CAMBRIDGE: Until recently America's booming New Economy reigned supreme: no inflation to speak of, stocks at all time highs, four years at over 4% growth, full employment, and budget surpluses. To that vision even cynics surrendered. Now everything looks different. Signs of inflation in product and labor markets loom; the only question now is whether the economy will slow quickly by itself or whether the Federal Reserve Board must beat it into the ground by quickly raising interest rates.
So, was it all hype or will the New Economy survive slowdown? The answer: it will live and spread throughout the world, becoming as pervasive as the welfare state and big government became in the 1930s. It will shape our economies and our lives for decades.
Why? The New Economy involves five interacting motors: technology, competition, and a new economic culture for government, households and business. Technology is the most obvious part: the telecommunications revolution is far more pervasive and spreading more rapidly than the telegraph or telephone did in their time. There is also the information revolution with its ability to create software programs that restructure dramatically tasks from accounting to ticketing, from finance to shopping to leisure. This part of the revolution is far from over: in fact, we are merely at the end of the beginning of this revolution. The explosion of computing capacity will soon introduce opportunities now out of reach of anyone's imagination today.
In terms of competition: we have not had as much nor as pervasive competition since early in the century. Sharply higher competition is even becoming the rule in countries that hate it like the devil -- Germany, France, Japan and others. The agents of competition are of course world trade, made more effective by technology, domestic deregulation and dismantling welfare states. Stockholders insist on getting their pound of flesh. Risk capital is available to anyone, not just the establishment, and there is no limit. It is a short step from here to breaking down protected markets. The New Economy is a rat race, but everybody, at least as a buyer, is king.