Nasdaq Crashed. The New Economy Didn't

The Nasdaq bubble has burst, and the New Economy is dead. Listen to the recession talk emanating from Wall Street and Washington these days, and that's the implied message. Don't believe it. Wall Street economists who consistently failed to predict the high-growth, low-inflation years of the '90s can't wait to say it was all a financial mirage. And Washington policymakers seeking huge income-tax cuts can't wait to bad-mouth the economic gains of recent years.

The basic truth is that the New Economy was always about productivity gains and still is. Nothing has changed. It's not about dot-com mania but the broad expanse of Old Economy corporations embracing new technologies and enhancing their performance. The Nasdaq collapse doesn't change this. In a paper given at the recent annual meeting of the American Economic Assn., Stanford University economics professor Robert E. Hall went so far as to argue that the dot-com blowup wasn't a speculative bubble at all but a rational market response. He said that the main reason that stocks of new Internet companies soared to wild valuations in the first place was that investors initially believed only startups would be able to harness the productivity enhancement of information technologies. When Old Economy companies surprised everyone by showing they could implement the same technologies, investors realized their mistake. They saw that the benefits of information technology were accruing to the big users of it, not necessarily brash young dot-coms with unorthodox new business models. Valuations suddenly appeared ridiculously high for the startups, and their stocks imploded.

We think Federal Reserve Chairman Alan Greenspan played a big role skimming the froth off the markets with his rate hikes. Greenspan believes there is a huge difference between overinflated stock prices and real productivity gains. Even as the Fed recently cut rates to buttress declining economic growth, it emphasized that advances in technology and productivity gains continue unabated.

The same message will soon be found in the Clinton Administration's last Economic Report of the President. It will show that productivity gains are spreading far from the information technology sector into all areas of the economy, such as trucking, retail and wholesale trade, and health care. This is what CEOs had been saying for most of the '90s, even before official government statistics showed a jump in productivity growth from an average of 1.6% for the '70s and '80s to twice that in recent years.

CEOs are still singing the productivity tune, and that is the song that people should listen to, not the Cassandra-like croakings of the naysayers. Beneath the downturn in this New Economy business cycle, structural productivity gains roll on.

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