So Who Do We Thank for This Boom?

Fortune issue: October 11, 1999

First Principles


So Who Do We Thank for This Boom?

By N. Gregory Mankiw

Have an economist you want to embarrass? Ask him why the U.S. economy is doing so well.

There is no denying that we've been experiencing something close to economic nirvana--rapid growth, low inflation, and high employment. To get a sense of how unexpectedly wonderful things are, I looked back at the Clinton Administration's first Economic Report of the President. It contains the projections that the new President's economic team made in February 1994, a year after Clinton took office and started putting his policies into effect.

What did the team expect the economy to look like in 1999, and how does reality compare? The Clinton economists expected growth in GDP between 1993 and 1999 to average 2.7%; it's averaged about 3.4%. They expected inflation in 1999 to be 3.4%; it's now about 2%. They expected nonfarm employment to reach 122 million in 1999; it's more than 128 million. Almost every statistic has turned out better than predicted.

What's significant is not that an economic forecast turned out to be wrong (most do) but that it's hard to explain this success, even in hindsight. Economic prophets of all denominations need to question their deities. Consider:

  • Supply-siders: When Clinton took office and raised taxes, extreme supply-siders predicted economic catastrophe. One right-wing economist I know was so sure of this that he liquidated his entire stock portfolio. Now, with the Dow 7,000 points higher and taxes at a historical high as a percentage of GDP, it's hard to argue that taxes cripple an economy. Taxes may distort incentives and reduce the size of the economic pie, but let's not overstate the case.


  • Government activists: Some people explain the strong economy by pointing out that candidate Clinton promised to stimulate growth by spending more on infrastructure, worker training, and other public investments. But it never happened. As former Labor Secretary Robert Reich laments in his memoir, Locked in the Cabinet, the liberal public-investment crowd in the new Administration lost most battles to the more conservative deficit-hawk crowd. The economy was ready to grow anyway.


  • Fiscal conservatives: Does deficit reduction get credit for the economic boom? That would be a nice morality play: We made the sacrifice of taxing ourselves more, and we're reaping the benefits. But deficit reduction doesn't have that big an impact on the economy (I could do the numbers for you but don't have the space). Even the Clinton Administration's first Economic Report estimated that deficit reduction would add only about 0.2 of a percentage point to the economy's growth rate. A more credible story goes the other way around: Rapid growth has automatically raised tax revenue and reduced spending on antipoverty programs, eliminating the budget deficit even more quickly than any policymaker intended.


  • Technology optimists: That leaves us with the Internet. Perhaps the information revolution has spurred the economy on to new, unexpected heights, as Alan Greenspan has suggested recently. This theory is hard to reject because it is so hard to judge. But are we really sure that computers are more significant than technologies that came before--like electricity, the telephone, and the internal combustion engine? Economists who have studied the numbers don't see much happening to productivity growth, except in the manufacture of computers. Perhaps we're so impressed by the present revolution because it's ours.

    And so the unexpectedly strong economy of the 1990s remains a mystery. What is not mysterious, however, is how it has led to high approval ratings for Clinton. Presidents get more credit than they deserve when the economy is good, and more blame when it's bad. When it comes to making economic policy, there's no substitute for being in the right place at the right time.



    N. GREGORY MANKIW is a Harvard economics professor and author of Principles of Economics.