Tuesday, November 26, 2013

The Most Important Thing to Understand about Future Economic Growth (and Inequality)

Matt Yglesias:

The point in both cases is to take a look at the myths and realities of the 1990s economy. They show that the full employment era of the late-1990s really delivered on the promise of equitable and broadly shared growth. It is true that there was a stock-market bubble, but it is also true that most people didn't own much in the way of stock and nonetheless shared in prosperity. Wages rose for working people. And in some ways even more incredibly, jobs became available for people who weren't previously working. With wages on the rise, employers were suddenly willing to invest in training or in taking risks on the "unemployable."

And they show that while of course the economy is a complicated place, this happy era of full employment was largely driven by a single factor—as the unemployment rate hit about 6 percent, conventional wisdom starting braying about the need for tighter money to head off incipient inflation, and Alan Greenspan ignored the conventional wisdom. Some other good things were happening in American public policy at the time, but none of them would have produced this wage growth and growth in job availability if Greenspan had deliberately kept unemployment high as an anti-inflation tactic.

Even if school reformers are right and their policies increase the skill base of the workforce and all sorts of happy feedback loops start happening, the default response would be to raise interest rates to slow the economy to raise unemployment and lower the risk of inflation. Also, too, cut taxes and steal pensions.

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