Dimensions: 6'' x 9'' 288 pages AEI Press  (Washington) Publication Date: December 1999 Hardcover ISBN: 0844741035 Price: $ 19.95 Add to Cart   Examination Copies

December 1999
The Illustrated Guide to the American Economy, Third Edition
By Herbert Stein and Murray Foss

This book consists of more than 120 factual statements--each illustrated by a page of color charts and explained in a page of text--that provide a broad picture of the U.S. economy. The following summary is meant to convey the scope and the major themes of the book.

Herbert Stein, a former chairman of the President's Council of Economic Advisers, had long been a senior fellow at AEI before his death in September 1999. His other books available from the AEI Press include What I Think: Essays on Economics, Politics, and Life(1998); On the Other Hand: Essays on Economics, Economists, and Politics (1995); and Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton (revised edition, 1994). Murray Foss, who was the senior staff economist in charge of forecasting for the Council of Economic Advisers, is a visiting scholar at AEI.

America Is a Rich Country

Our best overall measure for gauging economies of different sizes is the per capita gross domestic product--the sum of the total output of goods and services produced within the borders of a country, divided by the population. Total output per capita is significantly higher in the United States than in other large "rich" countries. Comparisons for 1998 based on the purchasing power of different local currencies--rather than exchange rates--show that the per capita GDP of the United States was 15 percent above Switzerland's, 25 percent above Canada's and Japan's, and 33 percent above Germany's. For both Sweden and the United Kingdom, the margin was 43 percent or more.

Highly industrialized countries like those contain only a small proportion of the world’s population. More than 70 percent of the world's population lives in countries with a per capita GDP less than 20 percent of that of the United States, but the gap has been narrowing for some of the largest countries.

Many charts in this book date back to 1929, and a few go back to the late nineteenth century. One chart shows that, since 1889, real GDP per capita has increased at an average annual rate of slightly more than 2 percent. Average growth was about 2 percent from 1889 to 1929 and, despite the Great Depression, about 2.4 percent from 1929 to 1973. In the past quarter-century, the growth rate has slowed down, mainly because the rate of growth of productivity--of output per employed person--has slowed down. Other industrialized countries have experienced a similar decline in growth during this period.

Although we usually measure the nation's performance by production (GDP), we can also measure it by the national income, which shows, broadly speaking, the income received by labor and capital for what each produces. Most of the national income--about 70 percent--is the labor share, or what is called employee compensation: wages, salaries, and fringe benefits. That share has risen since 1929 because of the increased importance of Social Security and private benefits such as health insurance. Fringe benefits now constitute some 12 percent of the national income.

Corporate profits dominate the income share attributable to capital. That share, after taxes, reached a peak in the 1960s but declined in the 1970s and 1980s. The strong expansion in the 1990s has brought the profits share close to the 1960s peak.

Productivity

In 1997, America's real GDP was more than five times its level a half-century earlier. Part of that increase in production came from the use of more labor and capital and part came from the more efficient use of labor and capital, that is, from increased productivity. We are especially interested in measuring productivity growth because rising productivity underlies rising living standards and most of what we think of as economic progress. If productivity growth slows down, so will the rise in living standards.

Over the past half-century, private business output grew at an average annual rate of 3.4 percent. Inputs--labor and capital combined--grew at 2.1 percent per year. The difference represents what is called multifactor productivity. That grew at an annual rate of 1.3 percent. Although that productivity rise is a large part of the total rise in output, economists have only a limited understanding of what lies behind the productivity increase. Part of the rise resulted from more research and from better labor quality because of more education, but those factors do not explain the whole story. Economists are also uncertain about why productivity has grown more slowly in the past quarter-century than in the corresponding period after World War II.

The Labor Force

The 1990s have witnessed a continuation of two well-established trends: the increased relative participation of women in the labor force and the decreased relative participation of men. In 1948, the women’s participation rate in the labor force was 38 percent of the men’s; in 1998, it was 80 percent. The character of jobs has also changed as management has substituted capital for labor, especially on the factory floor. In 1958, blue-collar jobs were 87 percent of white-collar jobs in the economy; by 1998, the blue-collar proportion had fallen to 42 percent.

New data on the labor force with breakdowns by education show that the more education an individual has, the likelier that person is to be employed. At least since 1970, differences in labor force participation rates broken down by education have become wider. Among older men without much education, retirement might seem a preferable alternative to jobs that have few prospects for advancement and are subject to layoffs from recessions and downsizing.

