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A . .S U N PORT O E R THESE A R E T H E GOOD O L D ◆ LI DAYS G STAN D N I V DS ◆ AR FEDERAL RESERVE BANK OF DALLAS 1993 ANNUAL REPORT CONTENTS PRESIDENT’S MESSAGE THESE ARE THE GOOD OLD DAYS THE YEAR 1 2 REVIEW 26 BOARDS OF DIRECTORS 30 ADVISORY COUNCILS 31 CONDITION 32 OPERATIONS 33 STATEMENT STATEMENT OF OF IN STATEMENT OF SURPLUS 34 VOLUME OPERATIONS 35 OFFICERS 36 OF President’s Message L AST YEAR, our annual report essay was knowledge and wisdom, and we will miss them all. entitled “The Churn: The Paradox of Progress.” It focused on the creative destruction taking place in At the Dallas Office we lost two very special friends and board members: Tom Frost and Leo the labor market. It showed how small net changes Linbeck. It is often said that Texas lost nine out of its in the employment and unemployment numbers 10 largest banks. Tom runs the tenth. He is widely obscure the large-scale destruction of old jobs and respected as the dean of Texas banking. He just the creation of new jobs. This churning renews and completed six years as a director of the Dallas Fed, revitalizes our economy and keeps it competitive in following earlier service as a member of our Federal a rapidly changing world. Advisory Council. Tom is a This year’s essay might gentleman and scholar. have been entitled “Churn II,” Better yet, a Texas gentle- because it shows the progress man and scholar. Our Bank that society is able to reap if has benefited greatly from it allows the churn to Tom’s wisdom, dedication happen. Instead, we are and years of service. calling this essay “These Are Leo Linbeck just com- the Good Old Days.” It pleted his seventh year as focuses on the dramatic a Board member, the last changes that have taken place in our living standards that two as chairman. We drafted Leo for an extra GNP figures fail to capture. year on the Board to While traditional measures enable him to complete may suggest the economy has our building project. been sluggish in recent years, Thanks, Leo. Thank you in many respects, these are for our building and for the good old days. Our point your friendship. Thank you is not to deny the slowdown for all the work you do in productivity growth or the behind the scenes, without potential growth rate of real fanfare or recognition, for GNP over the past two our country. decades. Annual growth of 2-and-a-half percent is As we work day to day and year to year, it’s not good enough. Our point is that wonderful easy to lose sight of the small steps that lead to giant changes are taking place in the way we live that strides—both for the Dallas Fed and in the broader should not be ignored in assessing trends in our sense. As we reflect on progress in this annual report, standard of living. As you review developments you are already familiar with, I think the cumulative we are challenged by the new year ahead and look forward to providing strong leadership in areas impact of the changes will astonish you. supporting free enterprise—the system that has The Dallas Fed has had some recent churning of enabled each generation of Americans to make the its own. Each year some of our directors move on and claim that “these are the good old days.” others take their place in a process of renewal. We just said goodbye to Clive Runnels from our Houston board, Diana Natalicio from the El Paso board and Javier Garza and Sam Sparks from our San Antonio Robert D. McTeer, Jr. board. They gave us freely the benefit of their President and Chief Executive Officer 1 2 THESE A R E T H E GOOD O L D ◆ DAYS G STAN D N I V RIP VAN WINKLE WAKES SPRING DAY IN 1994 DS ◆ LI A . .S U N PORT O E R AR TO A BRIGHT AND, RUBBING HIS EYES, QUICKLY REALIZES THE WORLD AROUND HIM HAS CHANGED. HE DISCOVERS ALMOST 25 YEARS HAVE FLOWN BY SINCE THE START OF HIS BIG SLEEP. AMONG HIS LAST MEMORIES BEFORE DOZING OFF IN 1970: WATCHING GEORGE C. SCOTT PORTRAY PATTON AT A MOVIE THEATER, SEEING ROWAN & M A R T I N ’ S L A U G H -I N O N T E L E V I S I O N A N D 3 These Are The Good Old Days Growth of U.S. Gross National Product, 1870–1990 listening to the Beatles’ Let It Be. President Richard Nixon had ordered U.S. troops into Cambodia to attack Viet Cong bases. New York’s once-hapless Mets had become the “Miracle Mets,” starting the 1970 season as World Series champions. Events since 1970 seem world-shaking. The Soviet Union has fallen apart. The global village has grown together. Yet what amazes Rip the most is the tremendous economic progress the United States has made in just a quarter of a century. Americans in the 1990s routinely withdraw money from automatic teller machines all over the world. We communicate on cellular phones, cook meals in minutes using microwave ovens, watch movies at home on videocassette players, listen to concert hall-quality music on compact discs and flash instant messages from one computer to another on a global grid called Internet. Americans figure checking-account balances on pocket calculators, use camcorders to film our children playing soccer, fight ulcers and depression with new wonder drugs, flick many things on and off by remote control. We have more cars, more household appliances, more vacation homes, more entertainment options and more Percent 6 5 3 2 1 0 –1 1870– 1890– 1913– 1929– 1938– 1950– 1960– 1973– 1890 1913 1929 1938 1950 1960 1973 1990 *Average is for 1870–1973. free time than Americans two decades ago. The contrast between American life then and now is astounding. Rip surveys the changes and concludes Americans never had it so good. He is puzzled, though, that so few people share his sense of wonderment. People seem glum about the U.S. economy of the 1990s and look back to the time Rip went to sleep—the late 1960s and early 1970s—as the apex of American prosperity. People reflect on that time as “the good old days” from which the U.S. standard of living has ebbed. Americans of the 1990s point Rip to many signs of lost vitality in the U.S. economy. Growth is slowing to a crawl. Productivity is stagnating. Paychecks are getting smaller and, for many workers, less certain. Other countries are gaining on us, even as more American families earn two incomes. (See “Catching Up” at the end of this essay.) Worst of all, perhaps, some Americans worry that their country, for the first time in its history, will fail to provide today’s children with living standards as high as their parents’. As if economic deterioration weren’t enough, discouraging reports on crime, education, homelessness and other social ills plague the country in the 1990s. The usual barometers of economic activity show cause for alarm. Inflation-adjusted manufacturing wages rose by 2 percent a year from 1950 to 1973, but they fell an average of 1.3 percent a year from 1973 to 1990. Inflation-adjusted median family income gained 3 percent a year from 1950 to 1973, but the annual increase ebbed to 0.1 percent in the past two decades. Productivity, a yardstick of the output from each hour of work, grew at an annual rate of 2.2 percent from 1870 to 1973, then slowed to 1 percent. The broadest measure of the economy’s well- The World Through Rip’s Eyes Average size of a new home (square feet) New homes with central air conditioning People using computers Households with color TV Households with cable TV Households with VCRs Households with two or more vehicles Median household net worth (real) Housing units lacking complete plumbing Homes lacking a telephone Households owning a microwave oven Heart transplant procedures Average work week Average daily time working in the home Work time to buy gas for 100-mile trip Annual paid vacation and holidays Number of people retired from work Women in the work force Recreational boats owned Manufacturers’ shipments of RVs Adult softball teams Recreational golfers Attendance at symphonies and orchestras Americans finishing high school Americans finishing four years of college Employee benefits as a share of payroll Life expectancy at birth (years) Death rate by natural causes (per 100,000) 1970 1990 1,500 34% <100,000 33.9% 4 million 0 29.3% $24,217 6.9% 13% <1% <10 37.1 hours 3.9 hours 49 minutes 15.5 days 13.3 million 31.5% 8.8 million 30,300 29,000 11.2 million 12.7 million 51.9% 13.5% 29.3% 70.8 714.3 2,080 76% 75.9 million 96.1% 55 million 67 million 54% $48,887 1.1% 5.2% 78.8% 2,125* 34.5 hours 3.5 hours 31 minutes* 22.5 days 25.3 million 56.6% 16 million 226,500 188,000 27.8 million 43.6 million 77.7% 24.4% 40.2%** 75.4 520.2 Avg.* 3.5% 4 *Figures are for 1991. **Figure is for 1992. 4 A Report On U.S. Living Standards By far, the largest omission in measured GNP is leisure—time for recreation, family, friends, entertainment, hobbies or just taking it easy. By the choices we make about work hours as incomes rise, Americans show we value leisure highly. Yet because time off from work isn’t traded in the marketplace, a trend toward greater leisure in recent decades counts for nothing in the GNP measure of standard of living. The GNP numbers also ignore the value of services produced and consumed in the home—cooking meals, doing laundry, mowing the lawn, washing the car and dozens more chores. Over time, many household tasks have been shifted toward the market, allowing families even more leisure. As families pay for household chores, GNP data reflect these transactions but can distort comparisons of GNP from one generation to the next. Time also brings new and improved products that enhance our lives in ways unavailable to previous generations at any price. Each innovation—air conditioners that use less energy, cars that handle more safely, cable television companies that deliver new programs into the home, foods with lower cholesterol and fat—raises the value of these goods and services and lifts consumers’ standards of living. Yet various studies suggest that the GNP statistics don’t adequately account for improvements, over time, in product quality. being—gross national product, or GNP—sends perhaps the most troubling signal of all. Even with the Great Depression of the 1930s, GNP expanded by an average of nearly 3.5 percent a year from 1870 to 1973. To the dismay of many Americans, the growth rate slipped to an annual average of less than 2.5 percent in the past two decades. The two versions of reality could hardly be more at odds. One says the country continues to reap the ever-larger bounty promised by free enterprise; the other, that the increase in Americans’ standard of living has slowed markedly in recent years. A loss of dynamism—if real—would challenge