Behind The Numbers:
 The Treadmill Economy

 Jeff Madrick

 There  is  no denying  that  the  United States  economy has  been
 growing at  an impressive rate over the  past two years. Since the
 end of 1995, gross domestic product (discounted for inflation) has
 risen  at  an  annual  rate of  more  than  4 percent.  Meanwhile,
 inflation  has  fallen to  an  annual  rate below  2 percent,  and
 interest   rates  are   down  to   levels  unseen  in   25  years.
 Productivity, we are told, is at last rising above its languishing
 trend  since   1973.  The  unemployment  rate   has  fallen  to  a
 quarter-century low of 4.5 percent-without generating any increase
 in inflation.  What enthusiasts  are most heartened  about is that
 this  resurgence of  growth began  late in the  economic expansion
 (now in its eighth  year) and without the help of fiscal stimulus.
 While the  economy was growing before  the resurgence, the rate of
 expansion was unusually tepid.  Even an imminent economic slowdown
 may not  dampen the  claims that Am  erica has now  entered a "New
 Economy" driven  by the computer revolution  and the unleashing of
 deregulated markets.

 But despite  the 4  percent growth since 1995,  the business cycle
 that began with the  last peak in 1990 remains the slowest-growing
 in post-World  War II history (see  "Cycling Downhill," at right).
 Real GDP  has risen on average  by 2.3 percent a  year since then.
 The average  rate of growth since the  cyclical peak in 1973, when
 the slow-growth economy more  or less began, has been 2.6 percent.
 The Ford-Carter  cycle of  the 1970s and the  Reagan-Bush cycle of
 the  1980s,  which admittedly  were  launched off  the troughs  of
 particularly  steep recessions,  nevertheless produced  an average
 rate of  growth of  about 2.75 percent  a year. Surely  it is more
 than  a little  premature  to call  this a  New Economy-especially
 relative to  the good old days  when a boom was  really a boom. In
 the 1950s and 1960s, rates of economic growth averaged 3.5 percent
 to 4.5 percent a  year for an entire business cycle. Even in terms
 of GDP per capita,  the 1990s business cycle has been growing more
 slowly than any other in the post-World War II period.

 The  recent growth  has not  even been  sufficient to make  up for
 unusually  sluggish growth  earlier in  the business  cycle. Total
 hourly  compensation-a measure  of the  salaries and wages  of all
 employees,  which also  in  cludes fringe  benefits-has shown  the
 fastest rise of any  other government data. Yet it has grown at an
 annual rate of only  about 0.5 percent in the 1990s cycle. This is
 more or  less comparable to the  rates of growth in  the 1970s and
 1980s,  which were  historically  low. Between  1948 and  1973, by
 comparison, total compensation grew by almost 3 percent a year.

 Median family  income is only  just now catching up  to its former
 high in  1989 of about $43,000 a  year (measured in 1996 dollars).
 And this  is only  the case because  so many spouses  are working.
 Median income for families with only one worker is still below the
 highs of  the 1970s.  Even if we  adjust for smaller  family size,
 median family  income has grown at only a  slow rate in the 1990s.
 Median family  income between  1967 (the first year  the data were
 compiled) and  1973, in contrast, grew by  nearly 3 percent a year
 even though  far fewer families had  two workers. About 30 percent
 of the  female labor  force worked then; today,  nearly 60 percent

 The average  wages of  production and nonsupervisory  workers, who
 basically comprise  the lower 80 percent  of earners, are still 10
 or 15 percent below  their 1973 highs. Poverty rates have improved
 unusually slowly in this  expansion and are still above the lowest
 levels attained  in the  mid-1980s, which in turn  were well above
 their best  levels of  the 1970s. An  astonishing one out  of five
 children still  grows up in poverty  today, a statistic the nation
 and its  policymakers shrug off like one  more baseball score in a
 long season.

