Economics Update (July-September 1997)

Why Is the Economy Doing So Well?

J ack Guynn is not surprised that people have begun to ask him, Why is the economy doing so well, and how long can it last? And as president and chief executive officer of the Federal Reserve Bank of Atlanta, Guynn is in a position to provide a thoughtful answer to these questions.

Speaking recently in Florida at a meeting of the Business Development Board of Palm Beach County, Guynn cited four reasons that the United States is enjoying its third-longest economic expansion since the end of World War II: low inflation, productivity gains, international trade and deregulation.

Jack Guynn

Jack Guynn,
president and CEO
of the Atlanta Fed
"Low and stable inflation," he said, "has given businesses the incentive and the confidence to build new plants and invest in new equipment, and that capital spending, in turn, has helped to create more jobs and more growth."

Although productivity gains are not showing up in the reported data, he said, business profitability tells a different story. Businesses are investing in productivity-enhancing equipment, particularly in the service industries. "All things being equal, you would not expect increased investment in industries that are experiencing declining productivity," he said. "Nor would you expect profits to stay up as employees begin to receive higher wages — unless, again, productivity was also increasing."

Guynn cited healthy competition from expanding international trade as another reason for the strong economy: "I see this global competition going hand in hand with U.S. businesses' meeting the domestic challenge of imported goods — not through trade barriers but through better products."

He also said that deregulation in industries such as banking, communications and transportation has created massive changes for the better in the economy.

What Monetary Policy Must Do

In answer to the question, How long can the expansion last? Guynn said, "The duration will depend in large measure on good policy — both monetary and fiscal."

He cited three things that can be done in the monetary policy arena to make the nation's expansion last.

"First, we must not let ourselves lose sight of how this economy has benefited from the interplay between low inflation and productivity. It seems to me that the low and stable inflation we've been experiencing — thanks to effective monetary policy — has contributed substantially to gains in productivity."

Second, the Fed must avoid making policy mistakes, which he said are usually caused by "waiting too long to tap the brakes."

Third, the Fed must continue to question and test conventional wisdom that assumes that the U.S. economy can have either low inflation or strong growth, but not both. "Recent experience suggests that we can have low inflation, low unemployment and strong real growth, and I think that there is growing evidence that low inflation is a precondition for achieving our other economic goals."

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