Americans’ view of who we are. The notion of a falling living standard affronts the American dream, one of the ideals that hold the nation together. It challenges the ingenuity of those in power, confronting them with the task of getting America moving again. Most broadly, it threatens Americans’ faith in the free enterprise system at the very moment of its historic triumph over communism. GNP Is Not Standard of Living As Rip learned, there are both bleak and bright views of America’s economic progress. To unravel the conflict between them, we must understand how society’s standard of living is measured. As a gauge of well-being, economists and policymakers usually rely on GNP, a simple sum of the market value of goods and services our nation churns out in a year. Every measure of how the economy is faring in some way derives from this aggregate. Growth is the percentage change in GNP, usually adjusted for inflation by a price index. Productivity divides the inflationadjusted, or real, GNP by the total number of hours worked. Per capita income apportions an equal share of real GNP to each person. At best, GNP offers only a crude measure of Americans’ well-being. The meter for GNP is dollars and cents or, through the magic of a price index, real goods and services. The meter for standard of living is happiness, an elusive concept. Even without consulting a philosopher, it’s clear they aren’t the same. GNP is not standard of living. By design, GNP counts only a fraction of what human beings might want in a better life. GNP figures ignore the contribution to people’s lives of anything, good or bad, that’s not explicitly bought and sold on the open market. For the most part, this is a practical matter: statisticians report what’s measurable. Markets give objective, easily calculated monetary values to shoes, televisions, haircuts, trips to Hawaii—a whole panoply of goods and services. What GNP Doesn’t Tell Us About Living Standards GNP is not standard of living. The two concepts are related, but standard of living has a much broader meaning. GNP does not reflect many factors that affect living standards. Among these are leisure, the value of goods families produce for personal use and conditions of life, such as health and safety, crime, pollution and longevity. GNP, in turn, includes some elements that do not affect today’s living standards, such as investment spending. Standard of Living Leisure Living Conditions Home Production and Consumption Market Consumption Government Purchases Investment GNP 5 The dollars-and-cents statistics of GNP just can’t measure the value of some things—like extra time for basketball. 6 A Report On U.S. Living Standards lieve, surveys show the country has never had as much leisure. What’s more, evidence from spending patterns and elsewhere suggests that today’s Americans are using their time off to squeeze more recreational activities into their lives. Over the past four generations, the time an average U.S. employee devotes to on-the-job work decreased by nearly one-half. Looking at just the most recent two decades, when concerns about American living standards became more pronounced, work hours declined an additional 9.3 percent, the equivalent of 23 days a year. Daily work hours aren’t the end of what’s happening to leisure. Americans are starting work later in life and, perhaps even more significant, they are enjoying longer periods of retirement. In the two decades after 1970, the age at which an average worker entered the labor force pushed forward by seven months. A typical retirement grew by more than four years. In addition, the average daily time devoted to household chores fell consistently—from 4 hours, 12 minutes in 1950, to 3 hours, 48 minutes in 1973, to an estimated 3 hours, 30 minutes in 1990. Over a year, 18 minutes a day aren’t trifling: they add up to more than four extra days off. Interestingly, the value of work at home might not be declining along with the time spent doing chores. Microwave ovens, no-iron fabrics, self-cleaning ovens, frost-free refrigerators and dozens of other conveniences make household work lighter and faster. In effect, technology is boosting household efficiency by enabling us to accomplish more with the same or less effort. Nor does GNP track a host of other important, nonmarket components of a higher quality of life— longevity, health and safety, working conditions, the environment. These aspects of daily life vary greatly from place to place, from one person’s experience to the next, but there’s evidence that they’ve improved decade by decade for most Americans. It’s no easy task to translate much of what’s not measured by GNP into dollars and cents. There are inherent difficulties in valuing leisure, home production, product quality, living conditions and whatever else might go into the true standard of living. Yet moving beyond narrow GNP to a broader notion of Americans’ well-being will help provide a more accurate—and, to many, surprising—view of how well the nation is doing. There’s no denying the country would be better off with a faster pace of economic expansion (See “Secrets of Growth” at the end of this essay.) The supposedly lackluster 2.5-percent GNP growth of recent decades, though, doesn’t capture all the gains in living standards. The omissions and lapses suggest that GNP, as it comes out of the government’s statistical mills, may understate the true income of Americans, perhaps by a large margin. Time For Symphonies and Softball Time is the ultimate scarce resource. Each day contains 24 hours. Each week consists of seven days. In a fast-paced, modern society, once work and chores are done, there almost always seems to be a shortage of time for what we enjoy. Many workers complain about haggard, sleep-deprived lifestyles. Yet, as hard as it may be for many Americans to be- Work Time Since 1870, Americans’ hours on the job have been cut almost in half. Even since 1970, we’ve shortened the workweek and gained extra vacation days and holidays. YEAR WORKWEEK (HOURS) WORKDAY (HOURS) WORKWEEK (DAYS) ANNUAL HOURS PAID FOR VACATION (DAYS) HOLIDAYS (DAYS) OTHER ABSENCE (DAYS) ANNUAL HOURS WORKED 1870 1890 1913 1929 1938 1950 1960 1973 1990 61 58.4 53.3 48.1 44 39.8 38.6 36.9 34.5 10.2 9.7 8.9 8 8 8 7.7 7.4 7.3 6 6 6 6 5.5 5 5 5 4.7 3,181 3,045 2,779 2,508 2,294 2,075 2,013 1,924 1,799 0 0 5 5.5 6 6.5 7 8 10.5 3 3 3.5 4 4.5 6 7 7.5 12 8 8 8 8 8 9 9 9 10 3,069 2,938 2,632 2,368 2,146 1,903 1,836 1,743 1,562 7 These Are The Good Old Days childhood, with more years of schooling, and a period of leisure after years of work are strictly modern expectations. When jobs and work at home are combined, virtually all segments of society worked less in 1990 than they did two decades before. The gain in leisure was a minuscule few minutes a week for employed men. Thanks largely to labor-saving appliances and other helping hands, women who didn’t work outside the home reaped 10 extra hours of leisure. Employed women saw a six-hour decline in total work. A trend toward more women taking jobs creates one caveat. Women who used to stay at home and now hold jobs may have increased their work—by about 13 hours a week. Inflexibility in the labor market typically requires them to put in a full week, and household chores await at the end of each day. Nevertheless, women with jobs spend less time on housework than their counterparts did 20 years ago, and they are compensated with higher incomes. But does having more free time translate into higher living standards? Statistics from the government and trade groups indicate Americans are spending more time and more money on recreation. From 1970 to 1991, the number of Americans who play golf regularly doubled to 11 percent of the population. Even after adjusting for population growth, the Today, the typical employee spends less than a third of all waking hours working, either at home or on the job. When totaled, the results are mindboggling: workers, on average, have added nearly five years of waking leisure to their lifetimes since 1973. A look back 120 years shows that an extended Less Work, More Leisure Today’s workers may feel pressed for time, but, as a nation, we start to work later in life and work fewer hours than earlier generations. In 1870, Americans could expect to spend 39 percent of their waking hours at leisure. Now, the time we spend in childhood, vacations, evenings, holidays and retirement adds up to 70 percent of our waking hours. ACTIVITY Age starting work (avg.) Life expectancy (years) Retirement age (avg.) Years on job Retirement (years) Annual hours worked Annual hours home work 1870 13 43.5 death 30.5 0 3,069 1,825 1950 17.6 67.2 68.5 49.6 0 1,903 1,544 1973 18.5 70.6 64.0 45.5 6.6 1,743 1,391 1990 19.1 75.0 63.6 44.5 11.4 1,562 1,278 LIFETIME HOURS Working at job Working at home Waking leisure 93,604 61,594 99,016 94,389 81,474 216,854 79,307 67,151 266,129 69,509 59,800 308,368 Three Profiles of a Lifetime 5 13 Home Production Work at Job 1870 Waking Leisure Sleep 0 (Birth) 43.5 (Death) 7 17.6 1950 0 (Birth) 67.2 (Death) 10 19.1 10 20 63.6 1990 0 (Birth) 30 40 Age 8 50 60 70 75 (Death) Innovative products are freeing Americans to work when, where and how we choose. 