 Working Harder For Less

 The heart of the  problem remains labor productivity-the output of
 goods  and services  per  hour of  work. It  is the  foundation of
 growth and  a rising standard of  living. The New Economy boosters
 say that the 1.8  percent growth rate since 1995 is the start of a
 new era.  But output per hour of work has  risen by 1.24 percent a
 year so far in the 1990s compared to 1.09 percent from the peak in
 1980 to  1990 (which includes the  short 1980-1982 cycle) and 1.28
 percent  between 1973 and  1980--all of  which are well  below the
 long-term average of more  than 2 percent since the second half of
 the  1800s   and  nearly  3  percent   since  World  War  II  (see
 "Productivity Growth Rates," at right).

 Even  if the  predicted recession  does not materialize,  a growth
 rate of  4 percent  for a couple  of years is  not much  to call a
 press  conference about. Neither  are a  couple of years  of labor
 productivity  growth  of  nearly  2  percent  a  year.  (In  fact,
 according to  the latest  data revisions, we have  really had only
 one  year  of rapid  productivity  growth.  In 1996,  productivity
 leaped  by  2.4 percent.  By  1997,  it was  growing  at only  1.4
 percent.) Between the low  of 1982 and 1987, the economy grew by a
 rate of  4 percent a  year-that?s five years of  4 percent growth.
 Labor productivity grew in these years by a full 2 percent a year.
 But  for the  entire 1980s  business cycle,  from one peak  to the
 next,  the  rates of  growth  of  both real  GDP and  productivity
 remained  far below  historical  norms just  as they  have  in the
 1990s.  In the  1950s  and 1960s,  let?s not  forget,  the economy
 produced annual  rates of  growth of 5  and 6 percent  for several
 years  at a  time;  productivity often  rose  at 3  percent and  4
 percent a year and sometimes more.

 Late-cycle  bursts of  growth are  not unprecedented  either. This
 economy may  only now be making  up for years of  restraint by the
 Federal Reserve  and highly  cautious financial markets  that have
 kept real  interest rates unusually high  and growth sluggish. The
 late-cycle rise in productivity  can be explained by the fact that
 when the rate of GDP growth suddenly rises, productivity will also
 usually  rise  at  an   above-trend  rate  as  well.  Business  is
 stretching thin all its  resources to meet suddenly rising demand.
 Workers are working harder  as businesses cannot take on new hires
 fast enough. In 1986, four years after the expansion began, output
 per hour  rose by 2.7 percent.  In 1968, a full  eight years after
 the previous bottom, it rose by 3.5 percent. With these numbers in
 mind, a sudden spurt of 2.4 percent in productivity in 1996 hardly
 looks  like  the beginning  of  a  New Economy.  In  such one-  or
 two-year  situations,  it  is  usually not  productivity  that  is
 pushing  the economy  faster,  but de  mand that  is  pulling more
 productivity out of the nation?s businesses.

 Some observers  are also excited that the  rate of growth has been
 achieved  without   the  Keynesian  stimulus   of  higher  federal
 spending. But  the widespread claim that  the current expansion is
 somehow more balanced or deep rooted because the federal budget is
 in surplus  requires that  we ignore the precipitous  climb of the
 stock market. As Dean Baker and other economists have pointed out,
 the (until recently) rising fortunes of Wall Street have increased
 wealth,  providing  an  economic  shot in  the  arm  the same  way
 Keynesian  spending  would-by stimulating  demand.  But the  stock
 market  is harder  to  control. Soaring  stock prices  and falling
 interest rates  are supporting  consumer spending as  well as more
 mortgage and  credit card borrowing. The  danger-as we monitor the
 stomach-churning gyrations of the  Dow-is what will happen if this
 balloon is pricked.

 The rate  of productivity growth has begun  to slow. In the second
 quarter of  1998, labor  productivity fell slightly,  after having
 been revised  up for the first quarter. For  the first half of the
 year, productivity has risen by an annual rate of 1.7 percent. But
 with rates of GDP growth at 4 percent, such a rate of productivity
 growth is historically low.  When GDP growth is above 4 percent or
 so, productivity  typically makes up  half or more of  the gain in
 output,  while gains  in hours  worked make  up the other  half or
 less. In  fact, during  the rapid growth  of the 1950s  and 1960s,
 productivity  accounted for closer  to 70  percent of the  gain in
 output, while  increases in hours worked  accounted for only about
 30 percent.  This was almost  reversed in the first  half of 1998.
 Productivity gains accounted for  only 40 percent of the growth of
 business output; gains in hours worked accounted for 60 percent.

