PBS: Think Tank: Transcript for "Is The Business Cycle Out of Business?"

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Is The Business Cycle Out of Business?

THINK TANK

ANNOUNCER: Funding for Think Tank is provided by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, and the Smith Richardson Foundation.

(Musical break.)

MR. WATTENBERG: Hello, I'm Ben Wattenberg. February 2000, marking the American economy's 107th consecutive month of growth. That's nine years, the longest economic expansion in our American history. Many economists, in fact, date the expansion back to 1982, 18 years ago.

Questions, is the business cycle out of business? Does this mean no more recessions? Does it mean that the stock market is going to stay high? Or is all this just happy talk of the sort that so often precedes the sound of a bubble bursting?

Think Tank is joined in this discussion by Anirvan Banerji, co-director of research with Jeffrey Moore at the Economic Cycle Research Institute, and a contributing author in Analyzing Modern Business Cycles; Knight Kiplinger, editor-in-chief of the Kiplinger Letter, and author of World Boom Ahead: Why Business and Consumers Will Prosper; and from San Francisco via fiber optic cable Steven Weber, associate professor of political science at the University of California at Berkeley, and author of an influential article in the journal Foreign Affairs entitled The End of the Business Cycle? The topic before the house, has the business cycle gone bust, this week on Think Tank.

(Musical break.)

MR. WATTENBERG: Over the last century, economists have carefully monitored the booms and busts of the American business cycle. Despite many severe spikes, the American economy has shown continuous ongoing growth. But in recent decades, shows decreasing volatility with longer periods of expansion getting longer and longer.

Listen to this comment from Federal Reserve Chairman Alan Greenspan who, just a few years earlier, had made the scary words 'irrational exuberance' part of the lexicon.

MR. GREENSPAN (From video): It has become increasingly difficult to deny that something profoundly different from the typical post-war business cycle has emerged.

MR. WATTENBERG: Fans of the new economy theory claim that technological advances, increased productivity, more trade, the global emergence of market economies, and smart Fed policy are converging to fuel the current 4 percent plus growth rates. But, hold on, haven't we been here before? This expansion breaks the record of the 1960s. In 1969, in fact, several noted economists collaborated to ponder the question: 'Is the Business Cycle Obsolete.' By the time their book hit the shelves, we were in the 1969-'70 recession.

Still, now, after the nine new years of growth, the American economy continues to move along, the big engine that could, begging again the questions again, is something very new and very important going on? What might it mean for America? What might it mean for Americans, 50 percent of whom now own stock?

Gentlemen in Washington, thank you so much for joining us.

Steven Weber, thank you for joining us in San Francisco.

Anirvan, let me begin with you, let's take those two periods, the 18-year period since the big recession of 1982, and the nine years since the recession of, what was it, '90-'91, what happened? How much have we been growing? What does it mean?

MR. BANERJI: What has happened, what has happened is, as you've pointed out, we've had lower volatility of these cyclical swings, and we've maintained a pretty good growth rate. Now, what happens is, when you do that, you tend to lengthen expansions, historically speaking.

MR. WATTENBERG: So, stability, or the approach of stability is a good in its own right.

MR. BANERJI: Absolutely. At least in terms of causing fewer recessions to occur for the simple reason that if you have the same growth rate, and then you just reduce this amplitude of the swings in the growth rate, the growth rate is likely to go below zero a lot less often, and that is one of the unique things that has happened in this expansion. This expansion, which is now the longest in U.S. history going back to 1790 actually, this expansion has the lowest volatility of all the business cycles in the post-war U.S.

MR. WATTENBERG: Steven Weber, would you consider the '91 to 2000, expansion a continuation of the '82 to '90 expansion, the exception being, I guess, just two quarters in mid-1990, quite possibly triggered by the Kuwait War, what do you think?

MR. WEBER: Well, Ben, we have a particular perspective on that out here in California. We see the short recession of '90 to '91 mainly as being a result of the end of the Cold War, actually. Here in California, it was actually a fairly deep recession for a short period of time, and it was manifested in a collapse of defense industry production, mainly in Southern California. What was particularly interesting about this particular shock was how the economy out here and overall in the United States as a whole was able to respond to the shock.

So, volatility is always the result of some shock getting inserted into the system and then cyclical dynamics being superimposed on top of that. What happened here, we had a huge shock, and we responded to it. Two quarters later we were growing again. That's an important lesson.

MR. WATTENBERG: Knight.

MR. KIPLINGER: I'm really glad Steven has brought up this point. I would like to offer a different thought on the last 18 years, which is, the United States has experienced a number of recessions in regions whose economies are as big as entire nations of the world and in business sectors of the United States that have a value as great as some other world economies.

In the mid-1980s, the heartland of America, the industrial Midwest, went through the ringer, then the oil patch, when oil prices collapsed.

