“Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying Nairu”
“The High Pressure U.S. Labor Market of the 1990s”
“Computers and Aggregate Economic Growth”
“Economic Statistics, the New Economy, and the Productivity Slowdown”
The Emerging Digital Economy
The rapid economic growth of the past few years has surprised even the most optimistic forecasters, and it has made a significant difference to Americans’ sense of themselves. The volume of goods and services the economy produces, the Gross Domestic Product (GDP), has grown at an annual rate of nearly 4 percent, discounted for inflation, since 1996. Few economists projected rates of growth as high as 3 percent a year. Only a few years ago, experts said that labor productivity, the output of the economy per hour of work and the source of a nation’s rising standard of living, was barely growing. But it has grown by more than 2 percent a year on average since then, and grew by an annual rate of 3 percent in the nine months ended in June.
The fall in the rate of unemployment has had the greatest social effect. It now stands at 4.3 percent, lower than at any other time since the 1960s. A reduction in unemployment does not simply mean that a higher proportion of people have jobs. It also means that the demand for workers in general is strong, making most jobs more secure and forcing wages to rise as well. During the past three years, wages have done just that, not merely rising for better-off workers, as they did for the previous two decades, but rising by about 8 percent after inflation on average for low-income workers as well. As a result, income inequality, which widened dramatically in the 1980s and early 1990s, is at last narrowing.
Meantime, inflation has, until recently, continued to subside, defying every economic forecast that I have seen. Consumer prices rose 2 percent during the last year. This surprisingly low rate of inflation enabled the nation’s central bank, the Federal Reserve, to lower interest rates rather than raise them as had been expected with such rapid rates of growth. Long-term mortgage rates fell to around 7 percent in mid-1998, for example, making the monthly cost of financing a home purchase lower compared to average family income than it had been in nearly twenty years. Low mortgage rates have made home equity loans to finance other kinds of consumption highly attractive. Low inflation and interest rates have also been powerful stimulants for the stock market, and high stock prices in turn have been a foundation for unusually strong consumer spending that has literally outpaced increases in income in recent months.
To a growing number of observers, this exuberant performance suggests a deep change in America’s prospects. A common explanation is that computerized technological advances have at last turned the economy around. The slow rates of growth that persisted since the early 1970s and led to historically torpid growth in wages for most Americans have ended, some now say, as a new information age at last takes hold. There is a great deal of doubt among economists about this. Many argue that the economy reached a high rate of growth in the …