The economy has two faces


As a general rule, pundits don't care what happens, as long as it proves them right-or at least gets them on TV. And since pundits generally disagree with each other about what will happen next (indeed, arguing with each other is their main activity), you might imagine that when new facts emerge they will inevitably make some pundits happy and others miserable. These people can't all be right, can they?

Well, yes, they can-at least when it comes to economics. You see, people who make pronouncements about the economy tend to disagree not only about how the economy works and where it is going, but also about which facts and numbers are important. Sometimes this means everyone is miserable: Smith looks at the latest figures on soybean futures and has the uncomfortable feeling that he may have been wrong, and that Jones-though an obvious fool-may have been right for the wrong reasons. Meanwhile, Jones, who has always scorned soybean price data in favor of looking at actual tofu shipments, has the same sinking feeling about Smith.

But there are golden eras in human experience when, for a brief and shining moment, everyone can find numbers to confirm his own opinions. This is one of those times.

The big argument about the U.S. economy is whether or not to buy into the "new paradigm" of economic growth. The old paradigm says that while the economy can experience periodic spurts of rapid growth, it cannot sustain a long-term growth rate greater than roughly 2.4% per year (the rate at which, historically, the unemployment rate neither rises nor falls); above that level, inflation will rear its ugly head. The new paradigm, however, says these old rules no longer apply. It postulates an economy totally changed by technology and globalization, one that can grow much fastermaybe 4% per year-without risk of inflation.

Not surprisingly, the new paradigmers are feeling pretty smug these days. In the first quarter, the U.S. economy grew at a blistering 4.2% even while inflation, as measured by the consumer price index, actually fell. From a new-paradigm point of view, this is just the latest link in a chain of evidence stretching back two years-a chain that proves the New Economy can race along without regard for old speed limits.

However, if you hang out with the old-paradigm types you discover something funny: After feeling nervous for a while that they might be missing something important, they have begun to act a lot more confident. They will tell you (happily) that according to the numbers they look at, there's bad news in the data if you just take the time to find it.

The most important piece of bad news for the economy-that the unemployment rate keeps falling-sounds like good news to your average citizen. And, of course, it is good news-for old paradigmers: Unemployment can't keep falling forever; sooner or later you run out of workers, and the economy's growth has to slow to a rate that keeps unemployment constant. The fact that unemployment is now falling at a healthy clip when the economy is growing at around 4% means that the sustainable rate of growth is well below 4%. In fact, old paradigmers will tell you that according to the latest data, the old 2.4% figure is once again looking pretty realistic.

The other piece of good news that is really bad news is that wages are rising. For a while it looked as if the tendency of wages to rise at an accelerating rate in a tight labor market had evaporated in a world of weak unions and millions of temps. But in the year that ended in April, wages rose faster than they have since 1983. For grumpy, unevolved economists, that sour, preinflationary note is sweet music indeed.

So if everyone claims that the latest figures confirm his theories, how's the public supposed to judge? Eventually, time will tell; for now, though, each side has some explaining to do.

For the new paradigmers, the problem is reconciling plunging unemployment with rampant economic growth. And their answer is ... well, they don't seem to have an answer. They just don't want to talk about it.

For the old guard the problem is, Where's the inflation? Wages are up and the labor markets are tight, but that CPI just keeps behaving itself. By way of an answer you'll get a list of special mitigating factors such as falling import prices due to a strong dollar and to Asia's collapse, and one-time cost savings because of the shift to HMOs. Those reasons may sound a bit lame, but at least they make sense.

For my money, even though the latest headline numbers are all rosy at first glance, they actually foreshadow a day of reckoning for the U.S. economy-and for the new paradigmers. Of course, I could be wrong, and they could be right. But if they are, they'll be right for the wrong reasons.

Originally published, 6.22.98