The New Paradigm - Federal Reserve Bank of Dallas

O
ut on a
New-Paradigm
Limb
"Paradigm" is a pretty fancy word
for a country boy. My understanding
of it is illustrated by the familiar
recipe for boiling a frog. You don't
boil a frog by dropping him into
boiling water. He'll jump out.
Instead, you drop him in cold
water and raise the heat. The frog
won't jump because he doesn't
realize his paradigm is shifting.
I believe our economy's paradigm
has been shifting. But like the
frog, many of us haven't noticed
because the change has been gradual.
Some attribute its improvement
to good luck and temporary
factors, or "positive supply shocks"
in economists' jargon. We have
been lucky, and some of our good
fortune has been based on temporary
factors. But we at the Dallas
Fed believe there's more to it than
that—a lot more.
We believe once-in-a-century
advances in technology are transforming
our economy. The computer
chip is doing for today's
knowledge economy what electricity
did for our industrial economy a
century ago. Synergies in technology
are driving an acceleration in
productivity growth that enables us
to grow faster with less inflation.
Economic progress is speeding up;
the speed limit is rising.
Technology is the main force
driving the New Economy, but not
the only one. Deregulation of key
industries is a factor. Increased
worldwide competition is another.
The collapse of communism and
hard-core socialism is part of the
mix, along with the fall of the Iron
Curtain in Europe and the protectionism
curtain in Latin America
and elsewhere. Freer trade and
investment throughout the world
are factors. Efficient U.S. capital
markets and the unique venture
capital system serving high tech
are important. So is the switch
from budget deficits to surpluses.
The Fed has done its part by
reducing inflation. In the inflationary
environment of the 1970s,
squeezed profits could be restored
by raising prices, with confidence
that competitors would go along.
Today's disinflationary environment
shifts the burden to productivity-enhancing
cost cutting as the
main route to higher profits.
While many factors are important
to the New Economy, our
essay focuses on technology. It
helps answer the skeptics who find
nothing new in the New Economy.
I'm on record saying the Internet
changes everything. I may exaggerate.
"Things are different this time"
are infamous last words that put me
out on a limb. So be it. The greater
exaggeration is to say nothing has
changed, except, perhaps, some of
the old economy's parameters.
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We've been growing
faster than potential
and sustaining the
unsustainable for four
years and counting.
1999 was another good year for
new-paradigm optimists. Real GDP
grew over 4 percent. Payroll employment
increased by 2.7 million
workers, or 2.1 percent. Unemployment
fell to 4.1 percent. And core
inflation continued to decline, to 2
percent or below, depending on the
measure. The year ended with the
expansion poised to become America's
longest.
Real GDP growth has averaged 4
percent for the past four years, with
declining inflation. This almost
doubles the 2 percent to 2.5 percent
not long ago considered the
maximum noninflationary potential.
But we've been growing faster
than potential and sustaining the
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT