BARRY BLUESTONE The Battle for Growth With Equity in the 21 st Century I n the last quarter of 1999 , the U.S. economy was expanded at an extraordinary 6.9 percent annual rate. The official unemployment rate had fallen to 4 percent, the lowest it had been in three decades. Inflation was all but non-existent. Indeed, the economy has been expanding at a rapid clip since 1994 – averaging close to 4.3 percent growth per year for the last half of the 1990 s. America has not enjoyed such prosperity since its»Glory Days« of the first quarter century after World War II . Throughout much of Europe and Japan, the picture is not anywhere near as rosy. In 1999 , while the U.S. economy was expanding at 4.2 percent, the average growth rate in Europe was only 1.6 percent and poor Japan could not muster a growth rate of even one percent. The official European unemployment rate was nearly two-and-a-half times higher than America’s, with Germany, France, and Italy seemingly stuck in double-digits. Why is the U.S. economy performing so very well? And what can Europe learn from the Ameri­can experience? The answers I will provide to these questions may be quite startling to a European audience, given what has become the conventional wisdom in both the U.S . and across the Atlantic. In a nutshell, the conventional wisdom sug­gests that America’s renaissance economy is due to a combination of conservative fiscal, monetary, and structural policies adopted since the middle of the 1990 s. In particular, the American obsession with reducing government deficits and building up a large fiscal surplus is credited with increasing the aggregate savings rate. Presumably, this has led to lower interest rates and an explosion in produc­tivity-enhancing investment. The adroit handling of inflation by the Federal Reserve Bank has also kept interest rates low and stimulated a spectacular stock market boom – leading, in turn, to both new capital spending and strong aggregate demand. As for structural factors, the standard argument posits that the weakening of trade unions and the retrenching of welfare programs and the social safety have been good for the economy. They have created a»flexible« labor market conducive to the creation of millions of new jobs. Meanwhile, the deregulation of equity and credit markets has fostered massive venture capital funds that under­write»dot.com« companies by the thousands. If only Europe were to follow the American lead in these areas, the logic goes, it too could have faster growth and lower unemployment. On the surface, the conventional wisdom seems incontrovertible and the timing of the U.S. recovery seems exquisite. After all, when federal government deficits were climbing during the 1980 s and 1990 s, growth slowed. Only when defi­cits were forced down under the Clinton Admini­stration did the current economic boom begin. When inflation was rampant, growth was stymied; when inflation was brought firmly under control by the U.S. central bank, America’s gross domestic product( GDP ) soared. When unions and the social safety net were strong, the economy stumbled; when union membership plummeted and govern­ment reforms limited unemployment benefits and welfare, unemployment declined. What more evidence could you possibly need to explain Ame­rica’s economic renaissance? As convincing a story as this might seem, it turns out to be largely wrong and its policy impli­cations mistaken. Deficit reduction has had very little to do with the current economic recovery, nor has monetary policy. And while»flexible« labor markets may have contributed to employ­ment growth and lower unemployment, it has come at the cost of unsettling increases in wage and income inequality. Venture capitalists have played a role, but the Wall Street boom began because of the success of new high tech compa­nies, not the other way round. The implications are clear. An obsession with building up the federal surplus to the point of paying off the entire federal IPG 3/2000 Barry Bluestone, The Battle for Growth With Equity in the 21st Century 271