Go to Brad DeLong's
The Current Boom
KQED Talking Points: 10/23/97
of Inflation as of 1992
Inflation, Unemployment, and the Federal Reserve
Warranted Stock Market
Stock Market Forecasts
- The rate of growth of output per worker--net national product--has
been gratifying since 1991: some 1.5 percent per year.
- There is an economic rule of thumb--Okun's Law--that allows us to assign
some part of output per worker growth to growth in the economy's productive
potential, and some part of it to shifts in unemployment and employment
related not to changes in productive potential but to the state of the
business cycle and the degree to which we are using the productive resources
- When applied to the post-1991 period, all of the acceleration
in economic growth since 1991 is due to increased cyclical utilization,
and none is due to increased growth in potential output relative
to the average since 1973.
The Productivity Slowdown
- Since 1973 output per worker growth has been much, much slower than
the pre-1973 trend: only some 0.7% per year, compared to 2.3% per year
in the generation that ended in 1973.
- Had economic growth since 1973 maintained its pre-1973 post-World War
II pace, we would today be some 50% better off as a country than we are--we
would have a net national product per worker of some $70,000 1992-value
dollars a year, rather than $47,000.
- Measured growth of 0.7% per year is a lot better than nothing, and
"true" growth is perhaps 1% per year higher--so our true material
standard of living is still doubling every 45 years or so. But our true
material standard of living used to double every 25 years.
- Thus there is a sense in which the productivity slowdown is the biggest
macroeconomic event of our century--so far three times the size of the
- In addition, the productivity slowdown will cause a political crisis:
we still have a social insurance system--taxes, social security, medicare--tuned
to an economy with measured output per worker growth of 2.0% per year or
more. Our explicit and implicit promises for the future cannot be met unless
growth accelerates. And if growth doesn't accelerate we as a nation have
to decide which sets of explicit and implicit promises we will keep, and
which we will break.
- (By contrast, actual
dividend growth has averaged 1.6% per year above inflation over
the past century and a quarter.)
- Current stock prices
are predicting not only a boom, they are implicitly predicting a
doubling of the rate of economic growth--not something that there is any
anywhere outside the stock market.
- Conclusion? The stock
market today is as overvalued as the Japanese market was in
Warranted Stock Market Values
- Another possibility is
that the risk premium--the premium expected return over bonds
that investors demand for holding risky assets like stocks--has greatly
- Once again, however,
the current level of the stock market is just too high for such a
story to make sense. I could believe that the risk premium had shrunk,
but that would
justify a Dow of 5500 or so--not 8000.
Go to Brad DeLong's
Professor of Economics
J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax