The Amazing American EconomyThe American economy in this last decade has been on an unbelievable run. Even more amazing is that as the expansion gets older, the economy has actually picked up speed, which is the opposite of the textbook theories. In the second quarter of this year, the economy grew at a rate over 5%, and for the last 12 months has expanded at over 6%. This is a pace that Third World countries would be proud of. For the largest and most advanced economy in the world, it is simply stunning.
The size of this growth is hard to imagine. At 6%, the economy adds almost 600 billion dollars to its yearly output. Which is the same as 10 Pakistans. This pace is widely assumed to be too fast to last forever, and in fact most observers believe that such rapid growth will lead to bottlenecks and shortages that result in inflation. The fear of an overheated economy that generates too much inflation has pushed Alan Greenspan, who runs the Federal Reserve Bank, to raise interest rates 6 times over the last year. By raising the cost of borrowing he hopes to slow the economy down to a more sustainable pace.
10 years ago, the general consensus was that the long-term growth of the economy was limited to about 2.5% per year. A rate higher than that would, over time, result in labor shortages and inflation. Now, the estimate for the safe “speed limit” is about 4%. This is a huge change. At 4% growth the economy doubles in size in 17 years, versus almost 30 years at 2.5%. In fact, the economy has grown faster than 4% in each of the last 4 years, and looks set to do it again in 2000 and 2001. The last time it did so well was 1962-1966. Rapid growth is also throwing off huge tax revenues for state and federal government. In California the legislature is fighting over what to do with a 13 billion-dollar surplus. In Washington, the debate is over how much new social spending versus tax reductions should occur. The politics of scarcity have been banished by this tidal wave of prosperity. The performance of the last few years has already caused the projected bankruptcy of the social security system to be pushed back several more years into the distant future.
International comparisons are even more revealing. Since 1990, United States industrial production has risen 50%. Britain, France, and Germany have managed only about a 15-20% rise. And Japan, the country that created so much anxiety for American business in the 1980’s, has not seen its industrial production increase at all since 1990. The flip side of the American success in the last decade is the abject failure of the Japanese system.
There are two major factors that have led to the American success. The first is a strong pickup in the growth rate of worker productivity. Productivity is the amount of output each worker generates. In the last 5 years productivity growth has accelerated from 1.5% per year to over 5% in the last 12 months. This rapid growth is due to improvements in education and investments in modern equipment by businesses. But the biggest component is probably the revolution in information technology. ATM machines replace bank tellers, automated switching replaces phone operators, and huge amounts of labor are freed up to do something more valuable. New production techniques allow companies to run with very low inventories. Dell, the computer company, only makes a computer after it has been ordered by a customer. If this system ever catches on with car companies, watch out. And the Internet is just getting started.
The second factor is the growth in trade. NAFTA, the free trade agreement with Mexico and Canada, went into effect in 1994. And WTO, the World Trade Organization, has greatly expanded trading opportunities for America. At first glance though, it is not obvious how trade has helped America in the 1990’s. The US has run ever-higher trade deficits; in fact it has reached over 300 billion dollars per year. But you don’t need to run a trade surplus to benefit from trade. What free trade does is make the economy more efficient, as resources are devoted to those activities that America is particularly good at. America is better off buying its plush toys and plastic chairs from China or Mexico, and using the labor and capital saved to build more computers, jet planes, or medical equipment. The openness of the economy has raised the standard of living sharply, even though the trade account is so negative.
America has been amazingly successful in its last 10 years. It now dominates the world economy to an extent few would have predicted in the 1980’s. The American system differs from Europe and Japan in that it allows people and companies to succeed and to fail, and it is open to rapid change and readjustment. These factors will keep America on top for the foreseeable future.
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