February 15, 2006
Anxiety Amid The Prosperity
WASHINGTON -- 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 1982, we've had only two recessions, lasting a combined
year and four months, with peak unemployment of 7.8 percent (June
1992). By contrast, in the previous 13 years, we had four recessions
lasting altogether about four years and having unemployment as
high as 10.8 percent (November, December 1982).
industry of economists is now 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.
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
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 one-in-10
chance of losing that position within a five-year period; by 1998,
the odds had increased to one in four.
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, reports Hewitt Associates.
sort of cost-conscious behavior also leads to more layoffs, even
among career workers. In 1983, 58 percent of men 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).
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
2006, Washington Post Writers Group
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