Policy Debate: Is there a New Economy?
Issues and Background
....better information technology is nothing new-it has been improving for
centuries. The Internet can be seen as the latest step along a path that began
with movable type, and progressed through the typewriter, the telephone,
radio, television, photocopying, and fax machines, to name just a few.... My
personal favorite example is the laying of the transatlantic cable in 1866,
which reduced the time it took to send a message from New York to London
from about a week to a few minutes. No modern IT innovation has, or I dare
say will, come close to such a gain! None of this is to belittle the marvels of
modern IT, which are marvelous indeed. But it is useful to remember that IT
has been improving forever; only the form of the latest technological
breakthrough keeps changing. Nowadays, it is the Net.
~Alan Blinder, "The
Internet and the New Economy," Internet Policy Institute, January
Housing and autos used to drive the U.S. economy. Now,
information technology accounts for a quarter to a third of economic growth. And
remember, this is an industry that pays very good wages. And it is an industry, bless
its heart, in which prices actually fall every year. How's that for noninflationary
growth? Furthermore, information technology affects every other industry. It boosts
productivity, reduces costs, cuts inventories, facilitates electronic commerce. It is, in
short, a transcendent technology--like railroads in the 19th century and automobiles
in the 20th.
~Stephen B. Shephard, "The
New Economy, What it Really Means", Business Week, November
The rate of growth of productivity in the U.S. economy remained relatively low in the 1980s and
early 1990s. Real wages fell in many industries during this period. Many economists argued that
structural changes in the economy had resulted in a natural rate of unemployment that was over
five percent. The late 1990s, however, provided a very different economic situation in which
a more rapid rate of productivity growth resulted in higher real wages throughout the economy.
This increase in productivity growth was accompanied by relatively low inflation and a rather
substantial decline in the unemployment rate (reaching a low of 3.9% in April 2000). This change
has been so dramatic that many have argued that the U.S. now has a "new economy" in which the old
rules no longer apply. It is generally argued that this "new economy" is the result of the growth of
the internet and an expansion of global competition.
"New economy" advocates suggest that the rapid expansion of the internet has resulted in
reduced transaction costs, the creation of profitable investment opportunities, and changes
in the nature of the labor market. They also argue that the widespread adoption of computers in
virtually every workplace has finally resulted in the productivity increases that had long been
anticipated. Deregulation, particularly in the telecommunications industry, is also given some of
the credit for the shift to a "new economy."
Most of the U.S. economic growth that has occurred since 1995 is the result of the rapid
growth of high-tech industries. While U.S. manufacturing and agricultural output has continued
to expand, the share of the labor force in these sectors of the economy has continued to decline
as a result of productivity improvements. A minority of the labor force is now directly involved
in the production of goods. Most of the growth in employment has been in the service sector,
particularly in "knowledge-based" jobs that require relatively more education and training.
Those who believe that there is a "new economy" argue that it is characterized by increased
risk-taking, innovation, and competition. Reductions in trade barriers and increases in the
volume of world trade have resulted in increases in global competition. This increase in
competition, it is argued, has helped keep price levels relatively low.
Skeptics argue that major innovations in the past such as the introduction of the steam engine,
the railroad, the production and distribution of electricity, the internal combustion engine,
and the television also spurred higher rates of economic growth. They suggest that while the
internet may eventually change the way in which production is organized, there is little impact
on most workers day-to-day work. While there is much publicity over the possibilities of
"telecommuting," most workers still work 40 hours per week at their jobs and travel to their
place of employment five days a week. They note that the invention of the printing press, the
typewriter, the telegraph, the telephone, and the fax machine all provided similar improvements
in communications and worker productivity.
Advocates of a "new economy" generally believe that the economy is now capable of sustaining
more growth without inflationary pressures. This view was adopted by Alan Greenspan and the Fed in the mid-1990s.
Throughout the late 1990s, the economy experienced an increasing rate of economic growth combined
with lower unemployment and stable (or falling) inflation rates. By late 1999 and early 2000,
however, the Fed became increasingly concerned with the possibility of a resurgence of inflation
and raised interest rate targets several times.
Those who question whether there is a "new economy" note that the U.S. economy exhibited similar
combinations of growth rates, unemployment, and inflation in the early 1960s,
long before the birth of the internet and an information-based economy. They suggest that
there is little evidence that there is a fundamental difference between the current
economy and the "old economy." Changes in the mix of goods produced and the sectoral pattern of
employment have been occurring throughout economic history. Skeptics note that the 1990s
were characterized by very high levels of investment, an "old economy" method of achieving
high rates of productivity growth.
In the past, economists argues that the economy could sustain growth rates of approximately
2-2.5% per year without an increase in inflationary pressures. New Economy advocates suggest that
the experience of the late 1990s indicate that a sustainable growth rate of 3-3.5% may now
be feasible. Skeptics note that the higher measured growth rate in the late 1990s is at least
partly the result of changes in the method of measuring real GDP (caused by the introduction
of a chain-weighted price index that eliminates the inflationary bias inherent in the old
GDP deflator). They suggest that higher growth rates are the results of reductions in measurement
error, rather than the result of structural changes in the economy.
The slowdown in U.S. economic growth that began in early 2001 and the subsequent recession have
raised some questions about whether the
"new economy" is a permanent or a transitory phenomena. The substantial decline in the market value of internet
companies during the past two years has also suggested that the initial expectations concerning the "new economy" may have
resulted in an overvaluation of the stock issued by these firms.
Time will eventually determine whether the "new economy" differs in fundamental ways from the
Primary Resources and Data
- Kevin Stiroh, "Is There a New Economy?"
Kevin Stiroh discusses the arguments for and against the existence of
a "new economy" in this article appearing in the July-August 1999 issue
of Challenge. This article provides a superb introduction to
the economic theories and empirical evidence that serve as the foundations
of much of the debate. (To view this document, the Adobe acrobat viewer
plugin is required. You may download this viewer by clicking here.)
- The New Economy Index
Policy Institute provides The New Economy Index, a website
devoted to providing information and statistics concerning the "new
economy." This web site provides a good description (with supporting
statistics) of how the "new economy" differs from the "old economy."
Myths About the New Economy" section provides a nice critique of
some of the more extreme positive and negative claims concerning the
- The Dismal Scientist
The Dismal Scientist web site provides current information and analysis concerning the
state of the U.S. economy. This site is a good place to visit to find information about
whether the "new economy" is living up to expectations. (Some material on this site is only available
- Federal Reserve District Banks
This page contains a list of links to the home pages of Federal Reserve District Bank web sites.
These sites contain articles dealing with monetary policy, including many that deal with
monetary policy and the "new economy."
- Consumer Price Indexes
This CPI page, provided by the Bureau of Labor Statistics, contains information about the
construction of the CPI. Problems in measuring output in the service sector and capturing
the effects of quality change are discussed at this web site. Since the "new economy"
involves increased service sector production, these measurement issues are often argued to be
more severe today than in past decades.
- Alan Greenspan, "Problems of Price Measurement"
In this January 3, 1998 speech delivered at the American Economic Association, Alan Greenspan,
the Chairman of the Federal Reserve Board of Governors, presents a detailed
discussion of the problems associated with measuring inflation. This article provides a particularly
good discussion of the difficulties in measuring price changes in
the service sector and for goods that exhibit quality change over time.
- Federal Reserve Board, "Monetary Policy Report to Congress"
This page contains links to the full text of the twice-yearly monetary policy report provided
to Congress by the Chair of the Federal Reserve Board.
Different Perspectives in the Debate
- Stephen B. Shepard, "The New Economy: What it Really Means"
Stephen B. Shepard sets out the major arguments for the existence of a "new economy" in
this November 17, 1997 issue of Business Week. He argues that the globalization of
business and revolutionary improvements in information technology have resulted in an
expansion of "entrepreneurial energy" that has substantially increased productivity and
economic growth. Shepard also indicates that errors in measuring output in the service sector
result in an underestimate of the rate of economic growth. He suggests that sustained economic
growth in the range of 3-3.5% per year is now feasible for the U.S. economy.
- Kevin Kelly, "New Rules for the New Economy"
In this September 1997 article in Wired,
Kevin Kelly examines the characteristics of the new economy. He argues
that the major cause of the structural change is the growth of networks,
and not computers by themselves. As Kelly notes, the benefits of owning
a fax machine grows as more people use them. The existence of such network
externalities result in increasing returns to scale in many industries.
These network externalities have been the ultimate cause of much of
the economic growth of the 1990s.
- Wired, "Encyclopedia of the New Economy"
This online document provides a brief argument supporting the existence of a "new economy."
- National Governors' Association, "State Strategies for the New Economy"
In this online document, the National Governors' Association argues
that states should alter their approaches to economic development by
encouraging human capital investment, developing improved communications
and transportation infrastructures, providing enhanced incentives for
innovation, and reducing regulations that introduce market distortions.
(To view this document, the Adobe acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- Paul Solman, "The 'New' Economy?"
This page contains a transcript of Paul Solman's interviews (on WGBH-Boston) with many economists and exhibitors
at the January 2000 American Economic Association meetings. These interviews include a quite
broad range of opinions from Arnold Harberger, Robert Gordon, Paul Samuelson, John Taylor,
and several others.
- John S. Irons, "Is There Anything New About the New Economy?"
In this online article, John S. Irons provides a summary of the various
definitions of the "new economy." He suggests that there is little new about the "new economy."
- Alan Greenspan, "Is There a New Economy?"
In this September 4, 1998 speech, Federal Reserve Board Chair Alan Greenspan addresses the
question of the existence of a "new economy." He notes that technological advances and global
competition have resulted in productivity increases. He notes, though, that human nature has
not changed. Greenspan suggests that the question of the existence of a "new economy" can only be answered
in the long run.
- Evan F. Koenig, "What's New About the New Economy?"
Evan F. Koenig discusses the arguments concerning the existence of a "new economy" in this online
version of an article appearing in the July/August 1998 issue of The Southwest Economy.
