ECO 202 Info and notes
From 1991 through 1995, the economy, employment, and pay growth all grew at a slow pace. In
contrast, the latter 1990s through the end of 2000 were characterized by quicker rates of
employment, productivity, and wage growth, as well as faster rates of investment and
consumption growth. Weller (2002), page 2 IT investment increased from 3% of GDP at the start
of 1991 to 4.9% at the end of 2000, accounting for more than one-third of all investments. In the
second part of the 1990s, innovation as shown by multifactor productivity growth more than
doubled. Weller (2002). The 1990s saw stronger consumer growth as a result of three causes.
First, after dropping unemployment rates in the second part of the 1990s, incomes increased as a
result of quicker employment growth and faster pay growth. The second factor driving
consumption was the sharp increase in stock prices. According to reasonable estimates, the rise
in stock prices may have contributed to as much as 84% of the increase in spending between
1997 and 1999. The so-called wealth impact vanished along with the stock market's steep
decrease in value beginning in early 2000. Third, greater consumer debt was necessary for higher
consumption growth. Rising default rates by the end of 2000, however, showed that families had
achieved historically high levels of debt service burden, or the portion of income devoted to
servicing debt, making further rises in consumer debt a significant strain on households. Banks
responded by restricting consumer borrowing. Therefore, income growth is the only element that
can maintain future consumption growth over the long term.
The growth that started in the 1990s is also characterized by a significant and sustained increase
in company investment. The share of investment in information technology increased from a
baseline of roughly 3 percent of GDP in the late 1980s to almost 6 percent of GDP by 1999, even
though labor force employment, labor force participation, and unemployment rates have been
comparable to those that occurred in earlier expansions. Because rapid capital investment
disrupts firms' ability to produce output, for example because workers are frequently taken away
from their regular tasks to install new equipment and learn how to use it effectively, the authors
contend that measured productivity growth may actually understate the underlying rate of
technical change. "Adjustment charges" like these "Adjustment costs" result in lower measured
productivity growth as well as poorer production growth.
When these many confounding variables are taken into account, the authors discover that the
substantial productivity gain in the second half of the 1990s was really caused by accelerated
technical development rather than inaccurate measurement or cyclical causes. They discover that
whereas true technology expanded at an annual pace of 1.2 percent in the first half of the 1990s,
it increased to 3.1 percent between 1995 and 1999. Because of the temporary dampening effect
of increasing investment on productivity growth mentioned above, the pace of technological
change over 1995–1999 even exceeded the observed growth rate of 2.5%.
