THE E-DIMENSION
29
similarly low figures for other leading countries and actual shrinkage in
Japan: -0.7% for 2001 and
-0.8% for 2002.
1
How unusually good was 1997? Not that unusual in 1983, for
instance, growth was almost 7% without a change in inflation, but
growth dropped to a lower rate over the next 10 years (an average
of 2.4%). The economy fluctuates, and there are sometimes short-
term increases in output, particularly following a period of underuse
of capacity. In 1982, the US economy was in recession, with high
unemployment, and 1983's growth surge could be accounted for by
the process of taking up the slack in the labor force.
Economist Arthur Okun proposed the ``law'' that unemployment
decreases by 1% for every 3% increase in GDP. Although subsequent
research has shown that this relationship is less stable than he supposed,
as a rule of thumb it seems to demonstrate that the higher-than-average
growth in both 1983 and 1997 could be explained by the drops in
unemployment in those years (2.2% in 1983, 0.6% in 1997).
But why has inflation remained low? Until recently it was gener-
ally thought that if US unemployment fell below about 6% inflation
would rise as workers, knowing that they were in a seller's market,
demanded higher wages. The answer could be that other factors
have helped to keep inflation low: the Asian financial crisis of 1997
reduced costs of imports to the US, for instance. It is possible that
the ``sustainable'' unemployment rate at a steady inflation rate has
dropped a little, perhaps due in part to a more flexible labor market
and a fear of downsizing. If the low inflation rate can be explained
by slow growth in wages and employee benefits, it is not evidence
for the new invisible boom in productivity claimed by New Economy
apologists.
While recognizing that such low inflation during a period of business
expansion was puzzling, Alan Greenspan, Chairman of the Federal
Reserve, had to this say about this issue in late 1998:
``Some of those who advocate a `new economy' attribute it
generally to technological innovations and breakthroughs in global-
ization that raise productivity and proffer new capacity on demand
and that have, accordingly, removed pricing power from the
world's producers on a more lasting basis.