 Working Longer For Less

 What?s driving  the noninflationary  growth of the last  two and a
 half  years is  not  people working  more productively;  it?s more
 people working  more hours. People are  coming out of the woodwork
 to take  available jobs, and those who  have jobs are working much
 longer  hours. The  recent rise  in productivity pales  beside the
 dramatic rise in total  hours worked. And the sudden appearance of
 this surplus  labor accounts for much more  of the subdued rate of
 inflation than  is generally realized. Enough  people want to work
 that  firms have  not had  to resort  to raising wages  to attract
 employees. This,  plus falling  import prices, has  kept inflation

 Usually  by  this  stage  in the  business  cycle,  there are  few
 unemployed workers to add to the labor force. But according to the
 Bureau of  Labor Statistics,  total hours worked have  risen at an
 annual rate  of nearly 2.5  percent a year since  the beginning of
 1996-the typical  pace when  the economy is coming  off its bottom
 and unemployment is high. It also represents a greater increase in
 hours worked  than the fall in the  unemployment rate from a level
 around 5.5 percent in 1996 to 4.3 percent would suggest. With work
 available,  labor  participation   rates  are  again  setting  new
 records,  especially among  blacks and  women. Employees  may feel
 they  ought to  get all  the work  they can  while they  are still
 employed (see  Barry Bluestone  and Stephen Rose,  "Overworked and
 Underemployed,"  TAP, March-April 1997).  The high number of hours
 worked may also reflect  the high number of part-time workers who,
 if  offered   full-time  work  or  a   second  job,  leap  at  the
 opportunity. In my view,  the willingness of people to work longer
 hours  is  stark evidence  not  of  a new  prosperity  but of  the
 inability  of most  Americans  to make  ends meet  after  years of
 lagging  wages. Since  the beginning  of 1996, total  hours worked
 have  accounted for  more  than 55  percent of  gains  in business
 output.  If this  were truly  a New Economy,  productivity-not the
 sweat of labor-should be accounting for the lion?s share of gains,
 as it did in the 1950s and 1960s.

 The  growing  labor force  hasn?t  just depressed  wages and  kept
 inflation  under control.  It has,  along with the  higher minimum
 wage, had the beneficial  effect of arresting the growth of income
 inequality.  Since the  1970s,  earnings increases  for low-income
 workers have  not kept  pace with those  of higher-income workers.
 But  Jared Bernstein  of  the Economic  Policy Institute  tracks a
 little-watched  quarterly  series   of  weekly  earnings  for  all
 workers, issued by the  Commerce Department, and he has found that
 in the past two  years low-income workers are at last experiencing
 some serious  pay hikes. In  the first quarters of  1997 and 1998,
 those workers in the  twenty-fifth percentile of earners (that is,
 those  workers earning  more  than the  bottom 25  percent  of the
 workforce) enjoyed a 3  percent annual hike over the earnings of a
 year earlier compared to  only a 0.9 percent hike for those in the
 seventy-fifth percentile  and a 1.3 percent  increase for those in
 the ninetieth percentile.

 The  only credible  case to  be made  for the  existence of  a New
 Economy  is   based  on  the  possibility   that  government  data
 significantly understate  productivity gains.  Economists say that
 the increases  in the quality of  some goods and especially modern
 services such  as health  care are difficult to  measure, and that
 the  Bureau of  Labor Statistics  does not adequately  account for
 such quality improvements when  computing the Consumer Price Index
 (CPI).  Failing  to account  for  these im  provements would  lead
 inflation to  be overstated, because the  data would not take into
 account the  fact that  consumers would be getting  more for their
 money.  The  Bureau  of  Labor Statistics  may  also  inadequately
 account for  the introduction of some  new products, the prices of
 which often fall rapidly. If the CPI is overestimated as a result,
 real output  is understated  and therefore productivity,  which is
 simply real output divided by hours worked, is also understated.

