Coming Home to Calhoun

Thank you for inviting me home to Calhoun. And thanks for letting me bring my little sister, Beverly, up from Atlanta. Thanks to all of you for coming.

Of course, having my sister here is a mixed blessing.

I’m glad to have her company, but she and my wife are good friends, which pretty much rules out looking up any of my old girlfriends while I’m here. George Strait said all his ex’s live in Texas and that’s why he hangs his hat in Tennessee. Well, I hang my hat in Texas, but I’m guessing most of my ex-girlfriends live within a 30-mile radius of Calhoun… with strange last names.

Actually, I’m not from Calhoun, exactly. I grew up on the side of the road in Ranger, about 18 miles east of here, on Highway 411, and went to high school in Fairmount. I’ve started saying “on the side of the road” to explain why a country boy like myself never learned the basics, like milking a cow or bailing hay, or hunting and fishing. I did pick some cotton though.

While I went to high school in Fairmount, much of my social life involved the drive-in in Calhoun. I don’t recall many of the fine movies I saw there, but I still have fond memories of the place. Now, don’t get me wrong. Remember, I’m talking about the 1950s.

If you remember Happy Days on TV, I was Richie Cunningham. Unfortunately, I lost out to the Fonz. Dating was different during basketball season. Fairmount was too small for a football team, so basketball was our main sport and main social activity. I especially enjoyed the bus trips to off-games. The girl’s team, the boy’s team and the cheerleaders were all packed into the school bus, along with coaches, the principal and the bus driver. Country music entertainment was provided from the back seat by Darrell Wilson and Donald Hopper. It was mainly bluegrass, and “Salty Dog” was the favorite song.

No monkey business was allowed on that bus. Mr. Craig, our coach, and Mr. Lacey, our principal, ran a tight ship. The world lost Mr. Lacey last year, one of its finest people. I’m honored by Mrs. Lacey’s presence tonight—Mrs. Amiee Lacey.

Fairmount had a pretty good team my junior year—only one junior and four seniors. Burl Wilson and Bobby Welch, members of that team, are here tonight. We won the Northwest Georgia Invitational Tournament in Rome that year, but my only memory of it was my asking a girl from another team to cheer for me to make my former girlfriend jealous. She did, but then when she and I started dating, she forced me to tell her I made up the girlfriend thing as an excuse to meet her. I’m not sure she believed me.

A footnote: I had my highest scoring game against Calhoun. It was a total fluke, but Calhoun’s coach apparently didn’t realize that because they double-teamed me in our next game and shut me down completely. I never thought it was fair for a little Class C school like Fairmount to have to play a big AAA, or whatever, school like Calhoun.

In the summers of 1958 and ’59, prior to my junior and senior years, I worked the night shift at Doyal’s Truck Stop, which had a lot of truck traffic before I-75 opened and took it away. During those summers, Doyal, my dad, worked the day shift, from 7 a.m. to 7 p.m., and Little Doyal, that’s me, worked the night shift from 7 p.m. to 7 a.m.—except for Saturday nights, when he stayed until midnight if I had a date. Of course, that meant I always had a date. That was my first economics lesson: Incentives matter.

I know what you’re thinking. You’re asking yourself what do pumping gas and playing high school basketball have to do with the Federal Reserve, the economy and monetary policy. Or the price of chickens and carpets. Good question. The basketball connection is that I always had a nagging fear that I would get turned around and disoriented and shoot a goal on the wrong end of the court and be known forevermore as “Wrong Way McTeer.” My biggest fear pumping gas was that I would accidentally put diesel fuel in a gasoline truck or gasoline in a diesel truck. My dad warned me about that almost every day—almost as often as my mother warned me about getting a fish bone stuck in my throat and choking to death or putting my eye out with a stick.

