When Five Economists Debate...
Ask five economics professors a simple question, and you'll get several dozen complicated answers. At least that's what happened in early January in New Orleans, when five of the nation's top academic economists butted heads over how Americans should go about "charting our course in the New Economy." One said a recession is a sure thing. Others said that's unlikely. One denied that the New Economy even exists, while another confessed embarrassment over having taken so long to realize its existence, and yet another claimed the New Economy began in 1844.
Along the way, the professors insulted each other liberally and went off on several strange tangents, including one over whether computers will replace economists. The occasion for the New Economy debate -- technically a "roundtable" -- was the annual meeting of the American Economic Assn.
Martin Baily, a Brit who is in his final days as chairman of President Clinton's Council of Economic Advisers, stoutly defended the existence of a New Economy, which he defined as "sharply improved economic performance linked to information technology." It started, according to his charts, in 1995. Not surprisingly, Baily attributed some of the economy's improvement to the federal budget surpluses achieved during the Clinton Administration. One of the most optimistic panelists, Baily said "there's a lot more still to come" and predicted that the recent drought of funding for tech startups is "going to be a transitory phenomenon" that will end "once we get through this turbulence on the way to a soft landing."
Robert Gordon, a Northwestern University economist who may be the most prominent foe of New Economy theories, argued that "the economy is in trouble for Old Economy reasons." He said the "Goldilocks economy" is due for a fall because low energy prices and the "unholy twins" of a rising dollar and a rising trade deficit have unnaturally supported it. Gordon said rising energy prices are now wreaking havoc, the dollar is "hanging by a thread," and the recent signs of weakness in the economy are likely to snowball.
Robert Hall of Stanford University provided a Silicon Valley perspective, arguing that the tech-stock bubble wasn't necessarily a bubble at all. Stock prices, he says, simply fell in response to new information. "The Nasdaq was rational 12 months ago. It's rational today. We learned a lot in between," Hall argued. Specifically, he said, what investors learned is that the benefits of info tech are real but will accrue mainly to its users, not to the dot-coms that have invented it.
Paul Krugman, of Princeton University, conceded he was wrong in the mid-1990s to diss the idea that a New Economy was taking shape. He said he took so much delight in skewering the logical fallacies of some early New Economy arguments that he missed the message coming from business people. "What was foolish on my part was not to listen to the groundswell of people in business that something was happening," Krugman said. Although the stock market seems to have lost faith in the New Economy, Krugman says he remains a convert -- largely because business people still think there's lots more room for productivity advances.
Finally, Yale University's William Nordhaus declared that he, too, believes in the New Economy, although he posited several dates for its origin -- including the invention of the telegraph in 1844 and the invention of the computer a century later. Since 1946, said Nordhaus, the cost of computing power has fallen by a factor of a billion: "There's nothing like this in history." According to his calculations, the recent improvement in economic performance is nearly half attributable to New Economy factors, with about a fifth attributable to "capital deepening" -- i.e., increased automation -- and the rest attributable to something called "other."
The esteemed professors behaved badly at times. Nordhaus ignored a question posed by the moderator, Harvard University's Dale Jorgenson. Hall trashed a recent New York Times column by Krugman and ripped into Gordon's ideas about the impact of energy prices on the economy. Gordon accused Hall of playing the same tricks he played when they were graduate students together 36 years ago. Krugman saved his barbs for the tax cuts proposed by President-elect George W. Bush, saying he doesn't buy the Bush advisers' Keynesian rationale that tax cuts will stimulate the flagging economy. Said Krugman: "The only good thing to say about that is they're not sincere." (Baily, it must be said, was unfailingly polite.)
If economists disagree on so much, who needs them anyway? Hall pointed out that they belong to that large class of college-educated workers whose pay has risen faster than average for reasons that are still not apparent. Perhaps, he said, an ill-defined substance called "e-capital" nicely complements the skills of college-educated workers.
On the other hand, Krugman said the wage edge for college grads isn't guaranteed to persist. He noted that weavers got a temporary pay advantage from the invention of yarn spinners a couple of centuries ago only to get thrown out of work by mechanical looms, which they then attempted to smash. Maybe, he said, the same thing will happen to professors. Instead of sitting on a dais in New Orleans, he speculated, "We're all going to be out of jobs, and we'll be out there smashing machines." Proposed topic for next year's roundtable: "Twenty Uses for Surplus Economists."
By Peter Coy in New Orleans
Edited by Beth Belton