Has Inflation Been Tamed?
Anyone who knows history is bound to doubt the "new economy." The phrase signifies that the U.S. economy has transformed itself and, as a result, we have entered an everlasting boom. It thrives on new technology and intense competition, which have suppressed inflation. Well, we've been through these phrases and phases before. In the 1920s, we had the "new era"; it preceded the Great Depression (in 1933, unemployment was 25 percent). In the 1960s, we had the "new economics"; it preceded the worst peacetime inflation in U.S. history (peaking at 12.3 percent in 1974 and 13.3 percent in 1979).</br></br>To recall this history is not to suggest an economic catastrophe lurks. But the precedents ought to inspire humility and caution in prophecy. We cannot see the future or, quite often, even understand the present. By the numbers, it's hard to argue that the economy's performance is superior to anything in the past. The current economic expansion is now in its 79th month. But there have been two longer expansions since World War II (the 106-month expansion from February 1961 to December 1969, and the 92-month expansion from November 1982 to July 1990).</br></br>The explosion in computing power and the Internet are impressive; but we have often had impressive bursts of new technology. In the 1950s and 1960s, direct long-distance dialing became virtually universal; before, operators had to complete all long-distance calls. In 1959, commercial jet travel began on domestic routes. In the 1950s and 1960s, railroads switched from steam locomotives to diesels. Construction of the Interstate Highway System (authorized by Congress in 1956) sped truck transportation. All these changes generated big efficiency gains.</br></br>Indeed, government productivity statistics -- measuring output per worker hour -- show far larger increases in the 1950s and 1960s than now. Between 1948 and 1965, productivity rose at an annual rate of 3 percent; since 1990, annual gains average less than one percent. It's argued that the statistics miss many real-world gains. This may be true, because a "service" economy is harder to measure than a "goods" economy: a ton of steel is easier to count than a bundle of health services. But do the statistics undercount by two-thirds (as necessary to match the gains of the 1950s and 1960s)? Though possible, that seems unlikely.</br></br>None of this denies that the economy has done well and, in some respects, better than expected. The central puzzle is tame inflation. In the past year, the consumer price index is up only 2.2 percent, which is lower than the 3.3 percent rise for all of 1996. Again, it's worth noting that this performance -- though excellent -- is hardly unprecedented. Between 1952 and 1965, inflation averaged 1.3 percent annually, with only two years (1956 and 1957) above 2 percent. And after the 1981-82 recession, inflation -- though higher than now -- stayed around 4 percent. Only in 1989 (4.6 percent) and 1990 (6.1 percent) did it rise sharply.