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1996 Annual Report—Federal Reserve Bank of Dallas

The Economy at Light Speed
Technology and Growth in the Information Age—And Beyond

A Letter from the President

The Federal Reserve Bank of Dallas has projected optimism in our recent annual report essays—optimism that the creative destruction of jobs renews and reinvigorates our economy ("The Churn: The Paradox of Progress," 1992); optimism that our living standards are continuing to rise, as shown by the way we live our lives ("These Are the Good Old Days," 1993); optimism that our evolution toward a service economy is not a bad thing ("The Service Sector: Give It Some Respect," 1994); and optimism that our dynamic economy still offers plenty of opportunity for individuals to move up ("By Our Own Bootstraps," 1995). In short, we have chosen to see the glass half full rather than half empty. We have confidence in the power of our free enterprise economy to produce rising living standards.

This year, we may be going too far, projecting our optimism well into the future. As a former economist, I've learned that forecasting is not too hazardous, as long as it isn't about the future. I've also learned that optimists have a better track record than pessimists. Besides, by 2020, I'll be retired and so, probably, will the authors of this and the other essays cited above, Mike Cox and Richard Alm.

Their hook in this essay, and the reason you may want to take it more seriously than a science fiction comic book, is that their high-tech world of 2020 is based on applications and refinements of technology that exists today. Our rationale for exploring the possibilities here is to counter the pessimism generated by current growth and productivity statistics, which seem increasingly inadequate for our third-wave service and information economy.

1996 was a good year for the Federal Reserve Bank of Dallas. Our banking system remained sound, our regional economy continued to outpace the national average, and we fully recovered the cost of the services we provided to our customers. Productivity improved as we continued to provide more services with fewer employees. Our public programs and educational activities were well received by larger audiences. We expect more of the same in 1997.

At the end of 1996, Cece Smith completed three years as chairman of the Board of Directors of the Federal Reserve Bank of Dallas and turned the chairmanship over to Roger Hemminghaus, who had been serving as deputy chairman. During 1997, Cece will serve the last of her six years on the Board as deputy chairman. I appreciate the valuable contribution Cece has made as chairman. She's a great boss.

1996 also saw the retirement of Dallas Fed Director J. B. Cooper, after six years of service on the Board and after previously serving on our Advisory Council on Small Business and Agriculture. J. B. will always remain for me the prototypical gentleman Texas farmer. Peyton Yates left the Dallas Board in April 1996 and was replaced by Bob McNair, who had been serving on our Houston Board. We will miss J. B. and Peyton. We will also miss Erich Wendl, who retired from our San Antonio Board; Walter Johnson, who retired from our Houston Board; and Veronica Callaghan and Ben Haines, who retired from our El Paso Board. All have made valuable contributions.

Internally, the most significant management changes in 1996 were the retirement of Tony Salvaggio on April 1 after almost 40 years of distinguished service, and the appointment of Helen Holcomb as our new first vice president.

Innovation and change are inherent components of our free enterprise economy and, I believe, of our great strength. Therefore, our optimism continues both for our world and for our economy.

The Economy at Light Speed
Technology and Growth in the Information Age—And Beyond

Imagination is more important than knowledge.
—Albert Einstein

Fast-forward to life in the year 2020. Though it's an overcast winter morning, Steve and Kim Jones wake to a sunrise of sea gulls and warm salt-air breezes, all synthesized by their Sensual, Audio and Visual Virtual Information and Entertainment system.

A fixture in most middle-class homes, SAVVIE regulates the indoor environment and operates 50-odd computer-controlled appliances, among them the Joneses' bed. All night it reads body shapes, weight, temperature and positions, adjusting to ensure the couple's complete comfort. The bed gathers data on each snoozer's heart rate, oxygen intake, bone density, neurological activities and other vital signs, all of it logged into a memory bank that compiles a daily health report.

After showering and dressing, Steve says, "Breakfast, Max." He's speaking to the family's intelligent agent, Maxwell, a book-sized computer that commands the SAVVIE appliances, maintains the home's environment and handles the family's shopping via the Internet. Max comes with its own personality. On hearing its name, Max activates the floor-to-ceiling video wall in any room and answers in the charming Scottish accent chosen by the Joneses, "Good morning, sir. What would you be having for breakfast today?"

Steve orders bacon and eggs without a twinge of guilt. In 2020, most foods have been genetically engineered to maintain taste and texture but provide optimal nutrition with less fat and cholesterol. As Steve and Kim eat, they ask Max for the morning newscast, personalized to reflect their interests. After a report on China's efforts to clean up the environment, Kim wants an update on the Chinese and American Mars colony. Steve requests an interview with Cowboys head coach Troy Aikman, preparing for Super Bowl LIV. Business news starts with the latest on around-the-clock stock trading, showing the Dow Jones industrial average surging past 31,000.[1]

Tiny robots scrub the dishes and run a whisper-quiet vacuum cleaner as Steve remarks to Kim, "TGIT"—Thank God it's Thursday. Like most Americans in 2020, Steve works from 9 a.m. to 4 p.m., Mondays through Thursdays. Steve has Max make reservations at the local sports cybercade, a virtual reality club that simulates hang-gliding, skiing and other outdoor adventures. Having fallen three times, Steve is resolved to complete his conquest of Mount McKinley. After reviewing Steve's daily health report, Max says, "Along with your usual vitamins, I'm recommending a wee extra bit of molybdenum to build stamina for tomorrow's climb."

