Introduction

The U.S. economy is undergoing a fundamental transformation at the dawn of the new millennium. Some of the most obvious outward signs of change are in fact among the root causes of it: revolutionary technological advances, including powerful personal computers, high-speed telecommunications, and the Internet. The market environment facilitated by these and other developments in the last decade and a half has been variously labeled the "information economy," "network economy," "digital economy," "knowledge economy," and the "risk society." Together, the whole package is often simply referred to as the "New Economy."

The story of how businesses are changing in today's economy has been told and retold with such frequency in recent years that it has become something of a cliche: the new rules of the game require speed, flexibility, and innovation. New, rapidly growing companies are selling to global markets almost from their inception, and established companies are being forced to reinvent their operations to stay competitive in the new terrain. This is the part of the New Economy that was born in Steve Jobs' and Steve Wozniak's garage, at Bell Labs, Xerox PARC, and in the trunk of Michael Dell's car. It is Silicon Valley: Netscape, Yahoo!, and the next Big Thing. And of course it is Microsoft, with a market capitalization now second only to General Electric's.

But this New Economy is about more than high technology and the frenetic action at the cutting edge. Most firms, not just the ones actually producing technology, are organizing work around it. The New Economy is a metal casting firm in Pittsburgh that uses computer-aided manufacturing technology to cut costs, save energy, and reduce waste. It is a farmer in Nebraska who sows genetically altered seeds and drives a tractor with a global satellite positioning system. It is an insurance company in Iowa that uses software to flatten managerial hierarchies and give its workers broader responsibilities and autonomy. It is a textile firm in Georgia that uses the Internet to take orders from customers around the world.

It is also as much about new organizational models as it is about new technologies. The New Economy is the Miller brewery in Trenton, Ohio, which produces 50 percent more beer per worker than the company's next-most-productive facility, in part because a lean, 13-member crew has been trained to work in teams to handle the overnight shift with no oversight.¹

Yet while the social and political implications of this New Economy are clearly vast, our system for tracking economic progress-the set of indicators we use as a gauge-has not kept up with the pace of evolution. Our statistical system was essentially established to measure a stable economy with most of the output in agricultural and manufactured goods. Until the Great Depression, economic indicators were often measures of natural resources and commodity production: the number of bales of cotton produced, hogs raised, steel ingots melted. (Even today, the United States spends three times more on agricultural statistics than on national income statistics, according to MIT economist Lester Thurow.) After the New Deal and the creation of federal statistical agencies, our economic indicators began to focus on monetary measures related to managing the business cycle. For example, significant effort is made to track the gross domestic product (GDP), inflation and changes in the money supply, business inventories, and consumer purchases thought to affect the business cycle, such as housing and autos. (The first 15 pages of the Congressional Joint Economic Committee's monthly "Economic Indicators" are devoted to these sorts of indicators of the business cycle. It is not until the sixteenth page that the report gets to arguably the most important indicator of economic well-being: productivity.)

The purpose of this report is to draw on a new set of indicators, gathered from existing public and private data, to examine some of the key characteristics of the New Economy.² We have divided these indicators into three groups. The first group tracks some of the elemental structural changes that collectively mark the transition to the New Economy: industrial and occupational change, globalization, the changing nature of competition and economic dynamism, and the progress of the information technology (IT) revolution. The second group examines the implications of this transition for working Americans: what is happening to incomes and economic growth, jobs, and employment dynamics. The third group assesses the nation's performance in terms of three main foundations for growth in the New Economy: the pace of transition to a digital economy, investment by business and government in technology and innovation, and progress on the development of education and skills.

STRUCTURAL TRANSFORMATION

Beyond the technological advances, what is actually new about the so-called New Economy? In one respect, nothing. We still work at jobs for a living, and we still buy, sell, and trade products and services, just like we always have. As Federal Reserve Chairman Alan Greenspan has noted, the heart of the economy is, as it always has been, grounded in human nature, not in any new technological reality. In Greenspan's analysis, "The way we evaluate assets, and the way changes in those assets affect our economy, do not appear to be coming out of a set of rules that is different from the one that governed the actions of our forebears.... As in the past, our advanced economy is primarily driven by how human psychology molds the value system that drives a competitive market economy. And that process is inextricably linked to human nature, which appears essentially immutable and, thus, anchors the future to the past."³ Nonetheless, Greenspan and other economists agree that some of the key rules of the game are changing, from the way we organize production, to our patterns of trade, to the way organizations deliver value to consumers.

