[Mb-civic] The Fears Under Our Prosperity - Robert J. Samuelson - Washington Post Op-Ed

[William Swiggard]

The Fears Under Our Prosperity

By Robert J. Samuelson
Thursday, February 16, 2006; A27

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.

http://www.washingtonpost.com/wp-dyn/content/article/2006/02/15/AR2006021502002.html?nav=hcmodule
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