The 1990's Bubble Economy
By Arnold Kling
William Nordhaus reviews two books on the economy of the 1990’s. One of the books, by Janet Yellen and Alan Blinder, apparently finds little evidence that economic policy was a major factor in the rapid economic growth of that era. Instead,
Their basic finding is that a series of unexpected and favorable developments were responsible for the extraordinary performance. Among the favorable developments were declining health care costs, a fall in oil prices, a rise in the exchange rate of the dollar, and changes in the way the consumer price index (CPI) was measured. The most important single development was the upturn in productivity growth. This directly lowered production cost and inflation, led to higher growth in real (or inflation-adjusted) wages, and reduced the demand of workers for higher money wages.
The Internet Bubble and financial scandals figure prominently in any history of the past decade. Nordhaus says that even though Internet commerce may have been a productive innovation,
innovation does not automatically lead to profits. Economic history teaches us that when a wondrous new product is invented, its price generally falls as other firms enter and imitate the product, rapidly eating away at the profits. In fact, with a few exceptions, companies producing innovations on average earn no more than a normal return on their investments.
On the topic of financial scandals, Nordhaus suggests,
One important reform that would illuminate the true state of corporate finances would be to require corporations to publish their tax returns. This would allow investors to assess profits by a standard yardstick.
For Discussion. What might be the unintended consequences of forcing corporations to disclose their tax returns to investors?