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"New Era" NAIRU Home |
How real is the new economy?The Economist 99-07-24, Leader The recent performance of the American economy has been so remarkable that it seems only proper to call forth a very big idea to explain it. The theory of the “new economy” meets this need. A large idea in more ways than one, it accommodates many followers. A lot of them these days are sober, sensible types, making uncontroversial claims about the growth of the high-tech industries, about the spread of the Internet, the expansion of e-business and so on. At the outer edge still stand the techno-visionaries, declaiming prophecies that are one part heroic forecast and three parts science fiction. These true believers argue that the information-technology revolution goes not just wide but unfathomably deep - that thanks to IT, nothing humans do will ever be the same. Next to this revolution, the visionaries sometimes seem to think, the invention of the internal-combustion engine was merely noteworthy. As for electricity, its real significance is only now coming to be understood (you need it for IT). Certainly, they would say, the new economy explains America’s record-breaking expansion, the recent surge in productivity, the vanishing of unemployment and the death of inflation. Abolishing the sad old laws of economics was but an afternoon’s work for the new paradigm. Who knows, the visionaries may be right about the distant future. Advancing technology has made clowns of forecasters for centuries. That makes it rash to believe the fundamentalists, but no wiser to say they are wrong: there is simply too little evidence to allow an intelligent discussion. However, what can and should be discussed, intelligently if possible, is the light that a more level-headed version of the new-economy thesis casts on the American economy right now. A respectable position - indeed it has lately become the consensus position - goes roughly as follows. Information technology is transforming the way America does business. This is revealing new opportunities for growth and helping companies to lower their costs. That is why Wall Street, recognising and confirming this, has soared to great heights. Also, compared with a few years ago, the economy can henceforth grow faster without risk of inflation. The proof lies in the current combination of rapid growth, very low unemployment and barely visible inflation. It all seems to fit. Given America’s marvellous performance, it seems curmudgeonly, unAmerican even, to question this thinking. You will find that the evidence is not after all quite so clear-cut. Especially puzzling are the productivity figures. Contrary to a widespread impression, the recent uptick in America’s productivity raises more questions than it answers. Robert Gordon of Northwestern University, one of the country’s top authorities on the subject, has found that more than 100% of the acceleration in productivity since 1995 happened not across the economy as a whole, nor even across IT at large, but in computer manufacturing, barely 1% of the economy. Elsewhere, growth in productivity has stalled or fallen. Might these strange figures be wrong? Yes, of course: the difficulty of measuring productivity in services, now most of the economy, is well-known. The trouble is, the more reliable figures for non-computer manufacturing show a worsening too - and that takes some explaining if the IT miracle is real. This is not to deny the scale and intensity of the IT revolution. Firms across America are embracing it; jobs have been lost, new ones created; ways of doing business are changing all over (see article). If the productivity figures are true, how can they be reconciled with this gale of creative destruction? One possibility is that firms are having to go wired in order to preserve or extend their share of the market, but are not in the end producing all that much extra output from given inputs. In other words, radical change in a competitive economy - even though it may be a matter of life or death for the companies involved - need not yield commensurate improvements in economy-wide productivity. Maybe, as Mr Gordon speculates, the highest-productivity applications of computers are already in place, so that the economy is now quite far along the path of diminishing returns. Maybe (to stray for a moment into long-range prognostication) the IT revolution will never come close to matching the significance of the internal-combustion engine and electrical power, which both gave rise to vast new supplies of entirely new final goods - as opposed to, say, taking advertising away from newspapers and giving it to the Internet, or reducing lead-times in supply chains. What about stock prices? What about the death of inflation? Wall Street is a fickle analyst, liable to change its mind at any minute. Put it this way: its Internet valuations call its judgment into question. As for the heavenly combination of low inflation and very low unemployment, there is no need yet for a big new idea to explain it. A combination of small old ones will do: the strong dollar, cheap commodities, the strength of Wall Street, cyclical weakness outside the United States, downward pressure on non-wage labour costs, and so on. To say this is not to belittle the success: America’s performance has been awesome. And the new rise in productivity is no less real for apparently being concentrated in one sub-sector: it still boosts growth. The only question is whether new economic forces are needed to account for these blessings. With luck the IT revolution will be everything its most zealous prophets claim, and mankind is on the verge of a leap forward as great as the one it made between the late 1800s and the middle of this century. Short of that is a more plausible wish: that today’s far-reaching changes in the way business is done will soon lift the trend of growth in productivity across the economy as a whole. Even this, a bit less than a miracle, would be a wonderful prize. But the puzzling fact is, it does not appear to have happened yet. As John Maynard Keynes might have said: “When the facts are unclear, I keep an open mind. What do you do, sir?” LINKS Robert Gordon’s most recent paper, “Has the ‘New Economy’ Rendered the Productivity Slowdown Obsolete?”, can be downloaded from Northwestern University. Alan Greenspan’s speeches are available from the Federal Reserve Board. The Department of Commerce’s report, “The Emerging Digital Economy II”, may be downloaded in PDF format. |