 But  for  understatement  of  productivity gains  to  explain  the
 existence  of  a  New  Economy,  there  would have  to  have  been
 significantly  more  mismeasurement since  1973  than before.  And
 there  is no  evidence that  that is  the case. Daniel  Sichel, an
 economist at  the Federal  Reserve, calculates that  even if those
 alleging mismeasurement are completely  right (which in my view is
 highly unlikely), the errors  would add at most a little less than
 0.3 percent a year  since the 1970s and would add still less since

 What New Economy?

 America  is  drawing  the   wrong  lessons  from  recent  economic
 performance. Far  from being proof that  a productivity revolution
 is underway,  the evidence reveals that  many more people need and
 want jobs than was previously believed. With the unemployment rate
 down to 4.5 percent-and  serious inflation nowhere in sight-claims
 that the  natural rate of  unemployment was 6 percent  or even 5.5
 percent  now  look  naive.   Ob  servers  who  insisted  that  the
 underground economy  was providing  so much opportunity  that many
 people didn?t  want jobs  at all-or that many  once fully employed
 Americans were  hap py  to retire early  or to stay  home with the
 kids   or   to  become   independent  contractors-look   foolishly
 incorrect. In truth, they look more than foolish-they look callous
 and even cruel.

 One last  bit of conventional wisdom, it seems  to me, is also now
 under  increasing  suspicion. We  have  long been  told that  many
 Americans were insufficiently skilled or educated to hold the jobs
 of  the New  Economy. Skill-biased  technological change  has left
 many workers  out in the  cold, especially those with  only a high
 school degree.  This accounts  for the disparity  in wages between
 college  and  high school  graduates.  But  consider the  curative
 effects of a little  fast economic growth. The last two years have
 shown that these so-called  unskilled workers can handle their new
 jobs-and get raises, to boot. In fact, the skill-biased technology
 argument has  always rested on slim evidence.  It may well be that
 in  slack  labor markets,  inequality  of  incomes increased  when
 growth was  slow, largely  be cause employers could  choose from a
 large pool  of better-educated  workers at relatively  lower wages
 than  they had  had to  pay in  the past.  As demand for  wor kers
 rises,  however, suddenly  it  seems that  even less-well-educated
 workers are  more valuable than business  thought only a couple of
 years earlier.

 There is  of course  a limit to  how much surplus there  is in the
 workforce; as  more people  join the workforce, at  some point the
 danger of inflation will  arise. But at the moment there is little
 wage  pressure overall.  In  my view,  low unemployment  rates are
 finally  allowing  the distribution  of  gains in  the economy  to
 become more equitable.

 The  problem remains  productivity. For  this economy to  be truly
 considered "new," it must put together three or four more years of
 2 percent annual productivity growth. Perhaps this will happen. At
 this writing,  however, the U.S. economy  looks like it is slowing
 down  rapidly, especially  as reduced  demand in Asia  for imports
 begins to have a  greater and greater effect around the world. For
 there to  be long-term in creases in  productivity, we must make a
 serious  commitment  to  public  investment  in  day  care,  early
 education,  infrastructure, and  basic research-all of  which have
 been  badly neglected in  the slow-growth  era. A reversal  in the
 unequal  distribution of  income is  also a critical  component of
 long-term growth.  Higher incomes for  low-income individuals will
 enable them  to educate themselves and  maintain confidence in the
 rewards  of work.  It will  also expand  the demand for  goods and
 services. All  this will benefit productivity.  To the extent that
 rapid economic  gains have been  made in the past  two years, they
 cannot  yet  be   attributed  to  the  long-heralded  productivity
 turnaround. Rather,  they have been won  on the backs of Americans
 who  need  to  work  more  and  haven?t  until  recently  had  the
 opportunity to do so.

               Jeff Madrick is the author of The End Of
               Affluence and the editor of Challenge

 Behind the numbers