By Paul Krugman
Do you remember the economy of the late 1990s? Or if you’re too young to remember it — I hope that’s true for at least some of my readers — what have you heard about it?
You probably remember it as a time of prosperity — low unemployment and rapid economic growth combined with low inflation — marred by irrational exuberance in the stock market. Pets.com anyone?
What you might not realize is how closely the economy of early 2024 resembles that of the late Clinton years. People might not be feeling the prosperity — or at least they say they aren’t feeling it, because there’s a huge gap between Americans’ positive assessment of their personal financial situation and their negative assessments of the economy. But by the numbers, things look pretty good. Notably, unemployment is actually a bit lower now than it was at the end of the roaring ’90s:
What about inflation? We did have a serious bout of inflation in 2021-22, but it has come way down since then. True, the past few inflation reports have been disappointing, but for the most part that probably reflects statistical noise. The Federal Reserve Bank of New York has a measure of underlying inflation that tries to filter out the noise; I like this measure in part because it’s an algorithm untouched by human hands and therefore leaves no room for motivated reasoning. And what this measure says is that underlying inflation is still a bit above the Federal Reserve’s 2 percent target, but not by much:
Still, what about interest rates? Many would-be home buyers, in particular, are feeling frustrated by high mortgage rates. Isn’t that a big difference from the way things were in the late ’90s?
Surprisingly, the answer is no. People remember that stocks were high back then; they tend to forget that interest rates were also very high. Indeed, mortgage rates were even higher than they are now:
And that comparison has me wondering whether high interest rates might last a lot longer than many people, including me, have been predicting.
Until recently I thought high interest rates were a temporary phenomenon, mainly caused by the Fed’s efforts to bring inflation down with rate hikes. Once the Fed had won that battle — which it mostly has — I expected a return to the low-rate environment that prevailed before Covid struck. But maybe, just maybe, we’re returning instead to the high-rate environment of the late 1990s.
Why were interest rates so high circa 1999? Supply and demand. America’s population, especially the number of residents in their prime working years, was still growing rapidly, creating a need for large investments in everything from housing to office buildings to shopping malls:
There was also a boom in business investment; the silliness of the dot-coms is what we remember, but from a macroeconomic point of view, surging investment in telecommunications — think installation of fiber-optic cables — was a much more important driver of the economy:
There was also a boom in business investment; the silliness of the dot-coms is what we remember, but from a macroeconomic point of view, surging investment in telecommunications — think installation of fiber-optic cables — was a much more important driver of the economy:
So maybe we really are seeing a return to something like the economic conditions of the late 1990s — both the good, in the form of low unemployment and (maybe) strong productivity growth, and the not so good, in the form of persistently high interest rates.
I, for one, didn’t see this coming, and as far as I know, nobody did. But as the bumper stickers don’t quite say, stuff happens.