Since the stock market crash in 2000 and the economic slowdown that followed, we have heard much less about the beneficial effects of the “New Economy.” Barely two or three years ago, some analysts were predicting that new technologies and new management methods, especially in computers and communications, would make companies so much more productive that growth would continue indefinitely and the stock markets would hit unheard-of peaks. This prediction apparently turned out to be wrong.
Does the recession nonetheless spell the end of the New Economy? Robert McTeer, president of the Federal Reserve Bank of Dallas, doesn’t think so. He is among those who remain optimistic.
Over the last few years, Bob McTeer has acquired a certain notoriety in U.S. and international business circles as a champion of the New Economy and a fan of monetary management that takes account of the new economic conditions it has created. In 1999, when the Fed decided to curb the markets’ “irrational exuberance” (the words of Alan Greenspan) by raising interest rates, Mr. McTeer was the only member of the Federal Open Market Committee to vote against this increase twice.
He believes that concepts such as the Phillips curve (predicting that if unemployment rises, inflation will fall, and vive versa) and its cousin NAIRU (an evaluation of the “natural” unemployment rate above which inflation begins to rise) no longer hold true in the context of the New Economy. In effect, the higher productivity that it produces creates a situation in which inflationary pressures are eased.
Productivity growth in the U.S. economy, which was fluctuating around 1% to 1.5% annually over the previous two decades, has exceeded 3% and has even hit 5% since the second half of the 1990s. This means the “speed limit” on economic growth (the sum of productivity gains and labour force growth) has been affected by an equivalent amount.
For the president of the Dallas Fed, it is important to look at every side of the equation, when it is said that inflation occurs when there is more capital chasing fewer goods. If far more goods can be produced without bottlenecks in resource allocation (thanks to the New Economy’s more efficient methods), then according to him monetary policy can be made more expansionary without the risk of stoking inflation.
It thus becomes absurd to aim for slower growth by raising interest rates under the pretext that excessively rapid growth could create inflationary pressures. Bob McTeer adds that other factors linked to the process of globalization are improving economic efficiency and reducing the potentially inflationary impact of growth. These factors, such as the end of the Cold War, the integration of ex-Communist countries into the world economy, as well as the privatization and deregulation wave affecting certain developing countries, are positive phenomena that also have repercussions in our countries.
McTeer now recognizes that an outburst of enthusiasm for high-tech sectors caused overinvestment and a financial bubble. Companies have to liquidate surplus inventory and refocus their activities on sectors with the highest demand and the highest profits. He admits this readjustment will take time, but was predicting a recovery starting last year. He remains highly optimistic about the future of the U.S. economy.
Furthermore, McTeer says there is no reason to believe the New Economy is a thing of the past. On the contrary, the high rates of productivity growth we saw in the late 1990s should be back as soon as the economy is doing better. For example, the development of biotechnology is just beginning, and New Economy ideas will gradually be taken up by more traditional sectors. Despite the slowdown, we haven’t lost the recipe book, he says.
Bob McTeer will be in Montreal on May 30 at the invitation of the Montreal Economic Institute to discuss the future prospects of the U.S. economy.
Michel Kelly-Gagnon est président de l’IEDM.