May 17, 2002

The Persistence of Relatively Rapid U.S. Growth

Between the previous world business cycle peak of 1989 and the just-past business-cycle peak, U.S. economic growth vastly outstripped that of the other components of the world economy's industrial core. U.S. industrial production grew by 46.6%; European Union industrial production grew by 23.2%; Japanese industrial production grew by 6.6%. Some--but less than half--of the U.S. growth edge over Europe comes from the U.S.'s faster population growth. But most of the edge over Europe in growth--and the overwhelming proportion of the edge over Japan--comes from three factors: falling U.S. unemployment, the result of better business cycle management; higher investment, the result of curing the deficit and a technology-driven capital inflow from abroad; and faster development and diffusion of new technologies and better forms of organization.

These three factors were themselves the result of good and lucky people at the Federal Reserve; a President and a Congress that cared about responsible budgeting; and an open, flexible, and entrepreneurial society. The third of these factors is a deep and enduring strength of America and the American economy. The other two are not. They are recent creations: budgeting was not only not responsible, it was extraordinarily irresponsible in the Reagan 1980s. The Federal Reserve was not as skilled as it as today and was very unlucky back in the stagflation-ridden 1970s.

Thus a large chunk of the underpinnings of the relatively rapid economic growth that we have seen in the U.S. in the past decade comes out of politics. If our political system performs well--continues to nominate and confirm superbly competent central bankers to the Federal Reserve, and continues to keep the federal deficit from returning to the high-deficit Reagan days during which it was a mammoth drain on America's rate of national saving and investment--the odds are that we will continue to look forward to rapid relative U.S. growth. If not, then history suggests that we will see a U.S. economy that grows more slowly than the rest of the industrial core despite America's deep and enduring economic strengths: U.S. economic growth was slower than in other industrial countries both in the Reagan deficit-ridden 1980s and in the stagflation-ridden 1970s.

Posted by DeLong at May 17, 2002 02:43 PM | TrackBack

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