The biggest concern among economists in the last year has been the prospect of a “hard landing” for the high-flying U.S. economy. They feared that either because of a crisis or by design, the United States would stall and knock the wind out of the global economy. That danger seems to be abating: The U.S. economy is gradually slowing, which is easing the pressure on the Federal Reserve to raise interest rates and also easing concern about future growth.
Admittedly, the current economic expansion, the longest in postwar history, continues at a blistering pace. Unemployment is near a 30-year low, and new jobs are constantly being created. Inflation remains in check. Wall Street is still heading for the stratosphere. The Dow Jones Industrial Average is near its all-time high, and the Nasdaq is equally buoyant.
The man on the street applauds those positive indicators, but for economists, they have traditionally been worrisome. It has been an item of faith that low unemployment rates trigger inflationary pressures. The Fed has traditionally raised interest rates in an attempt to keep those fires at bay.
The information revolution has forced economists to challenge their assumptions. Revisionists argue that new technologies boost labor productivity — the amount of output per hour of work. If true, then employment rates can drop to hitherto unimaginable levels without sparking inflation. Among the believers is Federal Reserve Board Chairman Alan Greenspan. His faith in the New Economy has stayed the hand of the Fed: It has not raised interest rates as high as many had anticipated. This restraint has allowed the U.S. economy to race ahead.
There is growing evidence that this once heretical view may be correct. From 1973 to 1995, labor productivity grew at about 1.4 percent a year. Since 1996, it has grown by nearly twice that amount. In the second quarter of this year, it surged to an annual rate of 5.3 percent, the fastest pace in 17 years. Better still, labor costs declined for the first time since 1984.
Old habits die hard, however. Even Mr. Greenspan is discomfited by the rosy outlook. Investors worry that the Fed will raise interest rates to take pressure off the economy. Even if that does not happen, a loss of confidence could have the same effect. The danger is in controlling the slowdown and making sure it does not become a stall or a crash.
Fortunately, there are signs that the U.S. economy is slowing of its own accord. In August, the unemployment rate nudged upward to 4.1 percent, a 0.1 percentage-point climb, and total payrolls fell by 105,000, which was more than forecast. Factory orders fell and consumer confidence has dipped slightly. Many credit the Fed’s previous rate hikes for these developments. Whatever the cause, it looks like the proverbial soft landing. And that, most economists reckon, means that the pressure is off the Fed to raise interest rates again this year.
There is plenty of room for things to go wrong. Oil prices could continue their spiral, and their impact would be felt throughout the entire economy. There is always the fear of another shock to the system: a bank collapse or a corporate default that spreads like collapsing dominoes throughout the world economy. The trigger could come from anywhere — an overextended “chaebol” in South Korea, a bankrupt investment trust in China, a failed bank in Latin America or a loss of business confidence in Southeast Asia.
To help avert the danger, and to compensate for the loss of demand in the U.S., other engines of the world economy need to do more. That fact has powerful implications for Japan, the second-largest economy in the world. Economic policymakers have to admit that traditional remedies have not worked. Despite tens of trillions of yen in stimulus packages, the economy has not regained its footing. Despite a record level of debt, one that leads all industrialized nations, the recovery remains anemic. Nor is there a guarantee that the Japanese economy will not drop back into recession.
Bold measures are required. One promising avenue is continuing deregulation. A survey released by the Economic Planning Agency Sept. 5 shows that, during the 1990s, deregulation led to the creation of 1.1 million jobs, nearly as many as were lost as a result of bankruptcy and competition during the same period. Those are impressive numbers given the general economic environment and the novelty of the concept. The pace should pick up as a new entrepreneurial spirit infuses the Japanese economy and the overall economy recovers. That may sound fanciful today, but a decade ago, the idea that the U.S. could simultaneously have 4 percent unemployment and little or no inflation was similarly fantastic.
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