Wednesday, June 04, 2003

It's Not the Economy: An excellent analysis of trends, numbers, and speculation in yesterday's WSJ (here, for subscribers) by Edmund Phelps. He says something that I've said before:
The most mindless optimism speaks ritually of "recession" from which we can expect "recovery" -- in labor, product and capital markets. But what recession? Standard interpretations of the usual charts estimate that in 1995-96 the economy was at or close to its long-run normal state -- with monetary disturbances in abeyance and no big nonmonetary disturbances either. (The core inflation rate was steady, averaging the same rate as in 1993-94.) Of course, what is normal is always evolving. Yet, impressively, the period's unemployment rate (5.5%), the share of GDP going to labor (65.8%), and stock-market wealth relative to the GDP (about 115%), were on the whole not far from their levels in two other pretty normal periods, 1987-88 and 1971. In the next four years the economy boomed, posting records in all these respects and others. Since 2000 it has fallen back: labor's share to its 1995-96 level, the stock market to its 1997 level and the unemployment rate -- at 6.1% -- to its 1994 level. So we're more or less back to normalcy. It was the boom that was abnormal.
Even if you can't stomach a "natural" unemployment rate, one can fairly posit a "normal" one; and the one we had during the late-90s boom was not normal. Was it entirely overinvestment driven? I agree with Phelps that this is still unknown, though I get the feeling that I he would be less inclined than I to think so.

Keep this in mind when you listen to the Democratic candidates crank about "the economy." What about it? Inflation? Not a problem. Deflation? Certainly not yet, and probably not the disaster it's thought to be. Which of the candidates has even begun to address what they think is currently "wrong" with the economy?


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