Nothing To Fear But Fear Of Growth
Remember the "limits to growth" crowd in the 1970s? They're back. But ins
tead of concerned liberals worrying about the planet running out of resources (boy, were they wrong!), we now have jittery bond traders worrying about the economy running out of capacity. Like Chicken Little warning that the sky is falling, these worrywarts are scared silly by growth and run around squawking, "Inflation! Inflation! Inflation!"
So, first-quarter gross domestic product comes in at a modest 2.6%, and what does the bond market do? It tanks, sending yields soaring. The index of employment costs are reported up a mere 3.2% for the first quarter, the smallest increase since 1979, and what happens? The bond market tanks again. The only thing that appears to make these bond vigilantes happy is high unemployment. At current yields, it almost seems as though they are building in an "unemployment rate premium" of 20% into 30-year bonds.
Trouble is, the fear of growth built into the bond market is dangerous. It threatens to stifle the great productivity surge, which promises to transform the U.S. economy, before it really gets off the ground.
Few of the bond traders have ever heard of, much less read, Joseph A. Schumpeter (1883-1950), the brilliant economist who argued that new technologies, markets, and forms of business organization supplant the old--and generate lots of economic growth. To Schumpeter, it is innovation that drives growth in a process that he called "creative destruction."
The conventional wisdom in the bond markets is that the U.S. economy is growing too fast, threatening to reignite inflation. Why? Because productivity is rising at 1% a year. This gives the U.S. a long-term noninflationary economic growth potential of 2.5% annually.
But what if technological innovation and globalization have raised productivity growth to 2% annually? Suddenly, long-term growth potential jumps to 3.5%. Double the productivity growth rate, and those impending capacity bottlenecks begin to fade. A wage-and-price spiral looks remote. A mature economy appears more like an emerging market. At 2% productivity growth, over $1 trillion in extra output accumulates by the year 2000, boosting jobs, shriveling the federal budget deficit, and raising per-capita income by $1,000.
Federal Reserve Chairman Alan Greenspan believes that American productivity growth is considerably above 1% and that the economy can grow faster without generating significant inflation. But he is cautious about acting on that belief because he knows that the financial markets demand that he maintain a strict anti-inflation stance.
Until the tyranny of conventional thinking about inflation and economic growth is ended, the U.S. will be forced to grow below its potential. That means jobs lost and dreams unfulfilled.