Huntsville Times (AL), June 10, 2001
Knight-Ridder/Tribune Media Services, June 3, 2001
Press (Atlantic City, NJ), June 12, 2001
Back before the dot-com bubble burst, it was common for otherwise educated people to be intoxicated with the spirits of a "new economy," where the old constraints -- including laws of gravity -- no longer applied. The vaporization of a few trillion dollars in the NASDAQ helped to shake a lot of people out of their stupor.
Now it seems that another defining feature of the alleged new economy -- "the productivity revolution" -- may have been as much a mirage as the wealth of Priceline.com or E-toys at their peak stock valuation. This week the Labor Department announced that productivity declined by 1.2 percent in the first quarter, its sharpest drop in more than seven years.
Since most people aren't exactly sure what productivity is or why it is so important, some explanation: productivity is most commonly measured as output (of goods or services, for example) per unit of labor. In English, this means that if we can produce twice as many shoes with the same amount of labor time, we have doubled productivity.
Increasing productivity is the main reason, other than advances in public health and medicine, that most peoples' standard of living today is higher than that of their grandparents (notice I didn't say parents -- back to that in a moment).
For reasons still largely unexplained by economists, productivity in the US economy grew much more slowly after 1973 than it did during the first half of the post-World-War II era. But from 1995-2000, it grew at an annual rate of 2.8 percent, as compared to an average of 1.4 percent in the previous two decades.
To believers in the "new economy," this was the payoff finally arriving from the large investments that had been made in new technologies, including computers, software, and the Internet. Most importantly to investors, this upsurge in productivity -- and the seemingly enormous potential of the new technologies to add to this trend -- formed the basis for the "irrational exuberance" of the stock market. If the productivity of the high-tech sector was going to fuel the (much faster) growth of the future, then the future profits of all these future Microsofts justified their fantastic stock prices.
Of course, most investors never bothered to check this new-found faith against some basic arithmetic. The latter would have showed them that even under "new-economy" assumptions about productivity, the average stock was (and still is) enormously overpriced.
But the difference between 2.8 versus 1.4 percent productivity growth is still big; it is the difference between a nation doubling its income per worker over 25 rather than 50 years. So the question is: do we have a new economy, based on new forms of technology and organization, that will generate higher productivity growth?
Federal Reserve Chairman Alan Greenspan was among those who seemed to accept that we do. In the last few months, he has noted the continued growth of productivity during the current slowdown as evidence for this theory. But the latest numbers tell a very different story: declining productivity and mass layoffs are the classic accompaniments of an old-style economic slowdown.
How, then, to explain the longest uninterrupted economic expansion in American history, in the 1990s? There were two new things about the economy, although neither was unprecedented. The most obvious was the biggest speculative stock market bubble since the 1920s, which fueled the consumption of upper income households.
The second, and more important change was the Fed's interest rate policy. Prior to 1996, the Fed believed that unemployment could not fall below 6 percent without igniting a spiral of inflation. The Fed would therefore raise interest rates, in order to slow the economy and increase unemployment, when unemployment fell below six percent. The Fed's decision to abandon this theory allowed the unemployment rate to fall to below 4 percent -- a level unseen since the 1960s -- and the expansion to continue beyond the point at which the Fed would normally have pulled the plug.
But what's really new and different about today's economy is actually getting kind of old. Over the past 27 years, the majority of the US labor force has failed to share in the gains from economic growth. In other words, the median real wage today is about the same as it was 27 years ago, despite the fact that our economy now generates about $34,000 more income for every person in the labor force.
This would surely be a scandal if the media were to focus on it, and most people would see our most urgent economic priority as restoring the conditions under which a rising tide can lift all boats. Then we could celebrate the dawn of a "new economy."