That Old New Economy
A leftist tries to make sense of the '90s boom.
After the New Economy, by Doug Henwood, New York: The New Press, 269 pages, $24.95
It seems like only yesterday. Gross domestic product was booming. Labor productivity was skyrocketing. And price inflation, at least as measured by government statistics, was almost nonexistent. The stock market was climbing. Companies like Yahoo and Amazon and eBay were trading at 90 times earnings or more. And New Economy guru George Gilder was getting respectful write-ups in The New York Times.
Oh, wait a minute. That was yesterday.
The New Economy still seems alive, if not quite as healthy as it was in the late 1990s. But we don't hear the phrase New Economy as much, and we certainly don't hear the utopian claims that once were made by its boosters and prophets. People are more circumspect about claiming that new technologies will revolutionize the world.
The bursting of the stock market bubble, the dot-com shakeout, and the brief recession have chastened even the most wild-eyed New Economy zealots. Before those events fade into history, it probably would be a good idea if someone looked back at the late '90s and tried to separate the New Economy myths that were promulgated at the time from the reality, to explain the excesses of the era, to figure out why so many people overestimated the New Economy then and whether we are underestimating the New Economy now.
Unfortunately, Doug Henwood isn't that author and After the New Economy isn't that book. Henwood, editor of the Left Business Observer, has some interesting things to say about the late-'90s hype in After the New Economy, but his critique of the actual U.S. economy focuses on a much longer period, undermining his argument. For instance, he is concerned with what he perceives as growing inequality in U.S. incomes. He tells us that from the mid-1970s to the mid-'90s real hourly pay for those in the bottom third of income distribution fell. But he also says that real wages at all levels started to rise in 1996, only to fall again as unemployment rose in 2001. It's hard to see how any of that indicts the New Economy.
Still, Henwood gets off to a promising start, summarizing concisely the most grandiose claims of the period: "Computers had unleashed a productivity miracle, recessions were a thing of the past, ideas had replaced things as the motors of economic life, the world had become unprecedentedly globalized, work had become deeply meaningful, and mutual funds had put an end to class conflict." As Henwood reminds us, it wasn't just stock hucksters and science fiction writers making these claims. The first chapter is prefaced by this now embarrassing quotation from "the late, prestigious MIT economist Rudi Dornbusch": "The U.S. economy likely will not see a recession for years to come. We don't want one, we don't need one, and as we have the tools to keep the current expansion going, we won't have one. This expansion will run forever."
The book starts to go downhill after that. For his symbol of New Economy hype, Henwood picks the techno-prophet George Gilder. Fair enough. In magazine articles, speeches, newsletter reports, and books such as Microcosm and Telecosm, Gilder became perhaps the best known and most optimistic herald of the New Economy. Thanks to new technologies, Gilder told us, "all of the monopolies and hierarchies and pyramids and power grids of industrial society are going to dissolve." And that was one of his more modest predictions.
In 2000 Gilder presided over a small empire of newsletters and conferences. Then the stock market crashed. Companies that Gilder had touted, such as Global Crossing and WorldCom, floundered. And Gilder himself experienced a very public reversal in his own fortunes, as did those who'd sunk their money into the companies he hyped.
But here's the rub. Gilder was still right about a whole lot of things: the rapid growth of bandwidth, for instance, and the impact that would have on work, communication, and entertainment. Someone probably could write an entire book on what Gilder got right, what he got wrong, why he was right, and why he was wrong. (Wired attempted just that in its October 2002 article "The Madness of King George," but the piece only scratched the surface.) Yet Henwood doesn't seem too interested in that. He'd rather remind us of the non-P.C. and often retrograde views on sex and race that Gilder displayed in his earlier books Men and Marriage and Visible Man, or let us know that the furniture in Gilder's home is reportedly so shabby that "Goodwill wouldn't accept it as a donation."
Henwood then turns to what really seems to interest him: numbers. His discussion of productivity figures is solid and generally fair. Measuring productivity is, as he argues, as much an art as a science. "An hour's labor may be an hour's labor, but how do you value the relative contributions of an experienced engineer and a janitor fresh out of high school?" he asks.
Henwood shows that, at least by some measures, the massive surge in productivity we've seen in the last seven or eight years is highly concentrated in a handful of industries. Northwestern University economist Robert Gordon, for instance, has persuasively argued that most of the acceleration of productivity has been restricted to the computer and high-tech sectors. McKinsey Global Institute found that wholesale and retail trade and security and commodity brokerages account for a disproportionate share of productivity growth.
