Talk about having things backwards!

Robert J. Gordon, whose work I have sometimes admired, has me thinking other thoughts with this 2002 study of economic performance. Well, with the one long paragraph I can read for free...

NBER Working Paper No. 8771
Issued in February 2002

This paper examines the sources of the U. S. macroeconomic miracle of 1995-2000 and attempts to distinguish among permanent sources of American leadership in high-technology industries, as contrasted with the particular post-1995 episode of technological acceleration, and with other independent sources of the economic miracle unrelated to technology.

Robert Gordon's focus, for this paper anyway, is technology. Not me. For me, the economy is almost synonymous with money. My economics is a study of monetary balances and imbalances. For me, technology is... exogenous. Outside. Apart. For me, technology is like human behavior: It is part of the environment that the economy exists in. It is a given. Economists are not supposed to mess with technology any more than they are supposed to mess with human nature. Macro economists, anyway.

Economists are supposed to keep an eye on money. Why? Because everything that happens in the economy has a dollar value. So, money gives the economist a way to see everything at once, big picture, free of all the gory details.

Why a hobbyist has to point this out, I do not know.

The core of the American achievement was the maintenance of low inflation in the presence of a decline in the unemployment rate to the lowest level reached in three decades.

Yes... The American achievement, this "macroeconomic miracle of 1995-2000", consisted of keeping inflation low while bringing unemployment down.

It was a shift of the Philips curve toward the origin.

The post-1995 technological acceleration, particularly in information technology (IT) and accompanying revival of productivity growth, directly contributed both to faster output growth and to holding down the inflation rate, but inflation was also held down by a substantial decline in real non-oil import prices, by low energy prices through early 1999, and by a temporary cessation in 1996-98 of inflation in real medical care prices. In turn low inflation allowed the Fed to maintain an easy monetary policy that fueled rapid growth in real demand, profits, and stock prices, which fed back into growth of consumption in excess of growth in income.

Robert Gordon says that inflation was held down by a decline in prices, by low prices, and by a cessation of price increases. I think that's funny. I think inflation is held down by a reduction of inflationary pressures. I think that when inflationary pressures are low, the result is price declines, low prices, and a cessation of price increases.

Robert Gordon gives us a list of ways prices went up or didn't go up. What he provides is an explanation of how inflationary pressures worked themselves out. It is not an explanation of why inflationary pressures were low. It is the cart before the horse.

As I have shown, the "sources" of the "miracle" were monetary in nature, what Robert J. Gordon calls the "other independent sources of the economic miracle unrelated to technology." The growth of debt slowed, and the growth of money accelerated. In effect, we reduced the cost of using money in the U.S. economy. By itself, this can explain "faster growth" and "holding down the inflation rate". But it may also explain "low energy prices" and the "temporary cessation of medical care prices".

The technological acceleration was made possible in part by permanent sources of American advantage over Europe and Japan, most notably the mixed system of government- and privately-funded research universities, the large role of U. S. government agencies providing research funding based on peer review, the strong tradition of patent and securities regulation, the leading worldwide position of U.S. business schools and U. S.-owned investment banking, accounting, and management-consulting firms, and the particular importance of the capital market for high-tech financing led by a uniquely dynamic venture capital industry.

That is one long sentence.

Here, Mr. Gordon looks at "structural" differences between the U.S. and other nations. This explains why the U.S. may have certain advantages over other nations. But it does not explain the five-year "miracle". Nor does it explain the absence of miracles for a generation before:

While these advantages help to explain why the IT boom happened in the United States, they did not prevent the U. S. from experiencing a dismal period of slow productivity growth between 1972 and 1995 nor from falling behind in numerous industries outside the IT sector.

The advantages Professor Gordon lists, above, explain neither the so-called miracle nor the absence of miracle. In other words, to bring up these "permanent sources of American advantage" is a distraction from more important issues.

The 1995-2000 productivity growth revival was fragile, both because a portion rested on unsustainably rapid output growth in 1999-2000 in the growth rate of computer investment after 1995 that could not continue forever. The web could only be invented once, Y2K artificially compressed the computer replacement cycle, and some IT purchases were made by dot-coms that by early 2001 were bankrupt. As an invention, the web provided abundant consumer surplus but no recipe for most dot-coms to make a profit from providing free services.

Earlier, Robert Gordon offered a list of examples of prices not going up, and presented it as an explanation of what held prices down. Results held up as causes.

Now he uses the same approach to explain why the "miracle" was "fragile". He gives a list of things that happened during the miracle years and says, simply, that they "could not continue forever." Obviously, they didn't last forever. Results held up as causes.

The web could only be invented once. That's your best argument, sir?

The article continues, but that's all I could get for free.

Summary

Examining the brief bright spot that he calls a "macroeconomic miracle," Robert Gordon emphasizes the role of technology. I emphasize the role of monetary balance.

I have shown that the rate of debt growth fell in the late 1980s and early 1990s, paving the way for a non-inflationary increase in the quantity of money. I have shown that the increase in money (in the context of reduced debt growth) did in fact occur. And I have made the point that these were the necessary changes to enable growth.

When the money is right for growth, the technology will arise to provide growth. Robert Gordon wonders why there was no burst of productivity in the 1972-1995 period. It is because the money was not right for growth.