We are about to rewrite history. Unless a recession begins in the next few days, this boom will soon become the longest in the American experience. In February, it will have lasted 107 months. The current record is 106 months between February 1961 and December 1969. By and large, Americans are behaving as if recessions are a relic of the past, even though everyone must realize that the boom will end someday -- and might end badly.
As with all records, people will celebrate and assert bragging rights. President Clinton has claimed credit. Alan Greenspan, chairman of the Federal Reserve Board, is idolized for his presumed role. The murkier truth is that the boom's causes reflect a protracted and largely nonpolitical process.
Low inflation has been the critical catalyst. In the past, rising inflation has doomed expansions through higher interest rates, increased labor costs and squeezed profits. Yet inflation remains tame. To explain tame inflation, I'd cite three factors:
(1) The Fed: Paul Volcker, chairman of the Fed between 1979 and 1987, crushed inflationary expectations. In the 1960s and 1970s, these had become ingrained. Companies raised prices because they expected customers would pay. Workers expected pay raises to compensate for higher prices -- and then some. By 1980, inflation had reached double digits. Volcker tightened money, increased interest rates and caused a savage recession. In 1982, unemployment neared 11 percent. Though brutal, the downturn stifled wage and price increases. By 1983, inflation was 4 percent. President Reagan sanctioned Volcker's policy by muting criticism. Since then, Greenspan's Fed has pursued "price stability" and has raised interest rates (as in 1994) to prevent inflation's upward creep. Presidents Bush and Clinton have emulated Reagan's self-restraint.
(2) Better Management: Through the 1970s, corporate managers were rarely fired. In the 1980s, things changed. Managers became vulnerable to job loss for many reasons: the recession; foreign competition; deregulation in the airline, trucking and communications industries; "hostile" corporate takeovers. Self-preservation made managers more ruthless. Old plants were shut. Layoffs and "downsizings" became common. Again, the immediate consequences were often cruel. But the lasting effect was less inflationary behavior.
(3) New Technology: As everyone knows, business investment in computers and communications has exploded. The presumption is that these investments enable companies to do things faster and cheaper -- they raise "productivity." Firms can minimize unneeded inventories or speed the processing of customer orders. Higher productivity can be magical. If a company improves productivity 3 percent, it can raise wages 3 percent without increasing prices or sacrificing profits. And productivity has improved. In recent years, it's approached 3 percent a year, up from 1.6 percent in the 1980s.
There are many plausible reasons that the boom won't last forever. Inflation might increase, with low unemployment pushing up wages. The Fed is already sufficiently worried that it's raising interest rates. Or the prevailing boom psychology might prove fatal. Undeniably, Americans have gone on a spending spree.
Since 1991, for example, personal after-tax income has risen 47 percent (with no correction for inflation). Meanwhile, consumer spending has risen about 57 percent. The gap between the two -- financed by borrowing or selling stocks -- totals almost $400 billion annually. Spending can't perpetually outstrip income.
One reason it has is the effusive stock market. Much of the market's increase reflects genuine economic gains. But some reflects speculation.
We'd all like the boom to glide along forever. Perhaps it has years to go. But it could be sowing the seeds of its own destruction.
Washington Post Writers Group