Is the New Economy Real?
The Industry Standard, August 20, 2001
This is the fundamental tenet of the new economy: Buy this gizmo and work smarter, faster, cheaper. Technology is supposed to increase productivity. And in recent years, the boom in technology spending led to a bang in productivity increases -- or so it seemed.
From 1973 to 1995, American productivity rose 1 percent annually; from 1996 to 2000, that rate jumped 180 basis points, to 2.8 percent, according to government data. Most believe the increase came from the adoption of PCs and, more recently, the Internet. "We believe that productivity is the promise of the Internet," Cisco Systems CEO John Chambers told investors last Tuesday. "And we are just beginning to see the paybacks of Internet applications and networking technology."
But the same day Cisco offered those encouraging words (and a discouraging no-growth forecast for the third quarter), government economists, who recalibrated their formulas to better reflect the economy, had a different story to tell. The upshot: The remarkable new-economy productivity increases weren't so remarkable after all.
The Bureau of Labor Statistics' revised data erased gains the new economy supposedly chalked up. The annual revision showed average productivity growth at 2.5 percent from 1996 to 2000, 30 basis points worse than originally reported. To new-economy critics, that suggests the gains were merely the product of an economic boom, where workers were pushed to meet rising demand. In other words, they argue, spending on new technology -- rather than the fruits of that technology itself -- may have fueled the dramatic productivity increases.
"It's fairly striking that the new-economy payoff is not nearly as great as people thought," says Robert Gay, Commerzbank Capital economist. "These revisions tone down the euphoria of the productivity miracle."
Worse still were the Bureau of Economic Analysis' revised gross domestic product figures, which were released the previous week. They showed that after-tax, nonfinancial corporate profit margins between 1998 and 2000 got worse, not better, as originally reported. New-economy critics seized on this, too, suggesting tech investments were like trading a cow for magic beans.
That said, things seem to be getting better. The second quarter productivity came in at a strong 2.5 percent. Although manufacturing still looks weak, technology, through the benefits of massive layoffs and cutbacks in hours worked, managed a strong productivity increase, offering signs that the worst pain in techland is over.
The big question posed by these figures is whether the downward revisions will continue. Until they do, most economists will probably remain in Fed Chief Alan Greenspan's camp, expecting the new economy to fuel productivity growth. "The only way the economy grows is through investment," says economist Alexander Paris of Barrington Research. "This is a much more competitive, capitalistic, price-competitive, global economic environment. The only way to remain competitive is to become more efficient, and we're seeing that the best way to do that is through technology."
But we're also seeing that the lag between technology investment and productivity enhancement is greater than first suspected -- and this dramatic, painful investment slowdown will make further enhancement all the more elusive.
Where'd the New Economy Go?
Revised figures debunk tech-
attributed profit margin gains.4
Original Numbers Revised
1998 7.0% 6.5%
1999 7.5% 6.0%
2000 7.6% 5.9%
Source: Bureau of Economic
Analysis, Nonfinancial Corporate