Here’s my point: My early fear of zigging when I should be zagging—on the basketball court and pumping gas—carried over into monetary policy. I can think of nothing worse than to tighten policy when it should be eased or to ease policy when it should be tightened. Fortunately, the economic situation is rarely that ambiguous. The question usually isn’t, do we zig or do we zag? Usually, the question is, do we zig or not zig? Or, do we zag or not zag? I can recall only one time when the Dallas Fed was trying to cut the discount rate while another Reserve Bank was trying to increase it. I’m not revealing confidential information here. It’s public.

Another way my roots influenced my work at the Fed is through my presidential letters in our annual reports. I usually try to personalize the economic concepts discussed in our annual report essays. That started with our 1992 essay, called “The Churn,” which was about how job creation and job destruction continuously revitalize our economy and keep it modern.

Economists call this “creative destruction” because the labor and capital needed for the new, growing sectors of the economy must come from the declining sectors. We can’t generate as many new competitive jobs if we don’t let the old noncompetitive jobs go. Europe’s economy is less dynamic than ours, in part because its governments try harder to protect existing jobs. They also provide the unemployed a more generous safety net. But by protecting the old jobs, they get fewer new jobs, making their unemployment rate almost twice as high as ours.

As I put it in a poem once:

But, I digress. I’m supposed to be talking about personalizing economic concepts. The cover of the annual report with the job churn essay featured an old picture of a blacksmith—to illustrate obsolete jobs. Well, my grandfather and his father were both blacksmiths and were put out of work by the newfangled automobile. My dad opened a filling station, and later a truck stop, to service the cars that drove them out of business—a perfect example of the churn at work. The truck stop did quite well until I-75 passed it by. It limped along for years, but it stands empty now, a monument to the churn.

I used this example in our 1992 annual report, which began my practice of personalizing economic concepts. The next year, the annual report essay, titled “These Are the Good Old Days,” showed the various ways U.S. living standards had risen, contrary to the false impression many people have. The following year’s essay was about the service sector, which is where most of us work these days. And, no, we aren’t all flipping hamburgers and taking in each other’s laundry. The growing service sector is actually higher on the economic food chain than the agricultural and manufacturing sectors that it is crowding out.

One essay was “By Our Own Bootstraps—Economic Opportunity and the Dynamics of Income Distribution.” It took issue with the common, but false, belief that the rich are getting richer while the poor are getting poorer. Both are getting richer. The rising tide is lifting all boats, just not by equal amounts or to the same level. There is also a lot of movement up and down the income ladder over time. Those on the bottom usually move up a rung or two during their working lives, while many at the top move down a notch. I personalized that issue by telling how I came home from school one day in the first grade and walked up to the front door of our little house, only to find the house missing. I’d forgotten that it was to be moved that day. As our income grew, we added a new room to that little house every few years until it looked almost respectable. But like the truck stop, it’s empty now.

As I added these personal, homey touches to serious issues each year, I couldn’t help noticing that the sky didn’t fall—although it might yet. In 2000, I finally let the red dog off the leash and just put the truck stop on the cover of our report on improving working conditions.

Another way I’ve drawn on my Gordon County roots is country music, which, as you know better than most, is the source of all wisdom. If you call the Dallas Fed and are lucky enough to be put on hold, you’ll hear some fine country music on the telephone system. In the spirit of full disclosure, however, I must acknowledge my preference for Texas country over modern-day Nashville country. The Texas version isn’t quite as country, but it’s more colorful and much more quotable. You might call it Texas country blues.

Texas country features some singers you’ve heard of, like Willie, Waylon and Lyle, and many you haven’t heard of, like Terry Allen and Billy Joe Shaver. Billy Joe started it for me, possibly because of a Georgia angle. I was in the minority on some economic policy issues and feeling isolated and put upon by colleagues and critics alike when I ran across Billy Joe’s “Georgia on a Fast Train”—

Now, that Billy Joe is a poet.

