CONTACT: Kathleen O'Toole, News Service (650) 725-1939;
Blame, credit for economy apportioned at economic center's birthday conference
It was one of those rare politically volatile conferences where people actually stuck to the preassigned subject, in this case the U.S. economy's performance over the last 15 years and what it bodes for the future.
True, Stanford Professor Anne Krueger dipped back a few centuries, but only to explain that vast reductions in transportation and communication costs gradually brought us to the current globalized economy.
And Professor Emeritus George Shultz of the Graduate School of Business harkened back to his experiences in the Eisenhower and Nixon administrations before settling in to his view of the last 15 years: Reagan and Thatcher provided the rhetorical leadership for a great expansion of individual freedoms that improved the world economy, including the economy of the United States.
Economics Professor Joseph Stiglitz, former chief of President Clinton's Council of Economic Advisers, offered a more critical review, especially of Fed chairman Alan Greenspan for reacting too slowly to an "unsustainable boom" from 1983 to 1989 a period that Stiglitz's Republican counterparts at the conference preferred to refer to as the "longest peacetime expansion in U.S. history."
"Yes, there was a lot of investment then," Stiglitz said, "but it was investment in empty office buildings, the same thing, by the way, that has led to the downfall of the Thai market" this summer.
Predictions for the next 15 years were tentative, reflecting the confusing state of current economic indicators. No one ventured predictions on the raging stock market. Greenspan summed up the confusion in his keynote speech when he said that only time will tell if the U.S. economy has recently entered a new period of expanding productivity and growth, following growth-rateslippage from 1973 to 1979, the sharpest downturn since the Depression. Even Stiglitz, who said he believes the current expansion is built on a better foundation than the previous one, conceded "it's too short to say that it's long at this point."
Convened on Sept. 5 to celebrate the 15th anniversary of Stanford's Center for Economic Policy Research (CEPR), the conference showcased how deeply involved this university has become in shaping national policies. John Shoven, dean of the School of Humanities and Sciences and the Charles Schwab Professor of Economics, suggested that Stanford would not have three former members of the presidential Council of Economic Advisers on its faculty if CEPR had not been created in 1982 to provide a place for scholars to research economic ideas with practical policy implications. "They would be at other institutions by now," he told the audience of scholars and Silicon Valley business people, many of whom have provided the center with financial support, advice and feedback.
From past Republican administrations, there was Shultz, who has served as budget director and secretary of labor, treasury and state, and Michael Boskin, former chair of President Bush's Council of Economic Advisers and most recently chair of a non-partisan congressional commission that recommended changing the way the country calculates the cost of living. (John Taylor, another member of the Bush council, organized the conference but did not speak.)
From the first Clinton administration, there was former Secretary of Defense William Perry and Stiglitz, now chief economist of the World Bank, a position previously held by Krueger. Rounding out the panels was a Silicon Valley businessman, T.J. Rodgers, president and CEO of Cypress Semiconductor, who has lobbied Congress for a much smaller government.
Not surprisingly, the Democrats and Republicans offered differing views of the last 15 years and prescriptions for the future. On the international economic front, Shultz said he was "a little uneasy" about America's ability to sustain its economic expansion for 15 more. He said he doesn't see enough attention being paid to security problems and implied that Clinton is not tending to business with China, Russia and the Middle East. "If we have some blow-ups, the international economy will feel it and when the international economy feels it, we'll feel it in this country in a big way."
He also said he sees increasing potential for terrorism, especially in Stanford's backyard, the Silicon Valley.
Perry, on the other hand, emphasized that the Soviet economy was ruined by maintaining a large standing army and said the real cut in the U.S. defense budget of 40 percent was good for the U.S. economy. The challenge, he said, will be for America's industry-military-technical university networks to learn a new model for feeding technological growth. During the Cold War, the U.S. defense department was a major funder of basic research that led to successful commercial innovations, he said, but now the challenge is to rapidly adapt commercial technological innovations to defense needs, rather than the other way around. Japan's recent failed attempt to become the world's technological innovator by having its government pick a few key commercial technologies to develop, he said, demonstrated why markets must drive the enterprise.
Perry, the Michael and Barbara Berberian Professor of Engineering-Economic Systems and Operations Research, also warned that American technical leadership was "not a divine right" but more like an "accident of history." Scientists and engineers moved here to escape fascism, he said, then with the help of the GI Bill trained a new generation who then was prepared to work on Cold War-driven projects. He finished by quoting Winston Churchill: "You can always count on the Americans to do the right thing after they've exhausted all other alternatives."
Fed praised and criticized
Boskin, the Tully Friedman Professor of Economics and senior fellow at the Hoover Institution, attributed America's economic successes of the last 15 years to the Federal Reserve and private industry. Congress, the president and inadequate statistical measures and accounting systems get the blame for the bad things, he said, but since there is often a lag before actions have consequences, voters often blame the wrong congresses and presidents. "I would give the Fed very high marks under Volcker and Greenspan, but the Fed in the '70s was a disaster."
