The U.S. Economy.

• Author: Green, R. Jeffrey
• Position: 2000 performance and forecasts

There is some controversy whether 2000 is the last year of the 20th century or the first year of the 21st. In economic terms, if it is the former, the century ended with a bang. If it is the latter, it set a standard that will be very hard to match. Figures 1 and 2 illustrate why. Figure 1 shows the broad economic situation as indicated by output growth and inflation for the past eight years.(1) Bear in mind that at the beginning of the period shown there was a solid consensus among economists that the U.S. economy could sustain growth of about 2.5 percent per year--anything higher, it was thought, would eventually lead to accelerating inflation. But over these eight years growth has exceeded the 2.5 percent speed limit in every year except 1995, and has been well above 4 percent for the past five. Inflation, however, has been notable mainly by its absence. Recently, of course, energy prices have shot upward, but there is scant evidence to date that inflation is spreading more broadly.

[Figures 1-2 ILLUSTRATION OMITTED]

Figure 2 depicts the labor market situation. The U.S. economy's ability to create jobs has been and continues to be remarkable. Over the past eight years payroll unemployment has risen by nearly 23 million, an average of above 2.8 million per year.(2) This substantially exceeds the underlying growth in the population, causing a nearly steady fall in unemployment. During the past six months the rate has been bouncing around 4 percent, a level not seen in 30 years. Like rapid growth, low unemployment has long been perceived as a precursor of inflationary pressure via rising wage rates. But as with inflation itself, there has been little pressure on labor costs.

The list of credits for this remarkable performance is a long one, but several get special billing. In the starring role is an historic surge of new technology. In addition to providing an avalanche of new products, new business application of the advances is pushing productivity at an accelerating pace. Higher productivity both raises output and--via lower costs--holds down inflation.

The second lead goes to international influences in a multi-faceted role. Expansion of free markets and the trade they engender is another force behind productive efficiency. The end of the cold war has allowed a major shift of resources away from defense toward civilian uses, including in particular investment in high tech. Access to foreign capital has allowed the U.S. economy to invest...