An economist’s reflections in a time of prosperity

For those who remember the days of recession, high unemployment and high inflation in the 1970s, the state of the American economy in 1999 is remarkable. We are enjoying the longest peacetime recovery in U.S. history, a record low unemployment rate (4.3 percent in May), and few signs of inflation, despite rapid expansion of output and jobs. The strength of the U.S. economy is largely the result of unusually strong spending by consumers. Increased levels of personal wealth (in the form of rising values of financial capital and housing) have made households more comfortable about borrowing to finance spending. Furthermore, demographic changes have augmented the number of younger households, which borrow against future earnings as they begin to establish families and careers, as well as the share of retired households, which spend beyond their current incomes by gradually reducing savings and selling assets.

Despite all this good news, some have expressed concern about the possible hidden costs of our macroeconomic success. And some wonder if the U.S. has prospered at the expense of other countries. Did the Asian countries, perhaps, suffer a financial recession over the last few years as "payment" for the U.S. economy's continued expansion?

Nothing could be further from the truth. Precisely because demand in the U.S. continued to be strong, export sales from Asia fell less than might have been expected, giving those countries an opportunity to begin to recover from recession. The long U.S. economic expansion of the 1990s has done more than lower domestic unemployment rates (which was especially valuable during a time of welfare reform, because it enabled large numbers of recipients to move off welfare into jobs). Expansion has also provided the needed spending stimulus to prevent Asian and Russian economic crises from drawing the whole world into a recession.