married worker, for example, may fare worse than other workers after being laid off, especially if a spouse's job has anchored the family to a particular community.) And many traditional remedies for worker displacement, such as protectionism and inflexible labor laws, are often rightly considered to hurt the nation's economic competitiveness. But there may be ways to help displaced workers without harming the economy. In "Are We Still a MiddleClass Nation?" (page 120) Michael Lind proposes that the federal government grant equity-market stakes to every citizen, so that all Americans, not just the richest, might draw extra income from investments. For both political and practical reasons Lind's plan would take time to implement. For the shorter term Robert Litan, an economist at the t he Brookings Institution, and Lori Kletzer, an economist at the University of California at Santa Cruz, have proposed a fairly inexpensive extension of unemployment insurance to cover workers who find new jobs that pay much less than their old ones. "Wage insurance" would make up a portion of the difference between old and new incomes for up to two years, so that the transition to a lower-income lifestyle would be more gradual. (A pilot program already exists for workers displaced by the movement of jobs overseas.) But wage insurance has potential as more than just a safety net; if unemployed workers knew they could more easily afford to take lower-paying l ower-paying jobs, they might feel freer to jump into whole new industries or career tracks; this would help the economy grow faster (by increasing the speed at which new industries grow) and might also ultimately increase the long-term income prospects of individual workers. A more radical variation on this concept comes from Robert Shiller, an economist at Yale, who believes that continuing financial-market innovations may soon enable private insurers t not o offer "livelihood insurance" that could protect workers from potential declines in their t heir occupations (thoughto against an individual worker's http://www.theatlantic.com/cgi-bin/send.cgi?page=http%3A//www.theatlantic.com/issues/2004/01/editors.htm

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underperformance within a flourishing field). Similar products might insure against the eventual devaluation of underperformance specific academic degrees in the United States (such as those in software engineering or Russian language), or even against declines in the performance of the U.S. economy as a whole, relative to the rest of the world. (As Shiller notes, the fact that the past century was a good one for America does not necessarily mean that the next one will be.) Collectively, these products might lessen the large and arguably increasing risks inherent in the U.S. capitalist system. These are bold ideas; it may be hard at first to wrap one's mind around them. And it is perhaps ironic that financial markets—which are regarded by many people as amoral if not immoral—might ultimately solve some of the problems that socialist and utopian thinkers have been trying for centuries to address. But as improbable as livelihood insurance may sound, advances in data collection, data analysis, and financial-risk theory are lowering the technical barriers to such a system. Government action could help the creation of livelihood insurance on a large scale. Part of the government's role would be technical—for tec hnical—for instance setting the standards for the collection and sharing of personal income data that are necessary if livelihood insurance is to work. But two equally important tasks would be the articulation of a new vision of society—one where people are protected against the unexpected shocks that accompany rapid economic change—and the promotion of financial-services products that can sustain that vision. Without large markets covering a wide range of occupations, carriers offering livelihood insurance might have difficulty hedging their risk sufficiently. Economists argue that the benefits of technological advance, freer trade, and greater competition are great enough that when—as inevitably happens—some people suffer as a result of these forces, those people can in theory be fully compensated for their losses. But in practice such workers are rarely, if ever, compensated—  and the consequences of polit the setbacks they suffer are more severe in the New Economy thanffrom theydifferenc were in es thein  past. Our econ economic omic (and political) ical) syste system m ca can n tol tolerate erate a cer certain tain llevel evel of in inequa equality lity rresult esulting ing rom diff erences ability and work ethic (though (t hough just how much is an open question). But too often inequality is gratuitous; many  people's  peopl e's eco economic nomic fortu fortunes nes ar aree buf buffeted feted by fa factors ctors they ccannot annot reaso reasonably nably predi predict ct and over which they h have ave no personal control. As a society we should seek to minimize the randomness of fortune that is inherent in democratic capitalism. THE LONG TERM

It is hard to say at any given point in time what the exact best recipe for growth is; economic and business environments vary widely from boom to bust. Yet when they stand back from the vicissitudes of the business cycle and consider longer periods of time, most economists agree that three factors are crucial for rapid, sustainable economic growth: new ideas and the technologies they create; business investment in new technologies and equipment; and ample "human capital": the collective skills and knowledge of the work force. In 2000, though expectations of what the stock market and the economy in general could produce were wildly unrealistic, there was genuine cause for optimism. Ideas and innovations were proliferating. Investment in these ideas and the technologies they created was considerable. And a flexible, highly educated work force stood ready to adopt new technologies quickly, and to generate still more innovations for the future. Three years later these conditions—a decline in the level l evel of business investment notwithstanding—remain largely in place. Moreover, technologies and business practices practice s developed before the bust (and not yet fully exploited) have generated a momentum that should help the economy over the next several years. he long-term picture, however, may be bleaker. Two key factors that have historically given the U.S. economy a competitive advantage—a superior education system and an attractive investment climate—  now appear to be eroding.

