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Home Publications Op-Eds & Columns New Economy Takes a Dive

New Economy Takes a Dive

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Dean Baker
October 31, 2001

While most of us have known that the economy has been heading down for a while, the release of new data on economic growth makes it official: the economy is in a recession. With hundreds of thousands having already lost their jobs and the unemployment rate moving rapidly higher, workers now feel lucky just to be employed. The healthy wage growth of the late nineties has come to an end. In addition, millions of workers have seen much of their retirement savings disappear in the stock market plunge that began in March of last year.

 It wasn’t supposed to be like this. Remember the glory days of the “new economy?” We were told, back then, that the new information based economy doesn’t have recessions like the old industrial based economy. The Internet and other innovations were supposed to allow for quick responses to changing circumstances and prevent inventory cycles and other unpleasant features of the industrial economy. It turns out that this wasn’t quite right. In fact, it turns out that a lot of the things we were told about the new economy weren’t quite right.

The new economy was supposed to mean a general wave of prosperity for all segments of the population. It is hard to find this story in the data. In the decade as a whole, the economy performed worse than in every other post-war decade except the eighties. Even during the boom years of the late nineties, net domestic product—the Commerce Department’s measure of usable economic output—grew only slightly faster than the inflation-ridden decade of the seventies.

Things look even worse from the standpoint of a typical worker. For the decade as a whole, real wages grew less than 0.5 percent annually, with wage gains in the last years offsetting the losses of the first part of the decade. By comparison, in the fifties and sixties, real wage growth averaged close to 2.0 percent annually. In other words, in two normal years in the fifties and sixties, workers achieved the same wage gains as they did for the whole 11-year cycle from 1990 to 2001.  

Workers didn’t just lose on the wage side. Increasingly, workers rely on 401(k) type defined contribution pension plans. If you had $100,000 sitting in the stock market in one of these plans back on March 15th of 2000, you’ve got about $70,000 in your account today. A drop of this size might set back the retirement date a few years.

As bad as all that is, more trouble is on the horizon. The United States has a hugely over-valued dollar, which is leading us to borrow from abroad at the rate of $440 billion a year. Needless to say, this can’t go on for long. Eventually the dollar will have to fall, and when it does, it will place upward pressure on prices and erode even the modest wage gains that workers have managed to eke out over the last decade.

There is no doubt about it, this economic slump is going to be very bad news for most people. But it didn’t have to be like this. Remember the folks who were telling you how great things were? They weren’t telling the truth, and should have known it.

At its peak in 2000, the stock market was selling for more than 30 times corporate earnings. It has generally been valued at less than 15 times corporate earnings. This might have made sense if profits were expected to soar, but the opposite was the case. The Congressional Budget Office, which produces all the projections for the budget debates, projected that real corporate profits would actually fall over the next decade.

With a stock market at more than twice its normal levels—at a time when profits were projected to shrink—it didn’t take a genius to realize that we had a serious stock market bubble. It was also obvious that the massive foreign borrowing could not continue. But instead of sounding the warnings, our political leaders sought to ride this bubble as long as they could. The upside was $10 trillion in illusory bubble wealth that fueled the late nineties prosperity. This amounts to an average of more than $70,000 for every family in the country.

The downside is the recession we’re seeing now. And don’t be fooled by the happy talk crew—it’s likely to be long and deep. It might be small consolation, but we should make sure that the politicians who got us into the new economy mess feel our pain.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

 

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