1 of 4 2/14/2007 8:28 AM February 13, 2007 This Expansion Looks Familiar By EDUARDO PORTER and JEREMY W. PETERS It is five years into an economic expansion and most Americans are still waiting for their share. Inflation is swallowing pay raises. Businesses are hiring, but forecasters worry that the economy may be about to stall. If this is a recovery, the leader of the political opposition complains, I can hardly wait for the recession. This may sound like the stuff of today s headlines. But it comes from 1996, when Bill Clinton was president and his rival was Bob Dole, the Republican nominee. The economic expansion in question, which got off to a sputtering start in March 1991, was to become the longest period of uninterrupted growth in the nation s history. Now, a little more than five years into an expansion that officially started in November 2001, the economy is showing remarkable parallels to the situation of a decade ago. It s striking how similar they are, said Robert J. Gordon, an economics professor at Northwestern University. The overall rate of growth has followed a trajectory almost identical to the first five years of the 1990s expansion. Now, as then, corporate profits have surged; the stock market has, too. But just as workers have finally begun to reap some of the spoils of a growing economy, many forecasters worry as they did a decade earlier that the expansion is running out of steam. What is striking, considering these similarities, is how little effect the policy choices of Democratic and Republican administrations seem to have had on how both growth cycles played out. Few economic forecasters expect the current growth cycle to have the length and vigor of the 1990s boom, which continued for 10 years from trough to peak. Yet fewer still expected strong growth in the mid-1990s. In early 1996, forecasters polled by the Federal Reserve Bank of Philadelphia predicted that the economy would grow merely 1.8 percent that year. The economy ended up growing at twice that pace. Average Americans were more pessimistic then than they are now. According to Gallup s most recent snapshot of public opinion, last month 52 percent of Americans rated economic conditions as either excellent or good. In May 1996, at a similar moment in the previous expansion, only 30 percent did so. Consumers don t expect a slowing economy, said Richard T. Curtin, who heads the surveys of consumers at the University of Michigan. According to consumers, we are going to improve. Given the parallels, perhaps it is not surprising that the economy is providing the same sort of political ammunition as it did 10 years ago.
2 of 4 2/14/2007 8:28 AM Profits are up for our companies, but where are the wage increases? asked Senator Hillary Rodham Clinton, in an online conversation with voters last month, after announcing that she intends to run for president. Where are the, you know, the benefits that should accrue to hard-working Americans? Wage increases have, indeed, been slow in coming. In December, 61 months after the economy started to grow, the wages of production and other nonmanagement workers were barely 1.7 percent higher, after inflation, than when the economy hit bottom in November 2001. Most of those gains came in the last few months. But many people have forgotten that, initially, the expansion of the 1990s was also called a jobless recovery, and then a joyless one, when employment started growing but real wages did not. In April 1996, 61 months into that growth cycle, the hourly wages of nonmanagement workers were actually worth 0.4 percent less, after inflation, than when the expansion began. Now this is a real economic slowdown, Mr. Dole said on a campaign stop in Florida in October of that year. And I might say, it s disastrous news for American workers and businesses and even worse news for lowand moderate-income Americans who have been squeezed and squeezed and squeezed by lower wages and higher taxes in this administration. Advocates on each side insist that government policy was crucial to steering the economy. Gene B. Sperling, a former economic adviser to Mr. Clinton, argued that his administration s efforts to cut the budget deficit were instrumental in bringing down interest rates and improving investors confidence in the economy. By contrast, Edward P. Lazear, President Bush s chief economic adviser, argued that the tax cuts enacted by the Bush administration in 2003 deserve some credit for the current expansion. They had a fundamental impact on investment, Mr. Lazear said. There was an abrupt turnaround at the point when those tax cuts were put into effect. But even Mr. Lazear conceded that the role of policy in driving the economy can be overstated. Neither President Clinton nor President Bush fundamentally altered the structure of the American economy, he said. This is a pretty healthy economy where the private market is most of what is going on. There are substantial differences, of course, in the nature of the two expansions. The early 90s were characterized by a building bust; the current one has been supported by a housing bubble. The boom of the second half of the 1990s was underpinned by an Internet-driven investment bubble, but most technology stocks today are far below their earlier highs. In both situations we had overinvestment, now in housing, then in fiber optics, said Joseph E. Stiglitz, a professor of economics at Columbia who was Mr. Clinton s chief economic adviser from 1995 to 1997. Mr. Bush and Mr. Clinton had very different economic priorities and will leave very different economic legacies. Mr. Clinton increased the top marginal tax rate to 39.6 percent, from 31 percent, and closed the budget deficit. President Bush cut tax rates back to 35 percent, and the deficit reappeared. Corporate profits have swollen twice as fast, as a share of the economy, in the first five years of this expansion, under Mr. Bush, as in the same period of the previous one.
