Commentary: The New Economy's New Convert

When Alan Greenspan began ruminating out loud on Aug. 27 about the possible need for the Federal Reserve to deal with the dangers of a speculative asset bubble, Wall Street went into a swoon. Suddenly, investors who had confidently bid up shares--especially tHose getting a lift from the Internet and electronic commerce--became doubters.

But while some true believers may be having qualms, former skeptics are beginning to embrace New Economy logic as they put together predictions of good things to come for the U.S. economy. On Sept. 9, Macroeconomic Advisers, one of the nation's leading economic forecasters--and a longtime critic of the whole notion of a technology-driven New Economy--will issue a report concluding that the U.S. is poised to enjoy a healthy degree of noninflationary groWth. Why? Because as long as high-tech investment continues, productivity should grow at rates close to 2.3%. "Rapid growth in the capital stock is pretty much locked in" for the next couple of years, unless investment spending unexpectedly plunges, says Joel Prakken, chairman of the firm. "You can tolerate faster growth without worrying about inflation pressure."

IMPORTANT CLIENTS. This is a major change for the St. Louis-based forecaster, which was founded in 1982 by renowned inflation hawk Laurence H. Meyer (now a governor of the Federal Reserve Board), Prakken and President Chris Varvares. Given Macroeconomic Advisers' continuing close ties to the Fed and its current client list, which includes the Congressional Budget Office and the Office of Management & Budget, the new forecast could have a significant effect on fiscal and monetary policy.

The firm, which supplies one of three large-scale macroeconomic forecasting models in widespread use today (the others are from Standard and Poor's DRI and the Federal Reserve), now appears to be the most bullish on the U.S. economy. DRI (a unit of The McGraw-Hill Companies, which publishes BUSINESS WEEK) still puts trend productivity growth at 1.8%. Any estimate that goes higher, says David Wyss, DRI's chief economist, "is probably optimistic."

Macroeconomic Advisers' new estimates of productivity growth, if accepted, could make it easier for the Congressional Budget Office and Office of Management & Budget to raise their long-term growth projections. Budget planners have generally stuck close to the "consensus" forecast of about 1.8% or so. But spin out the new forecasts for 10 years, and "you'd have a much bigger surplus," says Prakken.

GENTLER BRAKING. In terms of monetary policy, the higher productivity estimates would not eliminate the need to slow the economy. However, they certainly would limit how much tightening would be appropriate, says Prakken. Accepting faster growth, of course, goes a long way toward justifying lofty valuations in the stock market.

There are dangers. Macroeconomic Advisers' new forecasts of rapid productivity growth depend on continuing declines in the cost of technology and no letup in the investment boom. Neither trend is guaranteed. And if the equity market should plunge, businesses are likely to find it harder to raise capital for investment, dampening the productivity boom. But until that happens, the good times should roll.

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