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Friday, June 02, 2006

Why Are People So Unhappy with the Economy?

Charles Morris looks for similarities between economic conditions today and economic conditions in the past as he tries to explain current dissatisfaction with what appears on the surface to be a strong economy:

Freakoutonomics, by Charles R. Morris, Commentary, NY Times: Last month saw one of the sharpest drops in consumer confidence since the recessions of 1979-1982. But those were truly dreadful times. Oil prices tripled, rates on home mortgages shot into the mid-teens, the stock market was a disaster area and unemployment rates reached double digits.

Over the past three years, by contrast, American economic performance has been almost glittering. Inflation is still low, while employment and productivity have all been rising strongly. True, ... the sharp upsurge in gas prices is adding to consumer skittishness. But the reaction still seems inconsistent with the economy's underlying strengths.

There are parallels with another historical period, however, that suggest the deeper currents of uneasiness. Pan the camera back to Pittsburgh, July 1877. The Pennsylvania Railroad yard ... is a raging inferno, set afire by angry mobs of railroad workers. A contingent of state militiamen, trapped in a burning railroad roundhouse, fight their way through the flames with a Gatling gun.

Over the next few weeks riots rage throughout the country. In Chicago, ... "howling mobs" control the city. In New York, The Sun demands a "diet of lead" for rioters. Unrest in San Francisco explodes into a vicious anti-Chinese pogrom. The same period marks the glory years of the rural Granger movement and the Roman-candle growth of the Knights of Labor. American Populism puts down permanent roots.

Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: ... in fact, the decade saw possibly the fastest sustained growth in American history.

Employment grew strongly, faster than the rate of immigration; consumption ... rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world's first mass consumer society.

But why did people feel so miserable? Partly they were confused by prices, which were dropping sharply. Farmers thought falling grain prices meant they were getting poorer, without noticing that the price of everything else was falling too. ...[T]he price differences between what they sold and what they bought ... actually racked up solid gains in the 1870's.

But ordinary people still had good reason to be terrified... Midwestern 1870's factory farms — thousand-acre spreads with 70-horse plowing teams — quickly dominated world markets but also wiped out the much smaller grain farmers... Globalized grain markets were more volatile: good weather on the Russian steppes could ruin an American grower's year...

After the Civil War, artisanal local manufacturers usually enjoyed comfortable mini-monopolies. But with the rapid spread of the railroads and the telegraph, new department stores and mail-order catalogs pressured local producers and middlemen with mass-produced goods, a precursor to the Wal-Mart era. In the mid-1880's, the Bloomingdale's catalog promised that orders would arrive within two weeks in virtually the whole of the United States, including large swathes of territory reachable only by wagon-train a decade before. The productivity shock was comparable to that from the Internet in our own day.

Before the Civil War, America was perhaps the most egalitarian society in the world. But the unbridled entrepreneurialism of the 1870's gave rise to the robber barons. Even if ordinary people were doing better in the 1870's, the yawning gap between the very rich and everybody else fanned resentments. Interestingly, wealth inequality in today's America is roughly the same as in the Gilded Age.

The sharply increased social and geographic mobility of the 1870's set people adrift from traditional sources of security in families and villages. In our own day, the destruction of employer-employee relationships, the erosion of pension protection and employee health insurance may be creating a similar loss of moorings.

If one counts only the size of houses and cars, and the numbers of electronic gadgets stuffed into rec rooms, Americans are probably better off than ever before. But as the 1870's suggest, economic well-being doesn't come just from piling up toys. An economy has psychological or, if you will, spiritual, dimensions. A conviction of fairness, a feeling of not being totally on one's own, a sense of reasonable stability and predictability are all essential components of good economic performance. When they were missing in the 1870's, in the midst of a boom, the populace was brought to the brink of revolt.

Something worth remembering as we enter the New Gilded Age.

Update: Payroll Growth Stalls With 75,000 New Jobs. See Brad DeLong and Angry Bear. As John Berry notes, a pause at 5% is still very much in play.

    Posted by on Friday, June 2, 2006 at 12:25 AM in Economics, International Finance, International Trade, Unemployment | Permalink  TrackBack (1)  Comments (59)

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    » Freakoutonomics from UnLtd Blogs

    I've just learned a new word from Charles Morris: freakoutonomics. In the New York Times, Morris describes the sort of uneasiness and lack of confidence that Ben Friedman wrote about in The Moral Consequences of Economic Growth. Friedman argues that econ [Read More]

    Tracked on Saturday, June 03, 2006 at 10:56 AM


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