Date created:14 September 2002 Last modified: 14 September 2002 Maintained by: John Quiggin John Quiggin
15 August 2002
Unlike Errol Brown and Whitney Houston, I don't believe in miracles. In the last twenty years, the Swedish miracle, the Thatcher miracle and the New Zealand miracle, to name but a few, have crumbled into dust, or at least lost their shine. In retrospect, some of these former paragons look better than others, but none looks in the least miraculous.
In the late 1990s, simultaneous economic miracles (or 'New Economies') were proclaimed in Australia and the United States. In both cases, the central pieces of evidence supporting the claimed miracle were a sustained economic expansion and an upsurge in estimated productivity growth.
In the United States, the miracle was supposed to reflect the revolution wrought by the Internet and was bolstered by the proliferation of dynamic new 'dotcom' enterprises. In Australia, the 'miracle' was supposed to be the product of microeconomic reform. In particular, it was claimed that the increased flexibility associated with reform had 'fireproofed' the economy against the shocks associated with the Asian crisis.
The recent release of productivity statistics for the United States has gravely weakened claims of a miracle there. Whereas the rate of growth in labour productivity (output per hour) for the 1990s had been estimated at 2.5 per cent, a combination of weak recent data and downward revisions in estimates for earlier years has lowered the rate to 1.9 per cent.
On the face of it, this is still an improvement on the rate of 1.3 per cent experienced between 1973 and 1990 and close to the rate prevailing in Europe. As The Economist puts it, 'still a miracle Ð just'.
Unfortunately, as with everything in the US these days, there is an accounting problem. In the early 1990s, the US adopted a new system of accounting for improvements in the quality of goods such as computers, referred to as 'hedonic pricing'. There are arguments for and against the hedonic pricing method, but there is no doubt that it boosts estimates of the rate of productivity growth compared to the older approaches, which are still in use in Europe. If comparisons were made using a common method, US productivity growth in the 1990s would be little higher than between 1973 and 1990, and well below that prevailing in Europe.
Australia has had a similar experience. There was considerable excitement in the late 1990s over claims that the rate of multifactor productivity growth had reached 2.4 per cent between 1994 and 1998. If sustained over a long period, such a rate would indeed justify the tag 'miracle'. Unfortunately, just as in the US, a combination of data revisions and consideration of longer data periods has taken the gloss off. For the period since 1990, the revised estimate of MFP growth has been about half the 2.4 per cent level that formed the basis of the 'miracle' claims.
There remains the strong growth of the 1990s. In the US, the era of strong growth has already come to an end. The recent 'recovery' was little more than an inventory cycle overlaid on a longer-term downturn in the rate of growth. Another round of interest cuts may push things along for a while, but the overhang of debt and growing budget and current account deficits is getting harder to ignore all the time.
In Australia, our much-vaunted immunity to the Asian crisis was more a matter of adroit monetary policy than of domestic economic flexibility. Thanks to the Reserve Bank's decision to let the dollar depreciate, export demand was barely affected by the Asian crisis, so that there was no shock to adjust to.
But no central bank, no matter how good, can make the right call every time. We now face a nasty dilemma. The economy as a whole is still weak, with unemployment above 6 per cent, and growth patchy. But a huge bubble has developed in real estate, particularly in Sydney and Melbourne. The Reserve Bank has tried talking prices down, with little success so far.
The Bank now faces the delicate problem of deflating the bubble, without squeezing the rest of the economy or producing a devastating slump in house prices. Perhaps we will pull it off this time. But it would be a real miracle if monetary policy alone can keep the economy stable forever.
Australia has had plenty of luck in the last decade. Unfortunately, on the issue that matters most, our luck has been squandered. In the eight allegedly miraculous years since 1994, the unemployment rate has fallen by only two percentage points. Far from standing out as a miracle, our unemployment rate exceeds that in a dozen other OECD countries. When the next recession does come, we will pay a high price for this failure.
Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.Read more articles from John Quiggin's home page
