Structural Shifts Amid a Cyclical Fluctuation: A Tricky Enviornment for Countercyclical Macroeconomic Policies

The cyclical aspects of recent economic performance are well-known and disappointing: after falling 1.6 percent from third quarter 1990 through first quarter 1991, real GDP has risen very gradually for three quarters and, aided by the recent monetary easing, the economy is mounting a stronger recovery from recession. However, this cyclical fluctuation masks deeper, structural shifts in demand and supply that began before the recession took hold and will continue. to distinguish themselves well beyond the recovery. These non-cyclical adjustments, which underlie the uniqueness of this cycle, are generating a significantly different pattern of output. Economic policy makers, however, seem unable to discern these shifts and non-cyclical adjustments from previous cyclical fluctuations, and so they continue to pursue traditional countercyclical macroeconomic policies. Such policies would produce phantom, short-term gains for consumers and businesses at the expense of sustainable long-term increases in living standards, and only postpone needed economic reforms