Is the Boom and Bust Cycle Over?

This March, the current economic expansion celebrated another birthday. It's six years old and still growing. Unemployment rates are their lowest in a decade. At the same time, inflation rates remain modest and the stock market continues to boom. Sounds like the making of a national holiday. But blowing out the candles on the economic birthday cake has surely left many of the celebrants of capitalism a bit light-headed, if not downright giddy. The 228 members of the National Association of Business Economists, for instance, now expect these economic good times to roll on and on; a majority of them say we will not see a recession before 1999 at the earliest. If they are right, the current expansion will become the longest in U.S. history. At 72 months, it is already much longer than the 50-month average.Others go further still. "A new consensus," reports The Wall Street Journal, is emerging from boardrooms, trading floors, government offices, and even living rooms: "The big, bad business cycle has been tamed."We've heard this tune before. During the last outbreak of unbridled capitalist merrymaking -- when the economy expanded for nearly nine years during the 1960s -- Arthur Okun, Lyndon Johnson's economic advisor, proclaimed "the obsolescence of the business cycle."The boom-bust cycle was dead, he thought. A recession before the decade was through, and an even sharper economic downturn in the middle of the next decade, brought him back to reality. Cooler heads wonder when, not if, the next recession will come. "The Fed controls the business cycle," says Stephen Roach, chief economist at Morgan Stanley. "And in the end, it will raise rates enough to bring on a recession." But even the naysayers are not asking the important question. Why is this expansion handing its benefits almost exclusively to the top, and, despite its length, failing to give workers the usual benefits of long periods of growth: higher wages and purchasing power? The '90s expansion has gone on so long in part because the economy has grown so slowly. During an expansion, the economy makes up the ground lost during a recession and grows beyond its pre-recession levels in jobs, output, and other measures. Over the last six years, economic growth bobbed up and down from over 4% in some quarters to below 1% in others, averaging just 2.6% " about two-thirds the rate of the typical expansion and the slowest boom since World War II. Despite the mildness of the 1990-91 recession, this economic upswing took more than twice as long to recover the output lost during the recession compared to other postwar expansions. And it has not grown much past its pre-recession heights, less than 15%. The long expansion of the 1980s added about twice as much to output, and the 1960s expansion, the longest of the postwar period, did three times as well. Even the much shorter expansions of the 1970s, just 37 months in one case and 57 months in the other, did somewhat better. By historical standards, then, the last six years has done little to expand the economy. The good news on the jobs front is that the economy has added nearly 13 million new jobs since 1991. While the jobs are neither as temporary or forced part-time as some on the left have suggested, nor as well-paying as Clinton's economic advisors claim, they have kept official unemployment rates below 5.5% for nearly a year now. But even that falls short of the monthly average of jobs created during postwar expansions. The 1980s expansion created slightly more jobs each month. Even the expansion under Jimmy Carter did far better. Some are ready to celebrate this slower growth as the dispatching of unsustainable booms followed by economic busts. Paul McCulley, of UBS Securities Inc., says the economy has "entered a golden age in which growth modulates endlessly between soft landing and soft takeoffs." But even if he is right, much has been lost. Had the economy grown 3.5% a year over the last six years-- the U.S. economy's average through the recessions and expansions since 1890 -- we would boast an extra $500 billion of output and millions more jobs to lift our standard of living. Nor has the current long spell of growth brought rapid gains in labor productivity, the usual DNA of any golden age. Productivity has grown only 1% a year during the expansion. That's only two-thirds of the pace during the 1980s expansion and far short of the 2.9% per year increases in productivity that fueled the economic boom from 1960 to 1973. Only high tech has been growing rapidly, and now accounts for fully a third of today's economic growth. But the rest of the economy has done far less well, growing at less than 2% a year Why, then, has this expansion gone on so long? And why has the economy not grown more quickly? Much of the answer is Alan Greenspan. At the first sign of inflation, the inflation-phobic Federal Reserve Bank chair launched what he calls "preemptive strikes"; the Fed raised interest rates to rein in spending, dampen growth, and thereby cool off any employment buildup that might push up wages and ultimately prices. For instance, when economic growth heated up in the first half of 1994, exceeding 4% in one quarter, the Fed raised the discount rate, the interest rate it charges commercial banks for loans, four times within a year. A long expansion under the thumb of Greenspan has delivered much good news to those on the top. Corporate profits logged their fifth solid year of growth in 1996, the longest profit expansion since the mid-1960s. With these profits and with little fear that inflation will erode their returns, investors have pushed up stock prices faster in the 1990s than even during the Reagan years. But the Fed has bought high corporate profits and price stability at the cost of keeping workers' wages in check. Hourly wages and benefits have gone up only half as much as in the typical expansion. The economy added new jobs without pushing up real wages that could cut into corporate profit margins or ignite an inflation that would erode the high-flying financial markets' returns. When official unemployment rates got this low in the late 1980s, inflation was already above 4%. Now it's at 3% with few signs that it will heat up. Workers' economic insecurity means labor markets will remain slack and keep wages low even though the economy continues to add nearly 300,000 jobs a month. They are reluctant to quit their jobs as large-scale layoffs continue and as a huge pool of workers, many not recognized by the official unemployment figures, wait for jobs in the wings. Still Greenspan sees a threat of inflation when others cannot. Rising health insurance costs, brisk consumer spending fueled by job growth and mounting consumer debt, and the return of the reckless real estate and credit card loans of the 1980s, and a spreading sense that the economy is immune to recession, are all part of a recipe for future inflation, according to Greenspan. To slow growth and relieve the build-up of his inflationary pressures, he raised short-term interest rates in March. But the Fed will only stomp on the brakes hard enough to bring the slow expansion to an end if labor militancy shakes off a decade-long economic insecurity and pushes up wages. Rising wages will threaten corporate profits, something Greenspan is unlikely to tolerate even if workers have yet to receive a raise in real terms during the expansion. Without that militancy, the slow growth of this expansion will most likely continue for the next few years, perhaps even until the turn of the century. It remains in danger of being brought down by its own excesses or by the miscalculation of Greenspan's Fed (who after all promised a soft landing in 1989 but delivered a recession). But for now, without labor's challenge, Greenspan has the space necessary to engineer the kind of slow growth that will keep the expansion alive. That is something the well-to-do will no doubt go on celebrating, even if, or perhaps because, this expansion shows no signs of creating widespread prosperity.John Miller teaches economics at Wheaton College and is a member of the Dollars & Sense collective.


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