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July 31, 2001

No Fan of 90s Miracles'

By Kathryn M. Welling

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James W. Paulsen is the chief investment officer of Wells Capital Management. Also a Ph.D. in economics. Despite that considerable handicap, he also happens to be an engaging fellow and a clear thinker refreshingly willing to stake out a position untrampled by the herd. To wit: the '90s were considerably less-than-nifty. The decade's celebrated profits growth and the bull market it spawned diverted attention from what was (and is) seriously lacking: Demand growth. KMW

Jim, did we understand your May piece correctly? For all its roaring bull market, persistent disinflation, high employment rates, booming profits and even the first government surplus in decades, economic growth in the 1990s was actually pretty punk?

That's right. The "miracles" of the '90s - central to which was the phenomenon of "real growth with falling inflation" did not reflect a booming economy, even if it was the longest uninterrupted expansion in U.S. history. On the contrary, many of the decade's "miracles" were the result of sluggish world demand growth that emerged in the late 1980s and persisted throughout the last decade. And the many "miracles" of the '90s actually resulted from that weakness -

Sounds pretty paradoxical-

No argument. Which is one reason the idea deserves some attention. The first sign of what has been going on was probably the death of Japan - that economy going down and staying down for the count. Japan's decline left the developed world without a big engine. But there were other signs - all the oddities of the '90s, occurrences that were beyond explanation if you were looking at the cycles of the past 40-50 years; none of the economists' tools or theories seemed to explain what was happening. And yet the economy, at least from an American perspective, seemed to be so good that there was little reason to dig much deeper. Why not just sit back and marvel at the miracles of the '90s?

Indeed, why not expect them to reassert themselves at any moment?

Because the problem of weak world demand has not gone away, despite being overshadowed by the "miracle" '90s, and may now prove more difficult to ignore. Especially because many of the things that seem to be different in this cycle can be tied to the fact that demand growth downshifted early in the '90s and stayed down.

It's just that we were partying too hard to notice?

In effect. Until the late '80s, global sales growth in the post-war period had always been strong, for reasons that had their roots in the Great Depression. The way our forefathers made darn sure we would stay out of that kind of mess again was to make sure there was ample demand through two policies that stayed in place for a long time. One was to grow the size and scope of public spending - if private citizens weren't willing to spend, the government could step up. The other was to get monetary policy involved. Coming out of the Depression, when people kept cash in their mattresses, the most they could spend was what they made. But if you could encourage them to go to the bank -

And borrow -