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By David M. Blitzer, Managing Director and Chief Investment Strategist, Standard & Poor's Many television commentators, investment pundits, and technology gurus talk about the "new economy." The new economy is the idea that computers, the internet, and rapidly advancing information technology have changed the economy for the better. Economists and others have spent much of the last few years arguing over whether we have a new economy, or just a runaway stock market that could collapse. If we have a new economy, what does it mean for business? For government? For all of us - students, workers, citizens?
When you look at the recent performance of the economy, as shown in this booklet, two things will stand out. First, the current economic expansion is the longest one we have ever had. It began in March, 1991-and it has lasted longer than the boom of 1980s or the halcyon days of the 1960s. Second, if you look at the record of the last five years (1995-1999), they stand out as incredibly successful years-low unemployment and low inflation combined with very strong economic growth, job growth, and strong gains in productivity. Those years produced a record budget surplus instead of a record budget deficit. Productivity is the most important aspect of all - it is the closest thing economics has to a free lunch. When productivity rises, we get more output for the same inputs because we learn how to do things better. Rising productivity means that wages and profits can rise together while prices remain stable. Rising productivity means that everyone can be better off-that the economic pie which we all share gets bigger. The key question about the new economy is about productivity. Initially, productivity didn't show any gains from computer technology; however, the last year or two has seen clear evidence in the data that the new economy is spurring strong gains in productivity. In recently updated data for 1998 and 1999, and into 2000, we have seen strong gains in labor productivity. These gains are important. In the first half of 2000 wages rose rapidly, but this did not threaten renewed inflation because productivity more than kept pace. A key factor in the recent productivity gains is plummeting computer prices that make it cheaper and cheaper to provide more computing power for workers. Since 1995 computer costs have fallen faster than ever. This has lead to increased technology investment, increasing use of computers and information capital, and increased productivity. If we continue the record of falling technology costs and increasing technology investment, then the stage is set for more productivity gains. This is the cornerstone for continuing the new economy. What can this mean? The record of strong growth, job gains, and low inflation should be able to continue. But there are some things that even the new economy may not be able to guarantee. One is avoiding another recession. Avoiding recessions-those periods when the economy is shrinking, not growing- depends on more than just achieving productivity growth. Keeping expansions going and avoiding recessions depends on the plans and attitudes of consumers, investors, and business. If our optimism about the future shifts to fear and pessimism, we will stop investing, stop spending, and stop taking any economic risks. Rather, we will retreat in a vain search for safety. Unfortunately there is no way to know for sure when a recession might arrive or how to avoid it. We can sometimes get an early warning by watching people's spending or reading reports of consumer sentiment and business confidence. Maintaining everyone's confidence in the new economy is an important step to keeping this expansion going strong.
One other aspect of the new economy is the federal budget surplus. We entered the last decade with a record budget deficit. We enter the new millennium with a record budget surplus. Part of the shift was a change in tax laws, but a bigger part was a shift in the economy. When the economy is strong, incomes and profits rise-and so do tax payments. Further, in a good economy the government spends less as the rest of us do better. Will the budget surplus last? No one can say. Forecasts from various government agencies or forecasting companies that we all hear about are only a rough guide to what could happen. Whether we have a deficit or a surplus does make a difference and is an important question going forward. When there is a deficit, the government must borrow money. Its borrowing threatens to squeeze out other borrowers and can raise interest rates. One reason the economy has done well in the last few years is that interest rates are low. If the deficit returns, high interest rates could return as well. Economics was once nicknamed the "dismal science." One legacy of the name is that economists often need something to worry about. The trade deficit-we import more than we export so we borrow a lot of money from the rest of the world to pay our trade bills- is something economists worry about. What worry? As long as foreign investors will loan us money or invest in America to help pay our trade bills, everything is fine. But, if foreign investors decide they would rather put their money to work elsewhere, the US dollar will fall, US interest rates will rise, and the US economy will slow down. What can be done? Restricting imports is not the answer. Such an action is self-defeating. We import things because it is cheaper and easier to buy from abroad than to build at home. When we import goods and services from Canada, Mexico, China or any place else, we don't export American jobs. We import because buying abroad gets all of us a better deal. And we export when selling abroad, which gets everyone in America a better deal. The growth of imports depends on the growth of our economy; the growth of our exports depends on how fast other economies grow. When our economy grows faster than our trading partners' economies, imports rise faster than exports. This points to the most important economic puzzle for the new millennium-spreading the strong growth of our economy to other economies. New
York, 
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