Is the "New Economy" More Productive?
Sorting Fact from Fiction
Revised productivity figures have let the air out of the high-tech "New Economy" bubble.
This article is from the May/June 2002 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2002/0502baxandall.html
This article is from the May/June 2002 issue of Dollars & Sense magazine.
at a discount.
One of the great glories of the so-called "New Economy" was supposed to be that information-age advances in productivity were making possible a soaring stock market and a permanent economic boom. Starting in the mid-1990s, the official measure of national productivity—calculated as Gross Domestic Product (GDP), or total income, divided by the number of hours worked—finally gave credence to those, like Federal Reserve Chair Alan Greenspan, who crowed that rising output per worker was changing the very nature of the economy. In late 1995, a BusinessWeek cover proclaimed, "Productivity to the Rescue." And when preliminary estimates showed that productivity had shot up a blazing 3.4% in 1999 and 2000, Greenspan spoke of "not just a cyclical phenomenon or a statistical aberration … [but] a more deep-seated, still developing shift in our economic landscape," with the potential for even more gains in the future as information technology continued to spread.
A lot is at stake in these numbers. Productivity growth indicates how fast the economic pie is enlarging, and a few tenths of a percentage point over a period of years can have an enormous impact on things like budget deficits, corporate revenue projections, Social Security forecasts, and interest rates. If the same inputs will produce a lot more than they used to, all sorts of economic fantasies become possible. Thanks to the glowing productivity picture, stockbrokers were able to tell their clients that the unbelievable 86% increase in NASDAQ stocks in 1999 was somehow based on sound economic foundations. Similarly, President Bush used a sunny best-case scenario, which included very optimistic productivity forecasts, as a way to convince legislators to support his massive tax cut for the wealthy.
Also see "High-Tech Stocks and 'New Economy Hype'" in this issue.
But the numbers weren't as solid as they seemed. When more complete data became available, the "brave new world" productivity figures for 1999 and 2000 got revised downward from 3.4% to 2.6%. They still look good compared to the 1980s, when productivity rose at a rate of about 2.2% each year—but they're well below the 2.9% average that held between 1947 and 1973. And besides, the United States uses controversial techniques that artificially boost productivity figures, such as including productivity bonuses for new and improved products that aren't reflected in the prices of goods. Studies by European statistical offices suggest that, if European countries tried these methods, they could show a great increase in their own supposedly slower productivity growth.
Overall, the 1990s New Economy boom wasn't anything so special if you weren't deep into stocks. Annual GDP growth averaged 3.1% in the last decade, only slightly higher than the 2.9% average for the 1980s cycle—and below the 3.3% average for the 1970s and the 4.4% average for the 1960s. Wages for the average worker increased by less than 0.5% per year over the 1990s. Much of the alleged gain in productivity actually may have come at workers' expense, because new technology like laptops and cell phones have, if nothing else, made people work more off the job. Official productivity numbers only count the hours workers report on company time sheets, not the time information workers spend on their laptops on the train or after the kids go to bed.
And there's another reason to be skeptical about the "productivity revolution": Just three broad sectors—finance, real estate, and insurance; wholesale and retail trade; and business services—account for about 80% of all computers used in industry. According to the New Economy productivity spin, the not-actually-so-impressive productivity rate will accelerate as information technology spreads to the rest of the economy. But as economist Robert Gordon has shown, productivity growth has been lagging in precisely the industries that form the information-technology vanguard. Gordon goes so far as to say that it's "likely that the greatest benefits of computers lie a decade or more in the past, not in the future."
Few progressive economists have called out to tell the truth about the emperor's new clothes—perhaps because the Fed's new religion has tamed its fears of inflation, thus keeping it from its usual practice of cutting the money supply and thereby throwing people out of work out of fear of inflation. Gordon is a welcome exception. He points out that, although Internet and e-commerce will keep growing, on-line sales are mainly replacing off-line sales that would have occurred anyway. And while computer speed and memory may continue to grow exponentially, individuals' limited supply of time will prevent productivity and output from matching these gains. As Gordon reminds us, although computers have come a long way, we can't type, think, read, or even talk much faster than we could two decades ago.