The New Paradigm - Federal Reserve Bank of Dallas

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Roughly 1.3 million Americans work in the cell phone industry—making
the phones and their components, handling services and sales, and
doing other jobs. Without the chip, this industry and many others
wouldn’t exist.
The most far-reaching implication of the New Economy
centers on the trade-off between growth and inflation.
Now, unemployment can go lower and growth higher without
igniting inflation. Policymakers working under yesterday’s
mind-set had to be vigilant about growth and job creation,
reacting quickly to slow the economy before prices
spiraled out of control.
The New Economy is a controversial concept, still being
shaped by debates over its import and implications. That’s
not surprising, because adjusting to changes in economic
fundamentals takes time. The United States has passed
through several economic eras. We began as an agricultural
society. After the mid-19th century, the steam engine
and then electricity transformed the country into an industrial
nation. Today, deep into the Information Age, old economic
theories fail to explain new realities and policy signposts
don’t mean what they once did.
The challenge lies in adjusting our thinking to the new
realities.
The Microprocessor Miracle
Until the 1990s, contemporary Americans considered
the 1960s the quintessential good times because the
United States enjoyed uninterrupted growth for almost
nine years. 2 The 1960s, however, don’t provide the best
corollary for what’s happening in today’s economy. We
need to travel further back in time.
From 1895 to 1915, a great burst of inventiveness ushered
in an era of rapid technological change and economic
growth. Americans saw the arrival of one marvel after
another—automobiles, airplanes, telephones, phonographs,
radios, elevators, refrigeration and much more.
These new inventions barely registered as a blip in a GDP
dominated by farming, shopkeeping and small-scale production.
In time, though, the industries that grew out of
them formed the economic backbone of the 20th century.
The advances of this long-ago era would have been
impossible without a technology that arrived just after the
Civil War: electricity. Thomas Edison, the greatest of American
inventors, created the lightbulb in 1879 for the simple
task of illuminating a room. To build a market for his
invention, Edison harnessed electricity, building the
world’s first generating plant and distribution network in
New York City. As it spread through the economy, electricity
recast the economic paradigm.
Edison, without intending anything more than turning
night into day, triggered a revolution. Without electricity,
there would be no spark for internal combustion engines,
no power for telephones, radios, refrigerators and air conditioners.
Electricity provided an ever-ready energy source
for factories, with mass production driving down the cost of
making just about everything. Without it, we’d still rely on
muscles, steam and wind, rather than electric motors and
gasoline engines. We’d still be living in a world of horsedrawn
carriages, candles, ice houses and cottage industries.
Like electricity, the microprocessor is an important
invention in its own right and one that shook the world as
it touched off a rapid-fire proliferation of spillovers. The
device traces its origins to Dallas, where in 1958 Jack Kilby
of Texas Instruments fashioned the first integrated circuit,
a bundle of transistors on a piece of silicon. Thus began the
grand theme of modern electronics—ever smaller, ever
more powerful. Thirteen years later, Ted Hoff of Intel
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