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The Atlantic | January/February 2004 | America's Fortunes | Editors

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To a substantial degree America's economic strength during the twentieth century was attributable tto o the quality of its education system, and in particular to the expansion of educational opportunity to a large  proportion  prop ortion of its citizens citizens.. Am America erica b began egan that ccentury entury with the wo world's rld's best-e best-educat ducated ed po populatio pulation, n, an and d sp spent ent much of the next hundred years further improving its standing. In 1940, 30 percent of American workers had graduated from high school and fewer than six percent had graduated from college. By 2000, 89 percent had graduated from high school and 28 percent had graduated from college. Overall, Americans born in 1975 spent nearly twice as many years in school as Americans born a century earlier. Over the past twenty years, however, this trend has markedly slowed, and is expected to do so further in the coming decades. Whereasover fromthe 1980 labor force with a by college increased by 8.6 percent, nextthrough twenty 2000 years the thatproportion proportionofisthe expected to increase only education 1.5 to five  percent—d  perce nt—despite espite the ffact act th that at the finan financial cial b benefi enefits ts of a col college lege educa education tion have been incre increasing asing.. In most other economically advanced countries the average number of years people stay in school is now growing faster than it is in the United States—and young adults in a handful of those countries are now more highly educated, on average, than their U.S. counterparts. Ever since the launch of Sputnik, in the late 1950s, Americans have  been concer concerned—p ned—perhap erhapss exces excessively sively so—wi so—with th the quality of th thee edu education cation that U U.S. .S. ci citizens tizens receive receive.. Bu Butt only more recently has the United States seen its relative advantage in quantity of education begin to decline. The consequences of this stagnation must color any discussion of the future of the U.S. economy. (Two of its main causes are discussed elsewhere in "State of the Union." See "The Other Gender Gap," page 137, and "The Tuition Crunch," page 140.) As the rate at which we produce college graduates begins to slow the rate at which the U.S. economy creates and adopts new technologies and products will also slow. Income inequality will no doubt the smaller small er the of supply of collegeworkers, graduates, higher incomes are likely to command. Andgrow: the larger the supply less-educated thethe lower theirthe wages willthey be. Indeed, every high school student who chooses not to attend college hurts not only his own income prospects but also (by adding to the pool of workers competing for low-skill jobs) those of other less-educated workers. Just as our declining educational progress threatens the ability of the work force to absorb innovations quickly, so the deterioration of the government's fiscal position undermines the willingness of firms to invest in new technologies. The long-term fiscal problems of the federal government are covered in detail elsewhere in this feature (see "The $45 Trillion Problem," page 146). Suffice it to say here that the size of the budget deficit can have a real impact on the economy. Whereas low levels of debt keep interest rates down and inspire the confidence of foreign investors, high levels of debt ultimately discourage private investment by raising interest rates. It is no coincidence that as the federal budget swung into surplus in the second half of the 1990s, after a  period  perio d of annu annual al def deficits icits aaverag veraging ing aalmost lmost four percen percentt of GDP iin n the early part o off tha thatt deca decade, de, d domest omestic ic investment a share rose,without by 3.5 calamity percent. And although the country has managed to survive periods of high and as rising debtofinGDP the past (in the late 1980s, for example, and during World War II), we are embarked on a period of deepening annual deficits of unprecedented size, with no end in sight. According to the Congressional Budget Office, if the government does not make significant changes in spending or taxation, debt will mount rapidly over the next few years, reaching $10 trillion by 2010—and that's before it begins an exponential increase as the Baby Boom enters retirement. reti rement. The long-term fiscal crisis facing the United States comes primarily from a growing imbalance between what the government spends—primarily on Medicare and Social Security—and what it reaps in taxes, which were not high enough to sustain current entitlements even before the series of sharp tax cuts enacted si since nce 2000. Today we're simply foisting the many costs of this imbalance—rising debt, slower growth, and ultimately either higher taxes or broken promises—onto future generations.

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The Atlantic | January/February 2004 | America's Fortunes | Editors

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decline. Historically, America has been an adaptable, resilient nation; decline is not inevitable. But unless we devote more attention to education and fiscal balance, two issues that are absolutely central to long-term prosperity, the conditions that have produced widespread growth will dissipate. As weak as today's economy may look relative to that of 1999, at the rate we're going we may look back on 2003-2004 in ten or twenty years with wistful longing. The URL for this page is http://www.theatlantic.com/issues/2004/01/editors.htm.

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Clos Close e Wind Window ow

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