If the acceleration of productivity is concentrated in so few sectors, can it be sustained? Can its effects really be widespread? Those questions get at the heart of the debate about whether new technology has really produced a New Economy. So far, the gains have been sustained, even during the brief recession, and lately they seem even to have accelerated. (The book doesn't explicitly acknowledge this, though the fact does show up in some of its charts.)
Henwood's discussion of income, the core of the book, is less satisfying. He argues that income inequality has been growing for three decades, with real hourly pay for the bottom third of earners falling, pay for the middle staying roughly flat, and pay for the top rising nicely.
Most economists say this trend is largely explained by an increasing rate of return to knowledge and skills. In other words, the wage premium earned by the highly skilled is increasing. But Henwood contends that the explanation lies in, among other things, "racial, sexual, and other forms of discrimination; the declining power of unions; the eroding minimum wage; cutbacks in social spending…persistent labor market turbulence (layoffs, restructuring, givebacks) that put workers on the defensive and weaken their bargaining power; relatively high rates of unemployment…and, more controversially, the increasing importance of international trade and immigration."
Yet just two pages later, Henwood grants that black households have made tremendous gains in income relative to whites since the early 1980s, and that "since 1993, even the poorest fifth of black households have enjoyed stronger income gains than whites." The shrinking of the gender gap in income is "even more dramatic," he acknowledges. So much for racial and sexual discrimination as a primary explanation for the growing income gap.
As for immigration, Henwood really glosses over the subject, barely pausing to note that the influx of poor Hispanic immigrants drags down the income average for that group. Harvard economist George Borjas estimates that each 10 percent increase in the supply of labor through immigration reduces wages of natives by 3 percent to 4 percent.
It's simple enough economics. The more of something there is, all other things held constant, the lower the price it can command on the market. Adding millions of low-skilled workers to the economy should drive down the wages of those with low skills. A 1997 report from the National Research Council found that almost half the decline in real wages for native-born high school dropouts from 1980 to 1994 could be explained by competition from immigrant workers. None of that necessarily means we should end immigration, but it does mean that we should recognize it has costs.
Henwood stands on firmer ground when he tackles globalization. He finds that, for many leftists, globalization is a nebulous concept applied to "everything bad that's happened over the last decade or two."
He also points out that "antiglobalizers are frequently antidevelopmentalists as well, and like [Ralph] Nader, sport a closet full of hair shirts, not just for themselves but for everyone in sight."
Henwood argues that both globalization and economic development have definite benefits, although he also argues that the institutions under which both processes are currently taking place advantage capital over labor. He also does a good job of putting the current debate over globalization into historical context. "Early capitalism wasn't as local and personal as myth has it; from its beginning it was deeply international," he notes. "In the early U.S., early nineteenth century merchants imported British industrial goods and exported cotton, acting as financiers at every stage."
The book even comes tantalizingly close to putting the New Economy into historical context. "The early days of the telegraph were laden with fantasies of universal peace, love and understanding, very similar to some of our more fervent web enthusiasts—and even 'web' metaphors were themselves common," Henwood writes.
Indeed, the telegraph was a huge advance in communication, arguably a bigger advance over what then existed than the Internet has been. And it, too, revolutionized commerce and industry. The telegraph assisted the spread of railroads, for instance, by making it possible to communicate train schedules, synchronize time across distances, and warn operators of any disruptions.
The automobile, the telephone, and radio, to name just a few examples, also had profound changes on the way people lived and worked, but those changes weren't inevitable. Both Marx and the New Economy prophets were wrong: There are no historical laws.
Technology alone won't end oppression or guarantee an endless economic boom. Nor can new technology protect us from the bad policies of central bankers or lawmakers. That's something we found out when Federal Reserve Chairman Alan Greenspan raised interest rates in the late 1990s, temporarily choking economic growth and sending the stock market plummeting.
A sober appraisal of the New Economy would try to find out what mistakes were made in the '90s and who made them; it would ask what institutional arrangements would help us best realize the potential of new technologies. On the few occasions when Henwood actually tries to do this, he can be perceptive. Far too much of this book, however, focuses not on the New Economy but on old complaints about capitalism.