Commentary: The New Economy Starts To Hit Homeby
Is the New Economy making a big difference in the daily life of the average American? Not according to some skeptical economists and journalists, who argue that new products such as home computers and online services are inconsequential.
But these skeptics are wrong. There's a fundamental economic principle that states consumers spend their time and money in the ways that give them the greatest perceived benefits. To put it another way, if you want to know what's important to Americans, you need to watch what they do.
By that gauge, it would seem consumers are voting with their feet and their wallets for the New Economy. Spending on mainstays of the New Economy, such as computers and financial services, is up more than 12% over the last year, while purchases of old-economy goods like cars and clothes are barely rising. Moreover, many Americans are happily changing their daily routine to take advantage of the goods and services that define the New Economy--providing another piece of evidence that they see growing benefits from the technology on which the New Economy is founded.
Consider first the latest shifts in household spending. Over the last year, personal income has soared by almost 6%, while consumer confidence has jumped by 16% to a new record. In the past, that would have sent Americans scurrying into auto showrooms to buy either an additional car or a new model to replace an existing vehicle. Yet the latest report from auto makers, released Mar. 4, shows car and truck sales down 3.6% for the first two months of 1998.
COMPUTER BOOM. Instead, Americans are choosing to put the extra money in their paychecks into more computers. The number of personal computers bought at computer stores jumped by 54% from last January to this. Moreover, despite the sharp decline in computer prices, the actual dollars being laid out by households on computer gear is up 18% over 1997.
Other sectors also show the attraction of the New Economy for consumers. Despite a housing boom, sales of major appliances are up barely 1% over the last year. At the same time, however, household spending on telephone services is up almost 9%, as more and more consumers order multiple lines and join up for cellular service. And instead of splurging on new clothing, investors are willingly paying brokerage and mutual fund fees in order to ride the rising stock market.
Indeed, judging by their actions, Americans are enthusiastically availing themselves of the new options in financial services that technology is providing. Homeowners are quicker to refinance, in part because automated mortgage approval programs allow banks to grant mortgages faster and more cheaply. And, without today's powerful computers, it would not be economical to offer mutual funds and 401(k)s to the average worker. Also, though consumers say they resent the fees they now must pay at many automated teller machines, they keep using the ATMs--suggesting that the convenience and time-savings have real value.
HIGH-TECH TIMESAVERS. Sometimes new technology can be enticing enough to produce a very rapid change in behavior. For example, more than 60% of traffic on New York City's bridges and tunnels now uses EZ-Pass, a small radio transponder that allows people to pay their tolls without stopping. This level of acceptance, coming less than three years after EZ-Pass was introduced, points up the big gains: The resulting time savings for commuters--about 15 minutes a day, or more than 40 hours a year, allowing for holidays and vacations--is worth a week's wages.
Based on where consumers spend their money and time, even some seemingly frivolous uses of technology have real value. One of the most popular features of America Online Inc., for example, is its chat rooms, where people can argue, flirt, and generally mouth off. This may seem like a marginal enhancement to their well-being, but it's no more ridiculous than the notion of calling a friend on the telephone just to talk. What's more, AOL's 11 million customers value its services enough that the company was able to raise prices by 10% last month, something that car companies have been unable to do.
The truth is, in a market economy, value is determined by the preferences of consumers--and that's the way it should be.