Steve works for International Microtools Inc., a consortium that makes machines small enough to maneuver inside the human heart. He designs them on a three-dimensional computer screen, tailoring each tool to the customer's exact specifications. With a single keystroke, he sends his designs to factories, where durable-product generators fabricate the tiny machines from molecularly engineered composites that are stronger than steel, lighter than plastic and cheaper than either. Most days, Steve works from home or his vacation cabin, when necessary using his teleconferencing port to hold virtual meetings. Sensors follow Steve's eyes, changing the image on the video wall to match his slightest shift in focus. With a word to Max, Steve can consult with colleagues in Thailand and Argentina while working with a customer in Egypt. Language processors translate Steve's English into Thai, Spanish and Arabic.

After kissing Steve good-bye, Kim, a doctor, leaves for work in her nonpolluting vehicle powered by superconductive batteries that require recharging just once a month. There's no need for a key: the car identifies her by voice and smell. Kim speaks only a simple command, "Max, the office, please," and the car responds. Steering, acceleration and braking are self-controlled, with continuous feedback from the Coordinated Travel Network linked to navigational satellites that pinpoint a car's position anywhere on the planet. Computers and sensors in cars and roadbeds prevent collisions. As she travels to the office without fear of accident or breakdown, Kim catches up on her work by accessing the American Medical Association's Internet site on the vehicle's video display.

The emphasis of medicine in 2020 is on preventing disease and managing the aging process. With new vaccines and treatments, cavities, baldness, arthritis, hearing loss and the common cold rarely afflict Kim's patients. She analyzes patients' DNA to assess the risk of illnesses before they occur. Where necessary, DNA therapy allows her to implant healthy genes for those producing Alzheimer's disease, multiple sclerosis and heart ailments. Kim prescribes drugs that have slowed aging and stopped cancers, and she can order cloned blood, skin, bones, organs and the latest biotech breakthrough.

The Jones children—Jane, a teenager, and Ben, age 10—attend neighborhood schools, where teleconferencing and virtual reality provide indelible learning experiences—the sights, sounds and feel of rocketing through Saturn's rings, a touch-of-a-button tour of the Louvre. After school, Jane designs a new outfit, using 3-D scanners to perfect the fit and laser-guided machines to sew it. Ben and his pals play baseball on a holographic field that offers the realism of the Texas Rangers' ballpark.

That evening, Steve and Kim meet the Mings and the Huxtables at the Eclectic Rouge, a restaurant that offers a choice of ambiance as well as entree. It's Kim's birthday, so she chooses a Parisian sidewalk cafe for appetizers and the main course, then fireside at a Colorado ski resort for coffee and dessert. After dinner, the three couples head to the Jones home, where satellite linkups and fiber optic cables deliver a world of entertainment—everything from Las Vegas shows to symphony concerts and action movies. Thanks to the latest holographic device, viewers can walk inside the film and even talk with the characters. After a final champagne toast, the Joneses' guests hop into their self-driving cars for a safe trip home, and Steve and Kim retire for the evening, bidding Max to put out the dog, lock up and turn off the lights.

This vision of 2020 may sound far-fetched—a pipe dream, worlds away from today. After all, the rapid progress implied by the Joneses' lifestyle runs counter to well-publicized reports of an American economy whose growth rate has slipped. Pessimists, citing statistics on weakening productivity and gross domestic product growth, contend that the economy isn't strong enough to keep hoisting Americans upward. They offer a dour view: the generation coming of age today will be the first in American history not to live better than its parents.

One simple fact, however, suggests that this view will be proven wrong—and spectacularly so: nothing conjured up in this vision of 2020 requires any new technologies. Every device in the Joneses' lives uses 1997 science and technology, honed by a competitive economy into the next generation of goods and services.[2] With a mother lode of technologies ready to shape the next quarter century, there's reason to believe that progress will be faster than ever—a stunning display of capitalism's ability to lift living standards.

Ironically, though, our economic statistics may miss the show. The usual measures of progress—output and productivity—lose touch in an age of rapid technological advances. As the economy evolves, it delivers not only more production but also new goods and services, improved products, greater variety, more time off, better working conditions, more enjoyable jobs and other benefits. All of these raise our living standards but by their nature aren't easily measured. Most aren't even counted in GDP.

