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The End of Affluence
As the first European settlers arrived in America, ideas of wealth and prosperity were fully implanted in their minds. These ideas soon turned into reality, and the United States dominated the global economy up until the post World War II years. In this paper, from the Book The End of Affluence by Jeffery Madrick, we will discuss how America has gone from domination of the economic market , to just barely hanging on, and the many roads both good and bad that it took.
In the 1800?s a young historian by the name of Frederick Jackson Turner proclaimed that once Americas land had been purchased and fully cultivated, the deterioration of America would begin. Jackson was not alone in thinking this, many of his peers and colleagues had the same views and beliefs, but were proven wrong with the introduction of the Industrial Revolution. This new era introduced an abundant amount of shortcuts in the area labor and labor saving devices. The introduction of these devices meant that a company could now save on salaries, but still increase productivity. The results of this new way of business were evident, the years between 1790 and 1807 showed American exports rising from 20 million to 108 million exported goods a year. The increase in exported goods was not only due to the new inventions, but also the high tariffs placed on imports, giving America a trade surplus. This increase in trade not only brought about wealth and economic growth, but also revolutionized inventions.
One of the largest examples, is the introduction of the railroad, and the tremendous effect it had on the trade of goods. This revolutionary invention enabled the transportation of goods to become quicker, and opened new markets. The ability to transport goods quickly also returned a quicker profit enabling the seller to roll his money over into other items. This new and speedier cycle of buying and selling strengthened the American economy even more, allowing the U.S. to have an enormous trade surplus. The railroad was not the only major invention aiding prosperity. The Cotton Gin was another invention that revolutionized the way work was accomplished. This machine separated cotton fibers from seeds speeding labor 2 to 3 times of what it use to take. The introduction of these machines were effective labor saving devices, but unfortunately with every action there must have a reaction. This reaction came in the form of unemployment.
Unemployment was not a new issue to the U.S., but it was one that became widespread and rampant. The introduction of new inventions such as the cotton gin relieved thousands of workers from their jobs and drove them into unemployment. This new state of unemployment began to weaken the economy, and with the beginning of a recession, complicated matters further. These complicated issues brought the U.S economy from a small-scale recession, into a large-scale recession.
The introduction of this recession, lasted until the beginning of World War I, where it slowly returned to production standards, and then quickly went into a depression in the 1930?s, known as the great depression. This economic condition would continue to rise and fall until World War II, where the destruction of Japan and Europe opened new markets for the U.S. In relations to the economy, World War II presented itself as a savior, in the way that government placed great demands on the market, and thus in turn raised productivity rates to a record high. These production rates did not cease with the end of the war, but instead kept on climbing, due to the destruction of Europe and Japan, leaving the global market open for U.S. business. These happy times only lasted until the early 1970?s when the introduction of the Oil Embargo took effect, and the crippling of Americas productivity and economic rates began.
The enactment of the embargo was not the only reason the U.S. began to lose its productivity rate. The shipping of jobs to overseas companies and the entering of the Japanese into the global market also helped in the disabling of America?s economic growth. This crippling of America?s economy reached many more Americans than thought possible and had a domino effect on the economy. It first hit the corporations and forced them to downsize, causing a contraction of the company. This contraction meant the government could not extract taxes, causing the U.S to borrow
from other countries and thus expanding our national debt. The expansion of the national debt started producing figures that forecasted a 2% loss a year, and by the year 2013 many predict a 35 trillion-dollar loss in productivity. These figures all lead to the assumption that America will eventually lose it?s edge in the global market unless we reverse the receding productivity trend, and begin taking the market back. This brief history should give you an idea of how our economy has wavered over the period since our Independence. Now let?s take a look at we had to work with during this same time period.
Data Showed that the average income of American Colonist in the terms of purchasing power, exceeded the average income earned in England by the mid-1700. There was an abundant of land on the frontier, natural resources, a thriving domestic trade and agricultural exports supported by slave labor accounted for this unusual prosperity.
The exception since the Civil War was the result of scientific, engineering and technological breakthroughs of the nineteenth century and an unregulated market economy. America did not have an edge over other industrial nations in the development of labor replacing machines of the industrial revolution, although U.S. used these inventions to their advantage. The steam engine, the open-hearth furnace, and the internal combustion were all European inventions. British investors roamed all over the world putting their money into risky new enterprises. The Germans created a remarkable industrial boom after the Prussian victory in 1871 in the war against France. Free markets thrived everywhere from the Turkish bazaars to the shops of London long before the American economy took off.
