Where's the End of the Boom?
by Chris Farrell
April 2000
The longest expansion in U.S. history has changed the economic landscape and
altered the lives of millions, mostly for the better. More than nine years of
uninterrupted growth have raised workers' earnings to an all-time high. The
number of families owning homes and investing in the stock market is
at the highest levels ever. The unemployment rate is at a 30-year low. Yet
the boom is far from an unalloyed benefit.
Many are stuck in low-paying jobs or unable to find affordable housing.
WHAT A DIFFERENCE
a decade makes. In the '70s and '80s, American companies no
longer appeared competitive with foreign rivals. Japan seemed poised to eclipse
the U.S. in everything from cars to banks to computers. Books like Yale
professor Paul Kennedy's The Rise and Fall of the Great Powers stoked fears that
America would follow old imperial powers such as Austria, Hungary and Britain
into long-term economic decline. "I think there are ways you can make the relative decline go smoothly,
but there is no record of an economic power losing its economic edge and coming
back to its number one position," Kennedy said 12 years ago.
It didn't quite turn out that way. Japan's economy has stagnated ever since. In
the U.S., a "new economy" emerged thanks to an explosion in technological
innovation and entrepreneurial creativity. Policymakers at the national level
did their part by balancing the budget and taming inflation.
Open borders
also helped. "We encouraged a lot of trade over the same period, another important
ingredient," says Arthur Rolnick,
head of research at the Federal Reserve Bank of Minneapolis. "We continued our move to become the major trading country in the world, and the open trade policy, very competitive economy, has kept us on the competitive edge, and has produced the jobs and wealth you see today"
Taken altogether, it's now widely agreed the economy can grow much faster than
anyone expected only a few years ago without generating inflation.
How did all this come about? For starters, companies launched a spending spree
on high-tech gear, like computers and Internet networks. Management reorganized
the work place and broke down bureaucratic barriers.
"One thing that is significant is that there is not nearly as large
a corporate structure for most companies," says Larry Jodsaas, chief
executive of semiconductor maker VTC in Bloomington. "Small entrepreneurial companies have virtually no bureaucracy, which makes it a lot easier to get their job
done. You don't see several lines of management like you used to see in what I
call old-line companies."
What's more, companies learned they couldn't hike prices in an era of brutal
global competition. They found the only way to boost profits was instilling a
corporate culture capable of generating a steady stream of technological and
business improvements.
"I was in the computer business at Control Data, and if you developed a new
processor it would last three to five years," says Jodsass. "When I first went into the disk-drive business in the early 1980s, everything we developed we'd produce for three
to five years. Today, disk drive companies, if they produce a product for the
marketplace, it's in production for six months. And it's replaced. They have
to be better every six months. So if I'm not doing it my competition will."
The payoff from all this ferocious activity: higher productivity. During the
expansion, productivity has averaged a two-percent-plus pace a year - double the rate of business cycle upturns in the '70s and '80s.
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"The more
productive our workers are, the more we have to consume, the more wealth is
created, the greater our standard of living."
- Art Rolnick
Federal Reserve Bank - Minneapolis
|  |
"It is the amount of goods and services a worker on average produces," Rolnick notes.
"The more
productive our workers are, the more we have to consume, the more wealth is
created, the greater our standard of living."
Some economists still fear the current fast pace may prove shortlived, but odds
are, they're wrong. Unlike previous expansions in the past half-century, the
economy is improving as it ages. That's because it takes time for a web of
technological and commercial innovations to transform the way we work and live.
Take electricity. Many of the critical advances came in the 1880s. But Rolnick
notes it took two or three decades for the productivity-enhancing promise of
electrification to be realized.
"I would argue the same thing with the computers and the Internet. We're still
learning how to use these new tools. It doesn't happen overnight. But
fundamentally we're finally starting to see the productivity gains the last
three to four years."
Those gains are doing more than feeding corporate bottom lines. Unemployment
has dropped from its 1992 peak of 7.8 percent to 4 percent currently. Yet to the surprise of
most economists, today's low jobless rate has not ignited a wage-and-price
spiral, and it's doubtful even lower unemployment rates will.
What's more, says
Jim Paulson, chief investment strategist at Wells Capital Management, the
expansion is drawing more people into the work force.
"It isn't just that the unemployment rate is lower, the whole labor force has
gone up," he says. "If we were still settling with the same labor force that we were when
people first started worrying about it, probably would be a problem. But it
seems this thing continues to find new sources, whether its older workers who
stay longer or come back, whether its new women or whether its immigrants."
As the economic boom gathers strength, it's finally starting to raise the
incomes of society's most disadvantaged. Since the mid-1990s, the earnings of
those in the bottom 25 percent of wage earners have risen at the same pace as
higher paid workers. The jobless rate for those with those without a high
school education is as low as it has been since the government started keeping
track. The welfare case load has fallen by 50 percent over the past seven years.
One factor behind the durability of the boom is the widespread embrace of
entrepreneurship, what British economist John Maynard Keynes called "the animal
spirits of capitalism." Hordes of enterprising people, lured by the
achievements of Steve Jobs, Michael Dell, and Bill Gates, want to start their
own business. In the vanguard of today's business revolution are the dot.com
entrepreneurs.
VTC's Jodsass says Internet pioneers are creating a new business
model. "They are breaking down barriers. They have changed the way we do
business. They have changed the view of technology in the marketplace. They
have changed where people want to be."
Of course, a downturn in the business cycle is inevitable; it's in the nature of
the capitalist system. But there isn't one in sight, especially, says Paulson, if
prices continue to remain relatively stable. "If we stick around zero percent inflation, or one or minus -1, for five or 10
years, then the long bond will be like three-something than six-something, and that
means a higher stock market than we have today," he says.
To be sure, there is much that is troubling in the economy. Income inequality
has widened precipitously over the past two decades. Workers are fearful of
losing their jobs, and skills can become obsolete almost overnight. Many middle-class families can't afford to buy a home or pay the high price tag of a college
education.
Still, the U.S. economy is on a roll, and it doesn't look as if anything's going
to get in its way anytime soon.
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