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Kathleen O'Toole, News Service (650) 725-1939; e-mail:

Economists positive but cautious about 'new economy' reports

America may have a new economy with long-term higher growth rates, but there is too little evidence yet to count on it, several prominent economists said Friday, Jan. 28, at the annual meeting of the Stanford Institute for Economic Policy Research.

Three former members of the President's Council of Economic Advisers agreed there were signs the booming economy might last, but they cautioned that luck had also played a role in the success of recent years. Unemployment rates are now 4 percent, one percentage point lower than previously believed sustainable without causing accelerated inflation.

It may be possible the country can sustain fuller employment without inflation because "the evidence is mounting that [U.S.] productivity is growing," said Janet Yellen, former chair of President Clinton's council and a professor at the University of California-Berkeley's Haas School of Business. "We have to be careful to assume it could last because we've had some good luck also," she said, pointing to the slowdown in health care cost increases in recent years and the Asian financial crisis, which put money in American pockets by reducing the cost of Asian imports.

The U.S. economy should no longer be considered in isolation from the global economy, said Michael Boskin, former chief of President Bush's council and the Tully Friedman Professor of Economics at Stanford. He cautioned that the high U.S. income growth rates of 3 to 3.5 percent annually may not be sustainable, now that European and Asian economies appear to be recovering. "I'd like to see a decade [of those growth rates] before we convince ourselves of it," Boskin said. He also said that new technology is "by itself a substantial disinflation force. Whatever happens in the stock market, I think we're in only the second or third inning" of technology-driven productivity gains.

Two of the three longest economic expansions in the 1980s and 1990s have been "back to back, separated by a modest recession," noted John Taylor, who also served on Bush's council. "If business cycles are less frequent, that would explain a good amount of the movement in stock prices," said Taylor, the Mary and Robert Raymond Professor of Economics.

"Every recession in modern memory has been preceded by a run-up in inflation," Taylor said, giving credit to the Federal Reserve Board for keeping inflation down since the 1980s. He and Yellen mentioned that the nation's older, more educated work force also may help to keep unemployment down and productivity up.

Demonstrating their partisan beliefs, Yellen, a Democrat, advocated saving this year's federal budget surplus because of uncertainty about future spending, especially on Social Security and Medicare. A bipartisan agreement also has emerged, she said, for increasing defense spending this year.

Taylor, a Republican, said part of the surplus should be saved, but 3 percent of gross national product was too high. One percent should be used for tax cuts, he said.

In another panel discussion on the stock market, Nobel economist Myron Scholes, the Frank E. Buck Professor of Finance, Emeritus, said new companies were able to make initial public stock offerings before they had strong earnings because "people can sell great ideas these days. I don't think there is a bubble in the Internet sector. I think some stocks are overvalued and some undervalued."

On the other hand, Paul Romer, the Ralph Landau Senior Fellow at the institute and the STANCO 25 Professor of Economics at the business school, said "even with evidence of a new economy, I don't think it justifies some of the prices that you see."

In another panel discussion, economists discussed the role of the International Monetary Fund in stabilizing the global economy. Eisuke Sakakibara, a candidate for executive director of the fund and a former vice minister of finance for Japan, said the fund's employees did not have the political and cultural expertise needed to advise countries on how to restructure their banks. The fund should stick to its role as a lender of last resort in liquidity crises, he said.

Ronald McKinnon, the Eberle Professor of Economics, and Anne Krueger, the Herald and Caroline Ritch Professor in Humanities and Sciences, agreed the fund should stick to its original mandate. Krueger defended the fund for doing the best it could under severe time pressures during the Asian crisis. But McKinnon and George Shultz, former secretary of state, Hoover senior fellow and professor emeritus, said the fund should have done less to bail out U.S. banks and other international investors who make risky loans. They expect the fund to bail out countries, Shultz said, who then repay the investors with international taxpayer-financed loans.


By Kathleen O'Toole

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