The Old Business Cycle Has Not Yet Been Licked
The Guardian (London), February 12, 2000
Only time will tell if the US is now experiencing the birth of a new economy or the dying days of a stock market-fuelled economic bubble.
US economic performance since 1996 - about the midpoint of this record-breaking expansion - does makes a strong case for a "new economy".
Gross domestic product (GDP) adjusted for inflation has grown 4.4% per year. Productivity - an index of how much the economy produces in an hour of work - has risen at an impressive 2.7% annual rate. And, after nearly two decades of decline, the inflation-adjusted wages of the typical worker have risen about 2.5% per year.
The early days of this expansion, however, were particularly disappointing - remember the "jobless recovery"?. Over the entire expansion, which began in March 1991, GDP has grown at a slower, 3.6% annual rate - tying as the slowest rate in the eight expansions since 1949. Productivity growth has averaged 2.2% per year - better than the late 1970s and 1980s, but slower than every other postwar expansion. Despite strong growth since 1996, real wages are today barely 2% better than they were at the peak of the last business cycle in 1990 and are still about 1% below their 1973 level.
Without more data - particularly on how the economy fares through the next recession - economists would probably do best withholding final judgment on the roaring 90s.
Meanwhile, the main lessons from the "new economy" may turn out to be decidedly old-fashioned.
First, low unemployment is good for workers. Wages for the typical worker showed no signs of recovery until unemployment fell below 6% in March 1996. Workers at the bottom have benefited disproportionately from low unemployment - and the 1996-97 increases in the federal minimum wage - with wages up almost 10% since 1996. (Meanwhile, a huge untapped supply of labour and the burst in productivity prevented wage rises from translating into higher prices.)
Second, the distribution of economic growth matters. While wages have become somewhat more equal since 1996, income inequality (which includes nonwage income) and wealth inequality (driven by the stock market) have worsened considerably over the full business cycle.
Third, markets can con tribute only so much to solving social problems. The average low-wage worker made about $5.37 (£3.37) in 1996. The 10% real-wage growth since then translates into an extra 54 cents an hour. These market-driven gains fall far short of what is necessary to put health care within the reach of the 45m Americans still lacking even basic cover. Nor will these gains provide safe, affordable child care for working mothers, or decent housing and quality public education for the 12.7% of the population below the official poverty line.
The overvalued stock market, the yawning trade deficit and consumer spending far ahead of income growth - all key ingredients of the boom - point to what may be the hardest lesson from our prosperity: we haven't licked the business cycle yet.