The New Economy. What It Really Means

By the New Economy, we mean two broad trends that have been under way for several years. The first is the globalization of business. Simply put, capitalism is spreading around the world – if not full-blown capitalism, at least the introduction of market forces, freer trade, and widespread deregulation. It’s happening in the former communist countries, in the developing world of Latin America and Asia, and even in the industrialized West – with economic union in Europe and America’s free-trade agreement. For the U.S., it means international trade and investment play a much greater role in our economic life than before. Twenty years ago, exports and imports made up 17% of our economy. Today, they account for 25%.

The second trend is the revolution in information technology. This one is all around us – fax machines, cellular phones, personal computers, modems, the Internet. But it’s more than that. It’s the digitization of all information – words, pictures, data, and so on. This digital technology is creating new companies and new industries before our eyes.

All of this entrepreneurial energy is transforming Corporate America. You can argue about whether there is a New Economy, but there sure is a new business cycle. Housing and autos used to drive the U.S. economy. Now, information technology accounts for a quarter to a third of economic growth. And remember, this is an industry that pays very good wages. And it is an industry, in which prices actually fall every year. How’s that for no inflationary growth? Furthermore, information technology affects every other industry. It boosts productivity, reduces costs, cuts inventories, facilitates electronic commerce. It is, in short, a transcendent technology – like railroads in the 19^th century and automobiles in the 20^th.

These two broad trends, globalization and information technology, are undermining the old order, forcing business to restructure. If you want to compete in global markets or take advantage of rapid technological change, you have to move quickly – and that means getting rid of layers of management. Technology makes it possible.: put a PC on everyone’s desk, network them together, and you don’t need so many middle managers. The result: a radical restructuring that is making us more efficient.

These trends can combine in powerful ways to raise Americans’ standard of living, create jobs, spur entrepreneurial effort – and do all this without boosting inflation. To the believers in the New Economy, we have here the magic bullet – a way to return to the high growth, low-inflation conditions of the 1950s and 1960s. Forget 2% real growth. We’re talking 3%, or even 4%. Forget double-digit inflation and the natural rate of unemployment. We’re talking stable prices. Forget hopelessness in the developing world. We’re talking about raising living standards in India and Brazil.

How is it possible? First of all, globalization opens new markets for our goods and services. At the same time, global competition helps to keep at least some prices in check. As trade barriers fall, cheaper goods are available around the world. Cheaper labor, too, whether you’re talking about software programmers in Russia or textile workers in China. The cheaper goods prompt people to buy more of them, and workers everywhere get the chance to share in economic growth. The result is increased global demand and a supply explosion that helps keep costs down for both labor and products. While this is happening, the information revolution is spurring capital spending and renewed efficiency.

I vote for the New Economy, properly defined. Even though we haven’t ended the business cycle, outlawed recession, or banished inflation, the business cycle really has changed. It is powered more these days by technology and trade. And this may well enable us to grow faster than before without renewed inflation. Perhaps the 4% rate is too high – enough to justify interest-rate hikes by the Federal Reserve if things don’t slow. But the 2% - to 2.5% speed limit is probably obsolete. In an era of stronger productivity growth, which may just now be starting to show up in statistics, the speed limit for the U.S. economy is probably 3% to 3.5% a year.

If that doesn’t sound like much, remember, it is a 50% improvement over what the Old Economists deem possible.

By Stephen B. Shepard, Editor-in-chief of Business Week

(Condensed from www.businessweek.com/1997)

Notes

1. to be under way- начаться, начать осуществлять
2. simply put– иными словами (если выразиться проще)
3. How’s that for noninflationary growth? - Чем не источник безинфляционного роста экономики?
4. the magic bullet – чудодейственное средство
5. natural rate of unemployment – естественный уровень безработицы: долговременная безработица, которая не зависит от темпов экономического роста ( экономисты в США считают, что это уровень чуть ниже 6%)
6. to keep in check –сдерживать
7. to share in economic growth –воспользоваться благами быстрого роста экономики
8. this may well enable us –“well” часто используется для эмфазы (усиления высказывания); перевод: Это вполне может позволить нам (обеспечить нас)
9. the 4% rate…enough to justify interest-rate hikes by the Federal Reserve –4%-ные темпы роста экономики, которые оправдывают повышение ФРС процентной ставки.Когда экономика начинает расти слишком быстрыми темпами, грозя “перегревом”, ФРС прибегает к использованию такого инструмента денежно-кредитной политики (monetary policy), как управление процентными ставками. Это вызывает удорожание кредитов и, как результат, сокращение инвестиций в экономику, что тормозит ее рост.

