Is stronger, sustained growth evidence of a new age for the US economy or, is this just a particularly rosy phase of an inevitable cycle?
Perhaps the biggest economic talking point of this year was sparked off recently by Alan Greenspan, chairman of the US Federal Reserve Board, the American version of the Bank of England. In testimony to Congress, Greenspan, probably now the world's most influential economic policy maker, accepted that the evidence in favour of a 'new age' for the US economy was becoming more convincing by the day.
What is this 'new age'? It is nothing to do with Glastonbury hippies. Instead, says Greenspan, the US economy is enjoying a new lease of life because it is able to grow more strongly and for longer, without running into inflationary pressures. There are two reasons why this may be so. The first is the increasing flexibility of labour markets. Removing restrictive practices, new agers argue, has allowed unemployment to fall to much lower levels before those people in work start feeling secure enough in their jobs to ask for more money. The second component is new technology - and information technology in particular, which is having a decisive impact on productivity growth.
Labour markets improving
Should we believe the new agers - and is their creed relevant for the UK? I have long believed in the first strand of the UK version. Labour markets are clearly working better and there is now a better trade-off here between unemployment and wages growth. As the months have passed, the evidence for this as become increasingly compelling. Currently unemployment is lower than at any time since the early 1980s, but pay settlements are rising at just 3%. The last time unemployment was at or near present levels, in the late '80s, earnings growth was double the present rate.
There is much more difficulty in extending this first strand to the wider world economy. Although we have always looked to America as a nation with a flexible labour market, continental Europe is operating under a considerable handicap, with only slow progress towards flexibility being made there. Whether the unemployment-earnings trade-off has improved in Europe is exceedingly difficult to say - growth is so poor and European unemployment so high at 11% that wage claims are not at present the burning issue for the average worker.
For new agers, this particular circle is squared by globalisation. Even in some older industrial economies with the most rigid labour markets, they say, the forces of global competition and pressure from the newly industrialised countries means that there will always be a permanent lid on wages. I am sceptical of this argument. Even if it is true that …