What the next quarter century of capitalism likely promises, then, is a silent boom—a rapid economic advance that will improve everyday life but elude the regular readings of the economy's vital signs.[3] Statistical tools simply can't keep up with an economy moving at light speed.

Technology and Capitalism—Partners in Progress

Few Americans would deny today's technology explosion. Even in this era of supercomputers, space travel and cloning, though, technology isn't always seen as a boon. Amid the modern world's hustle and bustle, nostalgia for the simpler ways of times past is not uncommon. Technophobes cringe at programming the VCR or installing new peripherals on the PC. Apocalyptic literature, science fiction movies and neo-Luddite rhetoric portray technology as a dark, dehumanizing force.

That is the technology of myth. The technology of reality is a vital part of what spurs economic progress and raises living standards. Stone Age "high-tech" was knowing how to strike flint on rock to produce a spark and ignite a fire. But even at that basic level, technology improved the lives of those who used it. They kept warmer at night, ate hot food and slept more soundly, worrying less about attacks by saber-toothed tigers and marauding tribes. Fast-forward through the millennia, and it's the same story. Today's technology is much more complex, but it still makes those who use it better off. We are warmed by gas and electric furnaces, nourished by food heated in microwave ovens, and protected by locks, alarm systems and 911 operators. Technology leads to new products and services that improve our everyday lives. It must. After all, every innovation must pass the test of the marketplace: if people don't want it, they won't buy it.[4]

But technological know-how doesn't just happen. Ideas are sterile until an entrepreneur or a company transforms them into new goods and services or better production methods. The process involves discerning consumer tastes, researching, designing prototypes, obtaining financing, manufacturing, marketing and, often, starting all over again. Blood, sweat and tears. Why go through it?

Profit. Capitalism gives incentives to innovate by bestowing profit on those who bring successful products to market. Just as important, it readily shifts money, people and other resources from producing yesterday's goods and services to what consumers will buy today and tomorrow. Capitalism's ability to unleash innovation and invention lies at the very heart of the great legacy of the American experience—economic progress.

Successive generations of transportation show how new products come along to compete with existing ones. Suppose bankers in New York and San Francisco want to enter into a merger. In California's gold rush era, meeting might have meant a boat trip around the tip of South America. As time went by, the bankers would have found the train faster, then the airplane faster still. With the advent of teleconferencing, they can now convene in a matter of seconds, skipping the hassle and expense of transcontinental flight. Sometime beyond 2020, virtual meetings and all modes of shipping may be made obsolete by a Star Trek-like "transporter" that zaps people and products from one place to another.

In a free enterprise system, there's always competition from inventions and innovations that meet consumers' needs in a different way or make it cheaper and easier to manufacture existing products. Most of us overlook this "minor" feature of a market-based economy. When we catch a bargain on airfare, see our long-distance phone rates plummet, get a good deal on a car and so on, we welcome the low prices that result as today's companies compete for market share. But the existence of airplanes, telephones, automobiles and our other amenities we owe to another kind of rivalry that capitalism promotes. It's the competition from the next generation of goods and services, made possible by the relentless impulse in human beings to make themselves better off by improving life for everyone else.

By its very nature, capitalism seeks progress. Understanding this fact helps us see what speeds it up or slows it down.

Because technology in large part drives growth, stepping up the pace of invention and innovation increases the speed of economic progress. As with most economic activities, putting technology to work has a lot to do with incentives. An economy will produce technological change faster when the costs of doing so go down or the benefits go up. Several factors influence the speed of the process: the breadth and depth of a society's existing endowment of technology, the introduction of inventions with wide-ranging uses, the time it takes for products to spread throughout society, and overall market size. In assessing the possibilities of the future, it's more useful to look at these forces—the dynamics of how technology soaks into society—than statistics that say more about where we've been than where we're going. What's already in place offers to quicken economic progress.

Our inventory of technology is large and growing. Despite the rapid-fire introduction of new products in recent decades, we still have a large, relatively untapped stock of technology in the pipeline. The Joneses' lifestyle in 2020 suggests applications for dozens of modern-day breakthroughs. A "smart" bed, for example, could churn out a daily medical report using magnetic resonance imaging, a technology that helps doctors make medical diagnoses by showing the details of soft tissues the way X-rays reveal bones. The SAVVIE system, including faithful, tireless Max, might combine powerful microprocessors, artificial intelligence, voice recognition, speech synthesis, holography, virtual reality, fiber optics, high-definition TV, flat-screen displays and the Internet—all of which already exist, at least in prototype. Entrepreneurs could use the same technologies to produce the sports cybercade, Steve's virtual office, the Joneses' home entertainment amenities and the learning experiences offered by the schools Jane and Ben attend.

