Monday, Jul. 28, 1997
THE BEST OF TIMES?
By Bernard Baumohl
1990S U.S.: WHAT MORE COULD YOU ASK?
Unemployment: Under 5% this year Growth: Modest but steady; 2% average this decade Inflation: What inflation?
ECONOMIC BACKDROP Even veteran economists are rubbing their eyes in disbelief at how well the U.S. economy has behaved this decade. For years policymakers couldn't figure out how to reduce joblessness without flaring inflation. The 1990s finally revealed the secret: end the cold war; slash military spending. Pare annual federal budget deficits. Have a central-bank chairman who can deftly apply the monetary brakes to hold inflation down without killing the expansion. Voila! The healthiest economy in recent memory.
COMPETITIVE ADVANTAGE The demise of the Soviet Union shifted resources from defense to more productive uses and opened new export markets, labor pools and natural resources. Government's belt-tightening means Uncle Sam needs to borrow less, leading to lower interest rates. This year the deficit is expected to shrink to about $70 billion, down 75% from $290 billion in 1992. The annual red ink is now less than 1.4% of gross domestic product, the lowest of any industrialized country. Result: a productivity-driven boom.
WHAT WILL KILL THE BOOM Perhaps another oil shock. But the economy is in its seventh year of expansion--better than the 1950s and the Roaring Twenties. And this expansion should last out the 1990s, which would set a record for duration.
1609-1713 DIVERSITY BRINGS ON A GOLDEN AGE FOR THE DUTCH
Growth: The economy tripled in size Inflation: Manageable, lower than the rest of Europe
WHY IT THRIVED The Netherlands of William of Orange, Rembrandt and Descartes flourished through its diversity. The country welcomed immigrants fleeing persecution elsewhere in Europe. Its religious and cultural tolerance attracted merchants, artisans and financiers whose skills helped their new homeland dominate pre-industrial Europe. The population more than doubled, to 1.9 million. The recognition of property rights and contracts fueled business activity.
COMPETITIVE ADVANTAGE The Netherlands had more than half the world's merchant ships. It ruled trade and shipping not just in Europe but throughout Iberia, Africa, Asia and South America, led by the famed Dutch East India and Dutch West India companies. (A forerunner of the latter founded New York City.) Amsterdam became the global financial capital; Dutch workers' wages were Europe's highest. The link between freedom and entrepreneurship was not lost on Adam Smith when he wrote of the virtues of free-market economics.
WHAT KILLED THE BOOM To protect its merchant fleet, Holland built an armada larger than the British and French navies combined. But the cost of this outsize national defense caused taxes to rise sharply, and the Netherlands still lost its naval supremacy. The result was the end of Dutch mastery.
1837-1914 HAIL, BRITANNIA!
Unemployment: Half a century averaging just 4.3% Growth: A steady 2.3% Inflation: None!
ECONOMIC BACKDROP At 18, a girl named Victoria became Queen of England in 1837. Her 63-year reign, the longest in British history, spanned an era in which the country became the world's richest and most powerful. Colonial expansion reached its zenith; Britain ruled about 25% of the world's lands and population.
COMPETITIVE ADVANTAGE England led the Industrial Revolution and fed it with natural resources from its colonies. The pace of technological innovation was extraordinary and included the steam engine and the Bessemer steel converter. England produced more steel, locomotives and textiles than anyone else. Its economy grew fourfold from 1851 to 1911. Since the British pound was tied to gold, it was a global currency and helped make England the center of international banking.
WHAT KILLED THE BOOM Britain ultimately collapsed under the weight of defending the empire from colonial uprisings and imperial rivals. It lost its technological edge. Lastly, and most ghastly, the Great War bled it white.
