Shenehon Online: Did the New Economy Die?

By: Scot A. Torkelson

Wasn't it a year ago that the U.S. economy was immune to recession under the 'New Economy' banner? And today, the economic gurus and television pundits are pronouncing not only that we are not immune to recession, but that this recession means the New Economy is dead. I believe they are wrong on both counts. It is curious that their error in the first assumption-that the U.S. Economy is recession proof because of the New Economy-has led to their corollary assertion that, "if we go into recession and New Economy companies suffer weakness, then the New Economy itself is dead."

The fact is that globalization, higher productivity, the tendency toward lower inflation and even deflation are all very real indeed. The old economic model held that economic expansions lead to inflation and higher interest rates as demand increases. But this last business cycle is proof enough that things have changed. We have just experienced the longest economic expansion in U.S. history beginning in the second half of 1991 and extending over a 10-year period to the first half of 2001. During that entire period inflation and interest rates have tended to fall nearly consistently. This is because the New Economy does not utilize hard assets and commodity products in the same way as old economy companies. The following chart shows how the economy has doubled GDP (gross domestic product) since 1977 while the weight of all products produced has stayed the same over the period. What has happened? The New Economy companies' businesses are based on electrons (it's the 'e' in e-business) instead of atoms. So that by 2000 the dollar value of products produced in the U.S. has risen from $3.65 per lb. in 1977 to $7.93 per lb. by 2000. Does it really matter?

Ask oil drillers. In 1975 the 3-D imaging required for tracking new oil wells cost $5 million and took six months. Today costs are down to $50,000 and the same work can be completed within three days. Just because recession turns out not to be relegated to history, does not mean the new economy should.

Back To Top