An Outline of the
American Economy

Part 1
Introduction

PART 11

An Afterword

We have already noted that there is a significant contradiction between a simple model of the market system and the factual history of the American experience. The United States has always relied to some degree on the government as a creative economic agent. On the other hand, it has also always had some degree (at times a very large degree) of distrust of the competence of government. Labor, agriculture, the small firm, the large corporation, the Federal Reserve System and the government have all interacted to produce a variegated economic system.

What we have presented here has been mostly the historical record as explained by reason, theory and past experience. But what of the future? Predicting the future in any area, much less the dynamic, volatile field of economics, is a risky occupation. Doubtless the future is influenced by the past, but even the past is not without its contradictions. Furthermore, the future does not have to rely on the past. No one knows what new ideas, inventions or technical applications are around the corner. In the past, such developments (and the effect on productivity rates they can induce) have had far-reaching consequences for the economic world. They have provided the answer to such questions as: Which industries will flourish or fail? What kinds of jobs will be made available? What will be the standard of living for those who hold those jobs? And if it seems futile to speculate as to the specifics of these changes, it might nevertheless be useful to discuss the context in which they will take place.

INFLATION OR SLOW GROWTH?

By the late 1980s and early 1990s, inflation had not disappeared, but Americans were enjoying a level of inflation that was relatively low and stable compared with the 1970s. This resulted in large part from the severe recessions and tight monetary policy of the early 1980s. But many Americans were not totally convinced that the problem of inflation had been permanently solved. They suffered a scare in 1990 when, as a result of an outbreak of war in the oil-rich Gulf, the price of petroleum rose sharply on the world market. It declined again after a few months, and after hostilities had ceased the incident appeared not to have left lingering inflationary after-effects.

But the incident showed how vulnerable the U.S. economy is to sudden shocks. The 1990 oil shock appeared to help tip the U.S. economy into recession in 1991. By then, the major concern of many Americans was gradually shifting from fears of renewed inflation to questions about how soon there would be an economic recovery, how robust the recovery might be, and whether after an initial upswing the economy might suddenly slide downward -- a phenomenon known as a "double-dip" recession.

High interest rates inhibit economic growth, and interest rates were already high, in part because of large U.S. budget deficits and the prospect that they might continue indefinitely. In addition, economists anticipated demands for large amounts of capital for Eastern Europe -- a part of the world that was desperately trying to cast off the shackles of socialist controls and convert to market-based economies.

There were other reasons for concern about the robustness of an economic recovery. As a result of the lending excesses of the 1980s, which left a legacy of heavy indebtedness and crippled financial institutions, U.S. banks and other lenders had tightened lending standards in the 1990s. Indeed, the entire financial sector was under strain, as banks, savings and loans, and some insurance companies, hobbled by portfolios of poor-quality debt, struggled to remain afloat by getting injections of capital or merging. But more than a few toppled into bankruptcy, and some became insolvent.

Partly as a result of these problems, Americans were raising more and more questions about whether the structure of the U.S. financial system was suitable to global competition in the waning years of the 20th century. Only a few decades earlier U.S. money-center banks had been prominent in the ranks of the world's biggest banks; by 1991, there were none left among the top 20. While bigness is no assurance of strength, it was clear that the structure of American banking was obsolete, dominated by earlier-era thinking about the need for many small-town banks to lend money to farmers, as well as the imposition of numerous restrictions on banks during the Great Depression. But efforts to get agreement on a package of reforms proved difficult.

THE NEED TO RESTRUCTURE

As has been noted before, certain themes in economic history have tended to repeat themselves. Economic restructuring is one of them. And it is almost always painful. Many Americans had seen variations on it before: the consolidation of the agricultural sector that went on throughout the 20th century, pushing many farmers off their land; and the massive restructuring of the manufacturing sector during the 1970s and 1980s, which shrank the number of factory jobs drastically, all but depopulating some old U.S. industrial communities. It is an example of the "creative destruction" cited by the economist Joseph A. Schumpeter as the means by which capitalism reinvigorates itself; in the end, the restructured sector may be smaller or different, but it is stronger and more fit to endure the rigors of global competition. Meantime, those lost jobs are replaced by new ones in industries with more potential. In the late 20th century, those jobs were increasingly in such high-technology industries as computers and biotechnology, and in fast-expanding service industries such as health care and computer software.

HOW MUCH GROWTH?

One of the major issues facing the American public in the late 20th century had to do with growth. Economic growth has been at the core of American success: despite periodic depressions or recessions, the U.S. economy over time has continued to grow. The economic "pie" was always getting large enough for new generations of immigrants to carve themselves a slice.

Still, the voices of those who argue that a high rate of economic growth cannot be maintained, or perhaps might have to be forcibly constrained, had become increasingly loud. While no one accepted all the positions taken by nogrowth or slow-growth advocates, there clearly had been a weakening of belief in the idea that unconstrained, uninhibited growth was automatically good in itself.

For example, the development of land was being questioned as never before. In the 1990s, developers were required to file environmental impact reports with various levels of government. Local planning commissions and a number of federal agencies, such as the Environmental Protection Agency, were conducting research and administering programs in the name of safe, well-planned, economic development.

How much pollution is too much? How much open space are Americans willing to abandon in the drive to create new jobs? How many jobs should be sacrificed in order to protect endangered wildlife? (Some Americans were delighted -- and others enraged -- by a decision in 1991 to curtail timber cutting in certain federal forests in order to preserve the existence of an endangered species of owl.) How will decisions on these and other questions affect the overall quality of life? These are hard issues that generate almost as many opinions as there are interested parties.

Similar concerns on a global level were making their way to the forefront of U.S. policymakers' agendas (as well as those of other nations): How to deal with environmental challenges such as climate change, ozone depletion, deforestation and marine pollution. Will coal-burning power plants and gasoline-powered automobiles have to be constrained to limit emissions of carbon dioxide and other "greenhouse" gases, so-called because they are believed to contribute to a phenomenon known as global warming? If global warming occurs, will it lead to devastating changes, such as the destruction of rich agriculture-producing areas like the American heartland? Because of the huge size of its economy, the United States has necessarily become a major actor in such matters.

These questions and others like them go to the crux of the debate about future economic growth. What is an acceptable level of economic inequality in a nation as affluent as the United States? Would a prolonged period of slow or no growth, coupled with declining real incomes bring with it a host of new and possibly explosive social, political and economic problems -- problems that can barely be discerned from today's perspective?

Given the continuing existence of budget deficits, not just at the federal level, but also at the state and local levels, public funds seem sure to be limited. Will government maintain its role of watchdog and regulator? What will become of the services provided by the various forms of government? Will they be increasingly turned over to the private sector? Should such services continue to be provided at all?

As in the past, the decisions made in the future will substantially affect the shape and character of the U.S. economy.

Thus, more than two centuries after the birth of their nation, Americans continue to face many challenges. But as they had done 200 years earlier, immigrants continued to flood into the United States. In the 1990s, they were no longer coming in such great numbers from Europe, but from Asia and Latin America. For them, America was still what it had always been: the land of opportunity.

An Outline of the American Economy