December 26, 1989
"This Crystal Ball is Cloudy"
San Jose Mercury News
By Timothy Taylor
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OVER the past couple of years, I've been helping to write an introductory economics
textbook. Because the book won't be published until 1991, and because an edition
of a textbook is generally in use for three years, I've had a practical interest
in trying to predict the major economic issues of the early 1990s, so that they
could be used as illustrations and explanations in the book.
I've concluded that predicting the mysterious 1990s is an impossible job.
There are some topics that no one should try to forecast. You'd have to be
very fearless and even more foolish to take a firm position on whether perestroika
and glasnost will flourish or wither in the next three years.
But even when medium-term economic predictions over the last few decades have
stuck closer to home, they have tended to miss the major issues of the future
almost completely. To understand the difficulties of predicting the 1990s, even
though they are only a week away, consider the problem of someone sitting down
in 1969 and trying to predict the key issues of the early 1970s, or someone in
1979 trying to predict the key issues of the early 1980s.
At the end of the 1960s, the economy was surging through a golden decade of
economic growth. Although growth in GNP (adjusted for inflation) had slumped a
bit to 2.4 percent in 1969, GNP growth for the decade averaged 3.5 percent faster
than inflation. The average rate of unemployment during the 1960s was only 4.6
percent; by 1969 it had fallen all the way to 3.4 percent.
The one serious worry in the late 1960s was inflation, which was being fed
by high levels of government spending as Lyndon Johnson tried to fight a war in
Vietnam and a War on Poverty at the same time. The price level climbed annually
from between 1 percent and 2 percent in the early part of the decade to 3.1 percent
in 1967, zoomed to 4.2 percent in 1968, and then rocketed to 5.5 percent in 1969.
But although forecasters in 1969 were worried about inflation, not many of
them predicted that a conservative Republican president, Richard Nixon, would
forsake his faith in the free market and try to solve inflation with a program
of nationwide wage and price controls in 1971.
Even fewer forecasters predicted that a group of obscure nations in the Middle
East would resuscitate a moribund organization named OPEC, and use it to embargo
oil exports to the United States, quadruple the price of oil and cause a worldwide
In other words, forecasters in 1969 didn't just miss the boat; they missed
a whole fleet.
By 1979, inflation was running at 11.3 percent. The unemployment rate had averaged
6.1 percent during the 1970s -- 1.5 percent higher than during the 1960s -- but
it was down to a 5.8 percent rate in 1979. In the 1970s, growth in GNP fell to
only 2.9 percent per year faster than inflation.
This triple whammy of higher inflation, higher unemployment, and slower growth
went by the name of stagflation, and an economic forecaster in 1979 had to be
trying to figure out how (or if) the economy could climb out of this whole in
A lot of very inventive scenarios were predicted, but not many of them involved
another conservative Republican president, Ronald Reagan, foresaking his faith
in balanced budgets and proposing $200 billion deficits to Congress. Among those
who forecast larger budget deficits in 1979 -- and there were some advance warnings
-- most believed that deficits would cause higher inflation or lower investment,
as they had back in the late 1960s.
Practically no one expected that inflation would nose-dive from double digits
in 1981 to 3.2 percent in 1983, while the U.S. financed its federal borrowing
binge by becoming the world's largest debtor nation.
Once again, the economic forecasters of the late 1970s didn't just miss home
plate; they weren't even in the right ballpark.
As the 1980s draw to a close, inflation and unemployment are relatively low,
although the figures are still nothing to boast about by the standards of the
early and mid-1960s. But GNP growth in the 1980s has averaged only about 2.5 percent
per year faster than inflation, a full 1 percent per year slower than in the 1960s.
Over the past decade, that percent per year adds up: If the economy had grown
during the 1980s at the rate it did in the 1960s, GNP would be $500 billion bigger
right now, and a lot of social problems would look a lot more manageable. I hope
that the main policy issue of the 1990s will be how to regenerate a faster rate
of productivity and economic growth, but I'm not silly enough to believe that
the 1990s are likely to follow my personal agenda.
Back in 1959, did you foresee the war in Vietnam and the War on Poverty? In
1969, did you foresee the rise of OPEC and double-digit inflation and unemployment?
In 1979, did you foresee $200 billion budget deficits and the U.S. becoming the
world's largest debtor nation?
If so, and if you can prove it, then maybe your economic forecasts for the
1990s are worth listening to.
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