Transcript Sosa, McGwire, and Greenspan

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
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
Inflation rate stays low
Percent
6
5
4
Inflation rate (GDP)
3
Inflation rate (GDP)
(4 quarter average)
2
1
Q4: 0.7 percent
0
88
89
90
91
92
93
94
95
96
97
98
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
15
Growth rate of Real GDP
10
9.3
8.6
7.4
7.2
6.3
5.9
5.9
5.9
5.7
5.4
5
5.2
5.0
5.0
4.6
4.6
4.2
4.1
4.2
4.1
4.0
3.9
3.9
4.2
4.1
3.9
3.9
3.6
3.6
3.5
3.3
3.3
3.0
3.0
2.9
2.9
2.9
2.7
2.6
2.5
2.5
2.2
2.4
2.5
2.4
2.2
2.1
2.0
2.0
1.8
2.1
2.1
1.8
1.8
1.7
1.2
1.0
0.5
0.4
0
1.0
0.4
0.4
0.1
-1.9
-2.1
-5
-4.1
-10
84
86
88
90
92
94
96
98
No period like this in the history
of baseball
72
68
64
9/25: Sosa takes lead
66 to 65 for 45 minutes
McGwire in early
September:
"wouldn't it be great
if we ended up tied"
60
56
52
8/31
9/05
9/10
SOSA
9/15
9/20
MCGWIRE
9/25
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...
We will answer their demands for
a gold standard by saying to them:
You shall not press down
upon the brow of labor
this crown of thorns.
You shall not crucify
mankind upon a
cross of gold.
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?
A great supply side policy, but where
did the increased stability come from?
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.
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.”
This relationship between monetary
policy, inflation, and economic stability
was not always so clear. Remember this?
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!
WELCOME TO
A school dedicated to teaching the
science and art of monetary policy.
Out with the old.
In with the new.
OLD
NEW
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
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%