(Archived Content)
FROM THE OFFICE OF PUBLIC AFFAIRS
LS-1063Thank you. It is an honor to be here. What I wanted to speak about today was the new economy, what is new about it, and maybe not so new about it, and the crucial public policy challenges it poses for the years ahead.
I. What's New About the New Economy?
These are revolutionary times. It is inconceivable that anyone running for President in 1992 thought that they would ever need to have a cloning policy, an internet privacy policy, an approach to managing domain names, or many of the other public policy challenges that we have faced over the past eight years. We can only begin to know the full extent of the policy challenges that technology will put before us in the years ahead.
The new economy is about technology and innovation. It is about the power of markets; the fact that all over the world, countries have been reforming their economies and moving to a market-based system. And it's about global integration: the advent of the emerging market economies, and with that the beginnings of a global economy worthy of the name.
These basic elements -- new technology and knowledge, markets, and integration -- are changing our economy into one in which goods are more valued for the knowledge that is embodied in them than for their physical weight. And that, in turn, is changing our conventional concepts in economics.
Why? Because it is a particular characteristic of knowledge-based goods that my consumption of it does not necessarily detract from your consumption of it. If I am wearing a shoe, you cannot be wearing my shoe. But if I am informed, if have access to software, you can also have access to that software. Thomas Jefferson put it less prosaically: He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.
An information-based world is one in which more of the goods that are produced will have the character of pharmaceuticals or books or records, in that they involve very large fixed costs and much smaller marginal costs. And it is one in which the benefits of goods to consumers will rise with the number of goods already being used. A lowly fax machine probably has as its highest and best use, serving as a doorstop. But a hundred thousand fax machines make ten billion possible connections. With these kinds of network effects, the number of connections that are possible rises not proportionately with the number that are connected, but by the square of that number.
This greater salience of knowledge, of technology, of low marginal costs, has some important implications for business strategy and the functioning of the economy as a whole.
Most notably, I suspect we will see more of that phenomenon that engineers call positive feedback, philosophers call self-fulfilling prophecy, and others call snowball effects.
The old economy is driven by negative feedback: rising demand leads to higher prices, which leads producers to produce more and consumers to buy less, which restores equilibrium at a lower level of demand. By contrast, in an information economy, rising demand will often produce higher efficiency and lower prices, leading to yet higher demand. In that sense, if the agricultural and industrial economies were Smithian - the new economy is Schumpeterian.
Another way to draw the distinction would be to say that the old economy was a Newtonian system of opposing forces, in which disequilibria of demand and supply arose, only to be equilibrated by adjusting prices; whereas the new economy is more Darwinian, with the fittest surviving, and, as modern Darwinians have come to understand, accidents of history casting long and consequential shadows.
II. Implications for US Economic Performance
These new economy phenomena have very much been a feature of our own economy in recent years, which has benefited from what Vice-President Gore has called the information-technology supply shock.
Consider:
- In the 1970s we saw dramatic increases in the price of oil, one crucial input that flowed through many other sectors of the economy, and what followed was a quite dramatic deterioration in the economic performance of the United States and many other nations - along a number of dimensions.
- Today, we have again seen a sharp rise in the price of oil. But we have also seen, particularly in the US, the IT supply shock: another dramatic and continuing change in the price of a key input to the economy, only this time, the direction in prices is down. And in place of stagflation, we are seeing a combination of rapid growth and relative price stability for which we have yet to find a name.
Just as the supply shock from oil in the 1970s turned out to have much worse consequences for actual economic performance than were easily tracked by conventional economic models, so too it seems that the positive impact of this information technology shock has been rather larger than conventional models have been able to account for.
No one can say precisely how long this process will continue. But it is likely that there are potentially substantial benefits still to come. And it is a feature of exponential growth that each year's growth has a rising absolute impact. Go from fifty million Internet users to a hundred million users, that is fifty million more users. Enjoy the same rate of growth again, and you have an extra hundred million users. So far, in the United States at least, it appears that the effect of a larger base has been greater than any slowing in percentage growth, which means that the impact of information technology on the economy has continued to increase.
III. Five Core Policy Priorities for a New Economy
Once again, we cannot know how long this favorable dynamic will continue. But we do know it provides a remarkable moment of opportunity for us as nation. The critical question is how we can best take advantage of this moment.
Here let me highlight five crucial priorities.
First, strong fiscal policies to crowd in investment, rather than crowding it out.
Ten years ago, we had an economy that appeared to be caught in a vicious cycle of high deficits, rising debt, high interest rates, slowing growth, lower tax collections, higher deficits, and around and around again. Somehow the policy changes brought about in the early nineties, particularly in 1993, moved us over a kind of tipping point, where that vicious cycle gave way to a virtuous circle; of rising surpluses, diminishing debt, lower interest rates, more growth, rising revenues, and around and around again. It is that change from vicious cycle to virtuous circle that created room for very high levels of private investment that embodied all this technological change.
This fact has important implications for policy today. For, in an earlier era, when there were fewer profitable investment opportunities, for a large share of the nation's savings to end up as government borrowing rather than private investment, was maybe less of a problem. But today, when the investment potential is so much greater, the benefits of increased savings, and reduced government debt will be that much greater. Conversely, the implications for our long-term national wealth of returning to large-scale deficits might be that much more severe.
