Dow Eleven Thousand

Finally! After four and a half years of lethargy, the Dow Jones index broke above $11,000 today (closing at $11,012) for the first time since June 2001. Crossing the $11,000 mark puts the Dow about 6 percent below its all-time high of $11,750 set on Jan. 14, 2000. In the ensuing bear market, the Dow retreated to a low of $7,197 in October 2002 before starting its rebound. Perhaps more amazing was that General Motors led the way as shares climbed 5.5 percent.

When one looks honestly at the US economy it's quite rosy. Our Gross Domestic Product -- the single best indicator of economic progress -- grew by more than 3.5 percent again in 2005, compared with about 1.5 percent for the Euro Zone. U.S unemployment is 4.9 percent, compared with rates twice that high in Europe. We are creating net new jobs (jobs gained minus jobs lost) at a rate of 2 million a year. Inflation is low as are interest rates. All this after hurricanes caused $100 billion in damage in the United States and record high oil and gasoline prices.

Furthermore, the latest Census data show that, far from losing ground, the middle class in America has become a good deal richer. “Back in 1967, the income range for the middle class [the three middle quintiles] was between $28,800 and $39,000 (in today’s dollars). Now that income range is between $38,000 and $59,000.” The increase averages $14,600 or 43 percent real income.

Middle class families are 43 percent better off economically, all other things being equal. Except they are not equal. Tax cuts have increased net incomes, and home ownership and home equity increases have increased net worth. Americans are doing really well.

It's interesting to search for the source of this financial well being. Are we smarter, harder working, more entrepreneurial, less regulated and taxed??? Well there is some of all that. But the single most important factor is productivity.

GDP per capita is determined primarily, almost entirely, by productivity. People basically work in order to have a place to sleep and something to eat and so on and so forth. The huge differences around the world are the efficiencies with which they work -- their productivity. ( William Lewis )

Productivity, as measured by output per hour is compiled by the Bureau of Labor Statistics. So what are the numbers?

Period ----Average Productivity Growth
1955-1960--------2.03 percent
1960-1965--------2.79
1965-1970--------2.09
1970-1975--------2.31
1975-1980--------1.55
1980-1985--------1.38
1985-1990--------1.65
1990-1995--------1.59
1995-2000--------2.28
2000-2005--------3.39

What the table says is that the economy is in great shape. The average productivity growth rate in the last five years is the highest over the past half century, thanks to American technology (see Moore’s Law).

In a recent TCS interview, Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound. (Arnold Kling, author of Learning Economics.)

Americans know that our economic system gives them a real shot at upward mobility if they work hard and make good choices. But mobility and other socially desirable goals demand growth. In his new book, The Moral Consequences of Economic Growth, Benjamin Friedman, argues that when countries grow robustly, they become more tolerant, democratic and generous. All good things.