Transcript The New Economy: USA and FRG

The New Economy:
USA and FRG
Phillip J. Bryson
Duisburg,
Summer, 2001
US German Roles in a New Era
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Is the United States leading the world into a
new economic era?
Is there a ”New Economy.” The informationage service economy seems to be based upon
new rules.
Is that New Economy developing in
Germany? With the international spread of
technologies, they should tend toward a
common level.
Two Main Propositions
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the economy has changed in terms of its
fundamental structure and, of less significance
changes have produced a boom
• The boom has recently been approaching either a
new phase or an end.
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So, have fundamental changes permanently
altered the nature of and prospects for growth
and change?
I. Current Productivity
and Economic Performance
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Did the U.S. boom of the 1990s, together
with its effects and causes, warrant the
designation ”New Economy”?
In Germany, a period of fiscal trial following
reunification is now giving way to economic
reinvigoration. Europeans are encouraged by
economic integration and the arrival of the
Euro.
I. Current Productivity
and Economic Performance
The American Decade
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Stagnation in the early 90s. Apparent triumph
of the Asian Statist Model.
Porter (1990) wrote that a government’s role
in generating international competitiveness
was a vital ”if not the most important,
influence” in national economic
performance. The policies of the Japanese
and Korean governments were ”associated
with the success these nations’ firms have
The Boom that Followed
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The boom of the 1990s was fundamentally
different from preceding ones. The long
expansions of the 1960s and 1980s had been
flawed by
• inflationary tendencies when employment levels were
high, or
• had high levels of both inflation and unemployment.
• 1980s boom had huge federal budget deficits (expansionary fiscal policy)
• tight monetary policy response to the inflationary
seventies.
The Boom of the Nineties
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fiscal policy restrictive, monetary policy
accommodative.
The longest period of economic expansion in
U.S. history,
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declining unemployment
wage and price stability,
rising productivity, and
strong economic growth.
Productivity growth in the U.S., reports Krugman
has accelerated, perhaps from 1 percent per annum
to 2 percent or more.”
The German Recovery
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Through reunification, the ratio of public
spending to GDP increased from about 46%
in 1989 to almost 51% by 1996.
The ratio of public debt to GDP increased
from just under 42% to nearly 61%.
Budget deficits high in the 1990s, but came
down from 3.4% of GDP in 1996 to 2.6 % in
1997 and 1.7 % in 1998
The German Recovery
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High interest rates offset high reunification
outlays for reconstruction.
The structural unemployment problem was
worsened by the tight- money situation. West
German unemployment has exceeded eleven
per cent; in the east, the real rate has been
close to 20 % recently
German Fiscal Adjustments
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”Consolidation course” currently being
pursued:
• restrict spending and reduce public sector
deficits.
• achieve a balanced budget by no later than 2006.
• Significant tax reductions designed to stimulate
private spending.
• Higher taxes on energy consumption to
encourage economic use of energy resources.
BRD Corporate Governance Change?
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German corporate governance, traditionally
based on finance through the banking system,
may be changing . The development of the
German stock market, the Dax, as a means
inter alia of generating venture capital for high
tech and information industries, began to
support the development of a nascent, New
Economy.
Foundations of Economic Reorganization
Strategic Investments in the U.S
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Excess capacity generation into the 1970s,
Stock prices depressed with underutilization
of the capital stock, was underutilized;
little demand for products of obsolete
technologies.
Nevertheless, managers refused to downsize,
continued to invest. The result was
Share prices remained low and unproductive
assets accumulated.
Growing Need for Restructuring
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In the 1960s, large conglomerates formed.
Separate and disparate businesses under
single management, but information
dispersed in separate corporate divisions.
Competitive managerial outsiders noted low
ratio of share prices to corporate assets in
excessively large and unmanageable firms
With prices low and assets large, they could
leverage takeovers, produce greater profits
and higher share prices.
1980s Mergers and Acquisitions
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This was not merely an expression of
corporate greed, but a preparatory period of
industrial restructuring.
Many inefficiently managed firms forced to
exit the industrial scene. The effect?
• The value of public equity more than doubled
(from $1.4 to $3 trillion in a decade),
• a decline in productivity was reversed,
• real income was increased over the period by
about a third,
• record levels established for R&D
1980s Investments and 1990s Boom
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In 1970, total private gross fixed investment
below 15% of GDP.