The National Automated Highway Systems Consortium, led by General Motors Corp., is at work on a self-driving automobile. The Global Positioning System already helps truckers, taxi drivers and farmers. Satellite-based navigational systems are an option on some 1997 car models. Scientists at New Mexico's Sandia National Laboratories already produce micromachines with gears the width of a human hair. The Human Genome Project to map the location and sequence of 100,000 genes, expected to be finished by 2003, should allow future doctors to detect and treat diseases through DNA analysis.[5]

And the Joneses' lifestyle only hints at what's to come from our laboratories, think tanks and entrepreneurs. The potential boggles the mind. Many of the most promising projects involve tinkering with the basic elements of life and matter. In molecular engineering, for example, scientists are creating whole new materials, forged atom by atom, with astounding properties. How about a fiber stronger than steel yet more elastic than a spider's web, or perhaps one-molecule-thick coatings, more slippery than glare ice, that virtually eliminate friction? Those technologies, and many more, are already being readied for use in new generations of products. Researchers are working within the cells of living organisms. Biotechnology may lead to treatments for diseases and the production of synthetic organs, but it is already making possible clothing that kills germs, bugs that gobble up toxic waste, enzymes that soften blue jeans and cholesterol-eating peanuts with a shelf life measured in years, not months. (See Exhibit A in foldout: "25 Technologies for the Next 25 Years.")

America enters the 21st century steeped in a culture of invention and surfing a tsunami of technology. By one estimate, more than half the store of human knowledge has been produced over the past 50 years. In the United States, the number of scientists and engineers working in research and development has doubled since the early 1970s. More than half of U.S. patents have been issued in the past 40 years. The number of new products put on the market annually has tripled since 1980, and with so much R & D occurring, companies are likely to keep offering innovative goods and services at a furious pace.

Today's inventions are providing big spillovers. The parachute is a very useful product, especially when an airplane's engines conk out at 10,000 feet, but it hasn't had the same impact on the way we live as the internal combustion engine, the telephone or the jet airplane. Every so often, an invention comes along that really rocks the world, largely because it has far-reaching applications and serves as a building block for further invention. The wheel, the plow, the printing press and the steam engine are examples of technologies that generated significant spillovers. Had electricity not been harnessed for use more than a century ago, the modern household would have few of the conveniences we take for granted. No televisions. No refrigerators. No phones. Simply put, some inventions carry more weight than others. (See Exhibit B in foldout: "Not All Inventions Are Created Equal.")

In our time, it's the microprocessor—the tiny "brain" of the personal computer—that's producing spillovers and spawning waves of new and improved products. These little electronic marvels make hundreds of other modern creations possible—from fax machines and automatic tellers to air traffic control systems and the dinosaurs of Jurassic Park. The microprocessor is adding "smart" features to many everyday products. Today's cars, for example, have more computing power than the lunar landing module of the Apollo 11 mission that put Americans on the moon. And even more applications are just over the horizon, as time and imagination point us to new ways to use microprocessors. Meanwhile, the computer chip is getting even more powerful. At the start of the 1990s, the fastest chips could handle 94 million instructions per second. The next generation, due out this year, will ramp up to 1.6 billion.[6] We may look back on the microprocessor as an invention more pivotal than the printing press. (See Exhibit C in foldout: "Technology Spillovers.")

In 1801, J. M. Jacquard devised a binary control system on punched cards to program a loom to weave a preset pattern. Thomas Edison's light bulb gave people a reason for installing electric wiring in their homes. Christopher Latham Sholes invented the typewriter in 1867 to produce legible letters more quickly. Ben Logee Baird produced the first working television in 1926. Ted Hoff of Intel Corp. invented the microprocessor in 1971 as the indispensable component of the hand-held calculator. None of these inventors envisioned the PC. Yet binary programming, electricity, the typewriter keyboard, the cathode-ray tube, the microprocessor and hundreds of other inventions were available for the West Coast hobbyists and entrepreneurs who contrived the first crude personal computers in the mid-1970s.

Today, the PC is part of our technology inventory, contributing to new waves of invention. It would be impossible, for example, to envision the Internet, one of today's wonder technologies, without the computer. The Internet and the computer, in turn, pave the way for the next wave of advances—search engines to explore the World Wide Web, high-speed modems, gadgets that access the Internet through the television set, the software to design home pages and intelligent agents that automatically sift through the oceans of information available in cyberspace. The Internet may be particularly powerful in driving technological change because it reduces the cost of new discoveries by putting the latest research online at the touch of a button.

And the ripple effects from the PC don't stop with computer-related industries. Computational biology, a branch of science that uses computers to locate and code genes, illustrates how the PC's increasing power puts technology and progress on an even faster track. Biologists are already identifying six to 10 new proteins a week, and with more powerful microprocessors, the process is likely to be three times faster by the end of this year.

Each invention makes the next one easier because of the way spillovers kindle a fire that feeds on itself—one technology fueling development of another. If there is any alchemy in free enterprise, this is it: technology spillovers.

