Growth Without Inflation
September 29, 1997
- The late economist Arthur Okun theorized that when unemployment declines, gross domestic product rises -- a 1 percent decline usually being followed by a 3 percent GDP increase.
- The other is the Phillips curve, which linked wage inflation with lower unemployment.
While actual economic performance seemed to confirm these theories for several decades, events since the late 1980s have thoroughly undermined the predictive value of changes in the unemployment rate, the Cleveland economists contend.
They assert that: "Higher GDP growth should put downward -- rather than upward -- pressure on prices." In their view, inflation occurs when the central bank prints more money than demanded. If the Federal Reserve holds the money supply stable, prices will stay flat or fall.
Supply-side economists believe the economy can grow faster without triggering inflation.
- Tax cuts in the early 1980s put the economy on a new growth path, they point out.
- New taxes and regulations imposed in the early 1990s temporarily derailed that growth.
- In 1994, however, Congress cut taxes on capital and income, while reining in federal spending.
- Since then, an investment-led boom has produced both faster GDP growth and lower inflation as the Federal Reserve curbed money growth, they argue.
Source: Perspective, "Mr. Okun, Meet Mr. Phillips," Investor's Business Daily, September 29, 1997.
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