April 12, 2002

Was the New Economy Oversold?

I'm going to be on Nightly Business Report--90 seconds, which means 180 words, provided that the words are not big ones like "sesquipedalian." When I write, I have a very hard time writing anything less than 4000 words or so. When I talk, I have a very hard time figuring out how to compress what I need to say into less than 20 minutes. I find it an extraordinary, extraordinary trial to try to get anything down to the 800 words or so needed for a standard opinion-editorial without feeling that what I have written is either hopelessly simplistic, biased, or platitudinous. So how can I possibly figure out what to say that is worth saying in 90 seconds? Even my question to Rich Ivry was 230 words long, and that was just a question--not an attempt to provide an answer as well.

I have to find something that is (a) short, (b) interesting, (c) accurate, and (d) complete--I really don't want to become one of those people who pollutes the public discourse by sending half-truths out into the media stream. At the moment, however, I just have one idea: to talk about the fact that productivity growth has held up remarkably strongly in the 2001 recession, and the implications of that fact for growth over the next decade.

"Read the newspaper, listen to the TV, and it's hard to avoid the impression that the 'New Economy' of the nineties was grossly oversold. The crash of the NASDAQ and the dot-com bankruptcies demonstrated that a lot of late-nineties investment was socially-wasted fluff. The recession of 2001 showed that U.S. growth was not bound for the stratosphere.

"But if you hang out with the professional forecasters and builders of economic models, you hear a very different story. They are impressed by how small the recession of 2001 has been in terms of lost output, how rapid productivity growth has been throughout the recession, and they are expecting the next decade to look a lot more like the fast-growth second half of the nineties than like earlier periods of slow productivity and real wage growth. Consider the fourth quarter of 2001, in which hours worked in the U.S. economy fell at an annual rate of 3.3 percent. In a normal recession--a recession like those we have typically had since 1973--you would have expected such a steep fall in hours to be accompanied by an even steeper fall in production, for productivity typically falls when unemployment rises sharply and hours worked crash. But in the fourth quarter of 2001, production did not fall. Instead, it rose at an annual rate of 1.7 percent.

"If you are a politician in office, like Treasury Secretary O'Neill, this growth in fourth-quarter production lets you score political points by saying that there was never a recession at all (never mind that the U.S. economy has shed two million net jobs over the past year). But if you are an economist interested in forecasting more than the next three month's statistics, it suggests something much more interesting--that the process of automation and investment in information technology that fueled such rapid real wage and production growth in the late nineties is still going on under the surface even in the depth of the recession, even when businesses are under no immediate pressure to boost their capacity. This suggests that the underlying computer-driven productivity growth trend is rapid indeed.

Posted by DeLong at April 12, 2002 03:55 PM | TrackBack


17 months later and unemployment is still rising.

Also, look at MFP in 2001-- a 1.0 percent drop, just like in 1991.

Care to comment?

Posted by: william brown on July 7, 2003 12:47 PM
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