What distinguished Americas post civil war industrial revolution was the enormous continent wide market place, which enabled America to sell goods on a scale that could not be matched by the other countries. The mass production that resulted was not just a matter of replacing labor with machines, which all advanced countries eventually accomplished. It seems that mass production in America was a highly complex system of producing and distribution that reduced the costs of manufacturing each unit dramatically as the volume of production was raised. This increase was made possible by a market large enough to absorb the goods that high volume factories could produce. For nearly a century no other nations mass production industries were comparable to Americas, nor was our rate of growth equaled by any other major country during this period. Between 1870 and 1913, the eve of World War I, America?s rate of growth rose to nearly four percent a year. Germany?s gross domestic product (GDP) grew only 2.8 percent, Japan 2.3 and France 1.5 percent during this same period.
America?s population grew faster than Europe?s over the same years. The GDP per person also faster at a rate of 1.8 percent a year between 1870 and 1913, while the GDP per person rose only 1.6 percent in Germany, 1.4 percent in Japan, 1.3 percent in France and a lowly one percent in Britain.
By 1913, America was the most productive major nation in the world, producing 25 percent more per worker than Britain, who was the world leader for more than a century and twice as much per worker as Germany or France. By World War I, America was making more than 30 percent of the worlds goods!
In the mid nineteenth century, Great Britain was a highly mechanized and urbanized nation, the leader in the production of textiles, iron, and most of the other products associated with what is known as the First Industrial Revolution. Its dominance coincided with the fact that the most prosperous consumer market at the time was the area known as ?The Golden Triangle? which was between London, Cardiff, Edinburgh, and Glasgow. By 1840 America?s markets were growing rapidly. Canals and turnpikes made transportation far more efficient, and domestic trade was thriving. The American market place began to expand dramatically with the development of the railroad. The first short rail lines in America were laid in the 1830?s to connect nearby cities, waterways, and canals.
By the 1840?s, railroad technology had become efficient and standardized. During the 1850?s about twenty one thousand miles of track were laid. Complete systems were built that connected the major cities along the eastern seaboard from north to south and in turn, these same eastern cities to the developing regions of the interior including the old northwest around the great lakes. After the Civil War, the railroads expanded more rapidly. By the mid 1870?s, there was more than twice as much track laid in the United States as there had been in 1860, reaching coast to coast. Railroad companies were now the largest business concerns in the nation, importing both capital and labor from Europe, and creating enormous demand from capital goods, notably iron rails.
In the 1880?s, about seventy five thousand miles of railroad tracks were laid. The carrying capacity of the trains had also increased enormously doubling between 1860 and 1890. The telegraph spread rapidly, and by the 1880?s a merchant could order goods instantaneously and receive them almost anywhere within a week. By 1890, only 13 percent of the American population was not reachable by rail or steamship. In 1858, it cost 37 cents a bushel to ship wheat by rail from Chicago to New York. By 1870, the cost had fallen to 26 cents a bushel, and by 1890 it was 14 cents a bushel. In 1880 when Britain had about 16000 miles of track, America had more than 90,000 miles connecting an entire continent and one and a half times as many people. With a population 50 percent as large as Germany?s and a far higher income per person, Americans consumed three to four times as much in goods and services as the Germans did. From a colony of only about two million people, America had become an economic giant nearly 100 million strong. America, of course, did not and could not maintain their dominance. We lost some of our edge and some nations actually gave us a huge challenge in becoming the economic leaders. Let?s take a look at actually what we lost.
During the 1950?s and 1960?s the United States assumed we were above all others. Our society felt superior, and that we led and everyone else followed. We had the best goods and services, benefits, health care, and the least amount of poverty. We were closed minded to the fact that other nations would have the same or better marketplaces than us.