New products are spreading faster. Although feasible in the late 1800s, electric power didn't become universal until the mid-20th century. The first automobiles arrived on American roads in the late 1800s, but the country still had more horses than cars into the 1920s. The technology for television came in the 1920s, but the invention didn't reach America's living rooms in large numbers until the early 1950s. These examples illustrate a fact of technological life: the time between invention and diffusion can be decades or more.

But as lightning-fast communications spread information faster and consumers grow more sophisticated, new products are emerging more quickly than in the past. It took 55 years to get the automobile to a quarter of the U.S. population. The telephone required 35 years; the television, 26. Now look at some recent innovations: a quarter of U.S. households owned a personal computer within 16 years of its introduction. For the cellular telephone, the time shrank to 13 years.[7] The Internet is coming into commercial use even faster than the PC or the cell phone. (See Exhibit D in foldout: "The Newer, the Faster.")

New products follow a pattern. At first, the latest innovations are expensive and perhaps tricky to use, so their market consists of a handful of wealthy gadget lovers. Over time, the products become cheaper and more consumer-friendly through mass production and improved design. What was once a luxury becomes an everyday necessity. The companies that make the products can then expand rapidly, chalking up sales and adding new jobs. Can there be anything better for society-new and better products for consumers, increased sales for companies, more jobs for workers and more fuel for future progress?

Markets are getting larger. Larger markets increase the incentive to introduce new technology. It's simply a matter of payoff. Had Alexander Graham Bell lived on a small island with a population of 10, he'd have had little to gain from inventing the telephone. Fortunately for Bell—and 20th century denizens—he introduced his invention into a time with millions of potential customers, spread out on a continental scale.[8] In the 1990s, of course, many new products enter a market of hundreds of millions of customers.

Population is only one way markets grow. Rising incomes add to the number of people who can afford to splurge on the latest bells and whistles. Falling transportation costs and quickening information flows can enlarge markets. The dismantling of trade barriers can open whole new markets to U.S. producers. For many products yet to come, the market will be global, so the rewards for successful innovation figure to be even greater.

The Misunderstood Economy

Understanding how free enterprise stimulates progress gives us good reason for optimism about America's future. The system is working to perpetuate and even accelerate advances in our living standards. The irony is that the numbers don't agree. Progress is showing up everywhere but in the statistics.[9]

The problem, in part, lies in the tools we use. The national income and product accounts, developed in the 1940s, arrive at GDP by toting up the value of goods and services the economy produces. These accounts do a reasonably good job of measuring traditional output—tons of steel, bushels of wheat, cases of toothpaste, tables, chairs, haircuts. Add it all up, and you've got GDP.[10]

Much of what we get, however, isn't actually what we buy. We don't really want cars—we want transportation. We don't really want telephones—we want to communicate. We don't really want light bulbs—we want light.

The distinction isn't facetious. The everyday light bulb, for example, is a readily countable object that can be easily included in GDP: all we need to know is how many are sold and at what price. The light it produces, however, isn't so tangible. Yale University's William Nordhaus looked at the price of light and concluded it has fallen from 40 cents per 1,000 lumen hours in 1800 to a tenth of a cent today, a decline of 99 percent. Meanwhile, our measures of inflation show a 180 percent increase in the price of light bulbs and fixtures.[11] The result is an overstatement of inflation and an understatement of true growth.

Such measurement problems occur time and again whenever markets give us more for our money. Improvements in product quality, new goods, greater variety and customization, preventive goods-all can widen the gap between true and measured GDP. (See Exhibit 1: "Don't Count On It.")

The measurement problems are particularly acute when technology is moving rapidly. Take, for example, new goods. Today's VCRs provide better service than those that sold for $1,125 in 1981. But the VCR didn't make it into the consumer price index until 1987, after its price had fallen to under $300. The pocket calculator, invented in 1971, harnesses more computing power than a $750,000 room-sized mainframe of the 1950s but didn't show up in the consumer price statistics until 1978, after its price had fallen well below $100.[12] The personal computer was ignored by the statistics until 1987, when its cost to the average American had fallen from a lifetime of work to little more than two weeks' worth. When cellular telephones came on the market in 1984, consumers paid as much as $3,500 for the convenience of on-the-go communication. Now the phone often comes free, an inducement to sign with a cellular service provider.[13] Cell phones won't have a place in the price index until 1998, when at least 30 percent of Americans will own one. The result, in each of these cases, is an overestimation of inflation and an understatement of real growth and progress.

Statisticians wouldn't be stymied if these gains could be instantaneously tallied in the numbers that track the economy. It simply cannot be done. With rapid advances in technology, new and better products are coming at a dizzying rate. We buy cars that last longer and require less maintenance, manufacture stereos that reproduce truer sound, grow tomatoes that don't turn to mush when frozen, make clothes that fit better and require less care, improve mammograms to detect tumors at an early stage and pluck free information from cyberspace. In each case, we're getting more of what we want at the same or lower prices, befuddling the well-intended number crunchers.

