What Happened to the U.S. Economy?

by Harry Browne

July 30, 2003         

It's no secret that the American economy is ailing. But few people realize that it's been ailing for about 30 years.

When World War II ended, there were a few years of transition to peacetime, and then the economy returned to normal. From 1949 through 1973, economic growth (as measured by the estimated Gross Domestic Product) averaged 4.0% per year. But from 1973 through 2002, the growth was only 2.7% per year.

In other words, the economy was very strong for the 24 years from 1949 through 1973, but it has become more and more sluggish since then. This sluggish growth has left us all less well-off than we should have been.

The median family income is the income of the American family that's exactly in the middle of all families earning more than what half of American families make, and earning less than what the other half of American families earn. (Using this measurement eliminates the possibility that a few large incomes will skew the figures.)

From 1949 through 1973, the median income rose an average of 3.1% per year. Since then the increase has been only 0.2% per year barely any gain at all. If the earlier trend had continued, the typical American family's income today would be more than twice as large as it is.

The annual income of a middle American family, in thousands of dollars adjusted for inflation to 2002 dollars. The dotted line shows what the income would be if the trend from 1949 through 1973 had continued to the present. (1947 was the first year this indicator was calculated by the U.S. government.) This graph is plotted on a ratio scale; click here for an explanation.

The Chickens Come Home

What's so special about the year 1973? What happened then to cause the economy to slow down?

Actually, nothing. No unusual event occurred that year.

It's simply that 1973 appears to be when the weight of government finally made a significant difference on the economy. Government spending and regulation reached the point that they were causing visible problems.

It's hard to realize today when we have a $2 trillion federal budget that in 1961 the government spent less than $100 billion. But by 1971 the budget had more than doubled. And by 1975 it had more than tripled in just 14 years from 1961. Today the federal budget is twenty times the size it was forty years ago.

And with the increased federal spending came far-reaching new regulations.

Those were the years of the New Frontier, The Great Society, and The Great Society II (the Nixon years), and they gave the government enormous new powers with which to hamper private business.

We saw the enactment of Medicare, Medicaid, the Civil Rights Acts, the Clean Air Act, the War on Drugs, and price controls on oil plus the creation of the Environmental Protection Agency (EPA), the Consumer Product Safety Commission (CPSC), and the Occupational Safety and Health Administration (OSHA).

All these intrusions forced companies to rearrange their business methods to please politicians and bureaucrats rather than their customers and employees.

At some point, these intrusions had to hinder the ability of the U.S. economy to generate products, services, and income.

For example, by controlling over half the heath-care dollars in America, government inevitably slows down the economy. As health care becomes more and more expensive thanks to massive government health-care spending, oppressive regulations, and an expensive FDA process for new medicines Americans have to divert dollars to health care that might have gone into private schools or more comfortable retirement or better vacations.

Slow Growth

Politicians have tried to convince us that we've never had it so good.

But despite all the legends about the Reagan boom, there really were only two good economic years in the 1980s 1983 and 1984 and during the eight Reagan years average growth was only 2.9% a year.

And despite all the hoopla about the Clinton prosperity, the average growth in those years was only 3.7% per year less than the average through the prosperity, inflation, and recessions of the pre-1973 years.

Conservative and liberal activists crow about the "prosperous" 1980s or 1990s. But, in fact, both periods were anemic when compared with the pre-1973 years.

And now it's even worse. The economy has grown by only 2.1% per year over the past three years. The load of government has long since become too much for the economy to carry effortlessly.

The inexpensive extension of computer power to every segment of the economy may be the only thing that's kept America from descending into third-world status.

Piling On

And as though the economy weren't suffering enough already, along came 9/11. Needless to say, the event didn't cause the government to reexamine its foreign policy or to slim down to give the economy the necessary freedom to adjust to our new needs. No chance.

Instead, 9/11 has provided the perfect excuse to accelerate government growth. Not one federal program has been cut to accommodate the new spending plans. Instead, we get more government heaped on top of all that's already weighing down the economy.

Such things as the Patriot Act and the Homeland Security Department have to hurt the economy. Traveling businessmen lose an hour or two from their workdays because of airport security. Companies have to rearrange their affairs to comply with new reporting requirements.

Sending 150,000 soldiers to Iraq has to hurt the economy. They could have been producing goods and services that would enhance our lives.

These things add up.

Yes, military spending helps some companies. But the rest of us who pay for that spending have to go without other things we wanted more.

And the politicians have promised that this struggle will last for years and years perhaps for the rest of our lives.

No Cavalry

It's obvious that the politicians won't do what's required to restore the vibrant economy we once had.

The tax cuts are no remedy, because the federal government spends $2 trillion every year. Where will that come from?

Obviously, from you and me and other Americans. Any change in the tax rates changes only the method by which we pay the $2 trillion; it doesn't change the amount.

So we can't expect the politicians to rescue the economy.

There may be upward blips in economic statistics and the investment markets from time to time, but the long-term outlook for the economy will remain grim until there are dramatic reductions in the government's spending, controls, and intrusions. And that doesn't appear likely in the near future.

At some point we may slide into an extended period of "negative growth" a contraction of the economy that drags on for several years, rather than just two or three calendar quarters.

No one can know when that will occur. We can't even be sure it will occur. But we have to be mentally prepared for the possibility.

What to Do

I'm not asking you to accept a gloom-and-doom view of the future. But I am asking you to recognize what's already happened that the American economy has ceased being the powerful engine that generated the prosperity we've enjoyed. We've been living in an anemic economy for quite some time, perhaps without fully realizing it.

We can't predict the future reliably. And rather than trying, we should focus on recognizing the possibilities that exist and making sure we're able to weather whatever comes.

Because there's no way to know in advance which way the investment markets will move, I long ago sought protection in what I call a Permanent Portfolio.

This is a portfolio that doesn't change as the winds seem to change. I don't alter its makeup as I change my expectations for the future. Instead, it's designed to protect me whether the future brings prosperity, inflation, recession, or even a depression.

Over the past 33 years, the portfolio has averaged a 9.2% yearly gain through all kinds of economic environments. There have been only four losing years in that time the largest being only 6.1% in 1991. During 2000-2002, when the S&P 500 Index of stocks lost 37%, the Permanent Portfolio gained 9%.

My book Fail-Safe Investing explains how to set up such a portfolio, no matter how much capital is available, and it has just been republished as an Internet book. Details are at www.LibertyFree.com.

In sum, even though the politicians talk as though we're still living in the kind of economy we had 40 years ago, America has changed drastically and not for the better.

We have no way of knowing when or if the American economy will return to its traditional growth. So we have to take care of ourselves.