August 09, 2000

The U.S. unemployment rate is hovering around its 30-year low. To most people (and classical economists) that's cause for rejoicing. Other people (including many non-classical economists), though, worry that if things are going well, it can only mean theyre going to get worse. Keynesians have been scrambling over the past several years to explain how the U.S. has kept growing without a serious inflation threat. Not only have their forecasts been off the mark, but they've been hard pressed to understand the sources of growth and to measure the impact of productivity increases. It's more than just an academic exercise. Bad forecasts induce bad policy choices. Keynesians argue that errant estimates of productivity gains have been in large part responsible for widespread overestimation of inflation and underestimation of growth. As the recent revision of the National Income and Product Account show, during the 1990's the real GDP growth rate has been higher than we previously thought while the inflation rate has been lower.

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