The New EconomyEssay Preview: The New EconomyReport this essayTHE NEW ECONOMYIt works in America. Will it go global?It seems almost too good to be true. With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. Unemployment has fallen from 6% to about 4%, and inflation just keeps getting lower and lower. Leaving out food and energy, consumer inflation in 1999 was only 1.9%, the smallest increase in 34 years.
This spectacular boom was not built on smoke and mirrors. Rather, it reflects awillingness to undertake massive risky investments in innovative information technology,combined with a decade of retooling U.S. financial markets, governments, andcorporations to cut costs and increase flexibility and efficiency. The result is the so-calledNew Economy: faster growth and lower inflation.Most corporate executives and policymakers in Europe and Asia, once skeptical about the U.S. performance, have taken this lesson to heart. There are still widespread
misgivings about the U.S. model of free-market capitalism. But driven by a desire forfaster growth, combined with a fear of being left behind, the rest of the world is starting to embrace the benefits of a technology-driven expansion.But a global New Economy will not happen overnight. True, spending on technology, the most visible part of the New Economy, while not yet up to U.S. levels, is on the rise everywhere. Semiconductor sales were up 17% worldwide in 1999, while the number of Internet users in Western Europe and the Asia-Pacific region is expected to more than double over the next five years (chart). Even in a developing country such as India, the software industry is growing at a rate of 50% to 60% annually.
OLD VIRTUES. But the worldwide proliferation of mobile phones and Web accounts by itself will not bring about a more vibrant global economy. What are also needed are dramatic changes in core institutions that will translate technology into faster productivity growth. That means financial markets better able to fund innovation, more flexibility in corporations and labor markets, a faster pace of deregulation, and increased competition (table). “The New Economy is built on old virtues: thrift, investment, and letting market forces operate, says Treasury Secretary Lawrence H. Summers.
There are signs that the process of change has started. With growth picking up in Europe, and Asia emerging from its slump, Merrill Lynch & Co. is forecasting 3.3% world growth for 2000, with inflation slowing down (chart). Corporate restructuring has begun in Europe and Asia, financial markets are being rebuilt to support innovation, and there is more willingness to take risks. “Im seeing the entrepreneurial response almost
everywhere, says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute.“Its not Silicon Valley yet, but theres a lot of ferment. Even in slow-growing Japan, “Ithink there will be a New Economy, says Toshiba Corp. President Taizo Nishimuro,though he cautions that “it wont be the same as the U.S.Nevertheless, the process of shifting to a fast-growth track is still in its early stages in most of the world. Europe is at least two or three years behind the U.S., with Asia lagging even farther behind. While there are pockets of entrepreneurial vigor in places such as Finland, it has turned out to be an enormous challenge to reshape cultures to allow more risk-taking in Europe and Asia, where caution is a virtue.
It also takes time for policymakers to adjust to the New Economy. In the U.S., Federal Reserve Chairman Alan Greenspan, an enthusiastic proponent of technology-driven productivity gains, resisted great pressure to raise rates in the face of fast growth and low unemployment. By contrast, the two biggest central banks in Europe, the European Central Bank and the Bank of England, have adopted a policy of aggressively raising rates at the slightest hint of inflation, thus choking demand needed to justify business investment.
Moreover, investment in risky innovation–a linchpin of the New Economy–depends on open global markets, since national markets do not provide a big enough payoff for taking big risks. But as shown by the demonstrations against the World Trade Organization in Seattle, there are groups in every country who feel threatened by free trade. A widespread backlash against globalization could remove a key underpinning of the New Economy.
Ironically, skeptics also worry that a worldwide investment boom could itself trigger global inflation. The reason? Slow growth in Europe and Asia in the 1990s helped keep commodity prices and interest rates low in the U.S., despite strong growth in America. But as the rest of the world picks up steam, that slack is slowly disappearing. By sometime later this year or early 2001, unemployment in the major industrialized
economies should drop below the level that triggered inflation in the late 1980s. “Thatswhen you get a reasonable test of the New Economy thesis on a global basis, saysStephen S. Roach, chief economist at Morgan Stanley Dean Witter in New York.But despite these obstacles, a shift to a U.S.-style economic model is looking increasingly attractive as a guide to development. Based on the American example, technology-driven growth creates many more jobs than it destroys. Combined with big productivity gains, that allows the unemployment rate to fall without igniting inflation–something that would be welcome in European countries that have long struggled with high unemployment. Faster growth would also ease the long-term burden of funding the retirement of aging populations in Japan and Europe.