Leisure and Real Income

The labor statistics also suggest how leisure time has increased for men but probably not for women. Men are living longer and are spending fewer years working than in the past. In 1990, a man aged twenty could expect to experience seventeen years in retirement as against only four years at the start of the twentieth century. Each year, moreover, entails fewer hours of work, although the 1990s have witnessed some flattening in the long-term downward trend in hours worked per year. Life expectancies for women have risen more than those for men, but because women are employed to a greater extent than formerly, their leisure time--measured by the difference between life expectancy and (paid) working life expectancy--has gone down, at least in the second half of the twentieth century.

Changes in real income can be calculated in many different ways, depending on how income is defined and what price index is used. Some well-known series, such as the Bureau of Labor Statistics series on real average hourly or weekly earnings of "production workers," show declines since the early 1970s, but that situation yields an inaccurate picture of the course of real wages. For one thing, average weekly earnings have declined to some extent because many workers new to the labor market have chosen to work a relatively short week. Similarly, some family income series show very little growth since 1973. When better price indexes are used--some only recently available--and an allowance is made for the decrease in family size since 1973, the rise since 1973 is considerably greater. Even so, since 1973 the growth of real family income has undoubtedly slowed down, and production workers have done less well than average over that time.

Income Distribution and Poverty

As has been true in all times and all places, the distribution of income in the United States is unequal. In 1997, the bottom fifth, or quintile, of families, when ranked by the size of their money income, received 4 percent of aggregate income, whereas the top quintile received 49 percent. Over the past twenty years or so, the shares of income in all quintiles except the top fifth have declined, but some reasons for that drop are not well understood.

Changes in family structure at the bottom quintile have had important, negative economic effects. That quintile has been increasingly populated by young unmarried women, whose education and productivity are low, while the highest quintile is increasingly populated by families with two employed and educated adults. In 1979, a woman with a college education earned 34 percent more than a woman with only a high school education. In 1997, that difference had widened to 73 percent.

The degree of income inequality depends heavily on the definition of income. The lowest-income families are especially sensitive to the inclusion or exclusion of various government transfers, which enhance income, or taxes, which decrease income, unless the tax is negative, like the earned income tax credit. Most studies of income inequality omit from income an important factor, namely, the imputed return on equity from homeownership. Some analysts believe that consumption is a superior way to measure the relative position of families. If families are ranked according to their consumption expenditures, the unequal distribution apparent in income data diminishes considerably.

The official poverty rate has fluctuated around a rather flat trend over the past twenty years. The rate appears to be somewhat higher than in the late 1970s but much lower than in the early 1960s, when the Census Bureau published the first official poverty figures. There is no single definition of poverty. Indeed, the Census Bureau itself provides fourteen different standards for defining poverty. Even when a definition is chosen, different data sources can yield widely different figures on poverty.

Price Indexes and the Quality of Life

Both previous editions of The Illustrated Guide paid close attention to the quality of the numbers that measure the main aspects of the economy and their important parts. This new edition devotes several pages to price indexes. Price indexes are important because they are needed to derive measures of real income, or income adjusted for inflation. They are needed also to translate figures such as nominal retail sales into real retail sales. That kind of translation is fundamental to calculating real GDP.

The official price indexes of the Bureau of Labor Statistics, and notably the consumer price index, have improved in recent years because of continuous research by the BLS and criticisms of the CPI by the panel of economists known as the Boskin Commission. The commission estimated that the CPI was biased upward by about 1 percent per year in recent years. The main sources of bias came from the use of fixed base period weights; the inadequate treatment of quality change; slowness in accounting for new goods and services; and inadequate accounting for new types of lower-price retail outlets.

Some of these problems, such as the treatment of innovations, are inherently difficult and are not likely to be solved soon. Even if these statistical problems were solved, we must recognize that the well-being of the average family is affected by much more than transactions made in markets. How well off we are is affected by our health, by the environment, by the time spent caring for children and doing housework, and by the political and social conditions under which we live, among other things. Even when we have reliable figures on changes in real income, we still have no adequate way to take account of the many important aspects of living that are not captured by measuring real income.

The United States in the World Economy

Globalization is a word everyone uses today. One need only look at exports and imports in the national accounts to see how transactions with the rest of the world have increased in the past half-century. In the 1950s, the sum of exports and imports was 8 percent of GDP, but in the 1990s, that sum was 24 percent. The long-term increase is a consequence of the lowering of tariffs and of other government barriers to international trade; new forms of business organization; and reductions in the costs of transportation and communication. Rising real incomes, especially among the industrialized countries but also among developing countries, have fostered the growth of trade. Greater openness in international markets permits countries to concentrate on those products and services that they generate best and thus leads to lower costs and prices. The United States has benefited from trade but has not escaped the costs of increased competition from abroad. That pressure, however, is not unique to foreign trade: U.S. businesses and industries must constantly face competition from new and more efficient domestic businesses and industries.