3 of 4 2/14/2007 8:28 AM Still, policy has had less effect on the distribution of the rewards of growth than the stated goals of Democrats and Republicans would suggest. Indeed, the share of the economy devoted to workers compensation shrank as much in the first five years of the 1990s expansion to 56.3 percent, from 57.7 percent, of gross domestic product as in the most recent five years, when it fell to 56.6 percent, from 58.1 percent. The decline underscores the powerful impact of globalization and technological change on the American economy over the last three decades, putting strong downward pressure on production workers wages regardless of who occupies the White House. No one knows how this expansion will end. In the 1990s, nearly all the gains for ordinary Americans occurred in the second half of the decade. Comparing the current point in the economic cycle with the same moment a decade ago is something like predicting the outcome of a baseball game in the sixth inning. If we conjecture another five years of the current expansion, I think it s going to be another surprise, said Professor Gordon of Northwestern. We had a good surprise in the 90s, but this time I think we re in for a series of bad surprises. One ingredient that helped drive the 1990s expansion is missing today: the explosion of productivity that took off in the mid- 90s and lasted for more than a decade, when the investments that firms began to make in technology in the 1980s started to pay off. It s kind of hard to point to anything like that now, said Ken Matheny, senior economist at Macroeconomic Advisers. It s difficult to say that we re about to have another productivity and investment boom as we saw in the late 90s. Productivity grew by 3 percent in the last quarter of 2006. Still, for the full year, it grew only 2.1 percent, which is the slowest since 1997. Even as growth has remained on a remarkably similar path in both decades, administration critics say that President Bush s policies have weakened the economy s longer-term prospects. Professor Stiglitz argued that the Bush tax cuts, aimed mostly at the wealthy, opened a big hole in the budget and provided little stimulus to the economy. This forced the Federal Reserve to push interest rates very low to keep the economy afloat, he said, creating a bubble in housing. Under a more effective fiscal policy, Professor Stiglitz said, growth would be more broadly based and less of the economy would depend on real estate. Mr. Sperling suggested that the mushrooming of the nation s trade imbalance and the reappearance of large budget deficits have not caused more damage to the economy because money flooding into the United States from China and elsewhere has kept long-term interest rates low, underpinning investment and consumption. That support, he suggested, will eventually dry up. We are in a moment where excess savings are coming from India and China, so perhaps it is a moment in which fiscal irresponsibility won t have as negative short-term consequences, Mr. Sperling said. But it has
4 of 4 2/14/2007 8:28 AM increased the risk factor in the economy. It is still poor long-term policy. Meanwhile, the housing bubble has turned to bust, dragging residential investment down. Overall growth has been little affected so far, but many economists still expect household finances to weaken, cutting into consumer spending, the main bulwark of economic growth. Maybe we dodged a bullet, but you don t know, said Jeffrey A. Frankel, an economics professor at Harvard. The economy seems to be getting a second wind, though, and other economists are more sanguine. This expansion still has legs, said Bernard Baumohl, managing director of the Economic Outlook Group. If anything, he added, the biggest danger to the economy is that growth takes off again, so quickly that the Fed feels compelled to raise interest rates sharply to keep inflation at bay. Usually in the past, the Fed overdoes it, Mr. Baumohl said. If it does so again, that would be the end of this cycle. Copyright 2007 The New York Times Company Privacy Policy Search Corrections RSS First Look Help Contact Us Work for Us Site Map