That is why it is an overwhelming imperative that as we make our national economic choices that we not take for granted our current prosperity or our current projections, and that we not take steps that would diminish the very substantial room for private investment that our budget surpluses are now creating.
Second, major investments in human capital and education..
If investments in factories were the most important investments in an industrial age, surely the most important investments in an information age are in investments in education. Few economic trends in the past twenty years have been as pronounced as the sharp increase in the market return to additional education -- and the widening differential between those with more education and those with less.
There is much that can be said about the improvement in education that is necessary in the United States today -- and much that we do not know about how to improve quality, about how to set standards, provide for choices, and optimize learning. But there are some things we do know.
We do know that in the richest, most powerful country there has ever been, children in public schools should not have to go to class in renovated closets. There should not be kids in the richest country there has ever been who start the school day at four in the afternoon because the school works on three shifts due to overcrowding. There should not be any school cafeteria that begins to serve lunch at 9:45 in the morning so that it can accommodate all the traffic.
There are so many stories like these ones. And they stem from problems that we know how to solve. The right allocation of federal resources, through the right combination of tax credits, through the right combination of appropriations can give every kid a classroom that he can be proud of. If we want our kids to take their education seriously, we can take their education seriously too by providing the right kind of facilities. And the same goes for making teaching a valued and honored profession at a time when so many of our teachers are going to be coming up for retirement during the next ten years.
Third, making markets as large as possible.
A positive feedback economy, where there are very high fixed costs to begin with and very low marginal costs after that, is one in which traditional conceptions of the relationship between supply and price are turned on their head. That provides a powerful new economy rationale for governments to seek to make markets as large as possible.
In the text book diagram, the supply curve slopes upward. But orphan drugs actually cost much more than drugs than are very widely used. And best sellers cost much less than academic monographs. Why? Because of more room to spread those fixed costs, something that comes from larger markets.
How can public policy influence the effective size of such markets? The single most important step it can take is to open to the global economy. Indeed, the years ahead I suspect that economists will conclude that the new economy benefits of increased international trade -- the benefits that come from the spreading of fixed costs and greater product differentiation -- are larger than the traditional textbook benefits of trade, related to the exploitation of comparative advantage. We may also come to understand that imports as well as exports are helpful in the global economy, and that in many ways imports have been the safety valve on a high-pressure U.S. economy in recent years, preventing supply bottlenecks from building up and helping to keep inflation down.
But expanding markets isn't just about the global economy and opening to the rest of the world. It is also about expanding the scale and potential to take advantage of efficiency in our markets here in the US. That is why deregulation in key sectors of the economy -- and particularly key network sectors such as telecommunications and the financial sector has been such important steps. And certainly, removing barriers that artificially constrict the size of markets needs to continue to be an important agenda item in the years ahead.
Fourth, effective investments in the production of knowledge.
We know that markets and the spur of competition are the best producers of applied knowledge. At the same time, the most important innovations that we see today are built on progress in basic science, everything from group theory to quantum theory. If one asked what research had made the most important contribution to the navigation of ships since the 1600s, there is a very strong case for arguing that the most productive thing that happened was the development in pure mathematics of the concept of the square root of negative one, which set the stage for Maxwell's equations, which set the stage for harnasing electricity and magnetism and creating radio. That is one of hundreds if examples, demonstrating that the production of new knowledge has benefits that go far beyond anything that's envisioned at the time that the new knowledge is produced.
To take another example, the techniques that keep your credit card number confidential and private when you buy a book from amazon-dot-com are derived from research that was in the abstract part of pure mathematics fifteen years ago. And what can be said about mathematics, can be said about many other fields.
So, a central priority is to recognize that we as a country need to invest adequately-and that means invest much more in the production of basic knowledge in the years ahead.
Fifth, making sure that every American is included
It has traditionally been a moral priority to work to include every American in our prosperity - and to make sure that no one should be left behind. But today it is not only a moral issue. It is also an economic issue; because the strength of our economy has created a situation where we have jobs looking for people as much as people looking for jobs.
My family and I were at a baseball game a few months ago. A plane flew over the packed stadium with a message, and I assumed that it would be trying to sell some kind of car or trying to sell something. What the message actually did was announce an upcoming job fair on behalf of a number of companies. We live in a time when companies are paying large amounts of money to fly planes over stadiums, telling people about jobs. That does not happen too frequently in modern economies, and it underscores that in this kind of high-pressure economy, a crucial potential bottleneck is shortages of appropriately skilled people.
All of this means that what once would have been considered social policies are now also macro-economic policies: that is about effective education policies; it is about policies that move people effectively from welfare to work are today; it is about working to create family friendly workplaces so that parents can raise their kids and work as well. And it is about creating incentives to target demand and investment to the parts of our national economy, such as our inner cities, where there still are large pools of untapped talent, and people are still looking for jobs.
IV. Concluding Remarks
These are historic times for our economy as well as our country. We probably in the United States have not had as strong an economy over the last century and we probably have not ever been as strong relative to the rest of the world with the possible exception of the period right after the second world war. But if history teaches us anything it is that good times do not last automatically and that the world does not stand still. That makes it especially important that we do the things necessary to maintain these good times and use them to build a stronger future.
That is why I've emphasized the importance of the national choices that we will make with respect maintaining our surplus, with respect to investing in our people, with respect to integrating with the rest of the world, with respect to producing knowledge, and with respect to including everyone. If we can do those things right, a great deal else will follow. Thank you very much.