April 2000, Vol. 123, No. 4
Conferring on the new economy
Précis from past issues
Conferring on the new economy
On April 5, participants of a White House Conference on the New Economy pondered the implications of today’s information technology innovations on the economy and on society more broadly. This précis will focus on the economic issues addressed in a five-speaker panel and a speech by Federal Reserve Chairman Alan Greenspan.
There was little debate on the issue of whether or not a new economy existed. Greenspan noted, "It’s certainly become increasingly difficult to deny that something profoundly different from the typical postwar business cycle has emerged in recent years." Investment executive Abby Joseph Cohen identified 1994 or 1995 as the inflection point between traditional restructuring and downsizing and the onset of an era in which, while restructuring continues, there has been substantial job creation as well.
Greenspan cited 1993 as a year in which the difference first materialized in the data: "In the early 1990s, with little advance notice, those [technological] innovations began to offer sharply higher prospective returns on investment than had prevailed in previous decades. The first sign of the shift was the sharp rise in capital investment orders, especially for high-tech equipment, in 1993. This was unusual for a cyclical expansion because it occurred a full two years after the trough of the 1991 recession."
Economics professor James K. Galbraith advanced the interesting notion that it was the very vigor of the business cycle that helped bring about the new economy. Galbraith asserted that although economists are taught to fear full or even high employment as the precursor to runaway inflation, in this case, it may have worked out differently. He remarked that the economist Robert Eisner "taught that the real rules weren’t so grim. Eisner did believe that growth could raise wages, and yet also spur investment and productivity—in effect, that full employment in the old economy would bring the new economy to life."
Roger C. Altman, an investment banker, agreed that we are moving into a new economy defined as an Internet-driven economy. Altman did warn, however, that the conversion may not be as far along as some might suggest: "Electronic commerce totaled about $150 billion last year, and that’s in the context of a $9 trillion economy, so that ratio is still a small one. But that e-commerce base is expected to grow about 85 percent a year over the next four years. It will get to about $2 trillion on that basis. And obviously, it will get to a much more significant share of total economic activity in this country. But, in other words, we’re still in the early stages of converting to a new economy."
Software executive Kim Polese and economics professor William D. Nordhaus brought their diverse perspectives to the discussion surrounding this new economy. They touched on several points, among them: the increasing use of information technology by businesses and the wider diffusion of certain tools—intrinsic to the new economy—throughout the broader economic spectrum. Polese, a maven of the dot-com world, commented on behavioral and attitudinal changes in the business world and highlighted four "fundamental shifts": the offering of stock options, an open mindset regarding partnering, a sense of egalitarianism, and a willingness to take risks. She also stated that "the really exciting changes are happening in bricks-and-mortar companies, which are just now beginning to adopt the new technologies, creating these trading exchanges, [and] to make logistics and supply chains more efficient." Nordhaus similarly thought that the information technology sectors—computer hardware, software, and communications—are just the tip of the iceberg. He continued: "The really important part is going on under the surface, where it’s less visible, in the business areas—old-fashioned things like better scheduling, inventory control, and new-era type activities like improved price discovery and on-line auctions."
Greenspan detailed some more of the economic implications of these developments: "Before this revolution in information availability, most 20th-century business decision making had been hampered by pervasive uncertainty. Owing to the paucity of timely knowledge of customers’ needs, and of the location of inventories and materials flowing through complex production systems, businesses required substantial programmed redundancies to function effectively. Doubling up on materials and people was essential as back up to the inevitable misjudgments of the real time state of play in a company. Decisions were made from information that was hours, days, or even weeks old." He thus concluded "information technology raises output per hour in the total economy principally by reducing hours worked on activities needed to guard productive processes against the unknown and the unanticipated."
These notes are based on transcripts dated April 5, 2000, of the White House Conference on the New Economy. The transcripts are available on the Internet at: http://www.pub.whitehouse.gov/uri-res/I2R?urn:pdi://oma.eop.gov.us/2000/4/5/14.text.2 and http://www.pub.whitehouse.gov/uri-res/I2R?urn:pdi://oma.eop.gov.us/2000/4/6/5.text.1 (visited April 10, 2000).
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