Remarks by Lawrence Summers

I am delighted to be here. Let me especially thank my friend Congressman Markey, and Father William Leahy, the President of Boston College, for inviting me to be with you for this event. Today I want to reflect for a few minutes on three fundamental questions for the future. First, what is new about the "new" economy? Second, why has the American economy performed so well in this new era? Third, what are the right broad strategies for taking advantage of the opportunities that a new economy presents?

I.The Foundations of a New Economy

Ten years ago in Chicago I called my wife - simply to tell her that I was in a car that had a telephone. Seven years later, traveling abroad, I was handed a mobile phone to talk to (then) Secretary Rubin about the IRS. And I did not give it a second thought. Even though I was sitting in a canoe two hours outside Abidjan at the time. That experience brought together some of the most important forces in the world today: technology, markets, global integration and the changing source of economic value.

First, revolutions in technology

Advances in information technology, transportation and communications are taking us to a post-industrial age, with profound implications for economies and societies. And I am convinced that the process of diffusion is far from complete. The sign that a technology has become pervasive is when you notice its absence rather than its presence. By that standard, connection to the Internet has some way to go. Perhaps 3-4 percent of the letters of congratulation that I received on my appointment as Secretary were in the form of e-mails. With the scale of business-to-business connections many times greater than individual-to-individual ones, it is likely that we understate their importance when we equate our day-to-day experience with that of the broader economy. What we can say, based on the evidence, is that the diffusion of new technologies is likely to be an accelerating rather than a decelerating process. I have been struck, looking at the business literature on these issues, by how many of the charts are in log scale.

Second, the spread of market forces

A second trend that has been creating this new economy has been the erosion of centralized economic controls and the spread of market forces. It cannot be an accident that Soviet-style communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. Increasingly, the balance of economic advantage has tilted in favor of systems in which economic power and opportunities are more decentralized - and the skills and ideas of the individual are given greater weight. At the level of individual businesses and national economies, flexibility is winning out over rigid controls. And the capacity to respond to change is winning out over the capacity to dictate it.

Third, global integration

A third and perhaps most spectacular recent development is the beginnings of a more truly global economy. When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets - about economies where more than three billion people live moving toward the market and seeing rapid growth in incomes. For the first time in human history, living standards for huge populations have quadrupled or more in a single generation. This is an event, I would argue, whose importance in economic history can be compared only to the Industrial Revolution and the Renaissance.

Fourth, a changing source of economic value

A fourth major trend is a change in the nature of what constitutes a good. We are moving from an economy in which the canonical product is an ingot of iron, a barrel of oil or a bushel of wheat- to one in which the canonical product is gene sequence, a line of computer code, or a logo. As Chairman Greenspan has often emphasized, in such a world, goods are increasingly valued for the knowledge that went into them rather than their physical weight. And what you know matters more than how much you can lift. Taken together, these trends perhaps capture what is new about the present moment. Parameters such as normal rates of unemployment and potential GNP growth surely have changed in the new economy. But many of the laws of economics, and all of the verities of human psychology, have not changed. That is why the new economy has to be built on old virtues. Which brings us to the question of explaining America's recent economic success.

II. The Foundations of America's Recent Economic Success

The exceptional performance of the United States economy in the 1990s has been fundamentally the result of the coming together of two elements: the advent of what Vice-President Gore has called the "information technology supply shock", and a return to old virtues in economic policies - fiscal policies particularly. The oil shock of the mid-1970s dramatically raised the price of a commodity that, while not accounting for a large share of the economy, had enormous spillovers. The effect was a negative productivity shock, and a combination of ills that we had to coin a new term for: stagflation. Conversely, the information technology sector accounts for a similar fraction of the American economy in the 1990s that oil did in the 1970s. But developments in this sector have reduced inflation and unemployment, and substantially raised productivity - with positive impacts on the rest of the economy that are just beginning to be captured.

Our ability to take advantage of this supply shock has depended on the centrality of information technology to our economy - which, in turn, has depended in large part on the dynamism of the American financial system. This helped to ensure that US companies were forced early to undergo painful re-engineering, permitting them to emerge faster and stronger in their fields. And it helped to channel funds to new industries - through a venture capital sector in which entrepreneurs may raise their first $100 million before buying their first suits.

However, our ability to exploit these new opportunities has depended also and critically on President Clinton and Vice President Gore's determination to forge a new national consensus around sound macro-economic policies - and, especially, a new paradigm for the management of our nation's budget. Structural deficit policies give rise to vicious circles. With underlying deficits and rising debts and interest burdens, deficits tend to lead to rising interest rates - and so to falling investment and slowing growth, which reduce revenues further, increase deficits and start the cycle again. This process leads to steadily decreasing national saving and deteriorating economic performance - what we saw in the late 1980s and early 1990s. Deficits - and the vicious cycle that they set in train - are ever more costly in an environment of burgeoning opportunities for new investment. That is why it was so important for the United States to reverse a generation or more of public borrowing. And that is why fiscal policy has played such an important role in helping to sustain the current expansion. Surpluses give rise to a kind of virtuous circle of declining debt, increasing national savings, lower interest rates, and rising investment and growth - leading to further fiscal improvement and a continuation of the cycle. Indeed, American savers have had to absorb more than $2 trillion less in government debt since 1993 than they would have if the budget projections made in that year had been realized. That is more than $2 trillion dollars available for new investment in America's future. This has much to do with why the expansion has been investment led, capacity creating and long lived, with capacity utilization - even today - not far from historic norms. Real investment as a share of GNP is today higher than it has been at any time in the postwar period.

