US Economic Evolution: 1990s Boom to 2000s Recovery

The 1990s Economic Expansion

The future evolution of the American economy is closely related not only to the 1990–2000 period, which covered one of the most prolific economic expansions in history, but also to the subsequent turn of events brought about by the first Bush administration. The economic recession following the tragic events of September 11 had significant consequences, as did the broader economic cycles following the 1990s boom. The fiscal policy adopted by the American administration relied heavily on debt and large fiscal deficits, while monetary policy involved reducing interest rates to historic minimum levels of 1 percent to encourage economic recovery.

The beginning of the 1990s brought about a new president, Bill Clinton, for whom the campaign slogan "it's the economy, stupid" became an actual governing principle. President Clinton became synonymous with 1990s growth, and many of his bills did encourage this process. One notable example was his declaration that the "era of big government" was over in America. Indeed, many of his measures were directed at improving market forces and stimulating competition among market participants. Local telephone services, for example, were opened to competition, and he overall encouraged liberalization and globalization as a successful economic principle.

The collapse of the Soviet Union in 1991 and the end of the Cold War, combined with the results of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), which led to the founding of the World Trade Organization, stimulated free trade through the overall reduction of commercial barriers. For the United States, this meant that American products now had access to more potential markets where they could be commercialized.

Sources of Productivity Growth

National factors also made the 1990s expansion possible. Most importantly, the decade saw a significant increase in US labor hours and productivity. According to researchers, the growth pace picked up after 1995. While the period from 1973 to 1995 saw labor productivity increase at an annual rate of 1.44 percent and hours productivity at 1.33 percent, after 1995 these figures increased to 1.99 percent and 2.07 percent respectively. There are no signs that these trends reversed, as 2002 saw an increase in non-farm business sector productivity by 4.8 percent.

Researchers have identified three distinct sources of labor productivity growth: capital deepening, labor quality growth, and total factor productivity growth. Capital deepening relates to capital investments that improve working conditions and provide better productivity. Labor quality growth increases the proportion of more productive workers, while total factor productivity growth is defined as output per unit of capital and labor inputs. Understanding these mechanisms is crucial to comprehending how sustained economic growth becomes possible across an entire economy.

Management and Technological Innovation

One of the fundamental reasons for capital deepening was the technological boom that determined economic evolution in the 1990s and the strong capital investments made in the information technology sector. According to David Pearce, the Labor Department hired a consultancy company, Ernst and Young, to perform audits of companies with consistent productivity figures over five years. The result was a "common pattern": companies with consistent productivity and output figures successfully combined innovations in management and technology with employee training and empowerment programs. During the 1990s, the emphasis was on the first two components—management innovation and technology.

For innovations in management, no better example exists than Jack Welch, the former CEO of General Electric. The way he succeeded in transforming a century-old company into something as competitive and aligned with new technological advances as any new market entrant is remarkable. According to him, his main accomplishments were implementing the Six Sigma concept (a methodology emphasizing quality in production processes), developing e-business capabilities, and adapting to new realities imposed by globalization.

In terms of technology, the Internet became the newest and fastest communications tool, greatly influencing economic processes. The Dot-Com fever, when nearly every investor targeted an Internet-based company, drove the Dow Jones Index over the 11,000 point level in late 1999. Technology was booming in the 1990s, and the United States occupied the center of this transformation, giving American firms significant competitive advantages.

Economic Performance Indicators

The results of this productivity surge and technological investment are best explained through the Gross Domestic Product growth rate, the leading indicator of economic performance in a country. GDP growth reached 3.9 percent in 1997 and 4.2 percent in 1998. These excellent figures were corroborated with low inflation at 1.6 percent in 1998, the "smallest increase except for one year since 1964," and low unemployment at only 4.1 percent in November 1999, "the lowest rate in nearly 30 years." In order to maintain low inflation figures, the Federal Reserve gradually increased interest rates as economic growth accelerated, eventually reaching one of the highest levels recorded at 6.5 percent.