Sizing Up Downsizing
The Market Economy Has Not Killed the American Dream
OCTOBER 01, 1998 by CHRISTOPHER LEE
Christopher Lee is associate professor of economics at St. Ambrose University, College of Business, Davenport, Iowa.
Critics of voluntary cooperation through free markets typically describe one aspect of its wealth-creating dynamic as “downsizing.” They allege that such adjustments are, on balance, harmful.
The news media, as well as explicit market opponents, use “downsizing” to describe the alleged loss of millions of jobs that have been sacrificed on the altar of corporate greed. According to National Public Radio, the 1980s and 1990s witnessed “massive layoffs” by corporations that pursued short-term profits designed to increase stock values. The condemnation comes from many quarters, even mainstream churches. The Lutheran (the publication of the Evangelical Lutheran Church in America), for example, claimed that 43 million jobs were eliminated between 1979 and 1995—and that economic instability has destroyed faith in the American dream.
The job loss has taken its toll on the incomes, health, and spirit of American citizens, according to the critics and media. Last year Reuters reported a Finnish study that asserts downsizing harms employee health. Individual self-confidence is supposedly torn down by the threat of job cuts. Psychologist James Campbell Quick claims that downsizing causes workers to feel mistreated and abandoned. Even Fortune magazine used the term “executioners” to describe corporate job-cutters.
But the term “downsizing” is grossly misleading. More important, the social and economic adjustments so described provide tremendous net benefits.
There is an eerie Orwellian flavor to the term “downsizing” that has much more to do with propaganda than truth. Observe, for example, that the Amazon Rain Forest is characterized by tremendous amounts of water evaporation. Indeed, it may be unrivaled in this regard. But it would be seriously misleading to emphasize the evaporation at the expense of the rain, thereby leaving the incorrect impression that one is describing a desert. Bill Gates spends millions of dollars per year. Indeed, he may be unrivaled within the United States in that regard. But it would be seriously misleading to emphasize the spending at the expense of his wealth creation, thereby leaving the incorrect impression that one is describing a net consumer.
One has an ethical duty not to present misleading half-truths. (By the way, Tiger Woods has not beaten me in golf for the last three years.)
The Whole Truth
But presenting half-truths is exactly what critics have been doing. The simple truth is that the free-market economy, on net, creates jobs and has done so since its inception. This has been the case during the 1980s and 1990s, the so-called heyday of downsizing. Even in our hampered economy, more jobs are created than cut. This is an upsizing economy.
According to Federal Reserve data, 1980 started with total employment at more than 99.8 million. By the beginning of 1985, it had increased to over 106.3 million. On average, job creation exceeded job cuts by almost 1.3 million jobs each year during the 1980–1985 period. By the beginning of 1990, total employment had increased again to over 119 million. From 1985 to 1990, job creation exceeded job elimination by an average of more than 2.5 million per year. By the beginning of 1998 total employment had increased again to over 131 million. From 1990 to 1998, job creation exceeded job elimination by an average of almost 1.5 million jobs per year. Over the entire 1980–1998 period, net job creation was nearly 2 million jobs per year. The economic rain forest is hardly becoming an economic desert!
The U.S. experience contrasts sharply with that of the European Union (EU). During the 25-year period ending with 1995, EU countries added 8.5 million jobs while the United States added 46 million jobs, even though the EU has about one-third more people.
Not only has total employment increased, but the percentage of the population in the work force (those with jobs or actively seeking jobs) has increased, rising from 64 percent in January 1980 to 67.3 percent in January of 1998. The current numbers are all-time records.
Loss of Faith?
Even though the detractors of the market economy claim that workers have lost faith in the American dream, many data present a contrary view. They indicate, for example, that individuals are healthier than ever. According to the Centers for Disease Control and Prevention, 1996 U.S. life expectancy was at its all-time high of 76.1 years. Since life expectancy in 1900 was only 43.7 years, it has increased substantially during this century.
Furthermore, a nationwide poll by Money magazine reveals that individuals generally feel more secure about their jobs. Consumer confidence numbers reveal a similar picture. The Conference Board reported that the December 1997 index of consumer confidence jumped to 134.5, a 28-year high. Indeed, consumers should be confident because income has generally increased for all groups of Americans.
We are witnessing the continuing restructuring of the American economy in response to consumer dollar votes. The downsizing in mature industries is what permits growth industries to acquire workers. If downsizing had been prohibited, we would still be using the Pony Express instead of e-mail!
Change characterizes free-market economies. A review of the 1994 Forbes 400 reveals that opportunity still characterizes the American economy. Four-fifths of the richest Americans earned rather than inherited their wealth. This represented an increase from three-fifths in 1984. They earned their wealth in technology, retailing, and finance. Those dropped from the list got their money from inherited wealth, real estate, oil and gas, heavy manufacturing, media, and agriculture.
While the people on the Forbes list represent spectacular examples of economic success, it is also true that the gains have been spread throughout the American economy. This rising tide indeed has lifted all boats. All income groups, including the poor, have improved their position over time.
Who Are the “Poor”?
It is important to remember that the “poor” is not a fixed group of individuals. Defining the poor as those in the bottom 20 percent in income means that poverty will never be eliminated. There will always be a lowest 20 percent! But this does not mean that those who were previously the poor are still poor. They have generally moved up to higher incomes, and their places have been taken in part by those who were previously in higher income groups. More typically, they are replaced by new entrants into the labor market, essentially young individuals and immigrants.
