Abstract
Reverse the timeline back to 1999, the media was abuzz with news of the “new economy” and outrageous stock valuations. What really happened to productivity during this time, and why has it been so quickly forgotten? Furthermore was this actually a productive period for the economy vs. other periods?
In 1999 the business community and the business and investing media came close to running out of adjectives to described the munificent state of the new economy (Noam Chomsky), what was the real state of productivity growth during that period? Why have so few (any?) publications written articles about the media’s complicity in developing and sustaining this asset bubble? Is it because the media is unable to criticize itself? These are the same publications, radio and television programs that still want your trust.
An interesting article by the Center for Economic and Policy Research performed research on this topic and the following are some excerpts and comments on this research. The full report is at http://www.cepr.net/documents/publications/New%20Economy%20Goes%20Bust10-22.pdf
“Even a cursory review of the data shows that the “new economy” was mostly hype. For the business cycle as a whole the average GDP growth rate was 3.1 percent was much lower than in the fifties and sixties, and even slightly below the pace of the seventies.”
“At its peak the price of all corporate equities to after tax corporate profit was 31 to 1. This is more than twice the historic average of 15 to 1. The bubble implied more than $9 trillion in illusory wealth compared to a situation in which price-to-earning ratios were near historic levels.”
“The late nineties saw a huge run up in the value of the dollar, which lead to a substantial increase in the size of the US trade deficit. The high dollar and large current account deficits of the late nineties effectively borrowed wage growth from the future.”
“It was not an investment boom that spurred the economy forward in the last half of the decade but rather a stock market driven consumption splurge. This splurge sent savings rates to record lows and levels of indebtedness to record highs. In addition, foreign debt soared to unheard of levels as the US is borrowing more that $400 billion annually from abroad. Rather than laying the path for stable long-run growth, the nineties growth path was completely unsustainable.”
“As difficult as it may be to recover from the collapse of the stock market bubble, the long term impact of the dollar bubble may be even worse. Most of the run-up in the dollar occurred in the immediate aftermath of the East Asian financial crisis, as investors sought the security of the dollar denominated assets….As a result, the US trade deficit rose from 1.1 percent of GDP in 1996 to 3.7 percent of GDP in 2000. The effect of this borrowing is to allow the US to consume much more than it is producing, this makes the country feel richer in exactly the same was as a tax cut. Over the next several years, approximately 3 to 4 percent of output will have to be diverted towards correcting our trade imbalance instead of being used for consumption.”
“At the individual level, millions of households now find themselves with insufficient savings to pay for their retirement or their children’s education. The decision by the Federal Reserve Board and the Clinton Administration not to take any actions to try to limit the run-up of the stock bubble was a mistake that the nation will suffer from for many years to come.”
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