Journal of Policy Modeling25 (2003) 431–434

Editorial

The new economy and growth:editor’s introduction

This Silver Anniversary Issue of theJournal of Policy Modeling on “The NewEconomy and Growth” arose out of the Session that I organized at the AnnualMeeting of the American Economic Association (AEA) held in Washington DCon January 3, 2003. The participants in the Session were Martin Baily, MartinFeldstein, Robert Gordon, Dale Jorgenson, Joseph Stiglitz, and Larry Summers.Martin Baily and Robert Gordon did not produce a paper and were replaced inthis Special Issue with papers by William Baumol, Lawrence Klein, and StephenOnliner and Daniel Sichel.

This Special Issue is in memory of Rudi Dornbusch, who was to participate inthe Session I organized for January 2003, but past away in June 2002. Over theyears, Rudi participated in many top AEA Sessions, in which he enlightened usand entertained us. We dearly miss him.

There is today close to a general consensus that, since the mid-1990s, the UnitedStates has created a New Economy based on the rapid creation and widespreadutilization of new Information Technology (IT), which caused a jump or structuralacceleration in the growth of labor productivity and output, with low inflationand low unemployment. Some people even predicted that, by permitting moreefficient inventory management and the rapid spread of information throughoutthe economy, the New Technology would made recessions a thing of the past, orat least less likely. Well, we have had a recession in the United States in 2001 and,since then, the growth of GDP has been much slower throughout the world thanduring the second half of the 1990s. Yet, contrary to earlier experience, the growthof labor and multifactor productivity remains high by historical standards. Thefundamental question now being asked is whether the recent jump in productivitygrowth will persist in time and will contribute to higher GDP growth in the future.

In the first paper in this Special Issue, “Innovations and Growth: Two CommonMisaprehensions,” William Baumol examines two crucial aspects of innovations.The first is that possessors of intellectual property characteristically have muchto gain, not only by passively sharing innovations with other firms — even directcompetitors — but by actively devoting effort and resources to get others to usetheir innovations on suitable terms. The second crucial aspect of innovations is that

0161-8938/03/$ – see front matter © 2003 Society for Policy Modeling.doi:10.1016/S0161-8938(03)00037-1

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the act of imitation of the work of the original inventor is characteristically alsoan inventive act in itself, entailing adaptation, improvement, and discovery of newuses. Indeed, Baumol argues that the contribution of the “mere imitation” may, infact, be more significant in increasing productivity than the “original invention.”The author believes that these two aspects of innovations play a significant rolein the spectacular growth accomplishments of free market economies during thepast decade.

Martin Feldstein (“Why Is Productivity Growing Faster?”) points out that theacceleration of productivity that began in the mid-1990s reflects not only the avail-ability of new IT, but also incentives and institutional structures. Without strongincentives and appropriate institutional structures, the developments in IT wouldnot have been transformed into faster productivity growth. Feldstein points outthat while earlier generations of technological change permitted automation androbots in the production process, the IT revolution has brought productivity gainsto management, sales, purchasing, design, accounting, and other non-productionactivities. The big difference in the productivity increase between the US andEurope has been in the sectors that are substantial users of IT equipment and soft-ware. Even in these sectors, European firms had neither the incentive structure northe corporate environment supportive of introducing changes that could involvesignificant job changes and layoffs.

In their paper, “Lessons from the U.S. Growth Resurgence,” Dale Jorgenson,Mun Ho, and Kevin Stiroh examine the resurgence of US labor productivity growthin the late 1990s and present projections for both output and labor productivitygrowth. The authors show that both the production of IT and investment in ITplayed substantial roles in the US productivity revival for the broadly definedUS economy that includes business, households, and government. Their base-caseprojection of labor productivity growth is 1.8% per year over the next decade with arange of 1.1–2.4%, reflecting fundamental uncertainties about the rate of technicalprogress in IT production and investment in IT equipment and software. Theseestimates are in line with other recent studies, all of which project relatively strongproductivity growth in the near future.