To understand how the poor fare over time, one needs a longitudinal sample that tracks the success of the same individuals over time; otherwise, one is measuring an ever-changing group. The University of Michigan has collected such a sample, which is the subject of a Federal Reserve Bank of Dallas study.
This study stands in sharp contrast to the view of people who claim that the American dream has been shattered. Over the period 1975 to 1991, the poor did not get poorer; instead, they generally got richer! Only 5 percent of those in the bottom 20 percent in 1975 remained there in 1991. The other 95 percent had moved up the ladder. By 1991 roughly 80 percent of those in the bottom 20 percent in 1975 had moved up to the top 60 percent—middle class or above. Indeed, nearly a third had moved up to the top 20 percent. A poor person in 1975 was six times more likely to be rich in 1991 than still to be poor.
All income groups increased their real purchasing power over the period 1975 to 1991. But the bottom 20 percent had larger gains than the top 20 percent. Measured in 1993 dollars, the “poor” had an average gain in income of $25,322 from 1975 to 1991, while the top 20 percent had an average gain of only $3,974 during the same period. Every group increased its real income, but the poor had much larger increases than the rich.
These findings are confirmed by a separate and independent U.S. Treasury longitudinal sample covering 1979 to 1988. The study found that 86 percent of the individuals in the lowest income group moved up during that period, with 67 percent moving up to the middle class or above. The slightly lower values for the Treasury study are explained by the fact that it covered a shorter period.
Both the Federal Reserve and Treasury studies confirm that a fixed sample of individuals improved their relative income position. Assuming that the free market is allowed to work, there is every reason to believe that the individuals now in the bottom 20 percent will also move up the income ladder. The American dream is indeed alive and well.
But these studies underestimate the gains. Individuals in the 1975 sample improved their position relative to others. But the entire constellation of incomes was shifting upward as well. Thus, most people’s purchasing power would have improved in absolute terms even if their relative position had not changed. Using a constant benchmark, such as the living standards prevailing in 1975, we find that 98 percent of the individuals in the bottom 20 percent in 1975 had improved their living standards by 1991! About two-thirds of those in the lowest 20 percent that year had by 1991 achieved a living standard that exceeded what the middle class had in 1975.
Since all income groups have witnessed increases, it follows that today’s poorest 20 percent are better off than the poorest 20 percent earlier in our history. Consumption patterns confirm this conclusion. It is widely acknowledged that individuals give priority to life’s “necessities” and use additional, discretionary income to purchase less essential items. Food, clothing, and shelter are widely considered essentials. In 1920 the poorest 20 percent used 75 percent of their income to purchase those necessities. By 1950 the income percentage had decreased to 57 percent. And by 1993 that percentage had dropped to 45 percent of total consumption.
This is true even though the homes are larger and have better climate control, the food is more varied and safer, and clothing comes in more variety and in higher quality. That today’s poorest individuals spend a smaller percentage of their total income on necessities implies that they are better off than their earlier counterparts. Simply put, if one must be in the poorest 20 percent (or in any other income group for that matter), it is better to be there today than in 1975. These are the good old days!
Growth and Change
The free market’s creative restructuring in response to consumer preferences is not properly characterized as “downsizing.” Growth and change characterize free markets. It is something of an enigma, to me at least, to see so-called progressive “liberals” propose reactionary policies designed to preserve old modes of exchange and production. Policies that prevent firms from responding to changing consumer wants will serve only to impoverish Americans. The freer an economy, the greater is its average income growth. When government intervenes in the workings of the free market, income growth slows. (See, for example, the Heritage Foundation’s 1998 Index of Economic Freedom.)
The view that the market economy has killed the American dream is simply false. Individuals are healthier than ever. They live longer than ever. More jobs are being created than cut. Individual incomes are rising over time. There is great mobility up the income ladder. The market economy is the greatest institution for social cooperation ever developed. Capitalism has accomplished fantastic feats in spite of the dead weight of government. Imagine what it would do if freed from that burden.
- David Molpus, Alex Chadwick, “Downsizing,” Morning Edition NPR, November 14, 1997, www.elibrary.com, April 17, 1998.
- Cheryl Heckler-Feltz, “Broken Promises, Economic Earthquakes Shake American Dream,” The Lutheran, March 1997, pp. 8–9.
- Reuters, “Downsizing Threatens Worker Health,” October 17, 1997.
- Nathan Seppa, staff writers, APA Monitor, May 1996, www.apa.org, April 17, 1998.
- Kenneth Labich and Erin M. Davies, “Managing: How to Fire People and Still Sleep at Night,” Fortune, June 10, 1996, pp. 64ff.
- St. Louis Federal Reserve, www.stls.frb.org/fred/data.
- Peter Lynch, “The Upsizing of America,” Wall Street Journal, September 20, 1996, p. A14.
- St. Louis Federal Reserve, www.stls.frb.org/fred/data/employ/civpart.
- U.S. Bureau of the Census, U.S. Life Tables 1890 and 1901–1910, and Centers for Disease Control and Prevention, Vital Statistics Rates in the United States, 1940–1960, cited in MedAccess Corporation Table 27. Data are located at website http://www.medaccess.com/health93/TABLE027.htm.
- Lesley Alderman and Karen Cheney, “Your Worklife: Here’s the Good News about Jobs,” Money magazine, May 5, 1996, p. 110. The data was obtained at website http://www.elibrary. com/getdoc.cg . . . burl=http*C*//pathfinder.com/money.
- W. Michael Cox and Richard Alm, “By Our Own Bootstraps,” Federal Reserve Bank of Dallas, Annual Report, 1995, pp. 23–23.
- Ibid., p. 13. Subsequent income data come from this study.