NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Yes Virginia, There is a New Economy

"Baily and Lawrence assert that the change in TFP growth between 1995 and 2000 was primarily structural, not cyclical."

Despite skepticism about both the stock market boom of the 1990s and the influence of technological innovation, Martin Baily and Robert Lawrence believe that the new economy is real. In Do We Have A New E-conomy? (NBER Working Paper No. 8243), they claim that there has been a structural acceleration of total factor productivity (TFP), caused by innovation in information technology (IT) and the application of IT in service sectors, including wholesale and retail trade, finance, and business services. However, they do not believe that the economic growth of the 1990s was heavily dependent on the often-mentioned Internet.

Baily and Lawrence assert that the change in TFP growth between 1995 and 2000 was primarily structural, not cyclical. They estimate that the trend growth rate of labor productivity accelerated by 1.6 percentage points over that time period, to 3.1 percent a year up from 1.4 percent a year. Part of the acceleration was attributable to capital deepening especially in computers, communications, and software. The remainder was an acceleration of TFP growth in the computer sector and in the broad, non-computer industries.

Baily and Lawrence use annual data from the Bureau of Economic Analysis on gross domestic income by industry and employment by industry for 1989-99. Based on IT spending relative to the value added, IT-intensive industries had faster labor productivity growth than other industries, they find. The aforementioned service industries and durable manufacturing also had greater productivity growth than the overall economy. Improvements in supply chain management from IT were more essential to growth than the Internet, the authors conclude.

Finally, Baily and Lawrence believe that the stock market and favorable economic policy in the 1990s created an environment that was conducive to the financing, development, and application of innovation. High R and D and investment were the result of high demand for IT, the wide availability of venture capital and IPO market financing, and economic policy that stimulated domestic and international competition, funded research and lowered interest rates.

-- Noshua Watson


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