Please Spare Us A Boom

The answer is: please, spare us a boom.

All we’ve learned about government economic policy since the 1960s ought to reconcile us to a modest recovery-even one that’s called “sluggish.” Gradual recovery will bring enduring benefits. It will muffle inflation and force companies to become more productive. Artificial efforts to accelerate economic growth (through low interest rates, tax cuts or more government spending) have usually ended badly. They’ve ultimately raised inflation and spawned wasteful investment.

Arguing against a boom may seem wildly premature. Many Americans don’t yet see a recovery. The discussion is (as we say in the news biz) “ahead of the curve.” But even now, we ought to anticipate complaints that the recovery won’t be good enough. The attacks seem inevitable because (a) it’s an election year and (b) the criticisms will be partially true and, superficially, convincing.

Look at the numbers. In the eight recoveries since World War II, economic growth during the first two years has averaged 6.2 percent annually, reports economist Stephen McNees of the Federal Reserve Bank of Boston. Typically, the economy expands rapidly after a recession, because depleted inventories have to be replenished and there’s pent-up demand to be satisfied. Now look at the current outlook: the consensus of the 53 economists polled by Blue Chip Economic Indicators is for growth to rise to slightly more than 3 percent by 1993.

Ugh. The comparisons seem to demand government action to speed things up. But the comparisons are misleading, and the implication for economic policy is wrong. Contrary to popular impression, the recession was not especially severe by postwar standards: The civilian unemployment rate (7.3 percent in February) remains below the average for all postwar recessions (7.8 percent). Even with a modest recovery the Blue Chip economists think it will be 6.3 percent by the end of 1993.

Our economy is not-to use a familiar metaphor-a car that can be steered easily. In the metaphor, the government can “step on the gas” or “apply the brakes.” The imagery is meant to suggest that, given competent drivers (economic policymakers), government can somehow maximize economic growth. The imagery creates a vastly oversimplified and ultimately false picture: it ignores the huge diversity of industries and the special circumstances that cause their growth or decline.

This is crucial now. Slower economic growth stems, in part, from upheavals in specific industries. The most obvious is massive military demobilization. According to the Congressional Budget Office, at least 1.1 million defense-related jobs will be lost by 1995 (600,000 in defense industries and nearly 500,000 from the military and government). And other upheavals are also underway: the service sector-everything from banks to retail stores-is experiencing a major shakeout.

These disruptions involve moving people and money out of less productive or (as with the military) less needed sectors of the economy. The transitions take time. They hurt. But the geographical concentration of many industries means that the changes cant easily be cushioned by economic policies that affect the entire nation. Southern California is the citadel of the aerospace industry. In 1990 defense spending in Los Angeles County alone totaled $8 billion. The region will suffer from Pentagon cutbacks just as Texas suffered from dropping oil prices. Lower interest rates won’t much alter that.

Comparisons with the past are also misleading because the economy can’t grow as rapidly as it once did. Crudely, our potential growth reflects two factors: first, the increase in workers; and second, growth in productivity (economic efficiency). Both have slowed. In the 1990s, the labor force may grow only about 1 percent annually. This would be lower than any decade since the 1940s: the babyboom bulge has passed, and the influx of women into jobs is abating. In the 1970s, labor-force growth averaged about 2 percent annually. As for productivity, its annual growth has been roughly 1 percent since 1970. That’s less than half the rate of earlier postwar decades.

Trying to match earlier recoveries would be foolish. The target is false: we cant much raise labor-force growth, and increases in long-term productivity–obviously desirable–won’t be helped by artificial doses of demand. For now, our potential economic growth rate may be as low as 2 percent annually, or perhaps a bit more. We can afford slightly faster growth now, because unemployment is high. An expansion of 3 or 4 percent would gradually reduce joblessness without worsening inflation. If underlying productivity improves, it would automatically raise economic growth by increasing either wages or profits. These would represent genuine gains in purchasing power.

It’s important to clarify these issues now. Government’s basic role here is to foster a climate-through favorable political and social condition– conducive to economic growth, which is generated mainly by business. Government doesn’t primarily create growth. Although expansionary policies may temporarily spur production, they almost always leave debilitating legacies. The hangover from the 1960s and 1970s was high inflation. The effort to sustain the boom of the 1980s led to overinvestment in commercial real estate and a weakened banking system.

Our pursuit of the perfect boom has been a political theme for 30 years. It’s regularly gotten us into trouble. Even if government policies have the theoretical ability to raise our rate of economic growth-a dubious, but debatable, proposition-political pressures consistently lead to policies that remain too expansionary for too long. Can we learn from experience? Slower and steadier is better.

title: “Please Spare Us A Boom” ShowToc: true date: “2022-12-07” author: “Yvonne Woods”

The answer is: please, spare us a boom.