III.Core Implications for Future Economic Policy

If these judgments are correct - that the economy is new in the sense that it is driven by new technologies, the benefits are more global, it is more market-oriented, and the value of its goods is judged more by the ideas they embody than their physical mass - this has a number of implications for public policy today: Some newer aspects of economic policy become especially essential. And certain old virtues increase in value.

1. New Priorities for Economic Policy

It is a characteristic of the "weightless" goods of this new economy that there will often be very high initial fixed costs and low, even zero marginal costs. In that sense, the cost structure of the canonical industry will be increasingly reminiscent of that for pharmaceuticals, publishing or the recording industry. In these new kinds of industries, growth should have a greater potential to snowball. Success may have greater potential to become self-perpetuating, as growth leads to rapid declines in prices, and so to further expansion in the market and further growth. We see an aspect of this today in the fact that orphan drugs cost much more than drugs with a larger market - and bestsellers cost that much less than academic monographs that very few people may read. There is the further point about these new industries, beyond the fact that costs fall as markets grow, that the value of networks will be increasingly important. The first fax machine could do very little. With one hundred fax machines, ten thousand connections are possible - with ten million machines the possibilities are almost limitless. This reality - that growing demand and growing markets and networks will tend to reduce costs and raise efficiency - makes successful economic management all the more important. It also points up the importance of making sure that we function with as large markets as possible. That is why continued emphasis on deregulation will be crucial, to ensure that government is not preventing or distorting the development of fast-growing markets. It is why passing the Telecommunications Act was important. And it is why we worked so hard to pass the right kind of Financial Modernization legislation last year. Just as important, it highlights the enormous benefits that will flow from successful global economic integration, which is why we need to do all we can to keep our markets open, and to work to ensure that other countries open theirs. A number of upcoming decisions will show our continued commitment to this kind of integration. Let me highlight two here: granting China Permanent Normal Trade Relations (PNTR) status to support its entry into the WTO; and passing the African Growth and Opportunity Act and the enhanced Caribbean Basin Initiative. It also points up the importance of growing the size of our networks here at home, by making sure that everyone has a part. This has been an enduring national challenge going back to our efforts, half a century ago, to ensure that essentially every American had access to electricity, to running water, and to a telephone. It has its counterpart today in our work, through "First Account" and other initiatives, to ensure that every American has access to a bank account. This sounds like a small step. Until you consider that in this age of the Internet, derivatives, and embedded options, perhaps 15 percent of US households still do not have one.

2.The New Importance of Old Virtues

At the same time, in this new economy some of the oldest lessons of economic science acquire even greater force. It makes continued fiscal discipline even more important. For, at a time when growth and investment is critical, and financial markets respond more quickly than ever before to changes in the future prospects, the specter of rising public debt in the future will cause more economic damage today than was true in the past - and the prospect of continued surplus will do that much more good. By continuing to pay down debt within a framework that helps us meet our future commitments to Social Security and Medicare, we can help to maintain the virtuous cycle we have worked so hard to achieve. And we can re-load the fiscal cannon, preparing the government to respond to future contingencies such as recessions or threats from overseas. It also makes us even more dependent as a nation on the skills and capacities of our people - and makes more urgent the challenge of raising the quality and coverage of American education. This will have important direct benefits for the economy in reducing skill bottlenecks and expanding the productive potential of the workforce. It will also have important indirect benefits for our society, by weighing against the potentially inequitable consequences of new technologies. That is why the President has placed such an emphasis on investing in schools, on expanding Pell Grants and on creating the HOPE scholarship. And that is why his budget for FY2001 includes expanded deductions for college tuition that would essentially put four years of college within reach for every American. And this new economy surely makes the case for public support for scientific innovation, first elaborated nearly 40 years ago by Kenneth Arrow, that much more evident. That is why we pushed for an extension of the R & D tax credit last year. That is why we have increased America's national science and technology budget for seven successive years. And that is why the President's budget for FY2001 commits an unprecedented $43 billion to science and technology research as part of our 21st Century Research Fund - a 7 percent increase on the previous year.

III.Concluding Remarks

These are good times. The economy is working for most Americans. We have a great deal to be proud of. But let me conclude on a more somber note.

Just as the world in 1999 looks very different from the world of 1989, so too did things look very different in 1989 than in 1979 - and so, just as surely, will 2009 look very different from today. We cannot know what this new economy will look like a decade from now. What we can know is that we are enjoying a very special moment, a moment that confers a special responsibility on public policy to work to broaden the base of our prosperity - and minimize future risks.

Technology does provide Americans with remarkable opportunities. But they are not there for those who lack the basic means to take advantage of them. And it has been estimated that in America today, a child born of a single teenage mother who did not finish high school has an 80 percent chance of living in poverty at the age of ten. Male life expectancy in Washington, DC is several years below that in Mongolia or Belarus.

If our success is to continue, if our economy is to be what it has to be, and if it is to be a secure prosperity that we enjoy, then we as a country have to do more to ensure that all are included. That is why expanding support for the working poor through the Earned Income Tax Credit is so important. That is why we need to take the steps contained in our New Markets Initiative to help to unleash the potential of our inner cities and other disadvantaged areas. And that is why we need to expand programs such as Head Start and the Child Health Insurance Program so that every child starts out in life with the core essentials. Many are rightly focused today on preventing a gaping digital divide. And we should remember that nothing does more to create that divide than the inability to read.

Finally, technology is transforming our economy and our society. But we need to recognize that there are some things that many Americans would like to stay the same. As we work to build a modern financial system we have also to ensure that every consumer's right to privacy is properly protected. As we work to build a more global economy we have also to work to prevent a race to a bottom in the policies and protections that matter to us. As important as new markets, new technologies, and new global integration are, we have equally to recognize that their full potential will not be realized without the right kind of public purpose. Thank you.

Top of page