Twenty years ago in this column we discussed whether the economic activity of that time actually represented the New Economy that Time magazine first touted in a 1983 cover article.
Some economists picked up the notion in the 1990s that we were experiencing a “Goldilocks” economy characterized by high growth, increased employment, and low inflation. It was supposedly driven by the productivity gains of an economy based less on heavy industry and more on service, as well as organizations that were benefitting from new information technologies.
We all know how that worked out. It may have contributed to the thinking behind the “dot-com bubble,” which was characterized by a wave of IPOs for organizations built around the information economy, ballooning stock options, and new attitudes toward company value (with profit not required or even frowned upon). Twenty-year-old entrepreneurs became mega-millionaires, but not for long. It turned out that the “new economy” of that time was a house of cards.
It’s a good time to ask the question again. Policies of the Federal Reserve in concert with those of the recent administration produced results (prior to the pandemic) that challenge traditional economic theory centered on the so-called Phillips curve. It’s a simple economic model named after the economist who explored the positive relationship between low unemployment and higher wage rates. It was a short step to correlate, without proving causality, higher wage rates and inflation, and therefore low unemployment and inflation.
One way to think about the model is that nirvana is the point at which the economic benefits of lower unemployment no longer exceed the economic penalties of inflation, however those might be calculated. This thinking contributed to what came to be regarded as a target unemployment rate, with anything less causing excessive inflation. At one time, many economists thought this to be as high as 6 percent.
The Phillips curve has taken its lumps over the years. No fewer than seven distinguished economists have won Nobel Prizes for revising or proving shortcomings in the model. Nevertheless, it continues to influence fiscal and monetary policy across the globe from time to time.
"Did the economic experiment in the United States during the past four years show us a few things?"
But then the US economic policy of the past four years came along. It brought tax cuts and higher growth. The unemployment rate fell. Wages, particularly for low-income workers, increased. But contrary to Phillips curve thinking, inflation remained the same or even declined. Even as unemployment fell below 4 percent prior to the COVID-19 pandemic, the inflation rate continued to hold or even decline.
Did the economic experiment in the United States during the past four years show us a few things? Perhaps under the right conditions, long-held assumptions just aren’t valid?
What are some of those pre-pandemic conditions? Did gains from information technology that we have been expecting for several decades finally kick in, producing larger-than-expected productivity gains to fuel both higher wages and higher profits? How important was the loosening of regulations on business? How much did Federal Reserve policies—pumping enough money into the economy to maintain low interest rates, supporting business growth and lower borrowing costs—help? Should we be surprised that economic growth, at least in terms of how we measure it, increased without attendant inflation?
Did we learn some economic lessons in recent years? For example, under the right conditions, is inflation relatively insensitive to wages and unemployment? Over what range of unemployment rates—say, anywhere from 3 to 5 percent—does this apply? Can we pump trillions of deficit-increasing money into the economy without triggering excessive inflation? What if we spent some of it on added training to fight so-called structural unemployment of workers with the wrong skills for our future economy? With that, could we reduce unemployment to less than 3 percent with little or no inflation?
Or is significantly higher inflation just over the horizon? After all, there is at least a lull in globalization. China’s economic development has increased its costs of production and reduced international price competition. Outsourcing may have seen the end of its rapid growth. And workers may belatedly be gaining wage leverage with very low unemployment rates. Savings have accumulated in the US to the point that they could fuel demand that outpaces supply, increasing inflation. Extended ultra-low interest rates may promote all kinds of unwise financial decisions and volatility.
Has the new economy finally arrived? What do you think?
Share your insights in the comments below.
Summing up last month’s column
Last month, I asked what we could do to sustain organization diversity and whether we err in first hiring a more diverse workforce, perhaps to meet a goal, before working on skills to ensure that new hires feel included in decisions and execution. Respondents conveyed the sense that the challenge is substantial. They suggested, among other things, that organizations need to change their value structure, training, hiring, and measurement.
Danny commented that “Diversity and inclusion must be clearly spelled out in the PURPOSE of the organization … our core values must speak to D&I.”
Steve Hopkins added, “I am encouraged by (the) mention of attitude. I would suggest one verb further; behavior … Results are not realized in how an organization thinks or feels about diversity (or any other value). It is how it behaves.”
Meena R. provided a practical example: “When we think of diversity, we bring in people to improve diversity and then expect them to fit into existing systems and structures … For instance, if I were to take the example of India, often meetings start at 4 p.m. and go on till 7 p.m. If the organization is serious about having more women, ensure that meetings are held in the morning … Organizations don’t want to change—they want the individuals to ‘adjust.’ And then they call it diversity and inclusion!”
Turning to training, Donna K. remarked that “Equity and inclusion are continuous processes. Inclusion and equity practices must involve initially educating the senior leaders, as these are the folks who can open the right doors, … make the needed resources available, and align the D&I process with all of the business objectives. Additionally, leadership must be prepared to model inclusive behavior to set the tone throughout the rest of the organization.”
Regarding hiring, Mark reminded us that “Simply addressing the numbers is short-sighted and often can lead to significant damage to an organization. People brought in as ‘diversity hires’ can be seen by the remainder of the organization as charity cases … It is not about intentions but more about actions.”
Patti Gillenwater suggested that companies should change their hiring policies. In her words, “hiring individuals that have ‘grown up’ in diverse, inclusive environments is spot on. This would mean recruiting candidates from colleges and universities that are educating first generation college students and moving away from prioritizing candidates coming from more privileged backgrounds.”
Measurement was on the minds of several respondents. Steve Hopkins said that diversity “needs to be an intentional action with a measurable outcome … All things that demonstrate that it is inexpensive to be yourself and that one ‘belongs’ must be modeled and coached by leaders … add an inclusion metric: How (do) your team (members) rate (their) sense of belonging once they are there?”
SRamkeesoon captured the themes of several comments: “Recruitment, training, and retention efforts should incorporate the tenets of cultural intelligence, which address if an individual is consciously aware of others’ preferences, knowledge of norms and practices, a drive to learn about differences, and assessing what individuals do when interacting with people from different backgrounds.”
About the Author
James Heskett is the UPS Foundation Professor of Business Logistics, Emeritus, at Harvard Business School.