American Economy
Learning Goals
1. New Economy
2. New Economy in the .
3. 1990s: American Economic Boom
Economists on the US economy in 1980s & 1990s
“…American industry is not producing as well as it ought to produce, or as well as it used to produce, or as well as the industries of some other nations have learned to produce…if the trend cannot be reversed, then sooner or later the American standard of living must fall.” (MIT Commission, 1989)
“In recent years, the US economy has grown at a surprisingly fast pace, in a phase of expansion that started nine years ago and constitutes its longest-ever recorded period of sustained growth…US per capita income is now moving even further ahead of other OECD countries.” (OECD, 2000)
Definition of the New Economy
the productivity revival that occurred in the United States mostly in the second half of the 1990s
knowledge becomes a factor of production, and information and communications technologies are developed to an extent that makes all sectors of the economy more productive.
the institutional changes that were necessary for the firm’s accommodation to the digital economy, the nature of industrial competition, etc., which are transforming commerce, the economy, and society.
The Key New Economy Issues
“…to reduce costs, to coordinate large-scale operations, and to provide new or enhanced services, American firms have been investing in information technology at a furious pace. ”
“Capital input has been the most important source of . economic growth throughout the postwar period…The contribution of capital input since 1995 has boosted growth by nearly a full percentage point. The contribution of IT accounts for more than half of this increase…..”
The Internet’s Growing Contribution
The Internet
reduces transactions costs in the distribution of commodities and consumers
increases management efficiency, especially in facilitating more effective communications and supply chain management
increases competition, especially by rendering prices more transparent.
Other Factors
Greater competition in airlines, banking, etc., enhanced productivity growth.
Improved macro policies always help stability.
Globalization may well reduce instability as healthy foreign markets reduce the dependence on domestic consumers. Imported resources and products reduce inflationary pressure in domestic markets.
Globalized capital markets are broader and more liquid.
Characteristics of the New Economy
Heavy investment in IT (investments rose 28% per year in 1995-2000 in .; since IT prices fell, the real (price-adjusted) IT investments rose from $15 billion in 1990 to $300 billion in 2000, an increase of 20 times)
Economic globalization (global communications and global capital markets, global supply chains and global standards)
Innovations in engineering and manufacturing, as well as in banking and finance and business operations.
Accelerated productivity growth (in ., % . increase in 1973-95 and % increase in 1995-2000)
The New Economy in the US
Development of the internet economy is the most important feature of the 1990s boom.
The service sector provides the largest number of jobs and generates nearly two-thirds of GDP in the United States.
Knowledge-based industries, ., finance, insurance, business, legal and other professional services have led the growth of the services sector.
High tech industries have been the leading growth sector recently.
Key elements of the “new business models” of the 1990s
Vertical specialization
Outsourcing of more & more functions, esp. production.
High rates of new-firm formation.
R&D collaboration among firms; between firms and universities; between firms and public labs.
Markets for technology often underpin R&D collaboration, vertical specialization.
IP protection and strategy are more important.
Capital Market and IT
In the first half of 1999, the venture capital industry raised $25 billion at an annual rate.
Over $16 billion, went to the IT sector,
$12 billion went into Internet companies. In terms of market capitalization.
the IT hardware sector now accounts for about 14 percent of the US total. (A decade ago only six percent.)
Software component, 9 percent, was only two percent in 1989. Of total value of . stocks, internet sector stocks represent about 4 percent.
Computers and Technical Change
Diffusion of computer-based technologies due to rapid decline in computer prices.
This resulted not in economy-wide technical change (creating greater output from the same inputs), but in massive substitution of computers for labor and other inputs in home and business sector use.
Computers and Technical Change
Since 1990, Computers represent 20 percent of the capital inputs contribution to growth
Computer-related gains are fundamentally changing the economy
Trade’s Role in the 1990s Boom
The US economy increasingly open
The ratio of exported and imported goods and services to the GDP, the US reached % in 1998 (Japan’s at %).
. trade with the developing countries (40% of the total) significantly larger than Germany’s (16%);
American trade with transition countries only about one percent, Germany’s about 10 percent.
Trade’s Role in the 1990s Boom
. exports in recent years is a prime driver of economic growth, but exports have not increased as rapidly as imports.
Huge, long-standing trade deficits due to
modest prices of petroleum imports before 1999 OPEC rejuvenation, and
robust consumer demand.
Dollar appreciation on foreign currency markets
Developments in the broader economy & policy
US government's policy:
Macroeconomic policy & budget surpluses support lower interest rates, in contrast to the 1980s.
Trade & investment liberalization in global markets.
Domestic & international IPR strengthened.
The Boom of the Nineties
Fiscal policy restrictive, monetary policy accommodative.
The longest period of economic expansion in . history,
strong economic growth
declining unemployment
low inflation
low budget deficit
wage and price stability,
rising productivity
The Boom that Followed
The boom of the 1990s was fundamentally different from preceding ones. The long expansions of the 1960s and 1980s had been flawed by
inflationary tendencies when employment levels were high, or
had high levels of both inflation and unemployment.
1980s boom had huge federal budget deficits
(expansionary fiscal policy)
Looking ahead
Post 9/11 US federal R&D budget may shift toward defense.
US macroeconomic policy is reverting to high-deficit, (potentially) higher interest rates, reversing posture of the 90s.
US firms have demonstrated consistent strength in pioneering new technologies & business models.