The global economic crisis that began in Asia in 1997 has caused growing concern that one of the fundamental hallmarks of the New Economy, the increasingly complex state of global interconnectedness, may in fact be a harbinger of financial chaos. Many of the Asian economies that were touted as economic miracles for the better part of this decade are now in profound economic and social disarray. Slower growth and falling demand have plunged Russia into default, and now threaten Latin America. No one can precisely predict how these events will continue to unfold, but we believe that the worst-case scenario-a serious world-wide recession-would, at most, only slow the pace of the forces described in this report.

The trends at the heart of the New Economy are long-term structural trends. It is true that globalization is one of these new structural realities, and thus business cycles will increasingly tend to be world-wide in scale. But the current problems in Asia and elsewhere should not be seen as inherent features of the New Economy. The troubles are not simply a byproduct of the ability of capital to move instantaneously from market to market at the whims of international investors. Rather, one of the basic reasons for the Asian economic crisis is that Asian economies have not yet fully adapted their institutional structures (particularly their finance, investment, and banking systems), their business practices, or their policies to match the imperatives of the New Economy. In Japan, for example, slow growth in the service sector has hindered overall economic growth. Failure to dismantle barriers to imports and foreign direct investment, along with low levels of entrepreneurship, have limited competition⁴ In turn, there have been insufficient pressures for corporate and financial restructuring. Moreover, low levels of investment in information technology⁵ have meant a slower transition to a more digital economy, and a slower overall pace of change.⁶

The fallout of the economic crisis, while extremely destructive and painful in the short term, could eventually yield constructive developments. The turbulence puts pressure on governments to establish New Economy policy frameworks, on industries to embrace new business practices, and on societies to adopt new attitudes. One example of a constructive outcome would be the creation of modern, transparent banking and financial reporting systems which rely on the most realistic vehicle for both national governments and firms to deliver regular financial reports and other information to a worldwide audience in real time-the Internet. Such a system already exists in the United States; public companies must file their required documents and reports in electronic form with the Securities and Exchange Commission so the information can be archived and made immediately available to the public via Edgar, the agency's online database.⁷

The United States is ahead of the curve in a number of areas. Here, one of the most noticeable structural changes in the New Economy is the degree to which dynamism, constant innovation, and adaptation have become the norm. One of the keys to the recent strong U.S. economic performance has been the country's ability to embrace these changes. Nearly three quarters of all net new jobs are being created by 350,000 new fast-growing "gazelle" firms (companies with sales growth of at least 20 percent per year for four straight years). Almost a third of all jobs are now in flux (either being born or dying, added or subtracted) every year. This churning of the economy is being spurred by new technology, but also by increasing competition, a trend that is in turn partly a product of increasing globalization. Between 1970 and 1997, U.S. imports and exports grew three and a half times faster than GDP in 1992 dollars.

Another striking structural characteristic of the New Economy is occupational change. Between 1969 and 1995, virtually all the jobs lost in the production or distribution of goods have been replaced by jobs in offices. Today, almost 93 million American workers (which amounts to 80 percent of all jobs) do not spend their days making things-instead, they move things, process or generate information, or provide services to people.

THE CHALLENGE AHEAD

Is all of this turbulence, change, and complexity temporary, simply the byproduct of the transition from the Industrial Age to an information era? Or are these intrinsic and permanent aspects of the New Economy? The Progressive Policy Institute believes that the latter is true and that the challenge now is to learn how to manage and govern in an era of sustained and constant innovation and adaptation.

Some see the emergence of the New Economy as disruptive and threatening. Others celebrate it uncritically, ignoring the social strains created by its constant change and uneven distribution of costs and benefits, and rejecting any role for government. PPI subscribes to a third view, embracing the inherent new possibilities born of unleashed entrepreneurial energy for technological and economic progress, while supporting policies that foster growth and innovation, and equip all Americans with the tools they need to succeed. The New Economy is not an end in itself, but the means to advance larger progressive goals: new economic opportunities and higher living standards, more individual choice and freedom, greater dignity and autonomy for working Americans, stronger communities, and wider citizen participation in public life.