9 New products can make our lives safer, easier—or just more fun. 10 A Report On U.S. Living Standards number of adult softball teams jumped sixfold in two decades. In 1970, a quarter of Americans bowled; now, a third do. Ownership rates rose 50 percent for recreational boats and more than doubled for vacation homes. Pleasure trips per capita rose from 1.5 a year in 1980 to 1.8 in 1991. Average attendance at baseball games rose from 16,100 in 1973 to 31,377 in 1992. Football, hockey, basketball, golf and car racing are drawing bigger crowds—in person and on television. Cultural activities haven’t been short-changed. Per capita attendance at symphonies and operas doubled from 1970 to 1991. We’re reading more books; annual sales rose from 6.6 per person in 1974 to 8.1 in 1991. Money going to leisure activities has risen rapidly, too. From 1970 to 1990, spending rose from $1.2 billion to $4.1 billion for recreational vehicles, $2.7 billion to $7.6 billion for pleasure boats and $17 billion to $44 billion for sporting goods. Total recreational spending, adjusted for inflation, jumped from $91.3 billion in 1970 to $257.3 billion in 1990, an average annual gain of 9.1 percent that well outstrips population growth of 1 percent a year. In 20 years, the money consumers allocated to recreation increased from 5 percent of total spending to nearly 8 percent. The fact that Americans cram their off-work hours with all these recreational activities suggests we’re wealthier—financially better off to make use of the time off we’ve gained. Work hours and family budgets reveal what GNP numbers don’t: an explosion of leisure is improving the American lifestyle. Out of the Home and into the Market As U.S. living standards have risen, and especially as more women have entered the work force, chores once done by family members have become services provided by the marketplace. HOME ACTIVITY BUSINESS OR INDUSTRY Yardwork Mow the lawn Prune trees Trim bushes Weed and fertilize Install sprinklers Lawn mowing Tree service Yard maintenance Lawn and garden care Yard service Clothing Wash and dry clothes Maid, dry cleaning Iron, starch and fold clothes Laundry, dry cleaning Sew, knit and tailor garments Clothing makers, tailors Food Grow fruit and vegetables Raise livestock Preserve fruits and vegetables Slaughter and cure meat Cook and serve meals Clean the dishes Farming Ranching Canning, packaging Butchery Restaurant, catering Restaurant Household maintenance Clean house Wash windows Shampoo rugs Clean drapes Make minor repairs Repair appliances Paint the house Make or restore furniture Build homes or additions Design the home Decorate the home Exterminate pests Maids Window cleaning Carpet and rug cleaners Drapery cleaners Plumber, electrician Appliance repair House painting Furniture, upholsterers Home building, construction Architects Interior decorators Pest control, exterminator Family finances The Lost Art of Canning Vegetables Fill out tax forms Establish a financial plan Manage investments Prepare will, legal documents One way critics put down the U.S. economy is to say, “We’re becoming a nation of hamburger flippers.” Truth is, however, somebody always flipped hamburgers, or at least did the equivalent in preparing daily meals, usually in the home. In fact, running a household requires a daunting list of chores— cooking, cleaning, gardening, child care, shopping, banking, ferrying family members to ballet lessons and soccer practice. As Americans grow richer, many chores once done by family members are moving out of home production and into the market or, like gardening and canning, becoming hobbies rather than necessities. More so today than in the past, it’s more efficient for workers to spend time earning money doing what they do best on the job, then pay others to perform at least some household tasks. In modern economies, market alternatives to home production are readily available. To the extent they can afford it, Accountants, tax preparers Financial planners Brokerages Lawyers Personal care Cut and set hair Groom (manicures, facials) Educate children Babysit Administer health or medical needs Care for the elderly Exercise (jogging, calisthenics) Barber, beauty salon Beauty shops Schools, colleges Child care centers Doctors, hospital Nursing home Health and fitness centers Automobiles Maintain vehicles (change oil) Auto service station Wash and vacuum vehicles Car wash Repair vehicles Auto repair Miscellaneous Make gifts Care for pets Cut and split wood Repair mowers, bikes 11 Gift and craft shops Kennel, veterinarian Firewood, central heating Machine shops These Are The Good Old Days There’s a paradox in the GNP method of accounting. If a person were to marry his or her doctor (gardener, plumber, hair dresser, tax accountant and so forth) and no longer pay for these services, measured economic activity would decline by the amount of the professional fee. The family’s true standard of living, however, would remain unchanged. This distortion reveals that GNP understates living standards by the value of what’s produced and consumed in the home. Estimates suggest home production, if properly accounted for, would have boosted America’s 1992 GNP by about a third, or $2 trillion. Failure to properly account for households’ nonmarket production probably wouldn’t skew growth rates if the proportion of home and market consumption remained stable over time. The data show, however, that home production fell steadily from 45 percent of GNP at the end of World War II to 33 percent in 1973. It then leveled off. What was the impact on measured growth? The transfer of household chores to the market added 1.3 percentage points to measured annual GNP growth prior to 1973, implying an underlying growth rate for the period of just 2.2 percent. Adjustments after 1973 are insignificant. Merely recognizing the contribution of household production could bring growth rates of the past two decades into line with those experienced in the 1950s and 1960s. New and Improved From gadgets to wonder drugs, the list of products available to Americans gets longer by the day. A sampling of new or greatly improved products since 1970 Microwave oven Videocassette recorder Camcorder Laser printers Voice mail Cordless phone Cellular phone Personal computer Ultrasound Answering machine Home security systems Small-screen TVs Synthesizers CDs and CD players Pagers Remote controls Quartz/digital watches Sound systems Fax machines Digital/LED displays Coffee makers Video games Electronic date books Food processors Electric knives Aspartame In-line rollerskates Interactive toys Miniature radios Cable TV Exercise equipment Airbags All-terrain vehicles Medical advances since 1970 Cosmetics (Retin-A) CAT-scan Organ transplants Radial kerotonomy Artificial pancreas Monoclonal antibodies Painkillers In vitro fertilization (acetaminophen, Soft contact lenses ibuprofen) Cornea transplants Cosmetic surgery Decongestants (facelifts, implants, Anti-allergenics liposuction) Home pregnancy tests Biosynthesized drugs Anti-depressants (recombinant DNA Anti-ulcer drugs techniques) Not Just More, But Better, Too In judging whether Americans are better off, what should matter most are goods and services that bring enjoyment, provide convenience or reduce discomfort. In other words, the focus ought to be on consumption—the bulk, but not all, of GNP. Artifacts of everyday life provide proof of rising consumption during the past quarter century. The average number of televisions in a household rose from 1.4 in 1970 to 2.1 in 1990. Among those 15 years and older, passenger vehicles per 100,000 people increased from 61,400 in 1970 to 73,000 in 1991. Americans are enjoying more luxuries, too. The average amount spent on jewelry and watches, after adjusting for higher prices, more than doubled from 1970 to 1991. Many Americans live in bigger and better houses. From 1970 to 1992, an average new home increased in size by the equivalent of two 15-foot by 20-foot rooms. New houses are much more likely to have central air conditioning and garages. What about stories that fewer U.S. residents can afford the essential piece of the American dream—a home of their own? The data don’t support it. The rate of home ownership has held steady at around 65 percent of households hire professionals to cook, clean, paint, design landscapes, figure taxes and much more. Americans, for example, are finding ways to ease the burden of cooking at home. In 1993, restaurants received 43 percent of the country’s spending on food, a big gain from the 33 percent of 1972. Eating out, once an occasional luxury, has become a way of life. Even when we eat at home, we often rely more on market goods—heat-and-serve products, microwave meals and carry-out items. Usually, these shortcuts raise the cost of feeding a family, but as consumers become wealthier, they often opt to pay extra for ease and convenience. Entrepreneurs haven’t missed the trend away from home production: nearly all businesses whose services replace home production have shown strong gains in employment and sales in recent years. 12 Medical breakthroughs are enhancing and prolonging our lives. 13 With today’s technology, almost no place is out of reach. 14 A Report On U.S. Living Standards their own, make our lives safer, easier, more convenient or just plain more fun. Few facets of life are untouched by the arrival of new and better products, and GNP’s measurement of consumption can easily fall short of properly accounting for improvements in quality. The traditional measures of standard of living—real per capita income, for example—use an index to compensate for rising prices. Statisticians can calculate exactly what Americans pay for cars, clothing, computers and clocks and occasionally try to adjust for better quality, but even their best efforts aren’t likely to keep pace with the dizzying blitz of new products and features in a dynamic global economy. Price indexes, too, are apt to understate gains in product longevity, new features or better performance. The price of a tire, for example, rose from $13 in the mid-1930s to about $70 in early 1994, entering into a price index for tires as an increase of about 1.5 percent a year. However, today’s steel-belted radials last more than 10 times longer than the old four-ply cotton tires. Based on cost per 1,000 miles, tires now actually sell for less than half what they did 50 years ago. Even more astounding, an average worker in the 1930s worked almost four hours to buy those 1,000 miles. Today, the cost is less than five minutes. The benefits don’t stop there: drivers in safer cars are better off because they have fewer accidents, reducing the amount of time and money spent on repairs. Safer highways may lower GNP, but they raise the standard of living. Quirks of this sort permeate the price indexes. Modern fabrics last longer and require less care, adding to the value of clothing and linens. Frost-free refrigerators make the messy chore of defrosting a fading memory. In just the past decade, computers and the software to run them improved in speed, memory and ease of use by leaps and bounds. The rapidly rising cost of health care is a major national issue, but at least part of the increase in hospital fees and drug prices is the result of better quality. Car lovers may wax nostalgic about the Corvettes and Mustangs of yesteryear, but today’s cars go farther on a gallon of gas. What’s more, they’ve been improved with antilock brakes, fuel injectors, turbochargers, cruise control and sound systems that outperform even the home stereos of 1970. Today’s cars, with as many as 25 tiny microprocessors aboard, require less maintenance, too. Price indexes are also slow to incorporate the myriad of new products coming into common use. Pocket calculators entered the U.S. consumer price index in 1978 — only after the prices for these the population since 