In the early 1900?s the United States had the largest amount of iron ore reserves in the world, but by the 1960?s we owned only a fraction of it. Also, during those early years the automobile industry had 33% of the world exports and by the 1970?s our total exports fell to 18%. Foreign producers took over our entire electronics industry. We lost the dominance of worldwide exports when at one time we over powered the market and purchased cheap natural resources. When Japan started to successfully export their goods and services, Americans thought it was because of their low wages. However, even when there was an increase in wages Japan still produced and sold more than the United States. During the post war in 1973, Japans productivity growth did not fall nearly as low as the United States. Competition forced businesses to invest more and keep prices lower. IBM only had 2,500 competitors in 1965. Competitors grew to a high level of 50,000 in 1992. Countries like Mexico, India, China, Indonesia, and Thailand jumped on the ban-wagon of mass-production. Because of the reduction of trade barriers, free trade was widely established and the United States could no longer monopolize the market and trade. As you read labels and tags most goods and services are made in Japan or china. Over the years the U. S. became a net importer of many materials and natural resources. As times changed raw materials and certain metals were being replaced by more sophisticated productions. Most Metals and glass products were replaced with different types of plastics.
Workers were being replaced by machines, but the workers that held on to their jobs could only work part time so benefits would not have to be distributed. Jobs were scarce, people with skills and education stood little chance of becoming employed. Standards of living dropped, unemployment grew, and poverty struck dramatically. Plain and simple, the rich got richer and the poor got poorer. These are conditions that we as a nation created and there is no way of undoing what we started. However, Americans are optimists. We are taught to be optimistic about everything. We are indoctrinated in the notion things will always get better. There is nothing the American people cannot overcome. We adopt sayings that reflect this: ?We have nothing to fear but fear itself,? ?the power of positive thinking,? ?Yes, you can,? and ?I?ll do it my way.? No matter how bad things get we still expect someone or something to make it better. Technology is what most people point to as the item that will restore and maintain America?s prosperity.
We are taught from a very early age that technology has been the driving force behind America?s success. We were made to memorize a string of inventions that spurred our economic growth. It seems only logical to us that this will continue to be the case. We think that new inventions and technologies will continue to spur an ever-expanding economy. We turn a blind eye to the fact that many of the technologies that we claim expanded our economy had little effect on other countries. Railroads that are said to have spurred economic growth in America were used the world over. They did not have the same economic impact on other countries as America. It may be that the benefits of future technological developments may pass us by.
Maintaining marketplace superiority has also become increasingly difficult. An advanced computer system can just as easily be manufactured in India as it can in America and increasingly the worker needed to develop and manufacture it there is available locally. The volume of new patents registered by citizens and institutions of other nations is now almost equal to our own. The American share of high technology export market has fallen from 40 to 36 percent. All of this along with the fact that the profit margin in the manufacturing sector continues to fall, makes the likelihood of some new technology restoring the good old days to America very small.
American business has also held the idea that if only we can become more efficient we can maintain and or restore our superiority on the world stage. This has not been the case. All that really has developed is a decline in profit margins, which allows less money for future research and development of new products. Streamlining production has also reduced work forces and resulted in a general decline in average wages. This has a snowball effect on the economy by having less money available for spending by consumers.
Education has also been hard hit over the last two decades. We spend less of a percentage of our earnings on education than we did before 1971. People no longer go to college in order to ensure a rapidly rising in standard of living, they go in order to help insure that they will maintain a middle class standard.
Many people believe that a bright future lies in free trade with emerging markets. This is based on the idea that we will all make something that someone else wants. History has not shown this to be the case. Emerging markets grow a much higher rate than our own. This growth comes from developing export markets to developed nations. We are buying from them. These emerging markets also attract our investment capital because they promise higher rates of return. This leads to a decline in investment at home.
America?s optimism often blinds us to the changes happening in the world. Trends seem to indicate that America will not maintain its position of superiority in the world indefinitely. In actuality, our position has been steadily declining for decades. Maintaining an unrealistic optimism about America regaining its former position or even maintain what we have now is farfetched. America needs to develop a realistic economic policy based on the world today. However, it seems as if we have lost our bearing.
Unlike the dramatic consequences of a market crash or a sudden steep recession, the damage done by slow economic growth accumulates gradually and mostly imperceptibly. After the 1970?s we as a nation have struggled to make ends meet in our national budget. This is something we did not have to worry about before. In the 1930?s we financed Social Security with no worries of how we would pay for it. No broad political consensus opposed massive pensions paid out. We also mistakenly believed Lyndon Johnson could finance the Great Society and fight the Vietnam War without raising taxes. And why not? Economic growth had always exempted us from serious personal sacrifices as we paid for the social and other domestic programs that we agreed were necessary. By the time of the Health-Care debate in 1994 this was obviously no longer the case. Americans have generally underestimated how unusual our economic advantages once were, and how they have influenced the way we solve our social problems.
