This nation`s economic performance of the last nine years is unprecedentedu00e2u20ac”none of us have ever lived during such great prosperity: GDP is growing at 4% to 6% with low inflation and there`s high productivity, low unemployment, high profits, and a booming stock market. Yes, the rich are getting richer, as we see the creation of a whole new upper class of millionaires and a couple of hundred billionaires (more than three million families have over $1 million in equity investments.)The new new economy is said to be the creation of the Internet, broadband communications, gene adjusting, and many other new scientific wonders. Many believe credit goes to Bill Gates of Microsoft and the rest of the new enterprises that have dominated the stock market`s performance and our economy`s growth. But we have a presidential election this year, so credit for this wondrous economy undoubtedly will be claimed in the political arena like so:To the Reagan Administration credit will be given for:
- taming unreasonable union demands
- cutting taxes, especially high rates on capital gains and personal incomes
- deregulating many industries
- promoting free markets, including takeovers of large companies
The Bush Administration will get credit for:
- moving into a new form of budgeting, which set spending caps and required new taxes
- securing energy resources through the Gulf War victory
- fixing the S&L crisis and the banking problems of the late `80s, which provided the financial base for our expanding economy
The Clinton Administration will take credit for:
- providing a balanced budget surplus (also claimed by the Republicans of the Gingrich-led Congress)
- allowing the Fed total independence to set monetary policy
- supporting free trade and passing NATTA, even though unions were enraged
The Federal Reserve claims credit for:
- low inflation and interest rates, which indicated that monetary policy was sound and on target.
In fact, I`d like to claim a little credit myself since I helped the Bush Administration with the banking debacle. Also, I wrote a book back in 1982 titled Productivity: The American Advantage, which outlined how the United States, ranked about 18th at the time, would become the productivity leader of the world. (It sold very poorly.)Among all the claims for fathering this record economy, new levels of productivity seems the best explanation for such remarkable results. Thus, the real tussle should be over who is responsible for the explosion of productive activity, which has allowed everyone to benefit from the new economic system. Certainly the Internet is a source of efficiency not seen before in history.An even larger question today, though, is when will this boom end? There are many possible factors that may bring a close to this fairy tale. Among them:The end of “irrational exuberance” in the stock marketu00e2u20ac”In this scenario, the market today is too high because it`s the fad of the moment. At a P/E of about 22-23, the Dow Jones average is far above its norm of around 15-16, and many leading stocks are at more than 100 P/E. Something will come along to change the belief that we are in a new economy where P/Es are no longer relevant and one always gains by investing in common stocks.The labor shortage and full employment will result in higher wages (exceeding productivity gains)u00e2u20ac”This increase in cost results either in higher inflation or lower profits. Either one means a slowing of the economy and a fall in the stock market.Mounting trade deficits now running in excess of $200 billion a year and growingu00e2u20ac”Eventually the dollars spent on imports must come home either as a capital investment (as they are today) or as a claim on U.S. production in the future, when foreigners decide to collect on our IOUs. This will mean a decrease in the value of the dollar, higher interest rates in the U.S., and the end of the current boom. A mistake in the Fed`s monetary policyu00e2u20ac”That would result in slowing things down, not with a soft landing, but with a real fall in economic activity. Past history gives many examples of this type of failure, as alas, the setting of monetary policyu00e2u20ac”even by Greenspanu00e2u20ac”is an art, not a science.Who knows what the future may bringu00e2u20ac”and besides, Keynes advised us, “in the long run, we are all dead.” Somehow, though, I never seem to feel much better after that bit of philosophy.