Let's climb into our trusty Time Machine and travel back to the week of November 17th, 1997. BusinessWeek editor-in-chief Stephen B. Shepard is examining the merits of what was called The New Economy. It is early in the Bubble Era (1995-2007). It is so early, in fact, that the first bubble has not yet collapsed—that will happen in March, 2000—and the second, much larger bubble in housing is inconceivable. The future looks bright, as it always does when the balloon is filling up with Hot Air and has not yet had its inevitable collision with a pin.
Shepard ponders The New Economy: What It Really Means—
Let's begin with some basic definitions. First, here's what the New Economy isn't: It does not mean inflation is dead. It does not mean we'll never have another recession or that the business cycle is extinct. It does not mean the stock market is destined to shake off the correction and rise forever, like some beanstalk growing to the sky. It does not mean the financial turmoil in Asia won't affect the U.S.
So if the New Economy is not economic nirvana, what is it? How do we know it exists? Do the skeptics have a case.
By the New Economy, we mean two broad trends that have been under way for several years. The first is the globalization of business. Simply put, capitalism is spreading around the world--if not full-blown capitalism, at least the introduction of market forces, freer trade, and widespread deregulation. It's happening in the former communist countries, in the developing world of Latin America and Asia, and even in the industrialized West--with economic union in Europe and North America's free-trade agreement. For the U.S., this means international trade and investment play a much greater role in our economic life than before. Twenty years ago, exports and imports made up 17% of our economy. Today, they account for 25%.
The second trend is the revolution in information technology. This one is all around us--fax machines, cellular phones, personal computers, modems, the Internet. But it's more than that. It's the digitization of all information--words, pictures, data, and so on. This digital technology is creating new companies and new industries before our eyes. Here's a statistic that should amaze you: In Silicon Valley alone, 11 new companies are created every week. Not all succeed, obviously. But enough do. Last year, on average, a Silicon Valley company went public every five days, minting dozens of new millionaires in the process...
These trends can combine in powerful ways to raise Americans' standard of living, create jobs, spur entrepreneurial effort--and do all this without boosting inflation. To the believers in the New Economy, we have here the magic bullet--a way to return to the high-growth, low-inflation conditions of the 1950s and 1960s. Forget 2% real growth. We're talking 3%, or even 4%. Forget double-digit inflation and the natural rate of unemployment. We're talking stable prices. Forget hopelessness in the developing world. We're talking about raising living standards in India and Brazil.
Wow! If the New Economy is not quite Nirvana, it is close enough. Shepard goes on to debate the merits of this astonishing new economic order. Has something unique & miraculous arrived?
So which is it? Are we just lucky to have a temporary confluence of events that have combined to produce decent growth and low inflation? Won't the Phillips curve reassert itself in higher unemployment or higher inflation?
Or is there a New Economy operating that allows faster growth, with all its benefits, without reigniting inflation?
I vote for the New Economy, properly defined. Even though we haven't ended the business cycle, outlawed recession, or banished inflation, the business cycle really has changed. It is powered more these days by technology and trade.
And this may well enable us to grow faster than before without renewed inflation. Perhaps the 4% [GDP] rate of the past 12 months is too high--enough to justify interest-rate hikes by the Federal Reserve if things don't slow. But the 2%-to-2 1/2% speed limit is probably obsolete. In an era of stronger productivity growth, which may just now be starting to show up in statistics, the speed limit for the U.S. economy is probably 3% to 3 1/2% a year.
All good things must end. Or maybe we only thought things were good. So, with great reluctance, we climb back in our Time Machine and return to 2010. Believe me, I didn't want to come back. In the fall of 1997, I had just received a lucrative grant from the National Science Foundation to build a search engine for young kids called KidSearch! Don't bother to search the web—it disappeared about 9 years ago. Some two years later I would fall in love ... oh, never mind. In 2010, I live alone, have no money and write this blog.
Upon arriving back in the present, we see that there really is A New Economy. But this one has little in common with that of the late 1990s. In this one, GDP growth hovers around the zero line as the Fed scratches it head trying to figure out how to fight deflation, underemployment is over 18%, etc. In this new economy, 41 million Americans in 19 million households are receiving food stamps. This amounts to 13% of all Americans. The AP reports that poverty is on track to post a record gain in 2009—
WASHINGTON — The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 — the recession-ravaged first year of the Democrat's presidency — are to be released in the coming week, and demographers expect grim findings...
Interviews with six demographers who closely track poverty trends found wide consensus that 2009 figures are likely to show a significant rate increase to the range of 14.7 percent to 15 percent.
Should those estimates hold true, some 45 million people in this country, or more than 1 in 7, were poor last year. It would be the highest single-year increase since the government began calculating poverty figures in 1959. The previous high was in 1980 when the rate jumped 1.3 percentage points to 13 percent during the energy crisis.
If you had said in 1997 that we would have an economy like this one in 2010, you would have been laughed out of the room.
One in seven Americans, about 45 million in all, were "poor" last year. That's more poor people in America than the total populations of South Africa, Columbia, Myanmar, Spain, Sudan, Argentina, Poland, Tanzania, Kenya, Canada, Morocco, Algeria, Afghanistan, Peru, Nepal, Uganda, Uzbekistan, Saudi Arabia, Iraq, Venezuela, Malaysia, North Korea, Romania, Ghana, Yemen, Australia...
Hold your head high! And Welcome to the New New Economy.
thank you for the post!
-JDf
Posted by: jdf | 09/14/2010 at 01:14 PM