1920-29 THE ROARING TWENTIES
Unemployment: Dropped from 12% to 3.2% Growth: A powerful 3.6% pace Inflation: Dropped below 1%
ECONOMIC BACKDROP This was the decade of Jay Gatsby, Florenz Ziegfeld, the rise of the American middle class and unbounded optimism. Following a postwar depression in 1920-21, the economy bounced back with a vengeance, growing a torrid 30% in the next two years. And money succeeded in holding its purchasing power as inflation averaged a less than 1% in the decade. The boom filled federal coffers. The 1920s was the last decade in this century when the federal budget ran a surplus every year. The national debt shrank from $24 billion to $16 billion. Taxes were reduced.
COMPETITIVE ADVANTAGE This expansion was electrically powered. As the decade began, about half of all factories were electric, the rest mostly using steam. But by decade's end, more than 80% were on electricity. Household earnings rose; unemployment averaged 4.7%. Car ownership grew from 8 million to 24 million. In 1928 Herbert Hoover declared, "We in America are nearer to the final triumph over poverty than ever before in the history of any land." Oops.
WHAT KILLED THE BOOM The '20s flamed out when unchecked speculation led to the stock-market crash of 1929. Bank failures, price deflation and ultimately the Great Depression followed.
1950S U.S.: BIRTH OF THE BOOM ERA
Unemployment: Averaged only 4.5%; jobs for nearly everyone Growth: Despite two recessions, the economy managed 4% a year Inflation: Just 2.1%
ECONOMIC BACKDROP Prior transitions from war to peace were accompanied by painful economic downturns. But the 1950s radically parted with that tradition as a result of massive federal intervention and the fact that the U.S. emerged physically unscathed, and rich, from history's most destructive war. Government helped: the Employment Act of 1946 (promoting maximum employment and production), the G.I. Bill (giving veterans financial aid to return to school) and the Federal Aid Highway Act (building highways everywhere) eased the transition to a peacetime economy.
COMPETITIVE ADVANTAGE A perfect market. Ex-soldiers got married, and their offspring, the baby-boom generation, swelled the population 18.4%, to 178 million. Everybody went shopping: consumer spending--adjusted for inflation--surged 38% in the decade. As families grew, demand for hospitals, schools and homes took off. All this activity lifted the average annual growth in real gross national product by 4.8% from 1947 to 1953, slowing to 2.5% for the rest of the decade. Globally, the U.S. economy ruled.
WHAT KILLED THE BOOM The strain of being both an economic and a military superpower started to show. The federal deficit in 1959 jumped to 2.6% of gross domestic product, the largest since 1946. By the 1960s, ambitious social programs and the widening war in Vietnam led to higher taxes, while economies in Europe and Asia began to make inroads against the U.S.
1980s JAPAN INC.
Unemployment: Less than 3% throughout the decade Growth: Strong; 4% yearly average Inflation: Plunged from 8% to near zero
ECONOMIC BACKDROP Japan served as a marvel of industrial planning gone right. Japan's Ministry of International Trade and Industry kept the cost of capital low and directed resources to export sectors such as autos and consumer electronics, at the same time fiercely protecting the home market from foreign competition.
COMPETITIVE ADVANTAGE Close cooperation among all the links in the manufacturing chain--the cartel-like structure known as Keiretsu--turned the country into a production machine. A promise of lifetime employment and a culture of consensus created silky-smooth labor relations. For more than a decade, this unique brand of teamwork pushed Japan into an economic league of its own. No other country had such low unemployment and low inflation; the rest of the world struggled with stagflation (high unemployment and inflation). Japan racked up some $400 billion in trade surpluses in the decade. Indeed, by the end of the '80s, Japan had reached a standard of living that exceeded the U.S.'s (besting it by 17% as measured by gross national product per capita). Japan's ability to improve products and lower prices compensated for its lack of world-class technological innovation.
WHAT KILLED THE BOOM Wildly rich, Japanese investors splurged on stocks and drove real estate prices skyward. The speculative bubble in the financial markets and real estate popped loudly in the early 1990s and took the economy down with it. Other competitors closed the productivity gap. Now lifetime employment may be a thing of the past.
SOURCES: Burt Folsom, Mackinac Center for Public Policy; Jan de Vries and Ad van der Woude, The First Modern Economy (Cambridge University Press, 1997); Japan Economic Institute