1920s and 1990s
Letter to the Editor
The Wall Street Journal
September 4, 1998
Uncanny Parallels Between '20s and '90s
James Grant's ("The Coming Bust," editorial page, Aug. 28) debunking of the Pollyanna-like forecasts of economists and Wall Street gurus was right on target, especially the reference to Austrian business-cycle theory showing that central bank interest-rate manipulation often leads to "malinvestment" and downturns. The parallels between the 1920s and 1990s are uncanny: stock market excesses, ostensible price stability, uneasiness in foreign markets. The 1920s phrase "new era" has even reappeared as intellectuals, government officials and business leaders overcome by hubris falsely believe that they have overcome basic economic principles.
Some additional Austrian (and even early 20th century neoclassical) economics reinforces the point. The most important factor of production is labor, and when wages rise faster than prices, adjusting for productivity change, unemployment eventually increases. Likewise, the rise in the "adjusted real wage" in Europe over the past generation explains that continent's extremely high unemployment.
Over the past three quarters, the adjusted real wage has risen noticeably. This should lead to some rise in unemployment in months ahead. If accompanied by other policy shocks (e.g., an increase in the minimum wage) or market reactions (e.g., Asian bank failures, a further decline in equity prices), the adverse economic impact could be fairly substantial.
Distinguished Professors of Economics
( Profs. Gallaway and Vedder are the authors of Out of Work: Unemployment and Government in Twentieth-Century America, New York University Press, 1997.)