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Creative Destruction . . .

. . . is sweeping the American economic landscape.

12:00 AM, Jul 19, 2005 • By IRWIN M. STELZER
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IT IS IMPORTANT not to become so absorbed in studying the blips in interest rates, exchange rates, inflation rates and other economic indicators that we forget these are merely thermometers. They can tell us something about the temperature of an economy, but, taken alone, not much about the major changes that underlie these familiar figures.

Start with the energy sector. We know that demand for crude oil has outstripped supply, driving the price of crude to and past $60 per barrel. Whether that price will persist in the face of slowing growth in China, and the increase in supplies that will result from the 13 percent increase in oil companies' exploration outlays, compared with about 4 percent last year, we do not know.

But we can reasonably assume that the era of very low-priced oil is over, and that recent run-ups will change the way businesses and homeowners use fuels, just as past price spurts have done. Throw in the cost of the increasingly expensive pollution permits soon-to-be needed to burn fossil fuels, and you have a resurgence of interest in nuclear power, especially if the industry can persuade a very receptive Bush administration that our energy security requirements make it reasonable to provide subsidies and price guarantees. But no sane utility board will approve construction of a new nuclear plant until the politicians agree on a means for disposing of the nuclear waste, a process now stalled by Harry Reid. Reid has sworn to prevent the activation of Yucca Mountain, the nation's best available storage site, unfortunately located in his home state of Nevada. He apparently feels that the national interest is best served by leaving the waste in the hundreds of pools scattered around the country.

Another sector that is changing so fast that only the experts can understand what is going on is the media/entertainment industry. The travails of newspapers are well chronicled, not least by the newspapers themselves, as they see advertising revenue siphoned off to the internet, and the attention of younger people focused on more immediate ways of getting news. Some doubt that all of the current print players will survive, others say they will but in the much-changed role of "viewspapers" rather than newspapers--purveyors of opinion rather than printers of news that is stale by the time it hits the presses. (It is, of course, arguable that many of the leading newspapers long ago abandoned news for views-disguised as news.) Change is the only certainty.

But print is not the only media form under siege:

* Movie-going is way down, as audiences find the combination of big, flat-screen television sets that beautifully display the thousands of DVDs being released, or movies-on-demand from cable and satellite providers (and, soon, telcos), cheaper alternatives than a family night out at the flicks.

* The music sector is being revolutionized by downloading, the iPod (Apple sold 6.2 million iPods in the last quarter, compared with 860,00 a year earlier) and similar delivery devices, and a generation brought up with little regard for the hoary construct known as copyright protection.

* And television is being transformed as do-it-yourself channel creators use Tivo-type boxes and similar gadgets to gain control of scheduling and to act on their distaste for advertisements. That threatens the revenue stream on which program creators have historically relied, and suggests that pay-per-view and other forms of subscription are a wave of a future that might not include several existing broadcasters.

The retail sector will also be unrecognizable a relatively few years hence. The new, $30 billion, 1,000-store Federated-May department store combine faces multiple problems: consumers who have been shifting from department to specialty stores; the increased emphasis on value-for-money and up-to-the-second fashion that has propelled the growth of fleet-of-foot chains such as Zara; Wal-Mart, with its ever-lower prices for just about everything, including its well-received George apparel line; the willingness of brands with large consumer followings, such as Martha Stewart, to make product available to lower-end outlets such as Kmart; and the rise of the internet shopper. It is not inconceivable that the traditional department store will prove to be an economic dinosaur, its properties worth more than its business.

This revolution in retailing extends to the malls, once preferred for their weather-proof, closed environment. Many are now being rebuilt, opened to street-level window-shoppers, and constructed without the ubiquitous department-store "anchor" once deemed essential to the success of any mall. Unless owners of existing malls update their properties they may find the property put to better uses by a new wave of entrepreneurs.

Then we have the auto industry. Historic leaders are saddled with "legacy costs"--pensions, health-care insurance for retirees, and union contracts that make plant closings almost as uneconomic in America as they are legally difficult in Europe. Ford and GM are struggling to meet the competition of mostly-made-in-the-USA vehicles rolling off the assembly lines of Toyota, BMW, and other companies which are becoming more foreign in marque than in manufacture.

Don't conclude that all of this is a pudding without a theme, to borrow an expression from our British friends. These examples, a few among many, show that one reason the American economy is growing at a relatively rapid rate, and creating millions of new jobs in the face of intense global competition, is that it is flexible. Rising oil prices encourage new supplies and fuel-shifting. Resources move from one kind of retailing to another, and from inefficient to more efficient automakers. Technologically "with-it" media moguls and workers replace those who once dominated their industry. All, in response to consumer demands.

That's the creative part of economist Joseph Schumpeter's "creative destruction"--the ability of resources no longer needed in one part of the American economy to move to another, rather than to the dole queue.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.