1970, and there’s overwhelming evidence that today’s houses are stocked with more appliances and gadgets than ever. Microwave ovens, color televisions, videocassette recorders, answering machines, food processors, camcorders and exercise equipment are all now standard in many American homes. Three-quarters of U.S. homes had a clothes washer in 1990, up from less than two-thirds in 1970. At the same time, ownership of dryers jumped from 45 percent of households to almost 70 percent. About 45 percent of homes had dishwashers, up from 26 percent two decades ago. Between 1970 and 1990, the typical U.S. household gained 4.5 times more audio and video products, more than twice as much gear for sports and hobbies, 50 percent more in kitchen appliances and 30 percent more in furniture. In short, most Americans consume far more than previous generations. Of course, we could be paying for our consumption by depleting our savings. The evidence, however, says it isn’t so. Although Americans may not set aside as much as people in many other countries, the average American still has managed to gain net worth. The stock of real wealth per capita rose by 2 percent a year from 1970 to 1990. The nation has had the best of two worlds: consuming more in the present and setting aside more for the future—not a bad standard for “better off.” The news gets even better. As consumers, Americans can now possess products that didn’t even exist for past generations. Twenty years ago, only a lucky few could show movies at home. Today, two of every three U.S. households own videocassette recorders. When Elvis was king of rock ’n’ roll, many of his records succumbed to warps and scratches. Today’s compact discs give us concert hall-quality sound. A decade ago, most motorists had to search out a pay telephone to make a call. Today, cellular technology has put a phone in millions of cars. Companies served 11 million subscribers in 1992, up from a mere 92,000 in 1984. The past 20 years also brought many important medical breakthroughs— new drugs, new treatments and new diagnostic tools—to enhance and prolong our lives. We hardly notice many innovations that improve service. Fiber-optic cables greatly expand the capacity of telephone lines. Lasers on cash registers help speed us through check-out lines by scanning bar codes. Airbags await to cushion us from the impact of traffic accidents. Microprocessors guide pilots and air-traffic controllers. Doppler radar makes weather forecasts more reliable. These and a host of other products, many embedded with tiny silicon brains of 15 These Are The Good Old Days Quality of Life smaller, more powerful models fell by 98 percent from those of the electromechanical desktop devices they replaced. Statisticians missed 99 percent of the price decrease in penicillin. The list could go on: quality improvements are widespread in an age of advanced technology, with new products coming to the market just about every week. Any failure to properly account for better quality makes price indexes exaggerate increases in the cost of living. Economists frequently debate the extent of upward bias in inflation, but some studies suggest the bias might be significant—from a low of a third of a percentage point a year to as much as 2 percentage points over the past two decades. When price indexes overcompensate for inflation, they make GNP growth seem smaller than it actually is. Price-index problems have always existed. New products have been introduced and improvements in quality have taken place in previous eras, but there’s reason to believe they are greater now, during rapidly expanding technology and trade. Companies face intensifying competition and shrinking product cycles: the latest breakthroughs and updated models seem to be coming faster and faster. Record players reigned for decades before cassette tapes. The time between cassettes and compact discs was much shorter. Now, digital audio tape and recordable CDs are arriving. New models of computer chips once came out every few years. Now, it’s nearly an annual event. Accelerated technical progress makes it harder for the statisticians to accurately measure GNP and harder for GNP to serve as a proxy for living standards. While GNP is measured in dollars and cents, many factors affect living standards. Trends toward longer life spans, fewer accidents and decreasing air pollution suggest that U.S. living standards have continued to improve in recent years. New data even show progress in fighting crime. Longevity Years of age 80 70 60 50 40 1890 1910 1930 1950 1970 1990 Accidental Deaths Rate per 100,000 80 70 60 50 40 30 ’45 ’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’91 Air Pollution Index 110 Some Other Rays of Light 90 More leisure and higher consumption aren’t the only ways people’s lives have improved. Especially as societies become richer, citizens tend to put greater importance on nonmaterial factors that affect living standards: better health, safety, more pleasant working conditions, a cleaner environment. All of us could add other considerations we value. “The good life” becomes harder to measure when we move beyond the dollars and cents accounting of GNP data. Even so, there is evidence to counter fears that U.S. living standards are getting worse. Longevity may be the most important measure of well-being in a modern society. The data show that an average American’s life expectancy at birth has increased each decade during the past century. As might be expected, the biggest gains came in the first half of the 20th century, but the upward trend continues. In the past decade, the life span rose by more than one year and eight months. 70 50 30 ’40 ’50 ’60 ’70 ’80 ’85 ’91 Crime Rate per 100,000 6,000 5,000 4,000 3,000 2,000 1,000 ’60 ’65 ’70 ’75 ’80 ’83 ’85 ’87 ’89 ’91 ’92 16 Many Americans use leisure time to pursue better health. 17 As technological innovations and economic progress continue, today’s children can expect longer life spans and higher living standards. 18 A Report On U.S. Living Standards the bumper-to-bumper grind of an old-style commute. Imagine the possibilities: a lucky worker can type a report into a laptop computer while sitting in a beach chair in Maui, then send it to the office in Dallas via cellular circuits. With improving battery technology, there’s no need for even an extension cord. Safety at work has gotten better, too. Accidental deaths at work have declined consistently since at least 1945. Injuries on the job haven’t declined in recent years, but they are well below the levels of previous decades. If the hot, unsavory sweat shop symbolized the workplace of a bygone era, today’s standard might be the air-conditioned office and, at an increasing number of firms, employee cafeterias, daycare centers, break rooms and exercise facilities. Some data show that wages fell over the past 20 years. Yet those statistical series ignore the rapid growth of fringe benefits: with high tax rates, workers often prefer to take their higher pay in the form of additional health care, contributions to retirement funds or employee assistance programs. Figures on total compensation, which include extras employers pay for, don’t show a decline. Some workers are finding their benefits packages becoming leaner, but many others are getting new perks. Overall, nonpay compensation as a percentage of payroll is up a third since 1970. Compared with a generation ago, more employers are offering eye care, dental plans, paid maternity leave and stock-purchase plans. Today’s most progressive companies are starting to offer day care and paternity leave. It’s impossible to prove whether workplace abuses are declining. Even so, workers today have greater redress for unfair dismissal, sexual harassment and other problems. Americans are also making progress in improving the environment. Levels of such major pollutants as particulate matter, sulfur oxides, volatile organic compounds, carbon monoxide and lead were their highest in 1970 or before. Levels of nitrogen oxides peaked in 1980. Overall, air quality is better now than at any time since data collection in 1940. Water quality has improved since the 1960s, when authorities banned fishing in Lake Erie and fires erupted on the polluted Cuyahoga River near Cleveland. The U.S. Geological Survey, examining trends since 1980, found that fecal coliform bacteria and phosphorous have decreased substantially in many parts of the country. Other traditional indicators of water quality— dissolved oxygen, dissolved solids, nitrate and suspended sediments—have shown little change. Despite such gains, we live in a complex world, and it would be surprising if by every measure the country’s life were getting better. The general gains What’s more, the population generally sees itself as healthier. Surveys by the U.S. Department of Health and Human Services show a steady drop in the proportion of Americans who rate their health as “fair or poor,” from 12.2 percent in 1975 to 9.3 percent in 1991. Infant mortality rates fell from 20 deaths per 1,000 live births in 1970 to less than nine in 1991. The death rate from natural causes fell by 27 percent from 1970 to 1990, with the most progress coming in diseases of the heart. Cancer death rates are up slightly, but modern medical science provides treatments that prolong life. The portion of the adult population with high cholesterol fell sharply over the past two decades. What once was fatal can in many cases now be treated. Heart, liver and lung transplants, almost unheard of in the early 1970s, are common today. The country isn’t just healthier; it’s also safer in some respects. Accidental deaths have declined in every category, especially since 1970. Homes are safer. The workplace is safer. In 1991, 88,000 Americans died in accidents, the lowest figure since 1924. Highway deaths totaled 43,500 in 1991, the lowest they’ve been since 1962. Even more encouraging, the death rate per 100 million miles traveled on the nation’s roads fell from three in 1975 to 1.8 in 1990. At the higher rate, an additional 25,000 people would have died in 1990. The incidence of death from crashes of scheduled airliners has decreased to just a fraction of what it was 20 years ago. When it comes to time at work, improvement in the quality of life continues, at least for most Americans. The trend toward service employment has rescued many Americans from the daily grind of the manufacturing assembly line. And in manufacturing, modern robots assist worker effort, meaning less wear and tear on the human body. Observers also find greater workplace flexibility in the form of breaks, exercising and socializing. Properly understood, this time isn’t shirking. It goes for rest, birthday parties, fitness classes and awards ceremonies that employers support as tools to improve morale and efficiency. What’s more, trends point toward greater flexibility of scheduling to reduce stress involved in meeting family responsibilities. The number of people with flexible job hours rose from 9.1 million in 1985 to 12.1 million in 1991. New technologies— modems, E-mail, fax machines, digital networks— create opportunities for unheard of freedom from the confines of yesterday’s 8-to-5 straitjacket. The ranks of white-collar telecommuters, for example, swelled to 6.6 million in 1992, saving at least some employees 19 These Are The Good Old Days progress was hardly questioned. Why, then, do so many people seem to feel the country has lost its momentum? The question defies an easy answer. Part of the reason may be that many people aren’t aware of the quiet improvement in so many areas of their lives—from more leisure to bigger houses and better health. They are, on the other hand, tuned into ills around them on a daily basis — AIDs, global warming and crime, to cite just three examples. And rightly so: these are problems that need attention. Furthermore, there’s a normal human tendency to romanticize the past. Looking back at the highgrowth years from 1960 to 1973, for example, the nostalgic may gloss over many unsettling events. The country wrestled with the real possibility of nuclear annihilation, an unpopular war in Vietnam, racial strife that erupted in rioting, assassinations, political scandal and high rates of poverty. Many later problems— inflation in the 1970s, toxic waste dumps that needed cleaning up in the 1980s—trace their origins back to those “good old days.” History books can tell us about how Americans once lived. For the grandparents or great-grandparents of today’s workers, life really was a struggle. Hours of work stretched from dawn to well after dusk. Workplaces were often dimly lit, dirty and dangerous. Houses were hot in the summer, cold in the winter. At home, the daily chores were unending and backbreaking. Death came early. The social critics of the time attributed much of the harshness of everyday life to the failings of capitalism. Looking backward over a century or more, though, it’s obvious that the free enterprise system works— and works well, so long as private profit incentives are unfettered by government taxes, regulation, debt, policy instability or other burdens. Herein lies the secret to growth. If we let the system work, then every successive generation ought to be able to claim that “these are the good old days.” Few Americans would fail to recognize that living standards have improved by leaps and bounds over the long sweep of time. Our Rip Van Winkle, his eyes not blinded by nostalgia or negativism, sees quite clearly that it’s still true today. His fresh perspective affirms the promise of even higher living standards in the future—as long as we allow the free enterprise system to work. ¢ in health are clouded by the AIDS epidemic. Air and water may be getting cleaner, but they still aren’t pristine. Environmentalists warn of global warming, deforestation, hazardous waste dumping and endangered species. Working conditions may have become more pleasant for most Americans, but some workers displaced by downsizing may have new jobs that aren’t as good as the ones they lost, or they may have no job at all. Even among the 120 million employed in the United States, reports of widespread layoffs cause anxiety about job security. We are even more anxious about the increasing incidence of crime and violence. In polls taken in early 1994, crime ranked first among Americans’ worries. The data indicate why. Crime worsened in the 1970s and remains high. But even here there’s some encouraging news. Figures for the first half of 1993 show that crime rates are ebbing—by 3 percent in violent offenses. Clearly, Americans’ well-being will improve if the country can sustain a trend toward less crime. Diseases, pollution, unemployment and crime are but a few of the threats to our living standards, but we should not let them overshadow two decades of progress. A Last Look at Standards of Living Rising living standards may be the ultimate test of an economic system. The very notion of economic progress depends in large measure on the potential for most people to become increasingly better off. Successful economies make their citizens richer and happier. Failing ones leave them poorer. Americans may question whether we’re becoming better off. By historical standards, the past two decades’ 2.5-percent growth in GNP just doesn’t measure up. But GNP does not tell the whole story. A more careful look at leisure, home production, new products, quality improvements and noneconomic indicators casts doubt on claims that the U.S. economy’s rate of progress peaked a generation ago. If nothing else, this broader view proves the concept of standard of living cannot be captured by one or two numbers. By broadening our view, we find evidence that Americans are still building a better life. When all’s said and done, the gains in recent years probably aren’t too different from what they were a generation ago, when capitalism’s capacity for 20 Americans today can look forward to retirement years, something that was almost unheard of in our great-grandparents’ era. 21 Catching Up I N THE PAST TWO DECADES, Americans worried not only about the country’s ability to keep pace with its own past performance but also about a failure to grow as fast as many other countries. The numbers are fairly familiar. From 1973 to 1990, per capita GNP in the United States grew by an average 1.5 percent a year. By contrast, average annual economic gains were 3.1 percent for Japan and 2 percent for Germany. While the United States seemed to crawl forward, such developing countries as Korea, Taiwan, Thailand and, most recently, China managed to get their economies moving briskly. About GNP growth, Americans often ask, why are other nations doing so much better? The answer lies in a notion called convergence. Envision an explorer wielding a machete to cut a path through a dense jungle. He goes slowly, hacking his way forward, destination not really known. Those who come behind him have a much easier time of it. They see the path. They know where they’re going. They can move faster, gaining ground on the trailblazer. That’s just about what happens with economies. Using the sharp saber of free enterprise, the most advanced nations open the pathway for others by developing markets, technology, business systems and infrastructure—in effect, creating a successful model. Less developed countries can quickly adopt what works and exploit existing markets, and it shows up in faster rates of growth. In short, catching up takes less effort. Some nations don’t emulate successful examples. Those that do tend to converge with the leaders in economic performance. Without question, other nations are catching up to the United States. Per capita output in Japan rose from 50 percent of the U.S. average in 1970 to 72 percent in 1992. Germany moved up from 63 percent to 70 percent. Even so, the United States still hasn’t lost its lead—and it’s not likely to do so. As other countries move closer to the U.S. level of development, their growth rates slow and converge toward the U.S. performance. Take Japan, for example. Its average annual growth rate outdid that of the United States by 6.9 percentage points in the 1960s, by 2.3 percentage points in the 1970s and by 1.7 percentage points in the 1980s. At the end of the latest decade, some predicted Japan would overtake the United States as the world’s biggest economy. In the 1990s, however, both countries are likely to grow at about the same rate. Unless Japan experiences a renewed spurt of growth, it will not catch the United States. To some Americans, faster growth abroad is a threat. Nothing could be further from the truth. The United States doesn’t benefit when other countries stumble economically. Quite to the contrary, strong growth abroad provides opportunities for U.S. exports and business deals. All countries will move faster if they travel together. ¢ A High Standard For decades, the United States was the unchallenged leader in per capita GNP growth. Since the 1950s, GNP in other countries has risen faster than, but failed to match, the U.S. level. Real GNP per capita 32,000 16,000 8,000 United States Australia United Kingdom Sweden France Germany Japan 4,000 2,000 1,000 ’50 ’55 ’60 ’65 ’70 22 ’75 ’80 ’85 ’90 Secrets of Growth E A ’ VEN IF MERICANS living standards aren’t slipping, the U.S. economy can do better. Boosting the rate of GNP growth would make Americans even better off and help solve some of the country’s problems —unemployment, poverty and budget deficits, to name just a few. The U.S. economy has expanded by an average of 2.5 percent a year since 1973. Present and future generations of Americans would end up with much higher living standards if the economy could jump back to the 3.5-percent standard set in the century before 1973. The mathematics of it are straightforward but the results eye-opening: at the end of an average lifetime, the economy would be twice as large with the addition of just one percentage point a year to growth. Inquiry into what makes economies grow dates back at least as far as Adam Smith’s Wealth of Nations, published in 1776. In the past decade, with growth slowing in many parts of the world, the question has experienced a revival of interest, becoming one of economists’ hottest research topics. The latest thinking recognizes that growth doesn’t just happen. Instead, it arises out of the economic environment itself. The key is a stable framework of rights, freedoms and incentives that will spur individuals to work, businesses to produce and entrepreneurs to innovate. In a free enterprise system, growth is a natural and continuous process, but it must be nurtured by the correct policies. The following are the basic secrets of growth. Establish and preserve property rights. Private ownership of the means of production allows individuals to reap the rewards from economic activity, thus encouraging efficient use of resources to satisfy consumer wants. People produce more when working Endogenous Growth: Capitalism’s Perpetual Motion Machine Insatiable consumer wants, combined with the pursuit of self-interest, provide