Why This Recovery Won't Fall Off The Track SoonRudi Dornbusch
It feels as if the U.S. economic expansion has gone on far longer and cut far deeper into unemployment than the standards of postwar macroeconomic performance would have suggested. We may well be in a new world in which the traditional economic time limits don't apply. So far, this expansion has more than two years to go to beat the longest, but it still could set a record.
The nine postwar expansions identified by the National Bureau of Economic Research, measured from trough to peak, have averaged 50 months. The longest ones lasted 106 months (in the 1960s) and 91 months (in the 1980s). The present expansion, which started in March, 1991, is in its 77th month.
How much of this expansion is real and will last, and how much is just exuberance and numbers on computers? The stock market is roaring. Consumer confidence is at its highest level in more than a decade and may well reach the postwar high recorded in the 1960s. The good feelings come from sustained growth, record low levels of unemployment, a vast creation of paper and real wealth, a decade without inflation, the most sound budget in 30 years, and relatively peaceful times. Corporate profits have doubled in 10 years, and stocks, even adjusted for inflation, are at their highest levels in history. Median real family income, adjusted with a realistic measure of inflation, is also at its highest recorded level. True, CEOs and blue-collar workers share a sense of insecurity about jobs. But the former have platinum parachutes, while the latter often have their pick of new jobs from which to choose.
UNNATURAL CAUSES. Is all this real? Yes, wealth has been created by massive restructuring of government and business, dramatic innovations in technology and organization, the opening of the world economy, and the lengthening of economic horizons--the payoff from a noninflationary environment. And the absence of inflation is probably the single most important factor. It cost a lot to get to this point--the 1982 recession was the biggest dent in the economy since the Great Depression--but the journey was worth it. The massive restructuring of the U.S. economy could not have occurred without the long and vigorous expansion made possible by lasting low inflation. So, is inflation gone for good?
No postwar recovery has died in bed of old age--the Federal Reserve has murdered every one of them. The typical pattern is that a few years into a recovery, as unemployment drops and the labor and product markets tighten, wage and price inflation picks up, the wage-price spiral gets moving, and soon the Fed steps in to douse wage demands with a good old-fashioned recession. And the whole cycle starts all over again.
That process has changed in two critical ways. First, companies compete more than ever in the world economy: They can produce anywhere, source from anywhere, and face competition everywhere. With goods coming to resemble commodities, manufacturers are pressured by customers for the best prices and by stockholders for the best results.
Those pressures push down into the labor market. Workers can be made redundant. In the past, they were laid off in a recession, then recalled as recoveries began. A moment of wage discipline would occur, and then, with the upswing, pay packets would quickly recover. Today, employment in an individual facility depends far more on the global competitive position of the plant than on the U.S. cyclical position. So good economic times do not remove the pressure for companies to perform, or the insecurity of their workers.
STICK AROUND. Second, we no longer have unions that organize cyclical raiding parties on corporate profits. They are largely gone or have shifted their focus to jobs and away from wages. As a result, the U.S. business cycle has gained far more room to grow. Without wage inflation that's passed on to the product market, the economy can go much further toward reaching full employment.
So we have a high-pressure economy in two ways: high pressure of demand, which creates jobs for more and more people, and high pressure of competition, which combines higher output with cost control. We can't shrug off the fact that there is such a thing as full employment--even though we may not be sure at what jobless rate full employment has been reached. But unlike during the long expansion of the 1960s, we have the extra factor of global competition, and hence can expect to do a better job of keeping inflation under control than we did then.
The Fed can shut off growth and prosperity in no time. But don't worry, Fed Chairman Alan Greenspan is a great host. He won't remove the refreshments until inflation troubles really start. The boom is far from over.