MR. WATTENBERG: Texas, Colorado.

MR. KIPLINGER: California experienced almost 10 percent unemployment, a little south of 10 percent, during the severe collapse of defense and aerospace. New England was in recession for a good bit of the 1990s. And right now the agricultural sector of the United States is in a severe recession. But it doesn't even drag down the entire Midwestern economy. You have Omaha, Nebraska, and Oklahoma City, major telecommunications centers today. Des Moines, Iowa, is a financial services center.

So, we have had a series of rolling recessions, regional and sector recessions. The collapse of the S&Ls, the commercial real estate debacle in the Northeast and the middle Atlantic, and in California. But, at any given time, the diversity of the American economy has enabled strong sectors to carry the burden of sectors that were in collapse.

MR. WATTENBERG: How much of this should be credited to the idea that this is a free and open country, and when people have difficulty getting a job in one part of a sector, in one part of the country, they can say, honey, I'm going out to California, I'm going to get a job or, honey, I'm leaving California, I'm going to get a job, join me in a few months, which is not really prevalent to that extent anywhere else in the world.

MR. WEBER: Can I chime in on that? I think that's actually a very important point. The speed with which factors, economic factors, including workers, but not limited to workers, get redeployed in the United States is very fast. It's been faster within a national economy than it is in the world as a whole. But I think if you think about the world economy as a whole over the last 10 to 15 years, you could make the argument that the world as a whole is becoming a little bit more like the domestic economy of the United States in the degree to which factors can be redeployed across boundaries when you get a recession in one sector.

Now, that's less true for movement of people, but it's much more true for movement of capital and resources. So, in a sense, you get a world economy which is acting increasingly like a national economy in the ability to move factors of production around between sectors as you get these sort of rolling recessions, which are really just economic change, that's all they are.

MR. WATTENBERG: Anirvan, you buy that?

MR. BANERJI: Well, that may be true, but let's examine the effect of that. For example, we also may live with the Asian contagion effect. That was partly due to the very rapid movement of capital across borders, movement out of many economies, so it led to severe recessions in many countries.

MR. WATTENBERG: Severe but now apparently some of them, at least, South Korea, for example, very brief.

MR. BANERJI: Absolutely. Those were severe recessions, and typically severe recessions are followed by strong rebounds. That is the typical pattern, in fact.

MR. KIPLINGER: And the U.S. economy was greatly aided by the flight to safety of world capital that was sucked out of Asia and Latin America and Eastern Europe by that collapse of developing markets. That has been a boon to the U.S. stock market or the last couple of years. It remains to be seen whether the U.S. stock market will continue to be the preferred destination of world capital as growth rates strengthen.

MR. WEBER: But look at what we're doing, you know. Depending on how we cut up the world, we say there's a recession in one place, inflation in another place. But if we really are moving towards a more fluid world economy where money, goods and so on and so forth move around national borders as freely as they do, why are we measuring these things in national accounts, and what's the significance of those numbers?

MR. KIPLINGER: Well, right now, it's still quite significant. Anirvan makes the point that we have benefitted from the excess capacity, production in other economies, imports flooding into our economy. We have been a voracious consumer of the low-priced excess capacity of the rest of the world, which has kept our inflation down. At the same time, a year or so ago, it was very distressing to American exporters of heavy machinery and aircraft and agricultural products because the overseas demand for those products were quite a bit lower. We have benefitted in several ways. Capital came in, and expensive goods came in, and that has been to the benefit of the U.S. economy. Now I think it's time for the rest of the world to benefit us, because we're going to go into a slowdown, and our exports are going to soar as they pick up.

MR. WATTENBERG: Knight, people have been saying, we're going to go into a slowdown for 18 years now.

MR. KIPLINGER: A growth slowdown.

MR. WATTENBERG: A growth slowdown, meaning that we're going go to keep growing, but not as rapidly as we have been.

MR. KIPLINGER: And that will keep it growing longer.

MR. WATTENBERG: Hold it. I want to go back to the original chart, which is a chart of the American economy. You look at that century long chart, and the first thing you see is that there already is a new paradigm, and that came in, in 1945 or 1950, so we should all accept the idea that the last half a century in the United States is a new paradigm. This is something we had never experienced before. You had these terrible booms and busts and crashes, and skyrocketing economies, which, even though the country was growing, brought unmeasurable misery to millions of people.

Since World War we have been growing and growing without much volatility. Within that post-war time, you have this last 20 years, or this last 10 years, which is just continuing that new paradigm, that the shifts are even smaller than they were. The growth, because the shifts are smaller, is somewhat higher and, therefore, one may posit, I think, without being super silly and saying the whole world is changing, is that the likelihood of future recessions are very small because if you're going to grow at 4 percent, and you shrink one year by 3 percent, you're still in positive territory.