an endless fuel for economic growth. This diagram illustrates how the process works. Consumers will always want more than they have. The profit incentive, when allowed to operate, will continually power a quest for new ways to meet the needs of consumers. Innovation leads to the introduction of new and better products, which enhances consumption. New firms emerge to produce these products. In the process, they take business from old companies. The rising enterprises hire people for new and better jobs. Living standards rise. Even so, consumers still aren’t satisfied and want more. ’Round and ’round it goes. The system slows if something—bad policies, for example — creates an impediment. The secrets of growth make it go faster. Innovation New and Better Products Profit Incentive More Consumption Services Insatiable Wants New and Better Jobs Higher Standard of Living More Leisure 23 New Firms Emerge; Old Firms Die Secrets of Growth in their own self-interest: altruism is a weak motive when compared with the incentive for profit and personal material gain. Create market-friendly institutions. Markets won’t function properly without an appropriate legal code. Contracts need to be enforced. Property rights need to be upheld. Monopoly needs to be controlled. Institutions should facilitate economic activity and complement innovation. Maintain stable government policies. Households and businesses can pursue their economic interests only if government honors all promises—implicit and explicit. Frequent changes in tax laws or other government policies create uncertainty and instability that can make a mockery of long-range planning. Avoid protecting existing jobs, industries or businesses. The natural forces of creative destruction continuously regenerate the economy, but protection from failure prevents new, better or cheaper products from replacing older ones. By rejecting a paternalistic role for government, decision-making and responsibility stay in citizens’ hands, where they can be best used to make the hard choices that new opportunities bring. Keep taxes low and simple. People will work harder and invest more when they can keep a larger share of what they earn. Taxes that don’t discourage work or investment—such as user fees or levies on consumption— are less harmful to the economy. Loopholes and special favors divert resources to less efficient uses. Abstain from excessive regulation. Licenses, permits, fees and other burdens of operating businesses provide the same disincentives as taxes. Efforts to deregulate and privatize will pay off by increasing the rewards of going into business and hiring new employees. Invest in infrastructure. Government spending on transportation facilities and other investment-type projects can enhance the efficiency of the private sector and facilitate commerce. Maintain stable prices. Gyrations in the general price level wreak havoc on decision-making by businesses, households and governments. Steady, sensible control of the supply of money is the key to maintaining the currency’s purchasing power. Low inflation will facilitate the efficient exchange of goods and services. Nurture business credit, particularly for entrepreneurs. Keeping government debt low will conserve credit for use by private business. It’s tempting to try to legislate away credit risk with government guarantees, but such programs distort the allocation of investment funds and supplant the natural discipline of failure in the marketplace. Focus unemployment outlays on retraining. The bulk of unemployment funds should be used to prepare displaced workers for new jobs and provide incentives to work. Only a minimum payment should go for passive unemployment. Make education a priority. A better educated work force is more productive, and it speeds the introduction of new technology. Tax laws ought to treat education as a depreciable capital good, equal to, if not more important than, physical capital. Allowing choice in schools will foster competition and improve quality. Promote free trade. Tariffs, quotas and other trade barriers decrease competition and deny an economy the full advantage of the production efficiencies offered throughout the world. Free trade makes all nations wealthier. ¢ 24 Acknowledgments U.S. Department of Justice, Federal Bureau of Investigation, Uniform Crime Reports for the United States, 1975, Table 1, Index of Crime, United States, 1960–75; and Uniform Crime Reports for the United States, 1993, Table 1, Index of Crime, United States, 1973 –1992. Acknowledgment “These Are The Good Old Days: A Report on U.S. Living Standards” was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by W. Michael Cox, vice president and economic advisor, Federal Reserve Bank of Dallas. U.S. Department of Labor, Bureau of Labor Statistics, Bulletin 2434, Employment Cost Index and Levels, 1975 –93 (September 1993 and earlier years); Bulletin 2422, Employee Benefits in Medium and Small Establishments, 1991 (May 1993); Bulletin 2370, Employment, Hours, and Earnings, United States, 1909 –90, Volume I (March 1991); Employment and Earnings, monthly (Table A– 4: “Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race,” 1993 and earlier years); Monthly Labor Review, “Trends in Retirement Age by Sex, 1950 – 2005” ( July 1992), “Time-off Benefits in Small Establishments” (March 1992), “Variations in Holidays, Vacations, and Area Pay Levels” (February 1989) and “Absence from Work— Measuring the Hours Lost” (October 1977). Selected Bibliography Atack, Jeremy, and Fred Bateman, “How Long Was the Average Workday in 1880?” Journal of Economic History, March 1992. Balke, Nathan, and Robert J. Gordon, “Prewar Gross National Product,” Journal of Political Economy, February 1989. Desmond, Kevin, A Timetable of Inventions and Discoveries (New York: M. Evans and Co., 1986). Eisner, Robert, The Total Incomes Systems of Accounts (Chicago: University of Chicago Press, 1989). Data Sources for Figures Federal Reserve Bulletin, January 1992 and December 1984. Page 4 The World Through Rip’s Eyes Eisner, Federal Reserve Bulletin (1992 and 1984), National Safety Council, Statistical Abstract of the United States, U.S. Department of Commerce (Current Population Reports and Survey of Current Business), U.S. Department of Energy, U.S. Department of Health and Human Services, U.S. Department of Justice, U.S. Department of Labor (Bulletins 2434, 2422 and 2370; Employment and Earnings ; and Monthly Labor Review —March and July 1992 and 1977). Gordon, Robert J., The Measurement of Durable Goods Prices (Chicago: University of Chicago Press, 1990). Greis, Theresa Diss, The Decline of Annual Hours Worked in the United States Since 1947, Manpower and Human Resources Studies, no. 10, The Wharton School (Philadelphia: University of Philadelphia, 1984). Lund, Robert L., “Truth About the American Productive System,” in collaboration with Earl Reeves in Truth About the New Deal (New York: Longmans, Green and Co., 1936). Growth of U.S. Gross National Product, 1870 –1990 Balke and Gordon and U.S. Department of Commerce (Current Population Reports, Historical Statistics of the United States and Survey of Current Business). Maddison, Angus, Dynamic Forces in Capitalist Development (New York: Oxford University Press, 1991) and Economic Growth in the West (New York: The Twentieth Century Fund, 1964). Page 7 Work Time Atack and Bateman, Eisner, Greis, Maddison (1991 and 1964), U.S. Department of Commerce (Survey of Current Business) and U.S. Department of Labor (Bulletin 2370 and Monthly Labor Review — March and July 1992, 1989, 1977). National Safety Council, Accident Facts, 1992. Statistical Abstract of the United States, various issues. U.S. Department of Commerce, Bureau of the Census, Current Population Reports, series P– 65; Computer Use in the United States: 1989, series P–23, no. 171; and Historical Statistics of the United States: Colonial Times to 1970. Page 8 Less Work, More Leisure and Three Profiles of a Lifetime U.S. Department of Commerce (Historical Statistics of the United States), U.S. Department of Health and Human Services (Vital Statistics of the United States); see also page 7 sources. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, January 1992. Page 16 Quality of Life U.S. Department of Commerce (Current Population Reports), National Safety Council, Statistical Abstract of the United States, U.S. Department of Justice. U.S. Department of Energy, Office of Energy Markets and End Use, U.S. Residential Energy Consumption Survey, Housing Characteristics, annual, 1990 and various issues. U.S. Department of Health and Human Services, Public Health Services, National Center for Health Statistics, Vital Statistics of the United States, 1984 and annual; and Health United States 1992 and Healthy People 2000 Review, August 1993. Page 22 A High Standard Maddison (1991). 25 T H E ◆ ◆ YEAR -in- REVIEW IN 1993, OF DALLAS THE FEDERAL RESERVE BANK BUILT UPON THE FOUNDATION LAID BY ITS MOVE INTO STATE-OF-THE-ART FACILITIES A YEAR EARLIER. EFFORTS TO STREAMLINE OPERA- TIONS AND INCORPORATE TECHNOLOGICAL ADVANCES PAID SIGNIFICANT DIVIDENDS BY PROVIDING INCREASED EFFICIENCY AND EXPANDED E LEVENTH DISTRICT’S FINANCIAL INSTITUTIONS. MOREOVER, FLEXIBILITY IN SERVICES TO THE 26 The Year in Review continued moves toward consolidation in the Dallas amount of time required to resolve adjustments, an Fed’s operational areas were carefully balanced with increase in productivity and a reduction in costs, all the development of several programs to enhance of which translated into savings that will be passed quality and customer service. Overall, 1993 was a year in which the Bank took advantage of a variety of on to the Bank’s customers. Moreover, to meet the innovative programs and ideas to meet the challenge help customers operate as efficiently as possible, the of providing cost-effective and reliable financial Bank developed more than a dozen new paper- services while promoting safe and sound banking and electronic-check products. Advances were also and economic growth throughout the District. made in the Bank’s system for handling check adjustments, as tests were completed for an automated Eleventh District Economic Overview adjustments system that will be implemented in early multiplying financial service needs in the District and The Eleventh District experienced moderate 1994. The new system will improve the level of economic growth in 1993, outperforming the national service to financial institutions by increasing the economy for the fourth consecutive