The recent successes of the American economy have surpassed everyone’s expectations. We’ve managed to combine fast economic growth, low unemployment, and virtually nonexistent inflation. How did these happy conditions come about? What has technology got to do with it? And what policies can keep the ball rolling?
On the last question, conventional wisdom is insistent in its answer: slash government spending, weaken job security in the name of “flexibility,” and keep Wall Street happy and private business will take it from there. Technology, according to this view, is not a major factor. A different school of thought, however, asserts that technology plays a central role in today’s noninflationary growth. Whether our growth spurt will turn into a new long wave of prosperity turns on getting this right.
The key question is: how fast can the economy grow without triggering inflation? Official Clinton administration forecasts, and overcautious mainstream economists such as MIT’s Paul Krugman, continue to preach on the need for “diminished expectations,” contending that the U.S. gross domestic product cannot grow sustainably at an annual pace of more than about 2.3 percent.
They are wrong. This is not your parents’ GDP. The forces that were for so long assumed to trigger inflationary pressures have weakened or disappeared. Global competition, along with the undeniable (and regrettable) weakening of the bargaining power of unions, hold down price and wage growth. The successful “oil war” against Iraq has stabilized energy prices. The number of people wanting to work, and the hours of paid employment they are seeking, are at record highs and rising; the labor shortages that presaged earlier rounds of inflation are nowhere on the horizon. Most important, the long-promised productivity improvements from the use of computers and electronic communications are finally spreading throughout American business, from banking to retail trade to carmaking.
Based on these shifts, University of Massachusetts-Boston economist Barry Bluestone and I estimate that the long-run rate of potential annual economic growth now exceeds 3.0 percent. Over the next decade, that seven-tenths of a percentage point difference between 3.0 percent and 2.3 percent growth will amount to $3.1 trillion worth of GDP. Allowing the economy’s growth to fall that far behind its potential will cost us millions of jobs, numerous improvements in public health, and significant progress in combating urban poverty. Yet such underachievement will be precisely the consequence of cutting government spending on infrastructure and R&D.
Pathbreaking ideas about the relationship between short-run public policy, technology, investment, and long-term growth make excessive caution even more socially costly and therefore intolerable. Businesses respond to signals from policymakers as to whether overall demand-the key to future sales-is likely to grow. If policymakers keep short-run growth systematically beneath its potential by, for example, gutting public spending, companies will spend less on new plant and equipment. The recent spurt of investment is largely a catching-up after years of neglect; without positive expectations of future growth in demand, this investment cannot last. What we will lose if we neglect the situation are the innovations and productivity benefits that bubble up from investments in technology, which have a way of spilling over into unanticipated applications. In short, not only does technology contribute to growth, but the expectation of growth increases companies’ willingness to invest in new technology.
The U.S. economy’s performance is inspiring the world. At a conference this summer in Rome attended by trade union leaders, government ministers, and econ-omists from all over Europe, I heard one official after another express wonder at our robust growth even as they decried the dark side of U.S. economic expansion (one conference participant rightly bemoaned our “chronic inequities” and stagnating U.S. wages). An emerging growth consensus in Europe calls for sensible but targeted government spending on R&D, training, and infrastructure. Such public investments will not only provide jobs and useful services now, but also send signals to business about the likely payoffs to their own investments in technology that are the key to tomorrow’s economic growth.
Public spending is not the whole story, of course. Private investment in technology is unlikely to fully pay off unless business managers make their operations more hospitable to networking and collaboration. And companies need to devote more resources to training their ordinary em-ployees, not just their highest-paid professionals. But without more expansionary national economic policies, we will continue to sabotage the prospect for achieving even greater prosperity than what we are momentarily enjoying.