It is hard to think of a time when the bandwagon was hurtling so quickly in the wrong direction. True, few economists take seriously the full canon of the New Economy gurus, who believe the computer chip and the Internet are vastly increasing human productivity, vaulting the United States into a golden age of limitless growth in which recessions will disappear and the hard trade-offs of Depression-era economic laws won’t apply. Nonetheless, America has enjoyed close to 20 years of painless growth, forcing scholars to reconsider the old laws of economic gravity. The rapidly emerging consensus is that a new era is dawning.
We are finally starting to see productivity gains from the computer, which may raise (not abolish) the “speed limit” on growth, stretch the definition of full employment and dampen (not end) the business cycle. In this view, the stock bubble was but a blip in the road. And the next recession will be the first real test of the New Economy–not the last gasp.
This consensus has taken hold from Harvard to MIT and the Federal Reserve (where Alan Greenspan was an early believer) to the White House. Its most ringing expression came just two weeks ago in Bill Clinton’s last annual economic report, which opens: “Over the last eight years the American economy has transformed itself so radically that many believe we have created a New Economy.” Once confined to bastions of futuristic optimism like the Santa Fe Institute and the Berkeley Roundtable, the language of “virtuous circles” and positive “feedback loops” in a network economy now animates the report of the president’s Council of Economic Advisers. Before leaving office last Friday, council chairman Martin Baily told NEWSWEEK he had become a “New Economy convert” only in the last few months, as evidence of the information-technology boost to the economy mounted.
America’s popular skepticism is also sharply at odds with the rest of the world, which has no time for doubts. Japan and Germany are too busy looking for the secret of the U.S. boom, which rests on understanding one magic number. After languishing for decades, American productivity growth suddenly doubled in 1995 to 3 percent, where it still remains. This “productivity miracle” explains how, defying all expectations, the United States has continued to outrun other major industrial powers. If this keeps up, the U.S. economy would double in 25 years, instead of 67. What Wall Street bulls hail as “The Coming American Renaissance” might come to pass. And what many nations already see as a scary American dominance would continue to grow.
Europe is eager to catch up. In the United States, one seminar after another still asks, “What Is the New Economy?” In Europe, it is assumed that information technology is the hard drive of the “productivity miracle,” and American experts are in demand. “I just spoke in Germany last week,” says Jack Triplett, former chief economist of the U.S. Bureau of Economic Analysis. “Their feeling is, the United States has a New Economy, and we gotta get some quick.” In the following pages, we detail America’s long search for evidence of the New Economy, Europe’s race to build one of their own and the hope of developing nations that they won’t be left behind.
