Fortune issue: May 15, 2000
D.C., Stay Out of the New Economy
By N. Gregory Mankiw
Whenever times are good, politicians line up to take credit. Democrats say the current prosperity is the result of Bill Clinton's fiscal responsibility. Republicans say we should thank Ronald Reagan, who reined in government and unleashed the forces of entrepreneurship. The latest example: On April 5, Clinton hosted the White House Conference on the New Economy so that he could bask in the glory of our recent prosperity. It was an attention-grabbing event with an all-star cast: Treasury Secretary Lawrence Summers, Fed Chairman Alan Greenspan, Nobel laureate Amartya Sen, and World Bank President James Wolfensohn.
There is no denying that the economy has pumped out some impressive numbers in recent years. Shareholders enjoyed a historic bull market, and the good news on Wall Street has led to good news on the factory floor. After growing a mere 0.7% per year from 1992 to 1995, output per hour in the overall economy grew by 2.8% per year from 1995 to 1999. This acceleration in productivity growth has coincided with a sea change in how the economy allocates capital spending. Since 1995, investment in computers and software has grown 30% per year. We now spend about twice as much on these high-tech goods as we do on new single-family homes. The old economy was cement and plywood. The new economy is microchips and computer algorithms; it's primarily technological, not a byproduct of Washington.
You wouldn't know this from attending the White House conference. The ostensible purpose of assembling these luminaries was to help set the public policy framework for the ongoing technological revolution. But there was remarkably little focus to the discussion and not even the vaguest attempt at reaching any real conclusions.
The conference began with a session asking, "Is the new economy rewriting the rules on productivity and the business cycle?" It's a ridiculous question. Yes, we've had a few good years, but let's not get carried away. To suggest that we've rewritten the rules is wishful thinking of the highest order. No serious economist thinks the business cycle is dead. Nor can anyone say with confidence that these good times are going to last.
At the conference's most surreal session, the President shared the stage with Microsoft Chairman Bill Gates. Clinton complimented Gates on his philanthropy. Gates spoke about advances in biotechnology and the hope that new vaccines could wipe out many infectious diseases. Neither mentioned the Microsoft antitrust case--the most obvious way in which the government is sticking its hand into the new economy.
Economists are divided about the merits of the Microsoft case. Some think the government is protecting upstarts like Netscape from a big, bad monopoly. Others (like me) think the government is taking the new economy away from the scientists and engineers who created the prosperity and handing it over to the nation's lawyers.
The new economy is filled with companies that enjoy, at least temporarily, dominant positions in their market niches, such as Microsoft, Intel, Cisco, and Palm. The government has a responsibility to explain clearly what kind of business strategy is permissible and what is not. For example, if Microsoft's decision to add a Web browser to its operating system raised the government's ire, are all dominant firms suspect when they add new features to old products? If not, when do product innovations put companies at legal risk? Such questions about antitrust enforcement are at the heart of public policy. But because they involve serious disagreements about substantive matters, they were nowhere on the agenda of the White House conference.
I left the conference wondering whether its very existence was a sign that the new economy was headed in the wrong direction. There was a time when technology leaders largely ignored what was happening in our nation's capital, and the residents of Washington returned the favor. Now Bill Gates feels he has to rub elbows with Bill Clinton, while his company hires Washington insider Ralph Reed to lobby presidential candidate George W. Bush. The new economy, I fear, is looking more and more like the old one.
N. GREGORY MANKIW is an economics professor at Harvard and the author of Principles of Economics.