U.S. Economic Performance: Good Fortune Or A New Era?
September 1, 1999
The performance of the U.S. economy in the late 1990s was very good by most measures. Overall growth was robust; and both the unemployment rate and inflation were at the lowest levels in over 30 years. But for many economists, delight in the economy's strong performance was tempered by puzzlement.
- Since the 1960s, unemployment rates below 6 percent or so had been associated with rising rates of inflation.
- Yet in the late 1990s, with unemployment rates around 4 percent, inflation declined.
Explanations for the breakdown in the historic link between inflation and unemployment tend to fall into two categories: temporary factors and a new economic era.
Some economists say temporary factors -- such as the slowing rate of increase in costs for medical benefits -- have held down inflation in the face of low unemployment rates.
The low rate of inflation has, in turn, allowed the Federal Reserve to maintain and even reduce interest rates. Relatively easy money, in combination with strong real income growth, have supported the continued expansion.
Other economists believe the American economy is entering a new era of intense competition and high productivity growth in which inflation is much less of a threat. Advocates of new era do not see an intensification of global competition as simply a temporary factor.
Global competition brings competitive pressures on the American economy, providing incentives for investments in new technologies and the adoption of business practices that are yielding productivity gains.
So which perspective accounts for the extraordinary performance of the U.S. economy? It may be a combination of both.
Source: Lynn E. Browne ,"U.S. Economic Performance: Good Fortune, Bubble, or New Era?" New England Economic Review, May/June 1999, Federal Reserve Bank of Boston, P.O. Box 2076, Boston, Mass. 02106, (617) 973-3397.
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