The avid pursuit of total security is an illusion
As a society, we are now completing a basic economics course that has lasted about three decades. During that time. we made some colossal blunders, have slowly (and often painfully) learned from them and are now reaping some reward from our self-education. The largest blunders were allowing inflation to get out of hand and mismanaging some of our major corporations. And the benefits of correcting these problems may now explain why, journalistically speaking, the economy is so boring." Bad news" is pretty scarce.
In 1995 the stock market has risen about 15 percent, by the Dow Jones industrial average. Commentators debate whether it has overreached or will race to still-higher highs. Meanwhile, economists wonder whether the Federal Reserve has achieved its vaunted "soft landing": economic growth fast enough to keep unemployment low and slow enough to preclude higher inflation. A majority of economists seem to think that it has. But even skeptics do not anticipate either a very severe recession -- a "hard landing"--or a big surge in inflation.
Beyond this calm, there's evidence of several favorable long-term trends. One is a decline in inflationary expectations, Despite four years of recovery, labor costs rose by only 3.2 percent last year, which is the lowest rate since 1955. Easing interest rates on bonds and mortgages. which are heavily influenced by inflation forecasts, are another sign of long-term price optimism. (Rates on 30-year Treasury bonds are hovering around 7 percent, down more than a full percentage point since late last year.) The second favor-able trend is an improvement in the growth of productivity. Since 1990. output per worker hour has risen by about 2 percent a year. much better than in the Kate 1970s (0.7 percent annually) or the 1980s (1.2 percent).
Initially, higher productivity growth has boosted corporate profits. In 1994 they rose by 12 percent. and profit margins are better than at any time since 1978. But if sustained, higher productivity means higher average living standards, as it always has. Economist Stephen Roach of Morgan Stanley believes that the underlying productivity trend has improved by at least 0.5 percent a year. "Over the span of 10 years, such a boost in the nation's growth potential cumulates to about $300 billion [in extra annual income]," he recently told a congressional committee.
Of course, there are those who say that the economy's gains have exacted a terrible social cost -- mass anxiety about job security and corporate downsizing. Clearly, management attitudes and practices have altered. AMID RECORD PROFITS, COMPANIES CONTINUE TO LAY OFF EMPLOYEES, headlined The Wall Street Journal recently, FACING THE NEXT RECESSION WITHOUT FEAR: NEWLY LEAN CORPORATIONS EXPECT TO DO FINE WHEN TOUGH TIMES COME, said The New York Times in a similar story.
People would be crazy if they weren't more anxious. "The implicit employment contract that many people took for granted is either in grave jeopardy or it's gone," writes management consultant Judith Bardwick. The basic agreement was that "if you didn't screw up too badly anti your loyalty was obvious . . .the organization took care of you." No more. By now, everyone must know that hardly any major company will make this sort of sweeping commitment. Almost no one is completely safe from the corporate guillotine.
All these problems are genuine--and all need qualification. True, incidents of corporate cruelty or clumsiness abound: an Ohio man recently brought his daughter to his company for "Take Our Daughters to Work Day"--and was fired. But popular fear of change has outrun actual change. Companies aren't tossing everyone into the streets. There is "no evidence . . . that long-term jobs are becoming less common," reports Princeton economist Henry Farber in a new study. Among men 48 to 84, about 84 percent had been in their job more than 10 years in 1978; in 1993, that was 52 percent. For men, job tenure has eroded among workers with less than a high-school degree: but the tenure of women is rising, because more have career jobs.
Sure, there's heightened anxiety, but that's not all bad. Up to a point, uncertainties about job security and the next recession compel companies--and workers--to remain competitive and also cheek inflationary behavior. There is a psychological continuum here, as Bardwick argues. Too much fear can be paralyzing; but some is often better than none. Companies fearful about losing customers may restrain price increases or improve quality. Workers worried about their jobs may do them better.
It is in this sense that we are reaping the rewards of three decades of bitter experience. Chastened companies and workers are less sloppy, more accountable and more productive. Lower inflation creates more faith in the future. One result is that business investment in new equipment (machinery, computers) is now growing more rapidly than at any time since the early 1970s, reports John Berry of The Washington Post. Manufacturing capacity is rising by more than 4 percent a year, the fastest rate in 25 years.
The twin blunders of recent decades, though committed by different groups of people, stemmed from a common illusion: that the economy could, without impairing its performance. be purged of insecurity and instability. On the one hand, economists felt they could end business cycles and sustain "full employment"; that led, through easy money and credit, to double-digit inflation. On the other hand. executives felt they could expand their corporate empires forever; that led to bloated bureaucracies and high costs. From these errors came severe recessions (those of 1974-75 and 1981-82) to exorcise inflation and harsh corporate makeovers to restore competitiveness.
A society that accepts the inevitability of some insecurity may suffer less of it than one that avidly pursues absolute security. Gradual and modest change may avoid delayed and wrenching change. This is important because, at some point, the economy will cease to be boring. Something bad will happen: higher inflation, a recession, industrial turmoil. The impulse to ease the hurt, though natural, may be wrong. The lesson of our economic s course is that a market society must often tolerate change, even unpleasant change, because the alternative is worse.