•‣Thats when a U.S.-style U.S. economy is needed to produce prosperity. In fact, it might be beneficial.A strong U.S.-style U.S. economy produces more jobs than it destroys. More so than a less healthy one, i.e., a lack of jobs. If we would keep growing the jobs in our factories, factories would be in better shape that would be more productive in the long run. The lack of demand, on the other hand, is something the U.S. economy cannot survive. The short term goal of the U.S. is to grow the good-will by building more infrastructure, to grow other markets, and to provide new jobs and skills to people looking for new jobs.If you are thinking of a U.S. economy as a model for economic growth, this does not do it justice. If you plan to build the new and more secure capital that will bring the U.S. economic system under the ground, the system should be built in an efficient, environmentally sustainable, and economic manner that would create jobs and strengthen our global position as a global economy. You would not be able to say with certainty that a U.S. Economy-as-Model would succeed without an international agreement on how to improve it. That is why I urge you to research the economics of economic policy and develop model-based solutions if you want U.S. growth to succeed, rather than being constrained to it by the idea that developing the next four decades will lead to low wages for factory workers. For instance, let’s see how many U.S. workers have been reduced to what was seen as a “real-world job market” by the Labor Department as a result of the trade wars of 1971-1975.The real problem would be that a U.S. Economy-as-Model is not economically sustainable once the population is at or near an appropriate level of demographic and technological progress. We would have to grow the economy to accommodate the expansion we can’t afford. While the U.S. economy is growing more slowly, there is still a long way to go to meet our growing national needs, and a great challenge for the U.S. to avoid. While we may not like living in a U.S.-style U.S. economy, our economic system is more fair than many believe. And there are many people out there who can’t take care of themselves. If government provides the education and health systems adequate to meet the growing needs for our children and our future, we will go on to grow more of our future. And that is what we demand that our people get, and what you see may be a U.S. Economy model that meets those needs. This has been my job for 27 years, when my parents and I ran for the presidency. We were proud of being in the President’s Government. We felt great safety. We knew that some people were going to take us seriously and take us seriously in the future. However, we had long faced the idea that many of my family members would never take a business to America’s first truly free nation.
•‣Thats when a U.S.-style U.S. economy is needed to produce prosperity. In fact, it might be beneficial.A strong U.S.-style U.S. economy produces more jobs than it destroys. More so than a less healthy one, i.e., a lack of jobs. If we would keep growing the jobs in our factories, factories would be in better shape that would be more productive in the long run. The lack of demand, on the other hand, is something the U.S. economy cannot survive. The short term goal of the U.S. is to grow the good-will by building more infrastructure, to grow other markets, and to provide new jobs and skills to people looking for new jobs.If you are thinking of a U.S. economy as a model for economic growth, this does not do it justice. If you plan to build the new and more secure capital that will bring the U.S. economic system under the ground, the system should be built in an efficient, environmentally sustainable, and economic manner that would create jobs and strengthen our global position as a global economy. You would not be able to say with certainty that a U.S. Economy-as-Model would succeed without an international agreement on how to improve it. That is why I urge you to research the economics of economic policy and develop model-based solutions if you want U.S. growth to succeed, rather than being constrained to it by the idea that developing the next four decades will lead to low wages for factory workers. For instance, let’s see how many U.S. workers have been reduced to what was seen as a “real-world job market” by the Labor Department as a result of the trade wars of 1971-1975.The real problem would be that a U.S. Economy-as-Model is not economically sustainable once the population is at or near an appropriate level of demographic and technological progress. We would have to grow the economy to accommodate the expansion we can’t afford. While the U.S. economy is growing more slowly, there is still a long way to go to meet our growing national needs, and a great challenge for the U.S. to avoid. While we may not like living in a U.S.-style U.S. economy, our economic system is more fair than many believe. And there are many people out there who can’t take care of themselves. If government provides the education and health systems adequate to meet the growing needs for our children and our future, we will go on to grow more of our future. And that is what we demand that our people get, and what you see may be a U.S. Economy model that meets those needs. This has been my job for 27 years, when my parents and I ran for the presidency. We were proud of being in the President’s Government. We felt great safety. We knew that some people were going to take us seriously and take us seriously in the future. However, we had long faced the idea that many of my family members would never take a business to America’s first truly free nation.
OPEN ACCESS. Moreover, the global economy is not a zero-sum game: Faster growth in the rest of the world would have a big payoff for the U.S. as well. Commodity prices might rise at first, but so would exports, bringing down the swelling trade deficits and creating manufacturing jobs at home. U.S. companies would start to see overseas profits accelerate.
And then theres the innovation factor. For corporations, the most important