crisis and recovery

Filed in archive Global Economy on January 6, 2004

Edmund S. Phelps a professor for political economy at the Columbia University draws some excellent conclusions. He compares the crisis and adjacent recovery in 1920's with the current one and finds many similar patterns. Unfortunately the WSJ does not allow access without registration.

"Each boom was caused by the Advent of a general-purpose technology - commercially available electronic power in the 20s, the information and communication technologies in the 90's. "

"In the boom years these expectations fueled a wave of preparatory investing - much of it in infrastructure and employee training."

"The basic mechanisms are simple, though not widely understood: New visions of future profits raise t values (per unit) that entrepreneurs and CEOs put on new investments in business assets- in job ready employees, new customers, and plant and equipment - without raising the cost if acquiring them; this prompts stepped-up investing in such assets. In addition, increases in these assets values sooner or later lead to a sympathetic rise in share prices, despite errors and distortions; and that raises both firm's financial powers and financier's powers to fund new projects and firms. These developments in turn have labor-demand effects pulling up wages, hours and employment."

He goes on and describes the patterns of productivity gains by using the technologies (electric power/ IT & Internet) and its effects on stock markets.

"But with hourly productivity hours rising at 4% yearly, the real values put on business assets - and their reflection, real share prices - must now rise at 4% just to keep investment incentives from slipping."

So he concludes chances for a slow recovery with lee than normal investment ratios and reduced recovery of the job market is pretty much likely.