Statisticians keep track of cost—that's all they have to count. The economy produces worth—that's what people want. These aren't always the same concept, and they diverge as technology enables the economy to deliver more worth at less cost. If medical science invented a 1-cent pill that cured all our ills, it would be worth a lot but cost virtually nothing. Sound ludicrous? Consider the Internet. In trying to find a way to charge customers for accessing Web sites, companies have decided our smallest unit of money—1 cent—is too much. A 1/10-cent unit is needed. On GDP's radar screen, the Internet is barely registering a blip.[14] Take a moment to contemplate the irony: just when the economy is most successful—when it produces the most worth for the least cost—the gap between true and measured GDP growth is the greatest. The economy can get the least credit when it's accomplishing the most. (See Exhibit E in foldout: "The Language of Revolution.")

But the problem is deeper—even more fundamental. Our economy is not simply mismeasured, it's misunderstood.

The economy has never tried to produce GDP: it tries to produce happiness, or satisfaction. And there's a lot more to life than GDP. (See Exhibit 2: "Man Does Not Live by GDP Alone.")

In the information age, our economy is providing benefits beyond those easily captured by GDP. When making a list of needs and wants, most people start with food, clothing and shelter. After that, they move on to safety and security and leisure time, then perhaps to some of the "fun" aspects of life, such as entertainment, travel and cultural enrichment. Beyond that, most of us seek personal fulfillment, such as the satisfaction that comes from a worthwhile or enjoyable job. This list shouldn't surprise us. It reflects the influential work of Abraham Maslow (1908-70), the American psychologist. Maslow's pyramid, a staple of psychology, reveals a hierarchy of needs and wants buried deep in the human psyche. (See Exhibit 3: "Maslow's Hierarchy of Needs.") At the most basic level are the physiological needs. With those met, we move up to safety, social needs, self-esteem and, at the pinnacle of the pyramid, self-actualization.

As Americans grow wealthier, our physiological needs are being increasingly met, and there's a shift in wants from basic products to ever more intangible outputs. There are plenty of examples—from personal physical fitness gurus and Internet chat rooms to ecotourism and early retirement. One of the biggest yet most overlooked examples is improvement in our working conditions.

Americans today are less willing to bow to the deity of productivity and devote ourselves to churning out as much as possible. We've progressed from narrow productivity concerns to "have a nice day." What working conditions did Americans tolerate decades ago for the sake of productivity? Foul air, bad lighting, hazardous substances, long hours, inadequate sanitation, inflexible schedules, repetitive tasks, the risk of death. Few of today's workers face the on-the-job risks of their grandparents. Modern workplaces are well-lit and air-conditioned. Workplace deaths and accidents are at all-time lows. Hours at work have fallen for decades. Many workers have flexible schedules, including regular breaks. What are workers' concerns in the 1990s? Meaningful work, respect, empowerment, social activities, wellness programs and family benefits.

What's more, there's evidence that workers are using more of their on-the-job time for socializing, running errands, attending colleagues' retirement parties, going outside to smoke, selling their kids' Girl Scout cookies, exercising in company facilities—a little bit here, a little bit there. It all adds up: time-diary surveys find that the gap between actual weekly work time and what's reported in government statistics rose from one hour in 1965 to six hours today. But neither the GDP nor productivity statistics reflect job time spent on socialization, personal business or relaxation while at work.[15] (See Exhibit 4: "The Way We Work.")

And what about work that's fun? Most folks these days seek work they enjoy. Yet the standard statistics are apt to register economic regression if we quit a job we're good at but don't like in order to take one that's more enjoyable. It just doesn't make good sense.

We take our progress in ways other than GDP.

The economy today reflects our wealthier society's preferences for harder-to-measure consumption. As we grow richer still in the future, we can expect society to spend more of its time, energy and income addressing needs that are further and further from the physiological. Pity the poor statistician with the job of tracking our increasingly elusive economy.

By their very nature, the foibles of our statistics are hard to overcome. Critics of our national accounts can offer only an educated guess at the inaccuracies. Taken together, however, the glitches imply that the numbers that gauge our economy aren't giving us a fair reading of what's going on. Most important, the inaccuracies probably are worse than they were a decade or two ago, and they are likely to get even worse as we move into the 21st century and beyond. In short, our progress is becoming increasingly hard to capture with our measurement tools.

A Future of Fast Growth

The very notion of economic progress is an artifact of the modern, technology-rich era. Until the advent of capitalism in the 18th century, the world's living standards changed only slowly. The French farmer of the 17th century lived, worked and died pretty much like the Roman farmer of the 1st century b.c. The same cannot be said for our world: living standards rise from generation to generation. We are in the throes of one of history's great bursts of technology, put to use quickly and effectively by a vibrant market economy.