The highlight of my career as a music critic came a few months ago in an interview I did on National Public Radio. The interviewer said he’d heard that I’d made a pilgrimage to Buddy Holly’s grave in Lubbock, Texas, and asked if it was true. I said it was true. He then asked if Buddy had ever contributed anything to the economy. I said, “Well, his song ‘Rave On’ would have been a great anthem for the booming New Economy period of the late ’90s.” When that interview ran two days later, “Rave On” started up softly at that point and built up to full blast by the end of the credits. I may not have brought New Economy prosperity back yet, but I’m working on it. But I did bring Buddy Holly back.

A footnote to the Buddy Holly story: I once suggested to Alan Greenspan that we write an essay together on Buddy Holly, as the father of rock and roll, and Adam Smith, as the father of economics. He wasn’t sure about the Buddy Holly part. He said his musical tastes were closer to the musical tastes of Adam Smith—that is, J. S. Bach. I said I’d heard of old J. S., but I didn’t think he’d had as many hits as Buddy Holly.

For the record, Alan Greenspan is an accomplished musician himself, having attended the Julliard School. But I’ll bet he doesn’t know “Salty Dog.”

Another way I might embarrass my fellow Gordon Countians is my use of poetry to liven up economic analysis. But I do concentrate on the higher forms of poetry, like the limerick. The record books now say that we had a recession from March to November 2001. Everyone expected the recession to deepen following September 11, but surprisingly, the economy started recovering in the fourth quarter of 2001. I was addressing a group of Wall Street economists in New York shortly after that surprise rebound was announced. Not knowing anything that Wall Street economists didn’t already know, I decided to package it differently, in the form of a limerick.

This limerick:

But even though real GDP began recovering in the fourth quarter of 2001, net employment continued to decline until late last year. We were having a jobless recovery. I was back in New York late last year speaking to another group of Wall Street professionals, so I followed up with another limerick.

Now, as you can imagine, limericks are not Alan Greenspan’s favorite way of talking about the economy. But, just between you and me, he talks a little funny too. We call it Greenspeak on our web site. I mentioned this once when I introduced him to an audience in Washington. I told the audience about a cartoon that depicted the Chairman as Chicken Little, who always expected the sky to fall. This chicken, with the Chairman’s head, was below these giant pillars of the global economy. They were cracking and about to fall. But instead of saying, “The sky is falling. The sky is falling,” this chicken was saying, “The sky is measurably weakened. The sky is measurably weakened.”

Well, what about the economy and its prospects? As I’ve already noted, in a round about way, we had a brief recession in the first three quarters of 2001. Or, on a monthly basis, from March to November. Beginning in early January of 2001, the Fed eased monetary policy vigorously, cutting the short-term interbank interest rate 11 times in 2001 and once more each in 2002 and 2003, from 6.5 percent all the way down to 1 percent. More recently, fiscal policy added to the stimulus, swinging from surplus to deficit, even before the recent tax cut, which added significantly to the overall stimulus.

As we’ve already noted, the national economy began to grow again in late 2001, and the recovery in output and income is now more than two years old. It was not all that strong for a while, and each good quarter was followed by a weak quarter until the middle of last year. The second quarter strengthened, and the third quarter was very strong, rising at an annual rate of 8.2 percent. But until last fall, total employment continued to decline for almost two years after output and income began rising. Part of the problem was weak growth, but a greater part of the problem was very strong productivity growth that enabled businesses on average to produce more output without hiring more workers.

Productivity is defined as output per hour worked on average. After growing very slowly from the early ’70s to the mid-’90s, output per hour work grew about twice as fast in the late ’90s and even faster than that in the past year or so.

While I called rapid productivity growth a “problem’ in the context of needing to stimulate employment growth, it is anything but a problem in a longer term sense. Productivity growth is what raises per capita income and is what raises our standard of living. When productivity growth doubles—which it has, at least temporarily in recent years—our standard of living will double in half the time it formerly took. But as rapid productivity growth means you can get moderate growth from productivity growth alone, to get employment growth as well, the economy needs to grow even faster.