year. Nonfarm number of adjustments cases that can be researched employment in Texas, Louisiana and New Mexico and resolved on a same-day basis. In addition, in rose 2.2 percent last year, compared with 1.8 percent 1993 the Bank laid the groundwork to test medium- for the nation. Texas posted a gain of more than 2 speed check imaging. Successful completion of a percent, while New Mexico showed the greatest pilot project will enable the Dallas Fed to provide strength with an employment increase of more than state-of-the-art check imaging services throughout 4.5 percent. Louisiana’s increase was 1.2 percent. The primary factors behind the Texas economy’s the District beginning in mid-1994. growth were strong construction activity, a stable top priority was strengthening procedures to ensure energy industry and exports to Mexico. Industries quality and security and integrating a new currency that trade with Mexico were among Texas’ strongest vault materials handling process into the automated in 1993 and should receive a boost in 1994 from a cash management system. The Bank also advanced stronger Mexican economy and the passage of the North American Free Trade Agreement. Low interest the Federal Reserve System’s efforts to improve the quality of currency in circulation by hosting a series rates, stable home values and favorable demographics of cash operations seminars for financial institutions continued to fuel growth in single-family home con- throughout the District, and added an international struction in the state, while high natural gas prices dimension to the System’s effort to increase counter- encouraged relatively strong drilling activity. feit awareness by holding detection symposiums for In currency and coin operations, the Dallas Fed’s The principal sources of strength in New Mexico management and staff at Banco de México. were business relocation and expansion, a single- Continuing the System’s consolidation of its family housing boom and an increase in natural gas computer operations, the Bank’s automated clearing- production. Louisiana, meanwhile, continued to house (ACH) and funds transfer functions were combat losses in the energy industry, as falling oil successfully shifted to Federal Reserve Automation prices led to more movement out of the oil extraction business and worldwide demand for chemical Services at the Dallas Fed and at the Federal Reserve products remained weak. dation sites. ACH and funds transfer customers Bank of Richmond, two of the three System consoliexperienced no service disruptions during the transition, and the Bank was able to make progress in Dallas Fed Financial Services In 1993, the Dallas Fed focused its financial services efforts on improving the quality of products reducing electronic payments-related expenses. The Dallas Fed’s securities area was also heavily and services and implementing an aggressive cost involved in consolidation activities that take advan- containment program. In check collection, this tage of advances in automation technology. The resulted in fewer internal errors, a reduction in the Bank’s book-entry securities processing function and 27 The Year in Review its data processing support for Treasury tax and loan holding companies under Dallas Fed supervision last and savings bond applications were both transferred year controlled 650 insured commercial banks that to automation consolidation sites, and the District’s hold approximately 34 percent of all insured com- savings bond operations were merged with those of mercial bank assets in the District. Foreign banks the Federal Reserve Bank of Kansas City. continue to play a significant role in the District’s financial activities, with 36 foreign banks from 14 countries operating 21 state-licensed agencies and 23 Banking Supervision; Discount and Credit representative offices. In 1993, low market interest rates, wide interest spreads and changes in accounting rules helped the Research and Public Affairs Economic research and public affairs activities at Eleventh District’s commercial banking industry post another year of strong profits. The return on District the Dallas Fed in 1993 focused on the promotion of banking assets was 1.4 percent, exceeding the 1.2 a better understanding of free enterprise and its percent return of 1992. Moreover, the number of significance to the Southwest region’s economy, bank failures, which dropped from 31 in 1992 to 10 particularly in the area of free trade. The year was in 1993, was the lowest in eight years. highlighted by efforts to research and provide information on the international aspects of free trade— As the supervisor of state member banks and bank holding companies in the District, the Dallas from exchange rates, the role of financial institutions Fed is responsible for conducting examinations for in the international economy and intellectual property safety and soundness and for compliance with rights to developing-country debt and the Mexican consumer protection laws as well as the Community financial system. Moreover, the Center for Latin Reinvestment Act. Reflecting the stable health of the American Economics was established at the Bank to District’s banking industry, the Bank conducted foster further research in this area. The Bank also nearly the same number of examinations last year as studied the financial industry, looking into such the year before—432 examinations in 1993 com- issues as the “missing money” in the M2 figures, pared with 430 exams in 1992. Of the 432 examinations, 41 were reviews for compliance with consumer recession and recovery cycles, and the credit crunch. Numerous publications were produced for a and civil rights legislation. variety of Eleventh District audiences in support of the Bank’s research and economic education efforts. Consolidation activity in the Eleventh District in 1993 increased slightly from a year earlier. The Dallas In addition to regular issues of Economic Review, The Fed processed 229 applications for mergers and Southwest Economy, Financial Industry Studies, acquisitions, changes in control and management, Financial Industry Issues and Houston Business, and other actions requiring regulatory approval, up special editions of The Southwest Economy focusing from 207 such applications in 1992. on NAFTA and on the missing M2 were generated, as were two economic study guides for teachers and Because of a substantial decrease in seasonal lending to meet the temporary liquidity needs of student-oriented brochures on labor and international financial institutions in the District, the number of trade. The Bank sponsored a pair of conferences in loans extended by the Dallas Fed’s discount window 1993—one on imperatives for banking in the 1990s, dropped from 521 in 1992 to 210 in 1993, with total the other on North American free trade—and held credit extended decreasing from $1.3 billion in 1992 nearly two dozen workshops across the District to to $380 million in 1993. educate teachers on such topics as free enterprise and The 52 state-chartered banks under the Dallas Fed’s supervision in 1993 represented about 4 free trade. As part of its continuing efforts to encourage community development in the region, the Bank percent of all insured commercial banks in the also hosted a community investment lending confer- District and held more than 2 percent of all insured ence and conducted several workshops on commu- commercial bank assets. The more than 530 bank nity reinvestment policy issues and requirements. 28 The Year in Review One of the final public affairs activities of the year— an effort that should, well into the future, educate the public about the central bank’s role in maintaining a stable economy—was the completion of Bank tour exhibits. Designed and constructed over a period of two years, the exhibits will serve as the focal point of public tours that will begin at the Bank in 1994. In retrospect, the Dallas Fed’s activities in 1993 reflect a heightened effort to meet the multiplying needs of its constituents. Even as the banking industry continues to undergo major change, the Dallas Fed’s objectives remain consistent—to provide the highest quality, most cost-efficient financial services available, while serving as a vital conduit for sound banking and economic growth throughout the Eleventh District. ¢ 29 Boards of Directors Federal Reserve Bank of Dallas Chairman: Leo E. Linbeck, Jr. Chairman of the Board and Chief Executive Officer Linbeck Construction Corp. Houston, Texas Deputy Chairman: Cece Smith General Partner Phillips–Smith Specialty Retail Group Dallas, Texas Jeff Austin, Jr. Chairman of the Board Texas National Bank Longview, Texas Milton Carroll Chairman of the Board and Chief Executive Officer Instrument Products, Inc. Houston, Texas J. B. Cooper, Jr. Farmer Roscoe, Texas T. C. Frost Chairman of the Board Frost National Bank San Antonio, Texas Chairman Pro Tem: Alvin T. Johnson President Management Assistance Corp. of America El Paso, Texas Hugo Bustamante, Jr. Owner and Chief Executive Officer ProntoLube, dba ProntoLube El Paso, Texas Veronica K. Callaghan Vice President and Principal KASCO Ventures, Inc. El Paso, Texas Ben H. Haines, Jr. President and Chief Operating Officer First National Bank of Dona Ana County Las Cruces, New Mexico Wayne Merritt Chairman of the Board and President Texas National Bank of Midland Midland, Texas Diana S. Natalicio President The University of Texas at El Paso El Paso, Texas Houston Branch James A. Martin Third General Vice President International Association of Bridge, Structural and Ornamental Iron Workers Austin, Texas Eugene M. Phillips Chairman of the Board and President The First National Bank of Panhandle Panhandle, Texas Peyton Yates President Yates Drilling Co. Artesia, New Mexico Chairman: Judy Ley Allen Partner and Administrator Allen Investments Houston, Texas Federal Advisory Council Member Charles R. Hrdlicka Chairman and Chief Executive Officer Victoria Bank and Trust Victoria, Texas Walter E. Johnson President and Chief Executive Officer Southwest Bank of Texas Houston, Texas Chairman: W. Thomas Beard, III President Leoncita Cattle Co. Alpine, Texas J. Michael Solar Principal Attorney Solar & Ellis L.L.P. Houston, Texas San Antonio Branch Chairman: Erich Wendl President and Chief Executive Officer Maverick Markets, Inc. Corpus Christi, Texas Chairman Pro Tem: Carol L. Thompson Vice President ComputerLand Texas Austin, Texas Gregory W. Crane Chairman of the Board, President and Chief Executive Officer Broadway National Bank San Antonio, Texas Javier