Business & The Economy
Wednesday, August 23, 2000
As Economy Grows, Experts Debate:
Are Boom-Bust Cycles Gone Forever?
They seem to be fading, thanks to tech. Some cite tough Fed; others warn that policy is too tight
By M. Susan Basas
Investor's Business Daily
The economy couldn't be better. Inflation is low despite the lowest jobless rate in 30 years. Productivity gains, key to the higher economic speed limit, are
spurting ahead at a solid 3.6% in the first quarter and 5% in the second.
Has the economy found the magic potion of eternal growth with low inflation? Is the traditional business cycle dead?
“It's dying,” said R. David Ranson, president of H.C. Wainwright & Co., a Boston-based economic research firm.
This expansion has run a record 10 years, with few signs of letting up. Even Federal Reserve Chairman Alan Greenspan, the architect behind the six rate
hikes since June 1999, has admitted the economy may have seen a structural shift.
In other words, the rules have changed.
Image: The Best Of Both Worlds
Economists credit the technology gains of the past 10 years for the smoother economic cycles. Computerized inventory systems minimize the risk of
fluctuations.
But manufacturers point more to changes in their business plans than to computers or time-saving gadgets.
“We now engage in a business-plan discussion with our dealers to forecast demand for products,” said George Pipas, sales analysis manager at Ford
Motor Co.
“If we see demand is falling off, we have a basis for acting proactively to either adjust production or reduce prices. There's more input upstream from our
dealers about the level of demand.”
Analysts say the productivity boom is far from over. Gains will continue at a heady pace for years to come, said Gordon Richards, chief economist at the
National Association of Manufacturers.
“Technological advances have actually speeded up,” Richards said.
The economy wasn't always so resilient. Bad monetary policy, even worse fiscal policy, wars and a few oil shocks pushed the economy into recessions
six to 16 months long. The boom-and-bust business cycle were part of the American landscape.
“What we've learned is that monetary policy has to control inflation on a more permanent basis,” Richards said. “In most business cycles, the inflation rate
falls initially and then starts to pick up.”
This time the inflation rate has slumped even as the good times refuse to end. “We had 2.5% (inflation) in 1993 as the expansion was getting started,”
Richards said. “That dropped below 2%. This year we might get a little over 2%, but some of that is in oil price increases.
“Not only do we not have the massive buildup of inflation, characteristic of the 1970s, we don't even have the mild buildup characteristic of the 1980s.”
Also, information is faster and easier to get than ever. Again, that relates to technology.
The Fed doesn't have to wait for inflation before it acts, analysts say. The Fed can track key gauges — consumer demand, the jobs market, factory orders
— and can act before inflation even starts.
But perhaps the Fed is getting information too fast — or is acting on it too quickly. Some analysts argue that six rate hikes are too many. The economy can
take care of itself, with lower inflation coming from productivity gains.
Investment in equipment and software rose 21% in the second quarter. That's even better than the steady 14.5% per quarter since 1997. Investment leads
to technological advances, which leads to higher productivity, or more output per worker.
Richards notes that productivity gains have picked up steam in the past decade. “In 1973 to 1995, productivity was rising by 1.49% per year. From late
1995 onward, it's been averaging 2.6% per year.”
This happy union of strong growth and low inflation has plenty of room to run, many say.
“During the 1980s expansions, we were talking about it getting long in the tooth — getting old or wearing out,” said Joel Naroff, president and chief
economist of Naroff Economic Advisors Inc. in Holland, Pa. “You don't hear that phrase used anymore.”
Which brings us back to the original question: Is the business cycle dead? Not quite.
“Business cycles happen because unknown events happen,” said Rajeev Dhawan, director of economic forecasting for the UCLA Anderson Forecast, a
study. “Productivity improvement can't eliminate recessions, but it will make them less severe.”
“Without a serious policy mistake, we'll see continuation of technological advance in the next decade,” Richards said. More technological advances now
are being driven by private-sector research and development and less by government R&D, he says.
Analysts say technology enables the economy to weather the storm should a recession hit.
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