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Uncanny Parallels Between ’20s and ’90s

James Grant’s ("The Coming Bust," editorial page Aug. 28) debunking of the Pollyanna-like forecasts of economists and Wall Street gurus was right on target, especially the reference to Austrian business-cycle theory showing that central bank interest-rate manipulation often leads to "malinvestment" and downturns. The parallels between the 1920s and 1990s are uncanny with market excesses, ostensible price stability, uneasiness in foreign markets. The 1920s phrase ‘new era" has even reappeared as intellectuals, government officials and business leaders overcome by hubris falsely believe that they have overcome basic economic principles.

Some additional Austrian (and even early 20th century neoclassical) economics reinforces the point. The most important factor of production is labor, and when wages rise faster than prices, adjusting for productivity change, unemployment eventually increases. Likewise, the rise in the "adjusted real wage" in Europe over the past generation explains that continent’s extremely high unemployment.

Over the past three-quarters, the adjusted real wage has risen noticeably. This should lead to some rise in unemployment in months ahead. If accompanied by other policy shocks (e.g., an increase in the minimum wage) or market reactions (e.g., Asian bank failures, a further decline in equity prices), the adverse economic impact could be fairly substantial.

Lowell E. Gallaway is Professor of Economics at Ohio University and and co-author of the award-winning Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

Richard K. Vedder is a Senior Fellow at the Independent Institute, Distinguished Emeritus Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Independent Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS?: New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems.