The Diehard Economy

Why the doomsayers keep getting it wrong.

(Continued, page 2)

Those numbers, as noted above, have been holding up pretty well. Why's that? The erstwhile Dr. Doom, Henry Kaufman, offered me three explanations. One is the return of the U.S. to the role of undisputed military and financial superpower, which helps keep investors' money flowing in from abroad. Another is political cohesion. It may not always seem like it when you listen to the debates on Capitol Hill, but for two decades now U.S. economic policy has been following a reasonably consistent and consistently reasonable course--a mix of moderate Keynesianism in fiscal policy (economic stimulus when times are bad but no attempt to manage the economy the rest of the time), moderate monetarism (a Fed that's focused on keeping inflation at bay but isn't fanatical about it), and moderate free-marketeering (taxes and regulation are modest by European standards but far from nonexistent). Finally, there's what Kaufman calls "a greater responsiveness to economic and financial change."

This last attribute may be most important. We can't bank on global dominance forever. We can't assume politicians will always do the right thing. But if the U.S. economy is better than the rest of the world's at rolling with the punches, and better at taking advantage of the opportunities that pop up, well, that's what you'd call a sustainable advantage.

In fact, a lot of other economy watchers, from Alan Greenspan on down, started remarking on this new flexibility in the mid-1990s. At its most extreme, such as when it came to justifying tech stock valuations, this "new economy'' reasoning could get kind of silly. But that doesn't mean the core observation that the U.S. economy has fundamentally changed was wrong.

Finding hard evidence of this change is difficult. But there is that uptick in productivity growth, which could reflect newfound efficiencies generated by new ways of doing business. There's also been a marked decline in economic volatility: Since the 1981-82 recession, economic growth has followed a significantly smoother path than in the decades before (that is, downturns have been shallower and peaks less steep). The favored explanation for this has been a steadier hand at the Federal Reserve. But it may also have to do with changes in how markets--for goods, for services, for financial products--respond to events. One example: Mortgage markets used to be squeezed by regional credit crunches as banks and S&Ls battened down during slumps. Now mortgages are sliced and diced and packaged into securities sold to investors all over the world. Last year those investors kept buying, mortgage rates kept dropping, and the resulting boom in mortgage and home-equity lending may have been the single biggest reason the recession was so mild.

That's the theory, at least. But I wanted some more real-world evidence. So I got on a plane to Flint, Mich., birthplace of General Motors and marvel of the old U.S. economy, to see how that city fit into the new model.

That a person can get on a plane to Flint was a revelation in itself. I connected through Detroit, but there are also nonstops from Cincinnati, Minneapolis, Milwaukee, Atlanta, and Orlando. My flight was packed.

This was a revelation because most non-Michiganders who've heard of Flint have heard of it for one reason: Michael Moore's 1989 documentary Roger and Me, which told the sad tale of Flint's betrayal by GM. The Flint that Moore portrayed was a basket case, devastated by the loss of tens of thousands of high-paying jobs and perhaps even more devastated by the loss of trust in Father GM.

Because of Roger and Me, Flint has become a regular stop for journalists looking to expose the dark side of the post-1980 economy. And there's lots to expose, if that's what you're looking to do. Downtown is a less-than-lively assemblage of offices, empty storefronts, and a couple of lunch spots. Head north and you'll see grass growing where shops used to be, abandoned houses by the thousands, and GM's massive Buick City assembly plant going under the wrecker's ball. Crime is high; schools are struggling. The unemployment rate in Flint proper is 12.3%. The city government can't make ends meet; the longtime mayor was recently recalled by angry voters; the state is about to take over.

But across the street from City Hall, in the Genesee County government offices, these are the best of times. The county has a budget surplus. With fancy new suburban subdivisions going up all over and a bustling commercial center sprawling just west of Flint's city limits, the property tax base keeps rising. In the past five years the county's credit rating has been upgraded five times. In 2000 unemployment in Genesee County, including Flint, fell to 5.4%, its lowest level in more than 30 years. Last year it went back up to 7.1%--but that's still better than any year in the 1980s and all but one (1973) in the 1970s. And it's far less of a jump than had occurred in previous recessions.

A quarter-century ago, GM employed 80,000 people in the county. Today the number is only about 25,000. And yet the unemployment rate is lower. How does that compute? A lot of people simply left: The city's population has slid from 193,000 in 1970 to fewer than 125,000. This is usually painted as a sad and terrible phenomenon, but it's actually one of the great strengths of the U.S. economy: If there are no jobs where you live, you go somewhere else. That's far from the whole explanation, though. Genesee County's population, after dropping in the 1980s, is growing again. Some of the employment slack has been taken up by Flint's three hospitals, which are now regional medical centers, attracting patients from outside the county. Another growth area has been higher education: There are now 25,000 students at Flint's four colleges (one of them a former GM training institute), studying everything from truck driving to biochemistry. There are also new local businesses like the Coffee Beanery, a chain based in the county, and old ones that have discovered new ways of making money, like Schmald Tool & Die--which used to do only GM work but now supplies customers from all sorts of industries from all over the world.

The biggest change, though, is that the people of Greater Flint have taken up commuting. In 1970, 4,000 Genesee County residents traveled to jobs outside the county. Today the number's nearing 30,000. "We're now part of a much more diverse economy," said county treasurer Dan Kildee, who when I talked to him was about to head to New York to say the same thing to Standard & Poor's. "We're the northern edge of the southeastern Michigan economy. We're no longer a self-contained economy."

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