Garza Executive Vice President The Laredo National Bank Laredo, Texas Roger R. Hemminghaus Chairman of the Board, President and Chief Executive Officer Diamond Shamrock, Inc. San Antonio, Texas Chairman Pro Tem: I. H. Kempner, III Chairman of the Board Imperial Holly Corp. Sugar Land, Texas T. H. Dippel, Jr. Chairman of the Board and President Brenham Bancshares, Inc. Brenham, Texas El Paso Branch Clive Runnells President and Director Mid-Coast Cable Television, Inc. El Campo, Texas President and Director Runnells Cattle Co. Bay City, Texas Robert C. McNair Chief Executive Officer Cogen Technologies, Inc. Houston, Texas 30 Jack Moore Owner/Manager T. J. Moore Lumber, Inc. Ingram, Texas Sam R. Sparks President Sam R. Sparks, Inc. Progreso, Texas Effective December 31, 1993 Advisory Councils Financial Institutions Small Business and Agriculture James A. Altick President and Chief Executive Officer Central Bank Monroe, Louisiana Joe Alcantar President Alman Electric, Inc. Mesquite, Texas Jack Antonini President and Chief Executive Officer USAA Federal Savings Bank San Antonio, Texas Patrick E. Boyt Managing Partner P. E. Boyt Farms Devers, Texas John H. Arnold President and Chief Executive Officer Southwest Corporate Federal Credit Union Dallas, Texas Ron Davenport Owner Davenport Cattle Co. Friona, Texas Jack A. Collins President and Chief Executive Officer The Bank of the West Austin, Texas Robert D. Dooley Partner KPMG, Peat Marwick Dallas, Texas P. M. Elvir Managing Director Operations and Cash Management Bank One, Texas, N.A. Dallas, Texas T. Mike Field Agriculture and Real Estate Lubbock, Texas Robert G. Greer Chairman Tanglewood Bank, N.A. Houston, Texas Ron Humphreys Senior Vice President Marketing and Operations First Savings Bank FSB Clovis, New Mexico Don Powell Chairman, President and Chief Executive Officer The First National Bank of Amarillo Amarillo, Texas Annette Bailey Hamilton Chairman of the Board Annette 2 Cosmetiques, Inc. Dallas, Texas J. Jay O’Brien Cattleman Amarillo, Texas Lois Farfel Stark President Stark Productions, Inc. Houston, Texas Charles R. Tharp Partner/Manager Tharp Farms Las Cruces, New Mexico Jimmy Seay President and Chief Executive Officer The City National Bank Mineral Wells, Texas L. C. Unfred Farmer New Home, Texas Sandra M. Smith President and Chief Executive Officer Texas Federal Credit Union Dallas, Texas Jeffrey W. Wilson President Cattle Baron Restaurant, Inc. Roswell, New Mexico Hayden D. Watson Executive Vice President First Interstate Bank of Texas, N.A. Houston, Texas Effective December 31, 1993 31 Statement of Condition December 31, 1993 (Thousands) December 31, 1992 (Thousands) ASSETS Gold certificate account 1 Special drawing rights certificate account 2 Coin Loans to depository institutions Securities: Federal agency obligations U.S. government securities Total securities Items in process of collection Bank premises (net) Other assets Interdistrict settlement account TOTAL ASSETS $ 510,000 377,000 41,648 0 $ 463,000 377,000 27,426 0 198,648 14,219,076 $ 14,417,724 511,231 158,195 1,930,269 (2,830,800) $ 15,115,267 198,566 10,822,673 $ 11,021,239 418,164 161,185 1,998,586 2,314,128 $ 16,780,728 $ 12,096,542 $ 14,082,302 2,020,501 9,646 3,767 $ 2,033,914 380,451 112,290 $ 14,623,197 1,808,300 11,092 26,894 $ 1,846,286 355,660 72,594 $ 16,356,842 $ $ LIABILITIES Federal Reserve notes Deposits: Depository institutions Foreign Other Total deposits Deferred credit items Other liabilities TOTAL LIABILITIES CAPITAL ACCOUNTS Capital paid in Surplus TOTAL CAPITAL ACCOUNTS TOTAL LIABILITIES AND CAPITAL ACCOUNTS 246,035 246,035 $ 492,070 $ 15,115,267 1 This Bank’s share of gold certificates deposited by the U.S. Treasury with the Federal Reserve System. 2 This Bank’s share of special drawing rights certificates deposited by the U.S. Treasury with the Federal Reserve Bank of New York. 32 211,943 211,943 $ 423,886 $ 16,780,728 Statement of Operations 1993 (Thousands) CURRENT INCOME Interest on loans Interest on government securities Income on foreign currency Income from priced services Other income Total current income $ $ CURRENT EXPENSES Current operating expenses Less expenses reimbursed Current net operating expenses Cost of earnings credits Current net expenses CURRENT NET INCOME $ $ $ $ PROFIT AND LOSS Additions to current net income: Profit on sales of government securities (net) Profit on foreign exchange transactions (net) Other additions Total additions Deductions from current net income: Loss on sales of government securities (net) Loss on foreign exchange transactions (net) Other deductions Total deductions Net additions (deductions) $ $ $ Cost of unreimbursable Treasury services Assessment by Board of Governors: Expenditures Federal Reserve currency costs NET INCOME AVAILABLE FOR DISTRIBUTION 97 687,482 87,713 54,171 236 829,699 $ 115,241 9,317 105,924 7,932 113,856 715,843 $ 1,583 18,426 10 20,019 $ $ $ $ $ $ $ 181 645,883 168,875 53,345 290 868,574 107,879 8,863 99,016 11,217 110,233 758,341 4,565 0 4 4,569 $ $ 0 0 29,448 29,448 (9,429) $ $ 0 86,081 36 86,117 (81,548) $ 2,371 $ 2,318 $ 9,932 16,564 677,547 $ 10,274 14,354 649,847 $ 33 For the year ended December 31 1992 (Thousands) $ Statement of Surplus 1993 (Thousands) Surplus, January 1 Net income available for distribution LESS: Dividends paid Payments to the U.S. Treasury Net amount transferred to (from) surplus Surplus, December 31 $ $ $ 34 211,943 677,547 14,334 629,121 34,092 246,035 For the year ended December 31 1992 (Thousands) $ $ $ 211,440 649,847 13,077 636,267 503 211,943 Volume of Operations District Summary Number of Pieces Handled 1993 1992 Currency received and counted Coin received and counted Food stamps redeemed Transfers of funds CHECKS HANDLED Commercial—processed* Commercial—fine sorted U.S. government checks ACH ITEMS HANDLED Commercial U.S. government COLLECTION ITEMS HANDLED U.S. government coupons paid Municipal coupons and bonds ISSUES, REDEMPTIONS, EXCHANGES OF U.S. GOVERNMENT SECURITIES Definitive and book-entry LOANS Advances made Dollar Amount (Thousands) 1993 1992 1,137,737,587 1,333,702,015 464,601,664 984,670,412 724,822,479 436,547,796 17,207,161 196,731 2,396,819 15,556,204 127,515 2,241,908 6,434,362 6,199,053 10,636,232,838 8,082,428,378 1,146,543,615 503,800,889 29,740,142 1,105,328,973 476,632,826 29,769,663 671,186,816 139,944,287 31,608,562 607,988,036 124,205,173 36,933,809 151,236,263 50,652,442 128,009,669 46,265,782 576,708,956 60,724,041 509,256,382 54,355,908 8,841 8,305 11,519 132,126 8,577 545,965 9,867 292,312 2,954,922 3,403,064 2,877,908,104 1,876,923,996 210 521 388,882 1,295,073 *Exclusive of checks drawn on Federal Reserve Banks. 35 Officers Federal Reserve Bank of Dallas Genie D. Short Vice President John V. Duca Research Officer Larry M. Snell Vice President William C. Gruben Research Officer W. Arthur Tribble Vice President Evan F. Koenig Research Officer Gloria V. Brown Assistant Vice President and Community Affairs Officer Sharon A. Sweeney Associate Counsel and Associate Secretary Stephen P. A. Brown Assistant Vice President and Senior Economist Evelyn LV. Watkins Accounting Officer Terry B. Campbell Assistant Vice President El Paso Dallas Robert D. McTeer, Jr. President and Chief Executive Officer Tony J. Salvaggio First Vice President and Chief Operating Officer Robert D. Hankins Senior Vice President Larry J. Reck Senior Vice President Harvey Rosenblum Senior Vice President and Director of Research James L. Stull Senior Vice President Robert G. Feil Assistant Vice President Johnny L. Johnson Assistant Vice President Millard E. Sweatt Senior Vice President, General Counsel and Secretary Joanna O. Kolson Assistant Vice President Earl Anderson Vice President C. LaVor Lym Assistant Vice President Basil J. Asaro Vice President James R. McCullin Assistant Vice President Lyne H. Carter Vice President Dean A. Pankonien Assistant Vice President Jack A. Clymer Vice President John R. Phillips Assistant Vice President W. Michael Cox Vice President and Economic Advisor Larry C. Ripley Assistant Vice President Billy J. Dusek Vice President J. Tyrone Gholson Vice President Jerry L. Hedrick Vice President Helen E. Holcomb Vice President Joel L. Koonce, Jr. Vice President Robert F. Langlinais Vice President and General Auditor Rebecca W. Meinzer Vice President Gerald P. O’Driscoll, Jr. Vice President and Economic Advisor Mary M. Rosas Assistant Vice President Gayle Teague Assistant Vice President Michael N. Turner Assistant Vice President Stephen M. Welch Assistant Vice President Marion E. White Assistant Vice President Robert L. Whitman Assistant Vice President Bob W. Williams Assistant Vice President Emilie S. Worthy Assistant Vice President Meredith N. Black Supervisory Information Officer 36 Sam C. Clay Vice President in Charge J. Eloise Guinn Assistant Vice President Javier R. Jimenez Assistant Vice President Houston Robert Smith, III Senior Vice President in Charge Vernon L. Bartee Vice President Richard J. Burda Assistant Vice President René G. Gonzales Assistant Vice President Luther E. Richards Assistant Vice President Robert W. Gilmer Research Officer Kenneth V. McKee Audit Officer San Antonio Thomas H. Robertson Vice President in Charge Taylor H. Barbee Assistant Vice President Richard A. Gutierrez Assistant Vice President D. Karen Salisbury Operations Officer Effective January 1, 1994 The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States. Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve System and function as the nation’s central bank. The System’s basic purpose is to provide a flow of money and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks supervise banks and bank holding companies and provide certain F EATURE P HOTOGRAPHY BY S KEETER H AGLER. financial services to the banking industry, the federal government and the public. Since 1914, the Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District. The Eleventh District encompasses 350,000 DESIGNED AND PRINTED BY THE FEDERAL RESERVE B ANK OF D ALLAS G RAPHIC ARTS D EPARTMENT . square miles and comprises the state of Texas, northern Louisiana and southern New Mexico. The three branch offices of the Federal Reserve Bank of Dallas are in El Paso, Houston and San Antonio. FEDERAL RESERVE BANK OF DALLAS 2200 NORTH PEARL STREET DALLAS, TEXAS 75201 (214) 922-6000 EL PASO BRANCH 301 EAST MAIN STREET EL PASO, TEXAS 79901 (915) 544-4730 HOUSTON BRANCH 1701 SAN JACINTO STREET HOUSTON, TEXAS 77002 (713) 659-4433 SAN ANTONIO BRANCH 126 EAST NUEVA STREET SAN ANTONIO, TEXAS 78204 (210) 978-1200