Paul Krugman with a trip down memory lane:
You probably remember [the 1990s] 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.
He notes that inflation spiked in 2021-22 but that according to one good measure it’s actually come down to a level that’s barely above the Fed’s target rate.
What about interest rates? Well, people have forgotten that interest rates were higher during the 90s and mortgage rates were even higher than they are now:
Needless to say, the stock market was soaring as it is today. All of this leads Krugman to think that interest rates might remain high for longer that we might have thought.
[U]ntil recently it didn’t seem likely that the conditions that kept interest rates high a generation ago would re-emerge. The working-age population seemed set to stagnate or even shrink, given low fertility and the aging of the baby boomers. Technology continued to advance, but smartphones and video games didn’t seem to be generating a lot of business investment.
Then, suddenly, things seem to have changed.
He points out that weak demography was the reason for low interest rates prior to COVID. But while American fertility is still falling, a surge in immigration is changing that prospect.
He speculates that the rise in working from home has propped up residential investment and observes that there has been higher than expected business investment and that manufacturing driven by administration policies, has been soaring.
Krugman concludes:
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.
If he’s right, I suspect that inflation is the bigger political problem because it’s so immediate. Credit card interest rates have been high for ages and residential real estate rates haven’t been as big a problem as lack of housing. Let’s just hope there isn’t a new version of the Dot Com bubble on the immediate horizon.
And, by the way, that roaring economy led to a George W. Bush presidency (won by 587 votes in Jeb Bush’s Florida) and everything that came after.