I FIRST BEGAN TO SPEAK and write about a “New Era Economy” in 1996. By 1998, the Chicago Tribune had called me “Chicago’s most prominent New Era economist.” But my book on the subject, The New Era of Wealth, was not published until October 1999, just before the stock market peaked.
My thesis, which may sound trite today, suggested that the U.S. was in a virtuous circle of wealth creation. A combination of technology, globalization, good fiscal policy, and stable monetary policy was boosting productivity dramatically. As a result, the economy could grow faster, with less inflation (possibly deflation), than it had in the past. Stocks would climb and bond yields would remain low.
Many derided this thesis. A fellow Chicago-based analyst pithily changed “New Era” to “New Error.” Dr. Robert Gordon, a prominent economics professor at my alma mater, Northwestern University, wrote extensively in 1999 and 2000 that there was no New Economy.
The stock market crash of 2000-2001 seemed to prove the pessimists correct. And some, who invested in technology near the top after reading my book, still curse my name. These people, and many others, have soured on the idea of a New Era economy.
This is unfortunate and misguided. Everywhere, technology is causing a massive transformation in the way business, the economy, and even society is organized. The upheaval is equal to, or greater than, that of the Industrial Revolution.
Technology, especially the use of broadband Internet capabilities, is forcing the decentralization of production processes. Businesses that thought they were insulated from out-of-town competition are finding that they must think in a broader geographic fashion. Entrepreneurs can compete from virtually anywhere on the planet.
For example, on October 28, 2004, the Check Clearing for the 21st Century Act (Check 21) went into effect. Check 21 creates a brand new negotiable instrument called a “substitute check” — an electronic image of an actual check. Checks no longer need to be physically presented for clearing, but instead digital copies of a check will suffice.
As a result, a business in New York City could accept a handwritten check from a customer, scan and e-mail the image to a bank in Wyoming, and have access to the funds the same day. The world of banking has become both seamless and real-time across state borders. New York City banks now must compete with banks a fraction of their size, anywhere in the country. Competition is national, not local. In many cases, small banks, which may once have been customers of large banks, are now becoming competitors.
The impact of this trend can be seen in industry after industry. Old-line airlines (United, American, Delta) are not just under attack from low-cost alternatives, but their high-end customers as well. How, you may ask? High-end customers, who have traditionally paid full-fare for first or business class seats, are now drifting toward private jets. In effect the customer is now competing against the airline.
The fractional-jet-ownership marketplace is growing rapidly. Aircraft prices are falling due to advances in composite material and engine technology, and the Internet is allowing planes to be used more efficiently. Customers can schedule trips online in order to double-up with others who have the same travel plans. Online booking also allows passengers to take advantage of any plane that would normally fly an empty-leg return trip. As the numbers using these online services continue to grow, the existing fleet of lower-cost planes will be used more efficiently.
Two factors are at work in each of these marketplaces. First, technology is reducing production costs, while lifting quality. Equipment that was once only within the reach of large companies is now within the reach of small companies and individuals. Second, the Internet can create global markets where none existed before.
Last year, a rapidly growing Midwestern manufacturing firm, with which I am intimately knowledgeable, spent $2 million annually on printing. It now leases an $800,000 Xerox six-color iGen digital printing press to bring the printing in-house.
The iGen press will save the company millions in the next few years. In addition, the machine has much greater capacity than the firm needs. But this creates opportunity. The firm can use a Montana-based dot.com (www.printingforless.com) or a network developed by Xerox, to sell the excess capacity. In effect, this Midwest manufacturer is now in direct competition with its former supplier.
Other simple technology is upending entire industries. The Apple iPod, with its 40 GB hard drive, high-quality sound, and 99-cent songs, is changing the music business in a profound manner. Artists and record labels are still profiting, but distributors and retailers are going bankrupt.
The New Era lives. In fact, the combined impact of technology and globalization is a transformational tsunami. The opportunities are immense, but the pitfalls are just as large. Companies and individuals that cling to the past, closing their eyes to these forces, will fall behind.
IN ADDITION, OUR ELECTED POLITICAL REPRESENTATIVES must adjust fiscal policies to hasten the transformation, not hinder it. As entire industries are turned on their heads, jobs will be lost. But at the same time, new jobs and markets will be created. These jobs will not be traditional jobs. But the gains in productivity and efficiency will boost incomes on average and create tremendous wealth.
Vice President Cheney recently attempted to explain job growth in this New Era by highlighting the 430,000 people who make their living on eBay. Senator John Edwards, the Democratic candidate for vice president, ridiculed this idea by comparing these jobs to lemonade stands and bake sales. Cheney is right, Edwards is out of touch.
But Edwards went further. In the vice-presidential debate on October 5th, he said that America’s economic lights are “flickering” — suggesting a brownout is about to consume our nation. But nothing could be farther from the truth. For every business that is seeing its lights dim, another is lit up like a Christmas tree.
The technological tsunami is boosting productivity rapidly, and forcing a reorganization of our economy. The winners will be agile individuals, companies, communities, and nations that embrace these changes. The static model just wonâ€™t work anymore. Sticking our head in the sand is a losing strategy.
Tax cuts, especially on investment, help. High capital gains tax rates force many investors to keep assets longer than they should. In other words, the capital gains tax is a wall between old and new investment. High dividend tax rates force companies to hold on to cash, when they should be distributing it to shareholders so that new investments can be funded. The 2003 Bush tax cut was a very important development because it freed up capital to move toward new technologies and businesses.
Government policy in the New Era should be focused on increasing the flexibility of both capital and labor. Policies which reduce the cost of moving assets and skills across geographic, technological, or industry-related barriers should be encouraged. Those that try to preserve the status quo should be buried.
The New Era is for real. Ignore it at your own risk.
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