Can we repeat the success of the 1990s?

I’m often asked if there is any chance we can create an economy that is growing and adding jobs, where households see their standard of living rising, where inflation is modest, unemployment is low, and the federal government is not constantly adding to the national debt.  In short, can the perfect economy be created?

Many people will likely say “no.”  But history shows they’re wrong.  We actually had an economy close to being perfect not that long ago, in the 1990s.  The 1990s has been given numerous labels, including the marvelous decade, the perfect decade, the golden era, and others.

Why is there such praise for the 1990s?  It’s because the 1990s had most of the ingredients of a wonderful economy. It was a decade of economic growth, low unemployment, low inflation, rising household income, and prosperity spread among most income groups. 

Let me put some perspective on these accomplishments.  The average yearly economic growth rate since 2000 has been 2%.  But during the 1990s the annual growth rate was 3%. The jobless rate fell from 7.5% in the early 1990s to only 4% at the end of the decade.  Today’s jobless is 4.6% and it has been rising.  The 1990s annualized inflation rate stayed mostly in the range of 2.5% to 3% and declined over time.  And while we are now in the same range, the decade of the 2020s has been a volatile time for inflation, with the annualized rate reaching over 9% in mid-2022.

One of the key concerns for people is if their income is rising more than prices.  During the 1990s household income, after adjusting for price changes, rose 10%.  In our current decade of the 2020s household income is only ahead of price increases by 3%.  Also, during the 1990s, the rise in income inequality almost stopped.

These comparative accomplishments in the 1990s are certainly significant, but the last accomplishment I’ll mention may be the most eye-catching. Currently and continuing for several decades, the federal government has consistently added to the national debt. But during the 1990s, something unique occurred.  While the 1990s began with on-going budget deficits, by the end of the decade annual budget surpluses were occurring.  That’s right, in the last years of the 1990s the federal government was spending less than it was receiving in revenue.  The result was the size of the national debt was dropping.

Hopefully I have your attention and agreement that the 1990s was a different decade regarding the economy.  Two questions follow.   First, what caused this unique economy of the 1990s?  Second, can we replicate the 1990s economy today?

Likely the biggest difference in the 1990s was changes in the federal budget.  In order to balance the budget, Congress and the President agreed to reduce spending and increase taxes.  Federal spending as a percent of the economy, which had been rising since the 1950s, actually fell in the 1990s.  While taxes as a percent of the economy initially increased, at the end of the decade the ratio also fell. In the last year of the 1990’s the federal budget ran an annual budget surplus of $326 billion.

With the federal debt reduced, the federal government’s borrowing declined.  This meant the Federal government was in less competition with private companies for borrowing money.  This allowed the price of borrowing – interest rates – to fall. Mortgage rates fell from 10% to 7%, and commercial loan rates plunged from 15% to 4%.  Lower interest rates allowed more households and businesses to borrow, spend, and expand the economy.

The Federal Reserve – the “Fed” – also gets high marks from economists for carefully and cautiously using their tools to support the decade’s economic growth, but without sparking inflation.  Under the leadership of Alan Greenspan, the Fed correctly read the economy and made policy changes that supported non-inflationary economic growth.

Last, new technology clearly improved the productivity and growth of the 1990s economy.  The 1990s was the birth of the Dot-Com, or digital, era when computers and the internet were taking hold.  Easy access to information and increased communication capabilities created new businesses and also made existing businesses more efficient and profitable.  One downside was the Dot-Com recession of the early 2000s, which resulted from disappointment based on too much exuberance and too high of expectations for investment returns.

What lessons can be taken from the 1990s that could help us produce another “marvelous decade?”   Number one, success in controlling federal borrowing is important.  A strong case can be made that the budget agreements in the 1990s ultimately leading to a surplus were what stared the marvelous decade. Second is a Federal Reserve that can read the trends in the economy and use its tools to support those trends.  Third is the development and deployment of emerging technology that can make the economy more productive. 

Interestingly, we already have the third component today in the form of artificial intelligence.  The challenge is ensuring it is used in a positive way.  We also have a pending change in leadership at the Fed.  Moving the federal budget from deficit to surplus might be the biggest obstacle to repeating the 1990s.

I vividly remember the strong economy of the 1990s.  Could the decade be re-created today?   You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.