Cheerleaders vs. the Grumps: Does the Euphoric Economy Reflect Higher Productivity or Old-Fashioned 'Animal Spirits'?

By Samuelson, Robert J. | Newsweek, July 26, 1999 | Go to article overview

Cheerleaders vs. the Grumps: Does the Euphoric Economy Reflect Higher Productivity or Old-Fashioned 'Animal Spirits'?


Samuelson, Robert J., Newsweek


Call them cheerleaders and grumps--they're rivals in the debate over the economy. Cheerleaders are believers. They see today's boom as a glorious reward for superior U.S. technology, management and faith in markets. The grumps are skeptics. Without denying the economy's virtues, they think that it's got a bad case of what John Maynard Keynes called "animal spirits": an overvalued stock market has powered a consumer spending spree. History suggests that the boom will ultimately come to grief, as most booms do. I am firmly in the grump camp, but its skepticism has so far proved too pessimistic or, at any rate, premature.

How this debate is finally settled (by future events, not argument) hinges heavily on one of the economy's central mysteries: productivity. In theory, it's simple. Productivity signifies efficiency. Suppose the economy produces 100 widgets a year with 100 workers; the next year, the same 100 workers produce 103 widgets. Labor productivity has risen 3 percent. Living standards, wages and profits all depend on productivity. Throughout history, new technologies (from steel to telephones), better management and more-skilled workers have generated huge gains in productivity and income.

The trouble is that economists have a hard time predicting productivity. Between 1947 and 1973, it grew about 3 percent annually, reports the Bureau of Labor Statistics. In this period, family incomes roughly doubled. Then productivity growth collapsed. Between 1973 and 1994, it inched ahead about 1 percent annually. Income gains slowed to a crawl. Hardly anyone foresaw the productivity slowdown, and even after decades of study, it has not been convincingly explained. But here's the good news: since 1995, annual productivity growth has jumped to more than 2 percent.

Aha, say the cheerleaders. We're right. The boom is solid. It's not a speculative bubble. Because productivity drives future wages and profits, its faster growth justifies today's high stock prices and gleeful consumer spending. People have recognized--even if some academics and grumps have not--that the long-term economic outlook has brightened. Corporate profits and personal incomes will be higher than expected a few years ago. It's the "new economy."

Perhaps they are right. The case for a productivity breakout is strong. It starts with the decline of inflation and a host of forces (deregulation, foreign competition, corporate takeovers) that have made corporate managers focus more on cutting costs, improving efficiency and increasing profits. With high inflation, companies could raise profits by raising prices. Gains were often illusory (because they simply reflected inflation) but created the impression of success. Now, this is impossible. Imports, deregulation and takeover threats have compounded competitive pressures. Companies could lose markets and executives could lose their jobs. Danger concentrates the mind.

Then there's technology. Computers don't just enable companies to do things faster, argues economist Erik Brynjolfsson of the Massachusetts Institute of Technology. …

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