So What Happened to the 'New Economy'?

So What Happened to the 'New Economy'?

Toast of the town last year, just toast this year? Not exactly, say experts

By Sean Smith
Chronicle Editor

A little more than a year ago, Conte Forum - so often a venue for hard-nosed sporting competition - saw a different kind of clash, as prominent business executives, entrepreneurs and government officials traded opinions on America's technology-driven "New Economy."

Amidst the animated panel discussions of the Boston College Finance Conference 2000, keynote speaker Federal Reserve Chairman Alan Greenspan offered his own reading of the tealeaves. Noting the technology revolution's enormous impact on the US economy, Greenspan warned of "financial and economic instability" if demand for goods and services continued to outstrip supply.

Prof. Peter Gottschalk (Economics) is not particularly fond of the phrase "New Economy."

Within days of the March 6 conference, the Nasdaq index, regarded by many as a bellwether for the dot-coms, Internet stocks and other New Economy-related phenomena, soared above the magic 5,000-point ceiling, while the venerable Dow Jones Industrial Average posted its sharpest two-day loss in more than 16 months. The New Economy seemed to be flying high.

But that was then.

In the year since Greenspan stood at the Conte Forum podium, Nasdaq has dropped faster than a Red Sox fan's optimism - falling below 2,000 earlier this week - and the press has been rife with reports of dot-com failures and high-tech layoffs.

Boston College economic experts, however, say this reversal of fortune hardly constitutes the New Economy's death knell. If anything, faculty say, the New Economy might be a victim of its own celebrity: put on a pedestal by the popular media and public, then consigned to the dustbin like yesterday's Furby or other trendy item.

Assoc. Prof. Harold Petersen (Economics) says some "New Economy" entrepreneurs would have done well to emulate Andrew Carnegie. (Photo by Lee Pellegrini)

Visions of young, dot-com millionaire hotshots gone begging may make for good copy and snappy, vindictive jokes, but the past 12 months are more a reflection of good old-fashioned economic principles at work, say the BC experts.

Prof. Peter Gottschalk (Economics), for one, scoffs at the very phrase "New Economy."

"How exactly is this 'new'? What we are seeing is the result of long-term changes and developments that have been going on for years," said Gottschalk. "When we look back five years from now, we're not going to see economists saying, 'The economy changed drastically in the year 2000.' Economics just doesn't work like that."

One major source of confusion, Gottschalk and other experts say, is the use of "New Economy" as a catchall reference for stock market performance, job market trends and various economic indicators.

"There's always a 'new economy,' a factor that helps shape market forces," said Assoc. Prof. Harold Petersen (Economics). "In the 1890s, it was steel. In the 1990s, it was the silicon chip."

Assoc. Prof. Robert Murphy (Economics) said, "When people say 'New Economy,' they might mean Nasdaq or the tech craze of the past few years, and the advent of Internet companies.

"But from an economist's view, there's also this notion of a fundamental shift in the rate of productivity growth. From 1973 to 1995, the rate was 1 to 1 1/2 percent per year; since 1995, it's been 2 1/2 to 3 percent per year. The question one would ask is, is this a five-year blip or something more permanent?"

To be sure, Murphy and colleagues say, the economy - new, old or otherwise - has slowed considerably from last year. Given the unprecedented high level of economic growth experienced by the United States during the past several years, a leveling-off was inevitable.

"But the 'New Economy,' in the more general sense, is here to stay. What happened is, people got ahead of it," said Murphy.

"We've got a hangover due to unrealistic expectations," said Asst. Prof. John Gallaugher (CSOM). "The markets were filled with firms that had horrible business models. On top of that, stocks of traditionally strong performers like Cisco, EMC, Microsoft, and Intel were priced to perfection and had much further to fall.

"The expectations regarding profitability were unrealistic. Wal-Mart took 10 years to earn a profit, USA Today took 11. It's not at all surprising that Amazon, in going from zero to $1 billion-plus in four years, would still be in the red. Unfortunate for a firm like Amazon is that they felt compelled to expand their business to 'grow' into their market cap. This led them to invest in horrible businesses and expand from selling books, which is profitable for them, to selling barbecue grills, a business where they'll never make money."

Petersen says some of the "New Economy" entrepreneurs could perhaps have benefited from a little historical insight.

"This is something that goes back to Andrew Carnegie," he said. "When the railroads became a big business, obviously, they attracted a lot of investors who saw dollar bills in all those rails and bridges. Carnegie understood that it's better to be the one supplying the steel for the rails and bridges, because it's not as competitive.

"'E-commerce' and 'e-tailing' looked very appealing, because it was easy to get in there fast and be competitive. But if you're a firm like Cisco, which deals in infrastructure - supplying the steel, in other words - you're going to be able to weather these downturns a lot better."

The faculty experts also discount the idea that the "New Economy" downturn will be for the twenty or thirty-somethings who invested or took jobs in the high-tech field what the Great Depression was for their grandparents.

"The 'depression' analogy is much too severe," said Gallaugher. "By some estimates our economy is short one million tech workers. The dot-com layoffs will help a little bit, but the Department of Commerce put out a stat last year that's hanging on my door: It states that 'by the year 2006, 50 percent of all US jobs will be in the IT sector or require IT skills.'

"Every employer I speak with says they need more tech-savvy managers. We're in a reactionary belt-tightening phase now that's really rough on folks who are laid off and for some current job seekers, but folks who remain close to tech should always have a competitive advantage in the marketplace.
"In short, stay geeky!"


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