That process has begun, with growth exceeding an 8 percent rate in the third quarter, which is probably twice the long-run sustainable growth rate. And the unemployment rate has fallen from its recent peak of 6.4 percent to its present rate of 5.7 percent. Employment growth has been disappointing, even recently, but it should pick up if the economy continues growing anywhere near its recent pace. Most conditions for that to happen are favorable and I’m optimistic. Fiscal policy is easy—too easy for the long run—the tax cut it still being felt, and monetary policy has had the pedal to the metal for three years and counting.

But more is going on in the economy than its normal ebb and flow resulting from the business cycle. Layered on top of that are underlying trends that are making us richer in real terms while at the same time making the job churn that I mentioned earlier more painful. Rapid technology growth and change have made many jobs obsolete at a rate that poses a challenge for creating new jobs fast enough to replace them. Through new technology and new processes, businesses are literally producing more with fewer workers. On top of that, the long-standing trend of shifting production to lower cost venues abroad is continuing apace or perhaps accelerating. Shifting labor-intensive manufacturing jobs to China has been getting lots of attention, and lately the shifting of many service jobs to lower cost, English-speaking India has also accelerated. In my neck of the woods, even Mexico has been complaining of losing jobs to Asia.

It’s easy for us to think only as producers and view job outsourcing as a negative thing, forgetting how positive it is for U.S. consumers, who are getting high quality products at lower and lower cost. Freer trade and freer capital flows help some producers and hurt others, but they help all consumers through greater choice and lower cost. The challenge is for the U.S. to keep its dynamic economy and keep generating good, new jobs at a rate faster than its old jobs are disappearing.

We’ve always done it before. It’s easiest to see and appreciate in the agricultural sector. It used to take 90 percent of our workers working on the farm to produce our food. Now it takes closer to 2 percent to produce even more food. The difference doesn’t represent unemployed farmworkers. It represents employment in industries that weren’t even in existence several decades ago.

It’s easy to see the benefits of higher productivity in the farm sector. But the same thing has been happening in the manufacturing sector for decades. We’ve been producing more and more manufactured products, but with a manufacturing labor force that has been shrinking relative to the total labor force for decades, and in the past couple of years has been shrinking in absolute terms. Productivity growth in manufacturing—as in agriculture before it—has exceeded even the rapid overall growth in productivity I mentioned earlier. This is bad, and sad, if it’s your manufacturing job that becomes the victim of new technology at home or lower labor costs abroad. But what hurts a few workers a lot often helps all consumers a little.

In any case, good public policy is not to try to stop progress to protect the old jobs. Good public policy is keeping our economy open and free and letting the new, new things replace the old, old things. (Give up the blacksmith shops.) The churn has been happening for decades and has made us the most prosperous large industrial economy in the world (No. 1 and gaining). The pace of change seems to be accelerating, but the nature of the game has not changed. Measures against firing still discourage hiring. And too much safety net still mainly helps those avoiding sweat. Protection may protect the weak and the inefficient for a while. But the future belongs to the free. Free people, free trade, free enterprise.

The land of the free and the home of the brave was violated on September 11, 2001. And some innocent people with a Ranger mailing address were violated last Thursday. Bad people can do terrible things. Frankly, I never thought I’d ever see a Gordon County or Calhoun dateline on CNN, much less tiny Ranger. But all of you know, as I know, that where that tragedy happened was a statistical fluke that says absolutely nothing about the quality of the people of Gordon County. You can find people from the shallow end of the gene pool everywhere. Scum can grow anywhere until it’s cleaned up.

When Francis introduced me, she implied that I’m a returning VIP—a very important person. Not so. I’m not a very important person. I’m an ordinary person in an important job. I’m a Gordon County person and proud of it. And thanks for bringing me home.

Notes

1. For the complete poem, see “Give Growth a Chance.”