New Economy Myths and Reality

Abstract

In the late 1990s, some economists announced that the American economy had fundamentally changed. According to this "New Economy" view, technological advances had brought on a higher sustained level of productivity growth, which allowed faster economic growth with less inflation. But given events since 2000 - the long, steep stock market downturn, the falloff in business investment and the subsequent recession - many question whether anything in the New Economy view is valid.

Although those who hold this view consider accelerated productivity growth fundamental to the late '90s boom, other forces were also at work. These include the earlier deregulation of key U.S. industries, financial innovation and freer trade in many parts of the world. Despite this, the flood of Internet-related businesses and the spectacular rise in their stock valuations led some to see the New Economy as solely an Internet phenomenon.

Is the New Economy view simply Pollyanna economics? Or is it rooted in reality? An analysis of several myths shows that recent advances in information technology have, in fact, helped transform the U.S. economy. While such technology effects are an old story, the evidence suggests that the current situation differs significantly. The New Economy has not produced ever-increasing stock prices or tamed the business cycle. But it has accelerated productivity growth, making the economy more resilient and flexible, with less volatile growth rates and fewer and milder recessions, thereby improving living standards.

JEL Classification: L10, L20, O33, A10, B20, E32, O40