The economic progresses most Americans have enjoyed since the early 1800s, and which we still take largely for granted, were unprecedented. By the early 1970s, as we have seen, this rapid progress had slowed sharply for the large majority of Americans, and was reversed for many of us. Economic growth had averaged more than 3.5 percent a year since 1820, and fallen to a rate of 2.3 percent a year since 1973. The consequences of the slow economic growth since 1973 have been borne more heavily by some of us than by others, but it has frustrated almost all of us in ways more or less subtle. Wages and salaries have fallen, stagnated, or grown unusually slow for most Americans no matter how well educated they were. In part, it is inevitable that the losses have been especially steep for the young with only a high school education. These young and inexperienced workers are the first to lose their jobs when unemployment rises, as has happened consistently since the 1960s. But the jobs lost in manufacturing and other areas because of greater international competition, fragmenting markets, flexible production, and declining investment have taken a bigger toll on young and less educated workers as we recede from an economy dominated by mass production and distribution.
Despite the presumption by some that too many Americans are not working hard enough, Americans in fact responded to their changing economic fortunes by working much harder. The average full-time male employee now works about a week and a half longer a year than in 1973, the first extended increase in hours worked in this century. Seven million workers hold at least two jobs, the highest proportion in fifty years. The number of two-worker families rose by more than 20 percent in the 1980s. However, this increased effort did not offset the damage done by slow growth.
Some experts argue that the quality, variety, and ingenuity of the new products of the past two decades have made up for our stagnating or falling wages and lost leisure time. But, miraculous new time-saving products have been coming along since the beginning of human culture. Man has always been making more and better tools. It would be difficult to prove that they have improved our lives in greater increments than the products of the past. The difference however, is that now fewer and fewer Americans can afford to buy more, or have the financial peace of mind with which to enjoy them.
As slow growth continues, our anxiety may worsen and our public discourse becomes even more driven by fear. The social rifts that have appeared may widen as we face a future for which our history has not prepared us. This leads us to a topic that we need to learn and understand to survive in this slow economic period. Let?s analyze ?what we face in the future?.
Slow economic growth is the downfall to our recovery in the United States. However, a successful society can solve its problems in unanticipated ways. Energy and innovation typically arise from surprising places, more often from the bottom than the top. It will take a concerted effort from all Americans to help in the return to a prosperous nation. No one can say for certain that we won?t return to our rapid rate of economic growth. Business reforms, interactive communications new industrial techniques, overseas markets, and our progress in cutting the federal deficit and interest rates may produce faster economic growth than they have so far. Still other, unanticipated solutions for our slow growth may yet emerge. While these prospects are remote, you can determine for yourselves whether or not we are returning to rapid economic growth by following what specialist are saying and predicting. This can easily be found in The Wall Street Journal and other financial magazines. The best figures to track are quarterly figures issued by the federal Bureau of Labor Statistics, because the growth rate of productivity differs widely during various stages of the business cycle.
There is no blueprint for solving all the problems associated with slow growth. Nevertheless, the major issues that we must deal with forthrightly, are the unprecedented retirement and health costs associated with our aging population and the costs of a deteriorating environment. These issues will consistently require more of our future income. Meanwhile with slow economic growth, it will cost taxpayers more to keep up with the pace that we have now. We will also probably have to invest a greater proportion of our income, and to do so more deliberately than in the past. We will also have to increase our spending on education to keep pace with the rapid growth in technology. The future will almost surely require a more educated work force which means more money spent for education. We cannot turn our concerns to politicians alone. We as a nation must stand together to solve the problems of our future. This can be accomplished with industry and workers teaming together to create ideas to help with increasing the growth.
We as a nation have our work cut out for us. Slow economic growth may increasingly set old pensioners against young workers, homeowners against renters, suburbs against cities and those with power, by virtue of their own wealth against those who have none. We have already seen much of this reality in the angry arguments over welfare, Social Security, and other topics such as health care. Our main rival, however, is not the rest of the world, it is the memory of our exceptional past, when our economic advantages made us the most productive country in every major industry and our incomes grew accordingly. Once our mindset changes, then we can set down to business and hopefully before it is too late, take charge of the biggest national threat to our society
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