In the inflationary environment of the 1970s, a squeeze on profit margins usually led to price hikes. Firms could get away with it because their competitors would follow along. In the disinflationary environment of the '90s, however, the absence of pricing power made cost cutting the only option. I've suggested some things the new paradigm does not mean to me. At the same time, several factors are working to make the higher growth rate and the resulting tighter labor markets less inflationary than they might otherwise be.
Output driven by monetary expansion and excess demand is one thing.
The collapse of communism and hard-core socialism dramatically increased the number of countries and people participating in the world economy at a time when most economies are moving toward capitalism. Lower trade and investment barriers and international competition for capital often make global capacity more relevant than local capacity utilization. The Internet deserves special mention all by itself. It is changing everything. Our annual report essay points out some significant differences in the economics of the old and new economies.