It increased to 16.4% in 1974, to 18.8% in
1979, then stayed around 17 or 18% until the
mid-1980s.
By 1989 it was back down to 15.3 and by
1994 to 14.6% of GDP. So these
expenditures were substantial from about the
mid-1970s into the 1990s.
U.S. Private Investment in IT, 1960-99
• Year
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–
1960
1970
1975
1980
1982
1984
1986
1988
1990
1994
1998
1999
PFI*
IPE*
(Private (Information
Fixed
Processing
Investment) Equipment
and Software
75.7
4.9
150.4
16.7
236.5
28.2
484.2
69.6
531.0
88.9
670.1
121.7
740.7
137.6
802.7
155.9
847.2
176.1
1034.6
233.7
1460.0
356.9
1577.4
407.2
IPE/PFI
(IPE as
% PFI)
IE*
(Industrial
Equipment)
IE/PFI
(IE as %
of PFI)
6.47
11.10
11.92
14.37
16.74
18.16
18.58
19.42
20.79
22.59
24.45
25.81
9.3
20.2
31.1
60.4
62.3
67.6
74.8
83.5
91.5
113.3
150.2
151.4
12.3
13.4
13.2
12.5
11.7
10.1
10.1
10.4
10.8
11.0
10.3
9.6
• Source: Table B-16, Economic Report of the President, 2000, p. 326
and own calculations.
German Restructuring in the EU
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Economic integration, developing since the
ECSC established in 1950 and still evolving,
creates and diverts international trade
Expanding trade promotes structural
adjustments in industry, cost savings and
greater competitiveness as producers incur
economies of scale and scope.
Advocates of integration believe dynamic
effects great.
Germany and the New Economy
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If there is something really new in the New
Economy it will prove susceptible to
transplantation.
Characteristics of the U.S. economy of the
1990s will be subject to replication in
technical fields and in relevant industries in
Europe and Asia at an early date.
The New Economy in the US
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Development of the internet economy the
most important feature of the 1990s boom.
The service sector provides the largest
number of jobs and generates nearly twothirds of GDP in the United States.
Knowledge-based industries, e.g., finance,
insurance, business, legal and other
professional services have led the growth of
the services sector.
High tech industries have been the leading
Capital Market and IT.
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In the first half of 1999, the venture capital
industry raised $25 billion at an annual rate.
• Over $16 billion, went to the IT sector,
• $12 billion went into Internet companies. In
terms of market capitalization.
• the IT hardware sector now accounts for about
14 percent of the US total. (A decade ago only
six percent.)
• Software component c. 9 percent was only two
percent in 1989. Of total value of U.S. stocks,
internet sector stocks represent about 4 percent.
Computers and Technical Change
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Diffusion of computer-based technologies
due to rapid decline in computer prices.
Jorgenson and Stiroh: this resulted not in
economy-wide technical change (creating
greater output from the same inputs), but in
massive substitution of computers for labor
and other inputs in home and business sector
use.
Computers and Technical Change
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Since 1990, computers responsible for c. one
sixth of annual 2.4 percent output growth.
Computers represent c. 20 percent of the
capital inputs contribution to growth,
They represent 14 percent of the services
contribution of consumer durables.
Computer-related gains are fundamentally
changing the economy
• not by producing general growth spillover effects
• but returns to IT investments are captured by
computer users themselves as they substitute
equipment for other inputs.
Trade´s Role in the 1990s Boom
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The US economy increasingly open
• The ratio of exported and imported goods and
services to the GDP, the US reached 29.3% in
1998 (Japan’s at 18.1%). Heilemann et al (p. 38)
indicate the openness ratio of the Euro-Zone,
calculated exclusive of intra-EU trade, would not
be much higher.
• U.S. trade with the developing countries (40% of
the total) significantly larger than Germany’s
(16%);
• American trade with transition countries only
about one percent, Germany’s about 10 percent.
Trade´s Role in the 1990s Boom
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U.S. exports in recent years a prime driver of
economic growth, but exports have not
increased as rapidly as imports.
Huge, long-standing balance of trade deficits
due to
• Dollar appreciation on foreign currency markets,
• modest prices of petroleum imports before 1999
OPEC rejuvenation, and
• more than robust consumer demand.
Stock Prices, „Wealth Effect“ and Savings
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The ”wealth effect” comes from increasing
share prices. It encourages consumption by
providing an alternative form of wealth
accumulation. Why would one need normal
savings when the value of one‘s stock
holdings increases continually. Thus, private
savings in the U.S. even became negative
towards the end of the boom.