MR. BANERJI: You're quite right. And I think that's a very good point.

MR. WATTENBERG: You showed us those charts.

MR. BANERJI: Exactly and I think that's a very good point.

MR. WATTENBERG: Would you explain those charts, and we'll show them on the screen, just briefly.

MR. BANERJI: Certainly. If you still have a cycle, if you have a cycle where the growth rate of the economy cycles up and down, and part of the time it cycles below a zero growth rate, those are the times when you have recessions. Now, suppose that you boost the trend rate of growth well above what it was, then even though you have the same kinds of swings, the same size of swings, those swings are no longer going to carry you below a zero growth rate. Ergo, you're not going to have recessions per se.

If you have, alternatively, the same trend rate of growth, but you shrink the size of these swings, once again, you're not going to have these kinds of recessions, and that is really what has happened. The pattern, both the pre-war pattern that you showed, and the post-war pattern within the post-war recessions fit that pattern very well.

MR. WEBER: Those graphs, those numbers that you're showing -- I mean, that's a fact. The disagreement is what lies behind those numbers. And the question has really been, at least as I see it over the last few years, are we seeing this higher growth rate, this higher growth trend, as a result of sort of a confluence of lucky circumstances, recessions abroad, smart policy by the Federal Reserve, et cetera, et cetera, or is there something really different in the way we go about producing goods and services that has changed the economy in a way that allows us to grow at a higher rate for some period of time. That's what the argument turns on, and that's why we really need to talk about, the underlying driving forces of technology, changes in finance, changes in employment.

MR. WATTENBERG: Let's cut to the chase, what's the answer? You've asked the question.

MR. WEBER: I think the answer is yes. I think the answer is yes, because I think it's the only way to explain the data. I think the other way of explaining it, to say, well, we've gotten lucky and we keep getting lucky, is just bringing in ad hoc circumstances as they arise.

MR. WATTENBERG: So you really are a new paradigmer?

MR. WEBER: Yes, I'm a new paradigmer, sure. Of course I am. And let me tell you why, let me tell you how I really was truly convinced by this. When I did that research in 1995-1996, I thought, wow, you know, what we really need here is a test. If there were a huge shock to the American economy how would we respond? That would be the test of whether or not this is something new, or whether or not we've just been lucky. Well, you know, we had that test, there was a huge currency crisis in Asia and elsewhere. There was an enormous shock to the world economy, and I think if you had asked people like Paul Krugman (sp) and others in 1996 what do you expect would be the response to a shock of this magnitude, they would say, oh my goodness, that's the beginning of another Great Depression. Well, here we are, year 2000, and it's become a blip, a minor blip.

MR. BANERJI: You know, it's easy to say in hindsight that this is just a blip. I think we do a disservice to our understanding of what is going on to just discount the critical role that the Federal Reserve has played in bringing things back into balance. For example, in the fall of 1998, you remember this financial crisis that Bill Clinton called, I think rightly, the worst in 50 years. The Federal Reserve had to take very rapid policy action to stave off recession. Now it looks like a blip. Okay. Hindsight is 20/20, and once you have taken action it's fine.

But, what if the Federal Reserve hadn't acted? What if the Federal Reserve hadn't raised interest rates 7 times in 1994-95? What if the Federal Reserve doesn't act now? We have in '94, now we have a concerted, global expansion that is making us import inflationary pressures, which reinforces domestic inflationary pressures.

MR. WATTENBERG: Let me ask something else, Knight, maybe you can answer this more appropriately than anyone else, my sense is that in the last five, six, seven years of the 1990s there is something else at work, which is an incredible boost in the animal spirits of entrepreneurs. I mean, it has really become more popular than the NFL. I mean, this is what people want to do when they grow up, which is be an entrepreneur, and start something, and do an IPO, and make something, and the numbers reflect that, and that is a climate that yields a lot of growth.

MR. KIPLINGER: It's a climate that will yield a lot of growth, as long as capital is plentiful, and as long a somewhat speculative mood exists in capital markets. I think it's useful to explore why there is likely a growth slowdown ahead. The American consumer is a very powerful force in this whole equation. Consumer confidence is high, because personal income growth has been robust, joblessness is low.

Look at consumer spending, consumer spending has been running significantly higher than the growth in personal income. That cannot continue indefinitely, unless people are mentally, psychologically, or actually drawing down the appreciation of their assets to fuel their consumer spending, which is way ahead of the growth in their income.

This is so-called wealth effect, the wealth effect can bite you, as well. A stock market that does not go up as strongly over the next year or two, and I don't think that it will, will take some of the exuberance out of that over spending by consumers, housing starts and auto sales have been running at record levels for several years. This year I think housing starts will be off 8 or 10 percent, new home sales will be off 8 or 10 percent, auto sales will be down a bit, because the American consumer is exhausted, his tongue is hanging out, and he can't continue to fund this spending binge on the wealth effect alone. And that's going to calm things down. No recession, but a lower level of growth.

