NCPA - National Center for Policy Analysis

Friedman Predicts Resumption of Economic Growth

January 22, 2002

Nobel Prize winner Milton Friedman points out what he calls "an uncanny resemblance" between the U.S. economies of the 1990s and the 1920s, as well as the 1980s in Japan. In all three periods, technological change produced extraordinary economic growth -- followed by a market collapse.

  • Real economic growth during the first 10 years of each episode was remarkably similar -- but in two instances was followed in the U.S. by the Great Depression and stagnation for Japan.
  • In the U.S., unemployment reached 25 percent at the trough of the Great Depression -- during Japan's 1980s recession unemployment never exceeded single digits.
  • The three bull markets in stock likewise display remarkable similarities -- although the subsequent decline was much less in Japan in the 1990s than in the U.S. in the 1930s.
  • The quantity of money rose fairly steadily in all three of the decades preceding the stock market peak -- but at a much higher rate in 1980s Japan, which may explain why the Japanese bubble was so much more sweeping than in the two U.S. episodes.

The U.S. quantity of money fell by more than a third from the cyclical peak in 1929 to 1933. In Japan, it fell by two-tenths of one percent in the first year after the cyclical peak, and then rose by 2.5 percent per year in the next two years. In the current episode, the quantity of money in the U.S. has already risen by more than 11 percent during the first five quarters after the cyclical peak.

Friedman the current recession will be mild and expansion will soon resume.

Source: Milton Friedman (Hoover Institution), "The 1990s Boom Went Bust. What Next?" Wall Street Journal, January 22, 2002.

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