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Remember the New Economy? Entrepreneurs, financiers, and innovators were in the vanguard of a high-tech insurgency that, along with more open borders, smaller government, and a vibrant capital market, created a fast-growth, low-inflation economy. Americans prospered as productivity growth sharply accelerated in the last half of the '90s. While the thesis -- floated by some high-tech enthusiasts -- that the New Economy had banished the business cycle was off the wall, the U.S. did appear on the cusp of a productivity revolution.
Well, hardly anyone is enamored of the New Economy these days. Last year's bursting of the Internet-telecom-IPO bubble signaled a profit depression in high-tech industries saddled with too much capacity, too much debt, and too many harebrained schemes. The high-tech implosion sent the Wall Street skidding into a bear market and the economy flirting with recession.
Now, following the devastating terrorist attacks on America, the Dow is sharply lower, the economy is sinking fast, layoffs are surging, defense spending is up, and the idea of opening borders is highly suspect.
A GLOBAL GAME. "The New Economy was driven by a sense of optimism and confidence, a belief that demand would be there, that entrepreneurs could create new markets and revenues," says Martin Baily, former head of President Clinton's Council of Economic Advisers (CEA). "That confidence had been eroded before the attack, and now it's further eroded after the attack."
But don't sell short the New Economy. For one thing, the term largely captured a remarkable evolution in a very old economic system: Capitalism. The New Economy marked the spread of capitalist competition from a handful of industrial nations to most of the world following the collapse of communism in the late '80s. Intense international and domestic competition pushed American companies to search for greater efficiencies by investing in new information technologies and reorganizing the workplace.
The competition for markets and profits will only intensify now that China, after 15 years of negotiations, is on the verge of entering the World Trade Organization. The sealed agreement --reached the week following the terrorist strikes -- could allow the Asian giant to join the global trading system as early as December.
PERILOUS STATE. "With the New Economy, I've always focused on that we live in a much more competitive world," says Edward Yardeni, chief economist at Deutsche Banc Alex. Brown in New York. "The terrorist attack isn't diminishing global trade and competition."
Productivity growth remains strong despite the economy's perilous state. President Bush's CEA estimates that productivity grew at a compound annual rate of 3% from 1995 though 2000, about double the 1.4% yearly pace from 1973 to 1995. Still, despite the economy's growth rate plunging from some 6% in the early part of 2000 to near zero right now, productivity growth has averaged some 1.5% the past four quarters.
Baily, now a senior fellow at the Institute for International Economics, estimates that the big productivity benefits are showing up in large service industries that are heavy users of information technologies, such as wholesale and retail trade, finance, and business services. Take trucking. The industry is using satellite-based global-positioning systems, real-time weather and traffic information, and complex software to more efficiently meet customers' logistic needs. Baily estimates that, after adjusting for the effects of the business cycle, the economy's underlying productivity growth rate is a robust 2% to 2.5%.
FORCED EFFICIENCIES. Yes, the downturn is getting vicious. Boeing plans on firing as many as 30,000 employees, or some 15% of its workforce. The airlines have laid off tens of thousands of workers. Revenues at many software and hardware companies will evaporate over the next several months, the time of year when, traditionally, about 25% of all sales are recorded. But economists have long recognized that downturns also force management to burn the midnight oil figuring out ways to gain new efficiencies.
Entrepreneurs also find eager buyers for low-cost, innovative products and services. What's more, the economy's capital, labor, and product markets have become far more flexible over the past decade, thanks to everything from the rise of contingent workers to the spread of just-in-time inventory controls.
Laid-off workers will find new jobs faster than they did during previous downturns, and companies are adjusting quickly to shifts in demand. "It's the New Economy that will help us pull out of the downturn faster," says Arthur J. Rolnick, director of research at the Federal Reserve Bank of Minneapolis.
WHY FLY? Many segments of high-tech industry should get a boost over the coming year. Orders are expected to flow for online security and back-up computer systems, as well as wireless telecom services. A number of technologies have been developed for "coordination at a distance," such as meetings via the Internet and videoconferencing.
Companies will probably hike their investment in such telecommunication-meeting services, especially as prices go down and quality improves. "I think that once people get used to it, they'll wonder why they spent all that time in airplanes," says Hal Varian, an economist specializing in the economics of information at the University of California, Berkeley.
One real long-term threat to the New Economy is legislation designed to restrict immigrants. Foreign-born entrepreneurs and workers are the steroids of the New Economy, and they have kept California's Silicon Valley, Boston's Route 128, the Washington Beltway, and other high-tech hot spots at the cutting edge of global technology. It's estimated that about a third of Silicon Valley's engineers are immigrants.
PLANTING SEEDS. U.S. companies are still hungry for skilled workers, domestic or foreign. Already, the idea of clamping down on immigration is floating around Washington. But hopefully, it will fall by the wayside thanks to time and cooler heads. Says Baily: "I doubt we will keep out the people with the skills we need."
The economy will be hit hard over the next few months. But the seeds of a recovery are being planted as the Federal Reserve floods the system with money while the federal government cuts taxes and increases spending. When the revival finally occurs, the New Economy will reemerge with a vengeance.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online Edited by Beth Belton
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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