Bulls on Parade

Given the ideologically ambiguous legacy of the Clinton administration, one thing left and right seem to be able to agree upon nowadays was that the apparent prosperity that made the former president so popular was an illusion. After all, don’t you know about the tech stock bubble? I do know about it, but what I don’t know—and don’t typically see from critics of the 90s growth—is a theory of how an unsustainable peak in share prices is supposed to create a labor market boom.

One way to look at this is the contrast between stocks and houses. Houses are normally bought with leverage, normally bought domestically, and are very widely held. Stocks are pretty narrowly held with the majority in the hands of a small number of rich people, aren’t bought with much leverage, and are traded in a very international market. So when share prices rise, you don’t get the same middle-class debt dynamics that you get with houses.

But more to the point, when you think back to what made the economy of the nineties different from the eighties or the aughts it’s that you saw rising wages for working class people and sharply rising labor force participation rates. But it’s not as if the marginal worker was at a venture-financed startup. I remember the fast food chains in New York when I was in high school all seemed to perennially have help wanted signs in the window. That was because working at fast food chains is unpleasant, and fast food is a low margin business so Wendy’s and KFC can’t just easily increase wages. What happened instead is that people who’d be considered unemployable today were getting jobs at Wendy’s. Some of them were proving so inept that they’d have to be fired, but others were putting time in on the job and then once they had work experience were leaving to go work someplace else. This became the funnel through which labor force size could grow. Firms needed workers who would work for low wages, so they had to reach out and take risks on people who’d be locked out of the labor market today. People who could prove that they met basic standards of diligence could earn raises even without having much education. How does a frothy IPO market get you those employment dynamics?

The causal arrow more plausibly goes in the other direction. Real growth exceeded expectations, which led to expectations of future rapid growth which helped fuel high share prices. Obviously there were also some internet-specific dynamics to that, but stock prices went up across the board.

The story I would tell goes like this. Fiscal consolidation plus neoliberal reform plus the technology boom created a brief moment in the post-Volcker history of the world where the US Federal Reserve (but crucially not monetary authorities in Japan or Europe) decided to temporarily drop their paranoia about inflation and allow working class wages to rise. Rising wages both helped pull new people into the labor force, and also created a situation in which firms that were good at thinking up ways to economize on low-skill labor (Wal-Mart) prospered disproportionately, thus raising prodictivity. Basically Alan Greenspan took a bet on the growth potential of the American economy and it paid off, creating some irrational exuberance about share prices as a consequence.