We are about to rewrite history. Unless a recession begins in the next few days, this boom will soon become the longest in the American experience. In February, it will have lasted 107 months. The current record is 106 months between February 1961 and December 1969, according to the dating of business cycles by the National Bureau of Economic Research. By and large, Americans are behaving as if recessions are a relic of the past, even though everyone must realize that the boom will end someday--and might end badly.
As with all records, people will celebrate and assert bragging rights. President Clinton always claims credit and will almost certainly repeat the claims in tomorrow's State of the Union. Alan Greenspan, chairman of the Federal Reserve Board, is idolized for his presumed role. The murkier truth is that the boom's causes remain obscure and, to the extent they can be identified, reflect a protracted and largely nonpolitical process.
Low inflation has been the critical catalyst. In the past, rising inflation has doomed expansions through higher interest rates, increased labor costs and squeezed profits. Consumer spending, housing construction and business investment all suffered. Yet, inflation now remains tame. By various measures, it's running between 1 percent and slightly more than 2 percent a year. This is lower than in 1990 (between 4 percent and 6 percent by the same measures) and defies the conventional tendency of inflation to worsen as the economy "heats up."
To explain tame inflation, I'd cite three factors:
* The Fed: Paul Volcker, chairman of the Fed between 1979 and 1987, crushed inflationary expectations. In the 1960s and 1970s, these had become ingrained. Companies raised prices because they expected customers would pay. Workers expected pay raises to compensate for higher prices--and then some. The Fed blessed the process by creating more money. Its permissive policies rested on the prevailing--but faulty--theory that a bit of inflation aided economic growth. By 1980 inflation had reached double digits. Volcker tightened money, increased interest rates and caused a savage recession. In 1982 unemployment neared 11 percent. Though brutal, the downturn stifled wage and price increases. By 1983 inflation was 4 percent. President Reagan sanctioned Volcker's policy by muting criticism. Since then, Greenspan's Fed has pursued "price stability" and has raised interest rates (as in 1994) to prevent inflation's upward creep. Presidents Bush and Clinton have emulated Reagan's self-restraint.
* Better Management: Through the 1970s, corporate managers were rarely fired. Their job tenure rivaled university professors'. In the 1980s, things changed. Managers became vulnerable to job loss for many reasons: the recession; foreign competition; deregulation in the airline, trucking and communications industries; "hostile" corporate takeovers; the growth of new discounters (Wal-Mart, Home Depot). Self-preservation made managers more ruthless. They cut costs to raise profits. Old plants were shut. Layoffs and "downsizings" became common. Again, the immediate consequences were often cruel and (as with Volcker's recession) widely deplored. But the lasting effect was less inflationary behavior.
* New Technology: As everyone knows, business investment in computers and communications has exploded. The presumption is that these investments enable companies to do things faster and cheaper--they raise "productivity." Firms can minimize unneeded inventories or speed the processing of customer orders. Higher productivity can be magical. If a company improves productivity 3 percent, it can raise wages 3 percent without increasing prices or sacrificing profits. And productivity has improved. In recent years, it's approached 3 percent a year, up from 1.6 percent in the 1980s.
We're enjoying the fruits of purged inflationary psychology. Luck may also have helped. Economist John Makin of the American Enterprise Institute notes that the Asian financial crisis--which first seemed to threaten recession--may have prolonged the boom. It reduced inflationary pressures by "cutting the [worldwide] demand for raw materials" and stimulating cheap imports into the United States from debtor countries. It also prompted the Fed to cut interest rates in late 1998, providing "a tremendous tail wind for the U.S. economy and stock markets."
There are many plausible reasons that the boom won't last forever. Productivity gains could prove temporary. Inflation might increase, with low unemployment pushing up wages. The Fed is already sufficiently worried that it's raising interest rates. Or the prevailing boom psychology might prove fatal. Undeniably, Americans have gone on a spending spree. Since 1991, for example, personal after-tax income has risen 47 percent (with no correction for inflation); meanwhile, consumer spending has risen about 57 percent. The gap between the two--financed by borrowing or selling stocks--totals almost $400 billion annually. Spending can't perpetually outstrip income.
One reason it has is the effusive stock market. Consumer confidence has risen with consumer wealth, real or on paper. Much of the market's increase reflects genuine economic gains (lower inflation, higher profits). But some reflects sheer speculation.
In a recent report, analyst Steve Galbraith of Sanford C. Bernstein, an investment house, confirmed that there's less long-term holding of stocks--and more trading for instant profits. In 1999 the Nasdaq's turnover was 221 percent. This meant that the market's total number of shares was bought and sold not just once during the year but more than twice. In 1990 turnover was less than half that. "Of the 50 stocks with the highest returns [increases] on the Nasdaq only 15 made money," writes Galbraith, and "the average turnover in this group was 600 percent" (shares were bought and sold six times). On the New York Stock Exchange, turnover has nearly doubled since 1990 to 79 percent. Not surprisingly, margin debt--borrowing by investors to buy stocks--jumped 62 percent in 1999 to $229 billion.
So, the boom is making history, but its history isn't finished. We'd all like it to glide along forever. Perhaps it has years to go. But it could be sowing the seeds of its own destruction.