“Are we really on a cliff by the sea, poised perilously above the waves and the rocks? Or are we in fact down by the beach, on a gentle slope of soft and agreeable sand?”
“Can't We Go Faster?”
TAP, September 1997
I claim the best record of any economist to survive the 1990s, now that William Vickrey and Robert Eisner have passed on. In The American Prospect in 1994 [see “The Joys of Recession,” Winter], and again in 1997 [see “Can't We Go Faster?”], I urged my fellow economists to shed their fears of full unemployment and low interest rates. Few did. But then Alan Greenspan began to behave as if he had, on the sly, been reading the Prospect. Having worried the world with a preemptive strike against inﬂation, Greenspan stopped worrying. He froze the interest rate, allowed strong growth, and drove the economy to full-employment prosperity for the ﬁrst time in almost 30 years.
Nothing bad happened. Inﬂation did not rise. Instead, as Eisner had foretold, productivity growth rose, permitting higher output and higher wages without rising prices. As tax revenues surged, the federal budget deﬁcit disappeared, momentarily, by the decade's end.
The millennium ended gloriously; economists scrambled to catch up. Why hadn't inﬂation run away? Alongside Greenspan, most discovered that marvels of technological progress were being created by software companies and teenage billionaires who were transforming business culture. Robert Rubin, Larry Summers, and others predicted -- a bit too boldly -- that productivity miracles would continue forever. Ofﬁcial forecasts projected budget surpluses until the federal debt disappeared in 2013.
By then my mantra was “No new paradigms.” A bubble was clearly visible to all who remembered what one looked like. In 1998, I supported former Representative Henry Reuss' call for higher margin requirements, which could have cooled the dot-com madness without raising interest rates. This time, Greenspan paid no attention. In 1999, Paul Davidson and I warned that the bubble and the resulting budget surpluses would not last. In April 2000, at the White House New Economy Summit, I repeated the warning. The “ﬁscal drag” of surpluses threatened recession. No one wanted to hear.
Soon the bubble burst. Though many economists believed that September 11 caused the recession, those who had kept cool during the boom knew that recession was already well under way. In TAP that next month, I argued that larger public spending was needed to bring us out.
Amazingly, spending increases occurred. In 2003 they came from the Iraq War, whose short-term stimulus and long-term costs I addressed in the Prospect in 2002 [see “The Unbearable Costs of Empire,” November 18]. For 2004, George W. Bush told Congress, in effect, to spend whatever it liked. Congress did so. No appropriations were vetoed. Domestic spending rose, helping push the economic growth rate above 4 percent and Bush to victory.
Now, my bipolar fellow economists are again on the depressive downswing of their cycle, fearing budget deﬁcits -- an all-purpose phobia for our time. Greenspan, his reputation squandered on tax cuts and Social Security privatization, solemnly concurs. But they are all misstating the real problems yet again. Interested readers can consult my piece “Bankers Versus Base” in -- where else? -- The American Prospect, May 4, 2004.
James K. Galbraith is the Lloyd M. Bentsen Jr. Chair in government-business relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, and a senior scholar of the Levy Economics Institute.