NCPA - National Center for Policy Analysis

Economists Convert To New Economy Theories

August 1, 2000

How has the U.S. economy kept growing without a sign of serious inflation? Traditional theories have warned that rapid growth will eventually produce inflation. But that hasn't happened.

Enter the New Economy theory -- which says computers and information technology have boosted productivity, holding wage inflation in check and keeping prices more or less stable. A growing number of economists is buying that explanation.

Recently, Dale Jorgenson at Harvard University and Kevin Stiroh at the Federal Reserve Bank of New York set out to debunk the New Economy theory -- then found themselves embracing it.

  • As long as high-tech industries keep innovating, they say, the economy should be able to sustain the high rate of productivity growth and "the virtuous cycle of an investment-led expansion will continue."
  • They claim falling computer prices unleashed an investment boom which boosted productivity not only in the high-tech computer sector, but in "noninformation technology" sectors as well.
  • Overall, productivity grew by about 2.3 percent annually from 1995 to 1998 -- more than a full percentage point higher than the growth rate from 1990 to 1995.

According to their analysis, "noninformation technology" industries have contributed more to productivity gains than the computer sector. They estimate that about 70 percent of the one-percentage-point gain in productivity from technological progress comes from outside the sector.

Jorgenson foresees a future sustained growth rate of 3 percent to 3.5 percent, compared with the 2.5 percent rate that many economists had previously believed possible. Even the Fed seems comfortable with a growth rate of 4 percent.

Source: Steve Liesman, "Further Gains in Productivity Are Predicted," Wall Street Journal, August 1, 2000.

 

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