End of the Business Cycle?

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Usually, when confidence crosses over to hubris, disaster is not far
ahead.

The Clinton Administration's annual economic report for 2000 claims that
the longest economic expansion in US history can continue
"indefinitely", as long as "we stick to sound policy", asserts Chairman
Martin Baily, according the to WSJ.  The NY Time's report differs
somewhat by quoting Baily as saying: "stick to fiscal policy".
Putting the two papers together, one get the sense that the
Administration thinks current fiscal policy is sound policy.
I trust PK economists may have something to say about that.

Economics scholars, unlike those of us mortals who are unfortunate
enough to have to float in the daily turbulence of the market, tend to
focus on longterm trends and their congruence to economic theories.
Yet,  longterm is increasingly being re-defined.  In the technology and
comunication sectors, longterm evokes periods lasting less than 5 years.

Two factors have been identified by the report as responsible for the
"good" news:  technology driven productivity and trade globalization.
Even with somewhat slower productivity and spending growth, the CEA
believes the economy can continue to expand.
As for the huge trade deficit, the CEA expects global recovery to boost
demand for US exports.  Yet the US officially pursues a strong dollar
policy.
The optimism on e-commerce has yet to be substantiated by the results of
the current federal data-gathering initiative. B to B portion of
e-commerce is expected to rise to $1.3 trillion by 2003 from $43 billion
in 1998.  CEA does not address the question whether this a merely a
shift of commerce or a real growth.  Does the possibility exist for
technology to generate negative growth?  It happened to IBM - the
increased efficient (lower unit cost of calculation power) of IBM big
frames actually reduced overall IBM sales.
Creative destruction leaves real bodies in its path, not just phantom
concepts.  Are financial intermediaries ans stock excahnges sunset
industries, killed by ECN?

On fiscal policy, government spending declined as a share of the economy
during the Clinton watch.  This in no small way contributed to a
polarization of both income and wealth, with visisble distortions in
both the demand and supply sides of the economy.  The wealth effect tied
to equity markets can be reversed  suddenly.  Private debt is at all
time high and celebrated as a positive factor.  Household spending seems
to be heavily based on expected rising future earnings or paper profits,
both of which may vanished on short notice.

Politically, trade globalization is facing complex resistence world
wide.  It will either slow further globalization or force the terms of
trade to be revised.

Now, it may be interested to do a role-playing gaming simulation
execercise:  assuming PK eonomists gain control of the CEA, what kind of
report would they issue and what different policies would such a CEA
propose?

Henry C.K. Liu