Koenig provides evidence suggesting that there has been a reduction in firms' pricing power in
response to global competition. It is suggested that new pricing and distribution technologies have
helped to smooth out the business cycle. (Note that this article begins on p. 7 of the document.)
- Alan Blinder, "The Internet and the New Economy"
In this January 2000 online Internet
Policy Institute article, Alan Blinder examines the evidence concerning
the existence of a "new economy." He notes that there is at least circumstantial
evidence that the growth of the internet has resulted in productivity
gains. Blinder argues, however, that the U.S. economy has experienced
similar increases in productivity in recent decades. He also observes
that the effect of the internet on global communications is much less
dramatic than some earlier innovations, such as the introduction of
the transatlantic cable.
- Jason Pontin, "There is No New Economy"
Jason Pontin, in the September 1997 issue of Red Herring argues that the basic rules of
economics still apply in a world with increased global competition and digital technology. He suggests
that those who believe in a "new economy" believe that increased international competition helps
keep prices low. Pontin argues, though, that international competition has little impact in the
service sector in which most of the "new economy" production takes place (since most services
are not internationally traded). Pontin argues that the relationship between economic growth and
unemployment (known as "Okun's Law") does not appear to have been changed.
- Kevin Kelly, "New Economy? What New Economy?"
This May 1998 interview with Paul Krugman focuses on his somewhat skeptical views concerning the
existence of a "new economy." Krugman notes that the introduction of new technology has always
been a major factor in economic growth. He argues that there is little evidence to date of any
substantial structural change in the economy. Krugman suggests, however, that computers are
likely to ultimately reduce the rate of return to education and result in a more egalitarian
- Paul Krugman, "Speed Trap: The fuzzy logic of the 'New Economy'"
Paul Krugman examines the arguments concerning the existence of a "new economy" in this December
18, 1997 article appearing in Slate. He notes that productivity growth during the 1990s
was relatively low by historic standards. Krugman notes that while those who believe in a new economy
correctly argue that service-sector productivity gains are underestimated, they do not seem to be aware that
there were similar problems in measuring productivity increases in an industrial economy. He argues
that there is no credible evidence of a change in fundamental economic relationships.
- Paul Krugman, "White Collars Turn Blue"
In this September 29, 1996 New York Times Magazine article, Krugman argues that computers
will replace more white-collar workers than blue-collar workers. This will, he suggests, reduce the
rate of return to education and result in a more egalitarian society.
- Jeff Madrick, "Behind the Numbers: The Treadmill Economy"
Jeff Madrick examines the labor market conditions underlying the "new economy" in this article
appearing in the November/December 1998 issue of The American Prospect. He argues that the
increase in output is the result of an increase in the amount of labor being supplied. He suggests
that it is still too early to tell whether a "new economy" exists.
- Business Week, "The New Economy: It works in America. Will it go global?"
This January 31, 2000 article in Business Week examines whether the new economy will be a global phenomena. It is argued that
this will occur only if there is increased deregulation, improved financial systems, and other institutional changes.
It is suggested that this type of change is beginning to occur in the rest of the world. It is argued that Europe is only
a few years behind the U.S.
- U.S. Department of Housing and Urban Development, "Now is the Time: Places Left Behind in the New Economy"
This HUD study indicates that, while unemployment had fallen during the 1990s, there has
been substantial job loss in high-wage occupations while most of the job expansion has been in
relatively low-wage sectors. Many northeastern central cities still have relatively high
unemployment and poverty rates.
- Kit Sims Taylor, "The Brief Reign of the Knowledge Worker: Information Technology and
In this October, 1998 conference presentation, Kit Sims Taylor discusses the impact of the
"new economy" on the labor market for "knowledge workers," a market consisting of "professionals,
upper-middle managers and above, and those who create, modify, and synthesize knowledge." He notes
that it is dangerous to base projections of future labor market conditions on currently observed
trends. Taylor, suggests, though, that the demand for knowledge products is unlikely to keep up
with the supply.
- Glenn D. Rudebusch, "How Fast Can the New Economy Grow?"
In this February 25, 2000 Federal Reserve Bank of San Francisco Economic Letter, Glenn D. Rudebusch
notes that the higher growth rates of the late 1990s provide the major argument in support
of the existence of a "new economy." Yet, this higher measured growth rate is primarily the result of
changes in the way in which real GDP is measured. Under this revised measure, the "old economy"
also achieved higher growth rates. Rudebusch suggests that there is some evidence, though, that
the "new economy" may be able to achieve a sustainable pace of economic growth that is several
tenths of a point higher than in past decades.
- Lawrence Mishel, "The 'New Economy'"
In this February 14, 1999 editorial, Lawrence Mishel argues that the economic expansion of the
1990s has not increased the real earnings of white-collar workers, the group that is
expected to be the major beneficiary of this expansion. He questions the existence of a
- Larry Irving, "Equipping Our Children With the Tools to Compete Successfully in the
In this August 12, 1996 speech, Larry Irving argues that there is a need to provide more human
capital investment to accommodate the needs of the new economy.