NCPA - National Center for Policy Analysis

Innovations, Not Internet, are Fueling The New Economy

March 19, 2002

Despite skepticism about both the stock market boom of the 1990s and the influence of technological innovation, Martin Baily and Robert Lawrence believe that the new economy is real. The researchers claim that there has been a structural acceleration of total factor productivity (TFP), caused by innovation in information technology (IT) and the application of IT in service sectors, including wholesale and retail trade, finance, and business services. However, they do not believe that the economic growth of the 1990s was heavily dependent on the often-mentioned Internet.

Baily and Lawrence assert that the change in TFP growth between 1995 and 2000 was primarily structural (and therefore long lasting), not cyclical (and therefore temporary).

  • They estimate that the trend growth rate of labor productivity accelerated by 1.6 percentage points over that time period, to 3.1 percent a year up from 1.4 percent a year.
  • Part of the acceleration was attributable to capital expenditures -- especially for computers, communications and software -- with the rest due to an acceleration of TFP growth in the computer sector and in industry in general.
  • They found IT-intensive industries had faster labor productivity growth than other industries, while service industries and durable manufacturing also had greater productivity growth than the overall economy.
  • They concluded that improvements in supply chain management from IT were more essential to growth than the Internet.

Finally, Baily and Lawrence believe that the stock market and favorable economic policy in the 1990s created an environment that was conducive to the financing, development and application of innovation. Higher expenditures for research and development, and investment, were the result of high demand for IT, the wide availability of venture capital and market financing, and economic policy that stimulated domestic and international competition, funded research and lowered interest rates.

Source: Noshua Watson, "Yes Virginia, There is a New Economy," NBER Digest, August 2001; based on Martin Baily and Robert Lawrence, "Do We Have A New E-conomy?" NBER Working Paper No. 8243, April 2001, National Bureau of Economic Research.

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