The Fears Under Our Prosperity

By Robert J. Samuelson
Thursday, February 16, 2006

A puzzle of our time is why the economy has become increasingly stable while individual industries have become increasingly unstable. The continuing turmoil at General Motors and Ford simply reflects this more pervasive industrial instability -- also in airlines, telecommunications, pharmaceuticals and the mass media, among others. Hardly a week passes without layoffs from some major company, which is "downsizing," "restructuring" or "outsourcing." And yet, the broader economy has undeniably become more stable. Since the early 1980s, we've had only two recessions, lasting a combined year and four months and involving peak unemployment of 7.8 percent. By contrast, from 1969 to 1982, we had four recessions lasting altogether about four years and having unemployment as high as 10.8 percent.

A cottage industry of economists is cranking out studies on these questions. One intriguing theory -- completely counterintuitive -- is that the greater overall stability stems in part from the increased instability of individual industries. You would, of course, expect the opposite: As individual industries became less stable, so would the larger economy.

But the reality may be more complex. Different industries may go through cycles that are disconnected from each other, argue economists Diego Comin and Thomas Philippon of New York University. All don't rise and fall simultaneously. To simplify slightly: Housing, autos and farming might strengthen, while computers, airlines and chemicals weaken.

Assuming there's something to this theory -- which seems a good bet -- it helps explain the riddle of why there's so much anxiety amid so much prosperity. As Americans stock up on BlackBerrys and flat-panel TVs, it's hard to deny the affluence. But people also look to their employers for a sense of confidence about the future -- and here doubts have multiplied, because more companies and industries seem assailed by menacing forces.

We can all identify the usual suspects. Globalization. Deregulation. Greater domestic competition. In a series of papers, Comin, Philippon and various colleagues have shown that, for most businesses, sales, profits and employment have all become more volatile in recent decades. They bounce around more from year to year, suggesting greater industry instability. Competitive pressures have dramatically intensified. One telling statistic: In 1980 a firm in the top fifth of its industry had about a 1-in-10 chance of losing that position within a five-year period; by 1998 the odds had increased to 1 in 4.

Feeling threatened, corporate managers have altered pay and employment practices. In 1994, economists Peter Gottschalk of Boston College and Robert Moffitt of Johns Hopkins University showed that annual wage gains also had begun to bounce around more in the 1980s (in technical lingo, there was more variation around the average). Now, Comin and Erica Groshen of the Federal Reserve Bank of New York and Bess Rabin of Watson Wyatt Worldwide have connected these erratic wage increases to firms' fluctuating fortunes. In good years, companies enlarge the pot for wage and salaries, says Groshen; in bad years, the pot grows less or shrinks. About four-fifths of big U.S. firms also resort more to bonuses, personal incentives and stock options, Hewitt Associates reports.

The same sort of cost-conscious behavior also leads to more layoffs, even among career workers. In 1983, 58 percent of men ages 45 to 49 had been with their current employer 10 years or more, reports the Bureau of Labor Statistics. By 2004, the comparable figure was 48 percent. Little wonder that we have rising job insecurity, despite lower average unemployment.

Not by accident do many of these trends begin, or strengthen, in the 1980s. From 1980 to 1983, the Federal Reserve crushed inflation, which fell from 12.5 percent to 3.8 percent. Inflation dulls competition. Sloppy managers can simply raise prices. Because most companies are rapidly increasing prices, customers have a harder time discriminating. Inflation also comes to dominate the business cycle. It overwhelms other influences. Once inflation declined, competition -- based on prices, new products and technologies -- intensified. Differences among sectors became more pronounced.

So we return to the original puzzle: Why does an economy of greater stability have industries of lesser stability? The answer is competition. An intensely competitive economy enhances overall stability by holding down inflation (which is itself destabilizing) and spreading economic disruptions throughout the business cycle (rather than letting them accumulate for periodic, massive downturns).

But the solution to one problem creates other, though smaller, problems. Except during unsustainable booms, say, the late 1990s, even good times are punctuated with insecurities, disappointments, job losses, broken promises and shattered expectations. What may be good for us as a society may hurt many of us as individuals. The unending challenge is to find the necessary social protections that help the most vulnerable without frustrating desirable, if sometimes painful, change.

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