New Economy
From Free net encyclopedia
The New Economy is a term that was coined in late 1990s to describe the evolution of the United States and other rich countries from an industrial/manufacturing-based economy into a high technology-based economy, arising largely from new developments in the technology sector. At the time, some analysts claimed that this change in the economic structure of the United States had created a state of permanent steady growth, low unemployment, and immunity to boom-and-bust macroeconomic cycles. Furthermore, they believed that the change rendered obsolete many business practices. While many of the more exuberant predictions proved to be wrong, pundits continue to use the term New Economy to describe the contemporary American economy.
In the financial markets, the term is often associated with the Dot-com boom. This included the emergence of the NASDAQ as a rival to the New York Stock Exchange, a high rate of IPOs, the rise of Dot-com stocks over established firms, and the prevalent use of such tools as stock options.
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Background
Around 1995, U.S. economic growth accelerated, driven by faster productivity growth. Since the early 1970s, labour productivity growth had only averaged around 1-1.5 percent per year, but since 1995, growth has been much faster: 2-2.5 percent. In addition, unemployment rates were lower than they had been in years and inflation stayed low as well. Already in 1995, Newsweek coined the phrase 'New Economy' to refer to this happy state. According to many commentators in the late 1990s, investment in Information technology (ICT) had eliminated economic fluctuations and ushered in a golden age of economic prosperity. The economist Robert J. Gordon referred to it as the Goldilocks Economy.
As with many things that seem too good to last, the recession of 2001 discredited many of the more extreme predictions made during the boom years. However, subsequent research strongly suggests that productivity growth has been stimulated by heavy investment in ICT. Furthermore, continuing strong productivity growth since the 2001 recession make it likely that some of the gains of the late 1990s may endure.
Links: U.S. labour productivity data[1] and U.S. business cycle dates[2]
Technology sector
At the same time, there was a lot of investment in the companies of the technology sector. Stock shares rose dramatically. A lot of start-ups were created and the stock value was very high where floated. Newspapers and business leaders were starting to talk of new business models. Some even claimed that the old laws of economics did not apply anymore and that there new laws. They also claimed that the improvements in computer hardware and software will dramatically change the future, and that information is most important value in the New Economy.
Investment
Some, such as Joseph Stiglitz, have suggested that a lot of investment in Information technology, especially in software and unused fibre optics, was useless. However, this may be too harsh a judgement, given that U.S. investment in Information technology has remained relatively strong since 2002.[3] While there may have been some overinvestment, productivity research shows that much of the investment has been useful in raising output.