Tue December 25, 2012
Back To The Economy Of The '90s? Not So Fast
Originally published on Tue December 25, 2012 7:42 am
Throughout the debate over taxes and the "fiscal cliff," there's been a lot of looking backward — to the 1990s. The economic expansion of the 1990s was the longest in recorded American history.
Democrats say the economy thrived under the leadership of President Bill Clinton, including his tax rate increase on high earners. Republicans say government didn't spend as much then and that growth didn't really take off until the GOP took control of Congress in 1995.
So what actually happened in the '90s? What made them tick?
A Unique Boom
First, some numbers. Unemployment averaged just 5.7 percent in the '90s. The stock market returned 18 percent a year for the decade. Inflation was tame. And the federal government actually ran surpluses for a few years.
"The '90s was a very special period that's unlikely to be repeated for a while," says Mohamed El-Erian, CEO of PIMCO, the world's largest bond fund.
Many of the developments worked to the advantage of the U.S. El-Erian says the Cold War was over and new markets were opening around the world.
"Not only was there a peace dividend in terms of reallocating resources but there were more people to sell to and there was cheaper labor, so the U.S., as the dominant consumer and dominant producer at that time, benefited disproportionately from what was going on globally," says El-Erian, who President Obama is appointing as chairman of an advisory group on global economic development.
Domestically, the economic mojo was working too.
Harvard economist Dale Jorgenson says those little microchips being pumped out in Silicon Valley were transformational. As they got faster, cheaper and more powerful, the computer revolution reached into the workplace.
"There was an incredible boom in information technology equipment and software," says Jorgenson, who has written extensively about the productivity gains of the '90s. "People who hadn't been using information technology found they were able to apply it in their jobs. People who had been using it were upgrading their products very quickly."
'A Story About Microchips'
As the president and the Democrats like to point out, the economy did just fine after tax rates on high earners were raised in 1993. Tax rates were also cut — on capital gains in 1997.
Jorgenson doesn't think either change did much to fuel the boom.
"It was entirely a story about microchips," he says.
John O'Farrell, a partner in the Silicon Valley venture capital firm Andreessen Horowitz, agrees that huge improvements in computer technology — both software and hardware — propelled the economy.
"The U.S. really led this entire shift in the way the world works," O'Farrell says.
What he remembers is how the Internet unlocked the ability to communicate.
In 1997, O'Farrell left his job with a landline phone company to join a broadband startup, @Home Network.
"I was part of tens of thousands, if not hundreds of thousands of talented, smart, experienced people from all around the world, from other industries often, to take advantage of this enormous explosion of creativity," O'Farrell says.
He says Washington wasn't as central to the economy back then. The real action was in Silicon Valley, New York and Hollywood.
El-Erian, the PIMCO CEO, says Washington did make a positive contribution. The Federal Reserve finally conquered inflation. And the budget was under control.
"Government played a large role domestically and globally, but it was as an enabler as opposed to someone directly involved in the economy."
Now, it would be wrong to leave the impression that the era was some kind of economic utopia. There was plenty of froth over e-commerce. Online retailers with no plausible business model were hyped breathlessly by stock research analysts. The iconic image of the dot-com bubble was the doglike sock puppet that starred in commercials for online retailer Pets.com. Money-losing startups like Pets.com imploded.
And some big highfliers later turned out to be fraudulent — Enron, WorldCom. Home prices rose sharply late in the decade. Everyone knows how that ended.
El-Erian says in economic cycles there can be too much of a good thing.
"So the irony of capitalism is that stability tends to encourage excesses. Excesses encourage bubbles. Bubbles encourage crises," he says.
El-Erian says boom-to-bust is a pattern. But it's not an ironclad rule. He thinks that the financial meltdown could have been avoided.
And he says despite their current bickering and dithering, Washington politicians could avoid a different kind of crisis over the budget and the debt that's coming due.