All we’ve learned about government economic policy since the 1960s ought to reconcile us to a modest recovery-even one that’s called “sluggish.” Gradual recovery will bring enduring benefits. It will muffle inflation and force companies to become more productive. Artificial efforts to accelerate economic growth (through low interest rates, tax cuts or more government spending) have usually ended badly. They’ve ultimately raised inflation and spawned wasteful investment.

Arguing against a boom may seem wildly premature. Many Americans don’t yet see a recovery. The discussion is (as we say in the news biz) “ahead of the curve.” But even now, we ought to anticipate complaints that the recovery won’t be good enough. The attacks seem inevitable because (a) it’s an election year and (b) the criticisms will be partially true and, superficially, convincing.

Look at the numbers. In the eight recoveries since World War II, economic growth during the first two years has averaged 6.2 percent annually, reports economist Stephen McNees of the Federal Reserve Bank of Boston. Typically, the economy expands rapidly after a recession, because depleted inventories have to be replenished and there’s pent-up demand to be satisfied. Now look at the current outlook: the consensus of the 53 economists polled by Blue Chip Economic Indicators is for growth to rise to slightly more than 3 percent by 1993.

Ugh. The comparisons seem to demand government action to speed things up. But the comparisons are misleading, and the implication for economic policy is wrong. Contrary to popular impression, the recession was not especially severe by postwar standards: The civilian unemployment rate (7.3 percent in February) remains below the average for all postwar recessions (7.8 percent). Even with a modest recovery the Blue Chip economists think it will be 6.3 percent by the end of 1993.

Our economy is not-to use a familiar metaphor-a car that can be steered easily. In the metaphor, the government can “step on the gas” or “apply the brakes.” The imagery is meant to suggest that, given competent drivers (economic policymakers), government can somehow maximize economic growth. The imagery creates a vastly oversimplified and ultimately false picture: it ignores the huge diversity of industries and the special circumstances that cause their growth or decline.

This is crucial now. Slower economic growth stems, in part, from upheavals in specific industries. The most obvious is massive military demobilization. According to the Congressional Budget Office, at least 1.1 million defense-related jobs will be lost by 1995 (600,000 in defense industries and nearly 500,000 from the military and government). And other upheavals are also underway: the service sector-everything from banks to retail stores-is experiencing a major shakeout.

These disruptions involve moving people and money out of less productive or (as with the military) less needed sectors of the economy. The transitions take time. They hurt. But the geographical concentration of many industries means that the changes cant easily be cushioned by economic policies that affect the entire nation. Southern California is the citadel of the aerospace industry. In 1990 defense spending in Los Angeles County alone totaled $8 billion. The region will suffer from Pentagon cutbacks just as Texas suffered from dropping oil prices. Lower interest rates won’t much alter that.

Comparisons with the past are also misleading because the economy can’t grow as rapidly as it once did. Crudely, our potential growth reflects two factors: first, the increase in workers; and second, growth in productivity (economic efficiency). Both have slowed. In the 1990s, the labor force may grow only about 1 percent annually. This would be lower than any decade since the 1940s: the babyboom bulge has passed, and the influx of women into jobs is abating. In the 1970s, labor-force growth averaged about 2 percent annually. As for productivity, its annual growth has been roughly 1 percent since 1970. That’s less than half the rate of earlier postwar decades.

Trying to match earlier recoveries would be foolish. The target is false: we cant much raise labor-force growth, and increases in long-term productivity–obviously desirable–won’t be helped by artificial doses of demand. For now, our potential economic growth rate may be as low as 2 percent annually, or perhaps a bit more. We can afford slightly faster growth now, because unemployment is high. An expansion of 3 or 4 percent would gradually reduce joblessness without worsening inflation. If underlying productivity improves, it would automatically raise economic growth by increasing either wages or profits. These would represent genuine gains in purchasing power.

It’s important to clarify these issues now. Government’s basic role here is to foster a climate-through favorable political and social condition– conducive to economic growth, which is generated mainly by business. Government doesn’t primarily create growth. Although expansionary policies may temporarily spur production, they almost always leave debilitating legacies. The hangover from the 1960s and 1970s was high inflation. The effort to sustain the boom of the 1980s led to overinvestment in commercial real estate and a weakened banking system.

Our pursuit of the perfect boom has been a political theme for 30 years. It’s regularly gotten us into trouble. Even if government policies have the theoretical ability to raise our rate of economic growth-a dubious, but debatable, proposition-political pressures consistently lead to policies that remain too expansionary for too long. Can we learn from experience? Slower and steadier is better.