Phelps on the Great Displacement
By Arnold Kling
Edmund S. Phelps looks at one of my favorite topics: parallels between the current economy and the Great Depression.
Each boom was caused by the advent of a new general-purpose technology — commercially available electric power in the ’20s, the information and communication technologies in the ’90s. By mid-decade there were high and rising expectations of profits to be earned in the decade ahead from applications of the new technology. In the boom years these expectations fueled a wave of preparatory investing — much of it in infrastructure and employee training. The force of the expectations may be roughly gauged by the take-off of share prices. Take the S&P Composite stock price index adjusted for inflation — the “real S&P.” From pre-boom 1924 it rose 20% by 1925 and 104% by 1928; from the pre-boom 1996 level it rose 30% by 1997 and 98% by 1998.
…Recovery from the Depression faced stiff headwinds from the cost-savings and spin-off innovations made possible by the ’20s investments in the new general technology. The ’30s, after all, marked the rise of the great industrial laboratories that so impressed Schumpeter.
…The technological developments and overseas tensions that slowed and limited the ’30s recovery have clear parallels in the economy’s present situation. The 350,000 employees sent into the jobless pool every week is a significant hurdle on the way to getting unemployment back to the pre-boom rate of 1995-96 (5.5%), let alone the 5% level envisaged by some.
For Discussion. Phelps argues that employment is a function of the difference between stock market appreciation and productivity growth. Is this a good model for explaining movements in employment?