Today, though the foundations for the New Economy are in place, widespread benefits haven't yet been realized. Despite job growth, low unemployment, and other notable signs of economic progress-and despite gushing press accounts of fabulous new wealth and opportunities-a central paradox of the emerging New Economy is that the 1980s and 1990s have seen productivity and per capita GDP growth rates languish in the 1.25 percent range, while income inequality has grown. Our challenge is to create a progressive economic policy framework that will encourage a new era of higher growth, while promoting and enabling a broad-based prosperity that produces the widest possible winners' circle.

Old economic policy, shaped by the Great Depression, largely focused on creating jobs, controlling inflation, and managing the business cycle. The New Economy brings new concerns. Technology, as well as a highly competent Federal Reserve policy, may have lessened the importance and severity of the domestic business cycle. We have shown that we can create jobs-over nine million of them in the first five years of the Clinton Administration. And there is general agreement that in the new global economy, with increased competition and technology, the risk of inflation is reduced. The real challenge of economic policy now is to support and foster continued adaptation, including policies that lead to a fully digital economy characterized by continuous, high levels of innovation and a highly educated and skilled workforce.

The nascent transformation to a digital economy, where an increasing share of economic value is a product of electronic means, has the potential to usher in a new period of sustained higher productivity and wage growth in America. Most of the indicators of the transformation to a digital economy forecast steady progress. Computing and telecommunications costs have been falling dramatically, and the U.S. Internet economy is projected to be worth $350 billion by 2001 (when nearly 40 percent of U.S. households are projected to be online). But realizing the digital economy's potential will depend in part on regulatory, tax, and procurement policies-at all levels of government-aimed first at not hindering, and where possible at fostering this transformation. Government also clearly has a role to play in spurring the transformation by encouraging the electronic delivery of public services, though it has taken little more than baby steps in the right direction at this point.

New Economy economists like Paul Romer, Richard Nelson, and Rob Shapiro have focused on knowledge, technology, and learning as keys to economic growth and have begun to focus on how policy can actually affect innovation. A consensus has emerged that investments to develop and commercialize research and technology play a major role in increased standards of living for Americans. However, indicators of innovation and investment suggest cause for concern. In the last five years, federal support for both basic and applied research have fallen precipitously. Industry investment in basic research has also declined. Similarly, over the last decade the stock of machinery and equipment that American workers use to be productive has fallen as a share of GDP.

Education is another economic foundation area showing a lack of sufficient progress. Corporate expenditures on employee training have fallen in the 1990s as a share of GDP. Meanwhile, K-12 performance has simply failed to keep up with the pressing need for a skilled workforce, in spite of continued increases in education spending. We need a set of policies to ensure that American companies have the skilled workers they need to be productive, and that American workers have the skills they need to navigate, adapt, and prosper in the New Economy.

The New Economy puts a premium on what Nobel Laureate economist Douglas North calls "adaptive efficiency"-the ability of institutions to innovate, continuously learn, and productively change. In the old economy, fixed assets, financing, and labor were principal sources of competitive advantage for firms. But now, as markets fragment, technology accelerates, and competition comes from unexpected places, learning, creativity, and adaptation are becoming the principal sources of competitive advantage in many industries. Enabling constant innovation has become the goal of any organization committed to prospering, and should also become the goal of public policy in the New Economy.

PPI believes that a progressive innovation-oriented policy framework for the New Economy should rest on four pillars:

1. Investment in new economic foundations, specifically education, training, and scientific and technological research.

2. Creation of an open and flexible regulatory and trade regime that supports growth and innovation, including policies that support the IT revolution.

3. Development of policies to enable American workers to have the tools they need to navigate, adapt, and prosper in a continually changing economic environment.

4. Reinvention-and digitization-of government to make it fast, responsive, and flexible.

In summary, if we are to ask workers to take the risks inherent in embracing the New Economy, we must equip them with the tools to allow them to prosper and cope with change and uncertainty. If we fail to invest in a knowledge infrastructure-world-class education, training, science, and technology-our enterprises will not have the skilled workers and cutting-edge tools they need to grow and create well-paying jobs. And if Industrial Age government does not transform itself into Information Age government, it will become an inefficient, anachronistic institution, impeding rather than advancing progress.

 
Index Home | Introduction
SECTION I | SECTION II | SECTION III
Productivity Paradox | Knowledge Economy
Nine Myths | Data Sources | Endnotes | The Authors
 
 
The Progressive Policy Institute (PPI)
Technology, Innovation, and New Economy Project
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