Vocabulary

deregulation – дерегулирование (разгосударствление): уменьшение государственного регулирования для поощрения действий рыночных сил; обычно имеется в виду отмена различных ограничений, лимитов т.п.

digit– цифра; double digit (inflation) – уровень инфляции, выражаемый двузначной цифрой; digital – цифровой; to digitize – преобразовывать в цифровую форму; digitization – преобразование в цифровую форму

non-inflationary growth– темпы роста экономики, не вызывающие рост инфляции

electronic commerce –электронная коммерция, торговля (например, через Интернет)

to restructure (business) – провести реструктуризацию бизнеса или предприятия; restructuring– реструктуризация, реформа

layers of management – уровни менеджмента; middle manager – менеджер (руководитель) среднего звена; top manager – топ-менеджер, руководитель высшего звена

NAIRU (non-accelerating inflation rate of unemployment), natural rate of unemployment –естественный уровень безработицы

to keep (prices) in check – сдерживать рост (цен)

to hike = to raise – повышать; a hike - повышение

Exercises

1. Explain in English what the following mean ( besides dictionaries, you may have to use other sources of information, including the Internet)

full-blown capitalism, freer trade, widespread deregulation, America’s free trade agreement, digital technology, corporate America, electronic commerce, transcendent technology, to restructure business, trade barriers, software, old economists

1. Answer the questions.
1. How does the new economy differ from the old one?

2. In what way do globalization and information technology affect our life? 3. What role did railroads in the 19^th century and automobiles in the 20^th century play ?

4. What makes the author believe that faster non-inflationary economic growth is possible?

5. How could living standards in developing countries be improved?

3.Do exercise 11 on pages 63-64 in the Krasnov file

New Economy

Around 1995, U.S. economic growth accelerated, driven by faster productivity growth. Since the early 1970s, labour productivity growth had only averaged around 1-1.5% per year, but since 1995, growth has been much faster: 2-2.5%. In addition, unemployment rates were lower than they had been in years and inflation stayed low as well. Already in 1995, Newsweek coined the phrase ‘New Economy’ to refer to this happy state. According to many commentators in the late 1990s, investment in Information technology (ICT) had eliminated economic fluctuations and ushered in a golden age of economic prosperity. The economist Robert J. Gordon referred to it as the Goldilocks Economy.

In the financial markets, the term has been associated with the Dot-com boom. This included the emergence of the NASDAQ as a rival to the New York Stock Exchange, a high rate of IPOs, the rise of Dot-com stocks over established firms, and the prevalent use of such tools as stock options. In the wider economy the term has been associated with practices such as outsourcing, business process outsourcing and business process reengineering.

As with many things that seem too good to last, the recession of 2001 discredited many of the more extreme predictions made during the boom years. However, subsequent research strongly suggests that productivity growth has been stimulated by heavy investment in ICT. Furthermore, continuing strong productivity growth since the 2001 recession makes it likely that some of the gains of the late 1990s may endure.

While many of the more exuberant predictions proved to be wrong, some pundits continue to use the term New Economy to describe contemporary developments in business and the economy.

Notes

1. ICT –Information and Communication Technology
2. Goldilocks economy –экономика, развивающаяся оптимальными темпами (“not too hot, not too cold, just right”- reference to the fairy tale about Goldilocks)
3. NASDAQ (National Association of Securities Dealers Automated Quotations) –Автоматизированные котировкиНациональной ассоциации дилеров по ценным бумагам: система компьютеризированной внебиржевой котировки акций в США, организованная в 1971 году
4. As with many things that seem too good to last –Как часто бывает, когда трудно поверить, что такое положение сохранится (так хорошо, что не верится)
5. pundit –ученый, аналитик: ироническое обозначение “теоретиков”, пытающихся объяснить события на финансовых рынках, в экономике

Vocabulary

to average – составлять, равняться в среднем; average– средний

to coin the phrase – выдумать, придумать фразу

stock option (plan, scheme) –поощрение служащих компании путем предоставления им права купить акции данной компании на определенных условиях

reengineering –реинжениринг: коренная перестройка организационной структуры предприятия

IPO (initial public offering) –первичное публичное предложение (размещение) акций:первый выпуск корпорацией своих акций на рынок

pundit –ученый, аналитик: ироническое обозначение “теоретиков”, пытающихся объяснить события на финансовых рынках, в экономике

dot-com boom – необычайно высокий спрос на акции интернет-компаний

outsourcing –передача части функций предприятия в субподряд

Goldilocks’ Dilemma

Remember Goldilocks? She skipped unexpectedly from the storybooks into the economic histories of the late 20^th century by giving her name to that particular brand of inflation-free U.S. expansion that was neither too hot, nor too cold.

There are plenty of skeptics – many in Europe – who now believe that the whole “new economy” was a fairytale. Whether or not that turns out to be the case, Goldilocks slipped unnoticed from the jargon as the U.S. economy has decelerated.

The “not too hot, not too cold” part of the story related to Goldilocks’ choice of the three bears’ porridge. But in the rest of the tale, our heroine has to select a chair or bed that is neither too hard, not too soft.

The Federal Reserve Chairman is seeking a similar compromise when it comes to the economy. Clearly a recession is in nobody’s interests, but if the landing is too soft, then irrational exuberance could bubble up again in both the corporate sector and financial markets.

Notes