MR. WEBER: I think Knight is absolutely correct about that, but I think we're talking about the problem too narrowly in the sense that, yes, I expect consumer demand in the United States will start to tail off a little bit. But, we're about to see a major growth spurt in Europe, and we're about to see a major return of growth in parts of Asia. And a lot of that demand is going to get satisfied from production in U.S. factories.

MR. KIPLINGER: That's true.

MR. WEBER: So what does it matter if American demand goes, this is world demand we should be talking about.

MR. BANERJI: You know, in terms of world demand, I think there's an implicit assumption that's part of the discussion here that somehow there will be asynchronous growth in the world. So that when growth slacks off in one part of the world, that it will be taken up in another part of the world. In fact, that has been the experience in most of the 1990s, which is precisely why we have been so fortunate in being able to import disinflation most of the time. But, what happens when you have synchronous world expansion, and synchronous recessions, is that you have worse recessions, the worst, most severe recessions are the global ones. And in a globalized economy, those are more not less likely. Today, of course, we have a globalized expansion.

MR. WATTENBERG: So you have just resigned from the new paradigm club, is that right?

MR. BANERJI: Yes, I don't think I was ever part of the new paradigm club.

MR. WATTENBERG: I see. So I'm the only roaring bull, is that right?

MR. BANERJI: I think the point is when you get a good outcome, we have a tendency to pat ourselves on the back and say, hey, this is great, and we don't look at how much luck, how much of a part luck has played in bringing his about. And I think we have been extraordinary fortunate in having asynchronous expansions in the past decade.

MR. WATTENBERG: Isn't it true, though, that the fact of merely having this discussion that there may well be, or there might be something we're calling loosely a new paradigm or a new economy, basically recession proof, low inflation, with vigorous economic growth, 10 years ago if we had this discussion it would have been regarded as the funny farm. The fact that serious people can now talk about, maybe this is the new age. Keynes said it would take about 100 years to solve this problem. Well, we're getting close.

MR. WEBER: Yes, he also said in the long run we're all dead, you know.

MR. WATTENBERG: Well, he was right. Maybe he was right twice.

I have one last question I would like to address to you, which is this. By saying that it's got to go down, I'll take the two extreme points, that we're looking at too much, there's a bubble, it's going to come down, does that become self-fulfilling in a negative way?

And conversely, if babbling optimists like myself say, hey, this is really going to likely perhaps go on forever, it is a new paradigm, does that have a self-fulfilling aspect, is that a positive one or a negative one?

MR. KIPLINGER: I don't think it's self-fulfilling. If you look at the spate of gloomy books in the late 1980s, I debated on Larry King one night with Robby Bachra (sp) the Great Depression of 1990, some of Clyde Presowitz's (sp) books, the books that said Japan would eat our lunch throughout the decade of the '90s, people bought those books, they were frightened by them, and they continued doing the modernization of the U.S. economy, the global economy, the entrepreneurship, which mattered much more than what the authors were saying.

MR. WATTENBERG: Steven?

MR. WEBER: I second what Knight said. I think in addition, you know, we're a big country, it's a big world. There will always be some of you guys, and always some of us, and always some pessimists, and always some optimists. And I don't think -- unless that becomes a huge sort of secular shift in people's opinion and views that it would be a self-fulfilling prophesy.

MR. WATTENBERG: People say the market is driven by psychology, as well as by economics.

MR. WEBER: Sure.

MR. BANERJI: I would suggest here that we do need to look beyond these borders. It's really not necessarily just a bubble or the party goes on forever. The fact is, if you look at other mature economies, such as the U.K. and Canada, leave alone Japan, these economies have had expansions that have lasted over two decades in many cases. We're just approaching nine years now. So that in itself is not extraordinary. And we don't necessarily need to suggest that just because it's this long a crash is around the corner, though it may be, because as long as consumer and investor confidence holds up, we are probably going to keep going. But, if it doesn't we have a problem on our hands.

MR. WATTENBERG: On that calm note, I want to thank you, Anirvan Banerji, Knight Kiplinger and on the West Coast Steve Weber.

And thank you. We at Think Tank encourage feedback from our viewers via email. It is very important to us.

For Think Tank, I'm Ben Wattenberg.

ANNOUNCER: We at Think Tank depend on your views to make our show better. Please send your questions and comments to New River Media, 1219 Connecticut Avenue, Northwest, Washington, D.C. 20036, or email us at thinktank@pbs.org. To learn more about Think Tank, visit PBS Online at pbs.org. And please let us know where you watch Think Tank.

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Additional funding is provided by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, and the Smith Richardson Foundation.

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