It would, of course, be good to have statistics that capture all the nuances of the economy as it evolves to meet our needs. That's probably too much to expect. Expense and complexity make a daunting task of tracking an American economy centered less and less on tangible output. Our measurement technology cannot keep pace with the rest of our technological progress. Relying on our existing measures, we're going to miss a lot of what happens in the economy as it moves into the 21st century.

We are fast departing a time when progress can be measured by GDP or any other simple tally of what the economy produces. If we become fixated on the numbers and fail to imagine the possibilities, we may miss one of the greatest periods of economic advancement in history. Worse yet, if we judge 21st century progress by 20th century measures, we may infer that our system is failing and in need of repair by government.

That is the bad news.

Free enterprise is America's greatest welfare program. For more than two centuries, the system has worked to make our lives better. Whatever we've wanted—new and improved products, more leisure, better jobs, easier lives—it has provided in abundance.

The pessimists fret that our best days are behind us. They are wrong. We stand poised on the brink of a new era, one endowed with technology and teeming with opportunities. The future offers even faster economic progress. We can keep up with the Joneses.

That is the good news.

—W. Michael Cox and Richard Alm

Notes

1. This number is not pulled from thin air. The Dow ended 1996 at 6,448, and matching the long-term growth of 7 percent a year would put the index above 31,000 in 2020.
    
2. Americans will doubtlessly enjoy the fruits of even further advances in technology over the next 25 years. To suppose otherwise would be to exhibit the shortsightedness of Charles H. Duell, commissioner, U.S. Office of Patents, who in 1899 said, "Everything that can be invented has been invented."
    
3. The discrepancy applies to the past quarter century as well as to the future. The Dallas Fed's 1993 annual report essay, "These Are the Good Old Days," presented overwhelming evidence that the average American has a lot more than ever before. Yet the national accounts report only slow growth over the previous two decades. In their article "1974," Greenwood and Yorukoglu (forthcoming) explain how the measured productivity slowdown over the past two decades may have been related to the rapid technological advances associated with the computer.
    
4. The list of patented inventions that didn't quite make it illustrates the point. There wasn't much of a market for the boomerang bullet, eyeglasses for chickens, coffins with escape hatches or fire escape suspenders.
    
5. Even the Joneses' three-day weekends draw on recent experience. The average workweek fell from 36.9 hours in 1973 to 34.5 hours in 1990. An equal percentage decline over the next 25 years would yield a 31.4-hour workweek in 2020.
    
6. Predicting just how far microprocessor speed could go by 2020 would be about as silly as saying, "Where . . . the ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and weigh only 1.5 tons"—Popular Mechanics, March 1949.
    
7. Even the microwave oven and VCR illustrate the speedup in diffusion with the introduction of the microchip. The VCR was invented in 1952 and the microwave in 1953. When the microchip was introduced in 1971, less than 1 percent of households had either. Riding the cost-cutting wave of the microchip, however, a quarter of American homes enjoyed both by 1986—in just 15 years.
    
8. Said another way, Thomas R. Malthus had it exactly backward when he predicted that Earth's population would outstrip its resources, leading to ever-growing poverty. In a free enterprise system, growing population (market size) prompts more innovation, which stimulates the growth process. There is no guarantee of avoiding Malthus' dismal scenario in anything other than a market-based system.
    
9. One notable exception is Wall Street, where a bull market has pushed the Dow up over 250 percent since the start of the decade.
    
10. To arrive at "real" growth, a common proxy for how well the economy's doing, statisticians adjust the GDP numbers to account for rising prices. If the numbers overstate inflation, growth will come out equally low, suggesting that the economy is weaker than it really is.
     
11. By progressing from less to more expensive lighting equipment—from candles to lamps to light bulbs—without accounting for the service each provides (lumens), the price of light is recorded as rising, even though it in fact has sharply declined.
     
12. The first pocket calculators cost more than $600.
     
13. Competition has reduced the monthly cost of cellular service, too. The average local monthly bill went from nearly $100 in 1987 to under $50 by 1995.
     
14. U.S. researchers, say, can travel in seconds from Ukraine to the UK in cyberspace at virtually no cost, whereas alternative modes of travel would cost thousands of dollars.
     
15. Productivity statistics capture the gains in leisure time away from work because they measure output per hour at work. But GDP makes no attempt to include the value of any leisure, whether on or off the job.

Acknowledgment

"The Economy at Light Speed: Technology and Growth in the Information Age—And Beyond" was written by W. Michael Cox and Richard Alm. The essay is based on research conducted by Cox, vice president and economic advisor, Federal Reserve Bank of Dallas.

Selected References

Advisory Commission to Study the Consumer Price Index, "Toward a More Accurate Measure of the Cost of Living: Final Report to the Senate Finance Committee," December 4, 1996.

Berndt, Ernst R., Zvi Griliches and Neal Rappaport, "Econometric Estimates of Prices Indexes for Personal Computers in the 1990s," National Bureau of Economic Research Working Paper Series, no. 4549, November 1993.