Stephen Oliner and Danile Sichel (Information Technology and Productivity:Where Are We Now and Where Are We Going) provide updated estimates of theproximate sources of growth using a growth-accounting framework that focuses onIT. Their results confirm that the acceleration in labor productivity after 1995 wasdriven by the greater use of IT capital goods and the more rapid efficiency gains inthe production of these goods. To assess whether the pick up in productivity growthis sustainable, the authors analyze the steady-state properties of a multisectorgrowth model. This exercise generates a range of labor productivity growth of2 to 23/4% per year, which suggests that much — and possibly all — of theresurgence is sustainable.

In his article, “The Use of the Input–Output Tables to Estimate the Productivityof IT,” Lawrence Klein points out that the appearance of a “bubble” during the late1990s and recession in 2001, as well as excessive speculation that led, in a number

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of cases, to sensational illegality or at least violation of socially responsible codesof conduct have created the impression in some quarters that the “New” economywas a mirage and that long-lasting improvements in productivity and changes forthe better in the US or other major economies have not taken place. By examiningstatistics for some individual sectors with input–output tables, Klein shows thatefficiency gains arising from the utilization of IT did indeed lead to economies ofscale and the creation of a new economy in both the production and the globalmarketing processes of the sectors examined.

George Stiglitz points out in his “Globalization and Growth in Emerging Mar-kets and the New Economy” that those developing countries that have managed theglobalization process well have received major benefits in the form of much morerapid economic growth. More commonly than not, however, under the auspicesof the IMF, globalization has not been well managed and may have adversely af-fected growth and even increased poverty in some countries. The author identifieseight channels through which these adverse effects can take place. One of the mostimportant is the increased risk that developing countries are likely to face frommismanaged globalization, and higher risks can have adverse effects on growth.The lesson that Stiglitz draws from his analysis is not that nations should walk awayfrom globalization, but that they should be aware of the downside and potentialrisks that accompany the process of globalization and design policies to mitigatethese risks, thus making it more likely that globalization will in fact live up to theclaims that its ardent advocates have put forward. Stiglitz points out that the key toChina’s and Korea’s success with globalization was in fact based on their abilityto govern and regulate the globalization process in such a way as to avoid some ofits potential harmful effects while taking full advantage of its benefits.

In “Cyclical Dynamics in the New Economy,” Larry Summers begins by statingthat he disagreed with Joseph Stiglitz’s “proposition that the way to have moreinvestments is to have controls that keeps capital out” and adding that he “wasin near complete disagreement with every sentence that Joe uttered that includedthe world globalization.” Summers goes on to make four observations. First, hesays we must be very humble in making short- and medium-term projections onproductivity growth because our track record is dismal. Second, he states that he isoptimistic about future growth in the United States because IT seems to have leadto more rapid growth in productivity, less inflation, stronger markets, and a lowerapparent natural rate of unemployment. Third, he predicts that if the trend towardsaccelerated productivity continues we are likely to see more of future economicexpansions coming to an end because of bubble bursting than, as in the past, becauseof Fed tightening. Fourth, the presence of incentive arrangements that influencemanagers at the margin to increase efficiency made a valuable contribution toproductivity growth in the United States during the past decade.

In the last paper in this issue, this author examines how greater economic lib-eralization and deeper restructuring made the United States the most competitiveeconomy in the world. The paper also discusses the meaning, the measurement,and the spread of the New Economy among the G-7 countries, and how this resulted

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in much higher growth of output and productivity in the US economy relative toeconomies of the other leading industrial nations since 1995. Finally, the paperexamines the reasons that the new economy is likely to continue to develop duringthe decade and the steps that Europe must undertake if it is to catch up to the UnitedStates.

Dominick SalvatoreFordham University, 1 Red Oak Road

Bronxville, NY 10458, USATel.: +1-914-961-2917; fax:+1-914-337-3355

E-mail address: salvatore@fordham.edu