Stock Prices, „Wealth Effect“ and Savings
• Wie gerechnet wird, PI – C = S. (Wenn PI<C, S< 0.)
Aber diese Rechnung achtet nicht auf capital gains
(Kapital Gewinne). PI + CG - C = S, oder
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PI + CG < C, S < 0.
• Mit Verlust dieser Kapital Gewinne, S < 0, so daß wir
erwarten müßen, daß AD sich verkleinert und daß das
Wachstum sich mindert. Wir kommen dadurch zu einer
Rezession.
• Bginning in 1990, U.S. households’ real net worth increased by c.
$15 trillion, or by more than 50 percent. Of total wealth creation
in the 1990s, more than 60 percent came from rising stock values
Are Business Cycles History?
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Zarnowitz (1999) evaluates whether certain
factors promoting productivity growth also
promote greater economic stability.
• Downsizing and rationalization stabilize the
economy. But through cost-cutting and more
effective production, effective downsizing leads
to growth and, ultimately, to subsequent
opportunities for ”upsizing.” Inflationary
pressure may also return with recovery, with
upward wage adjustments and associated
inflationary pressure following.
Do factors promoting growth
also promote stability?
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Breakthroughs in information technologies
are thought to stabilize the economy. They
induce increased investments and increase
business profits.
But these productivity-enhancing effects have
yet to be documented quantitatively, any
specific link between information
technologies and the stability of economic
growth remains unclear.
Do factors promoting growth
also promote stability?
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Improved inventory control, especially
through just-in-time management techniques,
helps to stabilize the economy.
But Zarnowitz finds that constant dollar
inventory investments in the 1990s remained
about as ”volatile and as cyclical” as in the
past.
Do factors promoting growth
also promote stability?
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The growth of the service economy adds
stability, since the more volatile
manufacturing and construction sectors have
declined in significance.
This is probably true, but with growing
international competition in services, they are
also becoming more cyclical.
Do factors promoting growth
also promote stability?
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Deregulation of financial and other industries
is believed to have added stability. More
competition in airlines, trucking, banking,
etc., has enhanced productivity growth
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But it is unlikely that further deregulation will
promote further stability.
Do factors promoting growth
also promote stability?
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Discretionary macro policies could also be
the source of greater cyclical stability. Macroeconomic control through interest-rate
adjustments has been quite effective in recent
years as compared to the earlier effort to
manage money growth.
But policy agents cannot always anticipate
and avert business recessions or financial
crises, and policies can still be ”wrong,
mistimed, or bungled”
Do factors promoting growth
also promote stability?
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Finally, globalization has reduced instability
• Importing many resources and products reduces
domestic inflationary pressure. Foreign markets
reduce dependence on domestic demand for
prosperity.
• Globalized capital markets are broader and more
liquid, reducing the risk of bubbles and crashes.
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At the same time, added stock market
volatility and the economy’s vulnerability to
financial and currency market instability is
greater (Asian crisis).
Weaknesses,Potential Problems
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Savings Rates low due to wealth effect
High consumption, high imports and high
levels of personal indebtedness. When will
expectations change.
Increasing energy prices spill over and drive
up the prices of numerous other products
Increasing tightness in labor markets
prompted interest rate increases by the Fed
after mid-1999
Again, what is a “new economy”
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The use of the expression ”New Economy,”
when limited to a few, glamorous high-tech
sectors, is misleading.
We have in fact only one economy. If the
new sectors of the economy do not interact
with and change economic processes in the
old sectors, creating a whole new economic
structure, we should not talk of a New
Economy.
What is its future?
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Even if the New Economy is not recession
proof, it will not disappear in a slowdown.
The internet economy and its companion, the
relentless process of globalization, are here to
stay. They will be the basis of recovery, of
expansion, and of future well-being.
The benefits of the service and internet
economy will continue to spread, affecting
partners and competitors of the US globally.
What is its future?
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New technologies and the ratio of IT and hightech products to the BIP is lower in the EU
than in the US, and the contribution of these new
sectors to EU national growth is also smaller.
But internal European market growth, with
continuing liberalization and deregulation, will
increase competitiveness and dynamism.
• Note the European Commission’s initiative ”eEuro
2002" to use the internet as a more integral part of
education and ecommerce.
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A parallel development is the Euro