Boskin, Michael J., prepared statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 109–15.

Burns, Arthur F., Production Trends in the United States Since 1870 (New York: National Bureau of Economic Research, 1934).

Cellular Telecommunications Industry Association, "Wireless Growth Sets New Annual Records," media release, September 19, 1996.

Congressional Budget Office, Is the Growth of the CPI a Biased Measure of Changes in the Cost of Living? (Washington, D.C.: Congressional Budget Office, October 1994).

Darby, Michael R., prepared statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 173–76.

Diewert, W. Erwin, prepared statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 115–18.

Famighetti, Robert, ed., The World Almanac and Book of Facts, 1997 (Mahwah, N.J.: World Almanac Books).

Foulkes, Fred K., Creating More Meaningful Work (New York: American Management Association, 1969).

Gordon, Robert J., prepared statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 122–26.

Greenspan, Alan, prepared statement in "Review of Congressional Budget Cost Estimating: Joint Hearing Before the House of Representatives Committee on the Budget and the Senate Committee on the Budget," Serial no. 104-1, U.S. Government Printing Office, 1995, 130–49.

Greenwood, Jeremy, and Mehmet Yorukoglu, "1974," Carnegie-Rochester Conference Series on Public Policy, forthcoming.

Griliches, Zvi, prepared statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 129–32.

Jorgenson, Dale W., statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 36–41.

Klumpner, Jim, "Fact and Fancy: CPI Biases and the Federal Budget," Business Economics 31 (April 1996): 22–9.

Lebow, David E., John M. Roberts and David J. Stockton, "Monetary Policy and `the Price Level,' " mimeo, Federal Reserve Board, 1994.

Moulton, Brent R., "Bias in the Consumer Price Index: What Is the Evidence?" Journal of Economic Perspectives 10 (Fall 1996): 159–77.

Nakamura, Leonard, "Is the U.S. Economy Really Growing Too Slowly? Maybe We're Measuring Growth Wrong," Federal Reserve Bank of Philadelphia Business Review, forthcoming; "Is U.S. Economic Performance Really that Bad?" Federal Reserve Bank of Philadelphia Working Paper no. 95-21/R, April 1996; "Measuring Inflation in a High-Tech Age," Federal Reserve Bank of Philadelphia Business Review, November/December 1995, 13–25.

National Safety Council, "Work, 1995" in Accident Facts, 1996 ed. (Itasca, Ill., 1996).

Nordhaus, William D., "Do Real Output and Real Wage Measures Capture Reality? The History of Light Suggests Not," Yale Cowles Foundation Discussion Paper no. 1078, September 1994.

North, Peter, The Wall Chart of Science and Invention (New York: Dorset Press, 1991).

Paepke, C. Owen, The Evolution of Progress (New York: Random House, 1993).

Pakes, Ariel, statement in "Consumer Price Index: Hearings Before the Committee on Finance, United States Senate," Senate Hearing 104-69, U.S. Government Printing Office, 1995, 44–8.

Price, C. W., Orval Simpson, Dale Wolf, Charles Woodward, F. J. Moss, W. R. Basset and Others, Working Conditions, Wages and Profits (Chicago: A. W. Shaw, 1920).

Robinson, John P., and Ann Bostrom, "The Overestimated Workweek? What Time Diary Measures Suggest," Monthly Labor Review 117 (August 1994): 11–23.

Schumpeter, Joseph, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, vol. 2 (New York: McGraw-Hill, 1939).

Shapiro, Matthew D., and David W. Wilcox, "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Macroeconomics Annual 1996 (Cambridge, Mass.: MIT Press, 1996), 93–142.

Sherwood, Mark K., "Difficulties in the Measurement of Service Outputs," Monthly Labor Review 117 (March 1994): 11–9.

Slifman, L., and C. Corrado, "Decomposition of Productivity and Unit Costs," Board of Governors of the Federal Reserve System, mimeo, November 18, 1996.

W. E. Upjohn Institute for Employment Research, Work in America: Report of a Special Task Force to the Secretary of Health, Education and Welfare (Cambridge, Mass.: MIT Press, 1973).

U.S. Bureau of the Census, Statistical Abstract of the United States, various years; Historical Statistics of the United States: Colonial Times to 1970, Part 1, 1975.

U.S. Department of Energy, Energy Information Administration, Housing Characteristics (Washington, D.C.: Government Printing Office, various years).

U.S. Department of Labor, Bureau of Labor Statistics, Compensation and Working Conditions, June 1996; CPI Detailed Report: Data for January 1994, March 1994.

Veblen, Thorstein, The Theory of the Leisure Class: An Economic Study of Institutions (New York: MacMillan, 1899).

Wynne, Mark A., and Fiona D. Sigalla, "The Consumer Price Index," Federal Reserve Bank of Dallas Economic Review, Second Quarter 1994, 1–22.

About the Dallas Fed

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 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 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

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