The Diehard Economy

Why the doomsayers keep getting it wrong.

(Continued, page 3)

Just south of Genesee is Oakland County, formerly home to a couple of auto plants and a few fancy Detroit suburbs but now the economic heart of Michigan. Its growth is due partly to auto companies fleeing Detroit, but it's much more than that. Of the seven FORTUNE 500 companies based in the county, three (bankrupt-but-still-big Kmart, Pulte Homes, and Kelly Services) have nothing to do with cars. Unemployment in Oakland County was 3.6% last year, 2.2% the year before.

For Flint and Genesee County, this boom to the south is, of course, dumb luck. If Oakland County were 100 miles away, the story would be different. But it isn't 100 miles away, and there are a lot of Oakland Counties in this country: Sprawling, fast-growing former suburbs--author Joel Garreau coined the term "edge cities" to describe them--that have turned out to be more adept than older cities at accommodating the needs of growing businesses and the people who work at them. Happily for Greater Flint, it has been pulled into the economic realm of one.

It's not that GM no longer matters in Flint. It just matters a lot less--and looks a lot different. One of the first places I visited in town was a new plant where they make six-cylinder engines for the Olds Bravada, the GMC Envoy, and the Chevy TrailBlazer. To people who worked in the old V-8 factory that once stood on the site, the most striking things about it are how clean and quiet it is and how few people it employs (700, compared with 5,000 at the V-8 plant in its heyday). What struck me most was how much it resembled the cellular phone factory I visited two years ago and the printing plant I visited in January. GM's word for the plant's design happens to be "flexible." That is, you could take its modular parts out, or move them around, or move them someplace else, and they'd still work, Lego-like. Workers are trained to use lots of different machines. The facility fits into a far-flung network of plants, each handling a discrete part of the supply chain. That makes the system more capable of dealing with changes in technology or demand.

Flexible is a good description for what the Flint area's economy has become as well. It plugs right into a larger regional economy. Its companies and its institutions and its people no longer look only to GM for sustenance but to ever-widening networks of customers and suppliers and employers. Even the county's landscape, with its McMansion-filled subdivisions, Home Depots, and Applebee's Neighborhood Grills, has a certain modularity to it--it's often hard to tell if you're in suburban Flint, as opposed to suburban Atlanta or suburban Indianapolis.

This is not an unalloyed good, of course. Walking through the historical exhibits at Flint's Alfred P. Sloan Museum, the sense of loss is almost palpable. For much of the 20th century, Flint was a vibrant, raucous home to world-changing industrial innovation, epic labor struggles, and mass prosperity. Now it is, at best, "the northern edge of the southeastern Michigan economy."

What's more, the very definition of a flexible economy is one in which individual jobs are less secure. And for most of the past two decades, economic growth has done little to benefit low-income Americans (it certainly hasn't done much for folks still stuck on Flint's north side). If the wrenching changes of the past 20 or 30 years haven't paved the way for greater prosperity, then we sure have put a lot of people through a lot of hard times for nothing.

But was it really all for nothing? Or to paraphrase Ronald Reagan, are we better off now than we were 20 years ago? Certainly. The better question may be, Are we better off than we were 35 years ago, when the U.S. economy was last firing on all cylinders? By some concrete measures of living standards--like how many color TVs we have in our living rooms--we are. We just haven't been on the kind of sustained upward trajectory for everything that Americans became accustomed to in the post-war decades.

The last years of the 1990s offered tantalizing glimpses that the U.S. might be returning to an age of increasing opportunities and rising living standards. After years of stagnation, real hourly wages began rising, even for the lowest-paid workers. The percentage of Americans below the poverty line declined from 15.1% in 1993 to 11.3% in 2000. The flexible, responsive, modular economy was starting to deliver the goods.

Of course, Sept. 11 made it clear to a lot of Americans that there's more to life than supply chains and securitized mortgages. It's a dangerous world out there, and if the Taliban hadn't fallen so quickly in Afghanistan, the economy might not be so perky right now. With war raging on the West Bank, and Osama bin Laden still presumably out there plotting mayhem, a lot of bad stuff could still happen.

Those thoughts went through my mind as I leaned close to the window of Bruce Steinberg's office, trying to get a better look at the spot a couple of hundred yards away where the Twin Towers once stood. The thought of the hell that raged there can still get in the way of positive economic thinking.

Not that Steinberg, who was there Sept. 11, seemed overly concerned. "Some people just look for things to worry about," said the Merrill Lynch chief economist. "There's always something to worry about. But that shouldn't detract from the main point that our economy is incredible. It shrugs off shocks; it grows and grows. It is the most flexible and dynamic economy in the world."

I took a cab down to Steinberg's office just after my visit with Henry Kaufman. It seemed appropriate: In the 1970s, Kaufman became the most famous guru on Wall Street by being the most bearish man around at a time when bearishness turned out to be absolutely the right call. Now Steinberg, a 16-year Merrill veteran (and former FORTUNE writer) who became chief economist in 1997, is casting himself as the most bullish economist around--with growth forecasts almost invariably more optimistic than those of his peers at other investment banks.

Steinberg's argument that the economy is resilient is hard to dispute. Assuming faster growth in the future is more of a leap of faith. "When you look at the long sweep of economic history, you find that growth comes in multidecade spurts and then peters out as what was driving the growth fades," he said. His bet is that all that flexibility and opportunism discussed above are the ingredients of such a spurt, one that only got its start in the mid-1990s. There's no guaranteeing he's right. But as scenarios go, it sure beats gloom.

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