‘New Economy’ Taking the Stage

Has the United States entered a “new economy”? That’s the big question these days. The data are defying conventional wisdom. The economy continues to grow nicely without pushing up prices and wages, leaving interest rates stable. This puzzling anomaly has led even the redoubtable Federal Reserve Board chairman, Alan Greenspan, to depart from his usual way of looking at economic data in assessing the need for monetary action. What’s happening here?

Potentially, this could be an economic revolution, one in which sustained growth is possible without much inflation. Well, matters indeed have changed, in large part because of a truly global economy and technology-driven productivity gains.

International competition forces markets and industries to be more efficient, and cheaper imports help keep prices down for American consumers. Investments in new technology are beginning to yield productivity gains in both manufacturing and services. Meanwhile, Congress and the White House have reduced the economy-distorting federal budget deficits. U.S. financial markets, taking a cue from developments, are bumping stock prices to historical highs.

Greenspan, attempting to ride this strange wave, plows through mountains of data, arcane information that helps him spot emerging patterns of the new economy. For now he seems willing to lead the Fed away from its traditional caution and to permit faster growth by holding interest rates steady.

Are we ready to cast off the old economic models? Not quite. Economists are far from agreement on what is going on, and we need better tools to measure productivity gains, particularly those marked by new technology. We do know that real wages are up for the first time in a decade and many households are profiting in the soaring stock market. But the only sure thing about the nation’s economy is that, for most of us, it is for now a pleasant experience.