Stiglitz was decidedly less complimentary of the Fed, blaming Greenspan, although not by name, for not recognizing sooner the structural problems underlying the 1980s' expansion, which he said, was led by government deficit spending and failed tax and banking regulation policies.
Shultz defended Reagan's tax policies, saying that because of the 1986 law, "the rates are a lot lower than they were and the preferences in the tax system are a lot less." He said he was proud of his role in ending capital controls, but was critical of his colleague James Baker and other world leaders involved in the 1985 Plaza agreement, which "gave people the intoxicating feeling that governments could pronounce on exchanges rates and the rates would behave."
Like Stiglitz, he was critical of government leniency toward banking institutions. "We produced the lost decade in Latin America," he said, and have created a "bail-out mentality" in Mexico. "That's why the Mexican government ends up owning beauty parlors." He urged Clinton to go along with Republicans in Congress who oppose the creation of a permanent bail-out fund within the International Monetary Fund, which he described as an "invitation" for governments to be irresponsible.
Krueger, the Herald L. and Caroline Ritch Professor of Economics, stressed the importance of expanding the open trading regime and said she was hopeful that the creation of the fledgling World Trade Organization would eventually lead to "a rule of law" over international trade. This would benefit the economies of all nations, she said, and replace episodic unilateral trade sanctions that countries try to impose on each other when protectionist sentiments arise in political debates at home. As a rule of thumb, she said, "the growth of world trade in real terms has been almost exactly twice the rate of growth in world GDP. There seems to be a relationship there," she said, a "virtuous circle" in which more income generates more trade and more trade generates more income.
The illicit drug economy
But Krueger also said illicit drug trade was a troubling trend. While no one knows how large the drug trade is, she said the best guess is about 10 percent of the world's legal trade. "It's huge and growing fast. It's undermining a number of national governments in ways that seem to mingle with the security concerns that George [Shultz] was speaking of."
Krueger also said she was less supportive of the trend toward regional trade agreements than some other economists, including Shultz. A recent study by the World Bank, she said, suggests that growth in trade among Latin American nations in a regional trading agreement was coming at the expense of multilateral trading partners.
In his talk, Rodgers of Cypress Semiconductor entertained the birthday party crowd with some comparisons of his industry's productivity to that of an older powerhouse the auto industry. If cars had achieved the productivity gains of chips, he said, they would now be able to go 2,000 miles an hour and cost a penny. Why then, he asked, had American workers from the auto makers' glory days shared in the profits from their productivity gains while today's workers haven't? (When CEPR was founded, he noted, the average real hourly wage was $7.68 compared to just $7.43 today. Those are the official numbers, which Boskin's commission says are misleading because the cost of living has not increased as much as the official calculation indicates.) Rodgers blamed high government spending for low wages.
Preventing 'value subtracted'
Boskin outlined the behind-the-scenes role that academic economists play in making government policy. With a few exceptions, he said, "the cumulative value added by economists is preventing value subtracted." The audience laughed but Boskin insisted he was serious. "The very first thing I did when I got to Washington was kill a $10 billion let's-catch-up-with-the-Japanese in analog high-definition television program."
Over the longer run, he said, academic economists come up with ideas that lead to new agendas in Washington. Since CEPR began, he said, the profession's majority has shifted its understanding of inflation, so that now most see the cost of inflation as high and the costs of dis-inflation as less painful than previously thought. Greenspan later gave partial credit for this to Hoover Senior Research Fellow Milton Friedman and said that inflation is costly to economic growth partly because investors and consumers have difficulty telling real price changes from inflationary ones.
"When I look at the broad spectrum of economic events of the last 15 years," Boskin said, "it seems to me the singular most important policy achievement was two rounds of dis-inflation by the Federal Reserve, the first in the early 1980s [to bring inflation] from around 13 percent to 4.5 percent and then down to the 2.5 to 3 percent range in the 1990s. You could say it wasn't done perfectly, and it wasn't, and we can argue about the timing, but I think it has brought a tremendous intellectual shift in the economics profession." Nevertheless, he said, the Federal Reserve Board "probably still has too much discretion."
Stiglitz gave Congress, Bush and Clinton credit for bringing the economy into a stronger position by gradually tightening the federal budgeting process in 1990, 1993 and this year to get the deficit under control. The Bush administration also helped in 1989 by tightening the regulation of federally insured banks, making them responsible for at least part of the risks they took, he said.
He showed excerpts of Greenspan's congressional testimony on slides comments that both denied any structural problems in the economy on the eve of the 1990-91 recession and later the possibility that credit rationing was occurring.
The Fed lowered interest rates more than two dozen times before conceding deeper structural problems, he said. "It wasn't until the economy started coming out of the recession that the Fed saw the limitation of lower rates and finally, in February 1993, began to talk about the structural problems that a number of us had been talking about for four years as the source of the whole problem."
Boskin, however, blamed "information constraints and data problems." Greenspan, he said, had inaccurate information on inventories and unemployment. "We found out six months later that inventories had accumulated much more rapidly. We found out that there were 700,000 more unemployed people a year after the fact."
By Kathleen O'Toole