The Long Boom:

1
The Long Boom Sosa, McGwire, and Greenspan
JOHN B. TAYLOR Stanford Breakfast Briefing March
17, 1999
WWW.STANFORD.EDU/JOHNTAYL
2
U.S. economy is now in the longest expansion in
its peacetime history

• Despite economic crises in Thailand, Indonesia,
  Malaysia, Korea, Japan, Russia, Brazil,...
• Real GDP and job growth is up
• Inflation is down

3
Real GDP growth stays strong
Percent
8
GDP growth rate 1988-98
6
4
2
0
98Q4 6.1
-2
-4
-6
88
89
90
91
92
93
94
95
96
97
98
4
Inflation rate stays low
Percent
6
5
4
Inflation rate (GDP)
3
Inflation rate (GDP)
2
(4 quarter average)
1
Q4 0.7 percent
0
88
89
90
91
92
93
94
95
96
97
98
5
But the 1990s expansion is part of a much longer
and more amazing economic phenomenon

• 1999 will be 17th year of The Long Boom
• Includes not only the first, but also the second
  longest peacetime expansion in U.S. history
• 1990s (now 95 months),
• 1980s (92 months)
• Recession in between was short and mild

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Two Record Breakers Together
Growth rate of Real GDP
5.9
5.4
4.2
4.1
3.9
3.6
2.9
1.8
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Two Record Breakers Together
McGwire is trying out Sosa's trademark kiss
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No period like this in the history of baseball
72
9/25 Sosa takes lead
68
McGwire in early
66 to 65 for 45 minutes
September
"wouldn't it be great
64
if we ended up tied"
60
56
52
8/31
9/05
9/10
9/15
9/20
9/25
SOSA
MCGWIRE
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Similarly, no period like this in the history of
market economies

• Precedented Stability
• 17 years before this (1966-82) had 5 recessions
• In the 1890s there were three big recessions,
  leading to unrest and populist politics...

10
We will answer their demands for a gold standard
by saying to themYou shall not press down upon
the brow of labor this crown of thorns.You
shall not crucify mankind upon across of gold.
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Though Stanford was an oasis of prosperity
beating Cal twice in 1896
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Why has the Long Boom kept on going?

• Weaker pitching, better baseballs,?
• Good luck?
• No big shocks like the 1970s?
• But global shocks were huge in 1998
• Change in the economic rules?
• Services, inventories, high-tech new economy?
• Good policy?
• Fiscal policy?
• Deficit reduction and elimination?
• Counter-cyclical policy?
• What about the tax cuts of the early 1980s?

13
A great supply side policy, but where did the
increased stability come from?
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The answer is monetary policy

• But what is it about monetary policy
• More reactive to changes in inflation
• federal funds rate rises by twice as much when
  inflation rises 75 versus 150 basis points
• This has kept inflation (and expectations of
  inflation) low, thereby preventing recessions.

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Consider Alan Greenspan's recent testimony
concerning the long boom
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He asks and then answers as follows

• Why has pricing power of firms of late been so
  delimited?
• Monetary policy certainly has played a role in
  constraining the rise in the general level of
  prices
• But our current discretionary monetary policy
  has difficulty anchoring the price level over
  time in the same way that the gold standard did
  in the last century.

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This relationship between monetary policy,
inflation, and economic stability was not always
so clear. Remember this?
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Other potential benefits of the the recent
monetary policy experience

• Policy can be followed in other countries or
  regions
• The European Central Bank?
• Good monetary policy might become less dependent
  on outstanding people, such as Alan Greenspan
• Maybe the ideas can be taught in school!

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WELCOME TOA school dedicated to teaching
the science and art of monetary policy.
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Out with the old.In with the new.OLD
NEW
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Outlook for the rest of 1999 2000 The Long
Boom Goes On.

• Real GDP growth slowing a bit
• Inflation rate increasing a bit
• And the federal funds rate steady in the current
  4.75 percent range

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But it would be wise to consider some alternative
scenarios

• Scenario 1 inflation scare CPI inflation rises
  from 1.5 percent to 3.0 percent
• high money growth, tight labor markets
• Federal funds rate would probably go up by about
  2.25 to 7.0
• Likelihood of recession in 2000-2001 increases
• Scenario 2 big slowdown US growth falls to 1.0
  percent
• Funds rate would probably go down by about .5 to
  4.25

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(No Transcript)