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Money Woes, Whilst Thou E’er Be Gone?

Basil Enwegbara

Leading economists and scholars in the mid-1990s preached a new economic gospel; the gospel of the New Economy, simply driven by what they called information technology.

It was an unparalleled technology and brain-power economy, never before seen in any human history. This belief in technological determinism as the driver of America’s economic prosperity in the 1990s was accepted with little or no skepticism by the media and politicians. Even Wall Street used the new gospel to promote extraordinary levels of speculation in securities. The whole thinking community memorized these mechanistic views of economic growth. In other words, the rapid growth in the late 1990s, viewed only through a technology prism, drove the widely unquestioned faith in the myth that technology alone could ensure prosperity.

But there are questions many failed to ask then and are still not asking: why the sudden rapid growth in economy in the late 1990s? What were the sources of the unprecedented improvement in productivity in the 1990s? Was it simply based on maturing information technology? Shouldn’t it have been the result of the exciting new products that were standardized and appealed to a mass market, and the accompanying great scale economies of manufacturing, distribution, and marketing? What about the subdued inflation that resulted from a shift in the policies of the Federal Reserve? Couldn’t it be attributed to the soaring stock market, consumer and business borrowing, as well as freeing the economy from the decades of arms race with the former Soviet Union? Or couldn’t it be because of a cultural shift in the late 1990s that made business and entrepreneurialism in America, along with the 70 hour work week, glamorous?

The rapid information technology changes driving the prosperity of the 1990s, it should be argued, were the enormous economies of scale -- like the one that propelled America’s rise in the 19th century -- coupled with organizational and managerial skills as earlier seen in early 20th century mass production and distribution. But more of the forces driving the unprecedented economic prosperity witnessed in the 1990s came from the presence of America’s large and growing number of consumers, who had the money and willingness to spend on goods and services and who were readily reached through efficient and low-cost transportation and communications systems in late 1990s, as a result of globalization.

Because economic growth is essentially all about productivity growth, the conditions for productivity growth -- from large and expanding markets to technological advances to the availability of financial capital to improving transportation and communications systems to making the delivery of products fast and inexpensive, to the demand for goods widely available as well as to the newly found entrepreneurial culture, and together with the most effective legal and social environments -- ensured the growth in commerce and competitive economy.

The precipitous fall in the price of computer products -- such as Microsoft’s Windows, Intel’s Pentium, Cisco Systems, HP’s printers, AOL’s Internet subscribers, as well as Wal-Mart ‘s retail market and the bulging demand for related standardized products -- created enormous economies of scale for these makers of equipment and software and the providers of some mass-marketed services. This became the key catalyst for the exciting jump in productivity in the late 1990s. In other words, after almost three decades of fragmentation as a result of intense foreign competition, the old mass market of the 1950s and 1960s that drove an unprecedented economic growth returned in the late 1990s, correcting a fundamental cause of the productivity slowdown caused mainly by Japanese companies.

But with the exhaustion of the economies of scale and the rapid productivity growth over since 2000, America today faces the old challenges in their new form. These have made the repeat of the prosperity of the of late 1990s almost impossible in the next decades. America’s corporate debt and personal debt now stand at record proportions of income (nonfinancial corporate debt rose from about 3.5% of sales in the mid-1990s to a record of nearly 10% of sales in 2000; household debt in America now is at a record level of nearly 100% of disposable income). Profitability has been falling for corporations since 2000, implying that returns on capital have been continuously eroded. Above all, the high stock prices that encouraged borrowing and spending in the late 1990s have reverted to less explosive levels.

Not only is America’s poor saving culture, which made dependence on the flow of foreign capital to U.S. markets the major source of investment capital, worsening the situation, but also the return to expansive military spending - put on hold during the 1990s with the collapse of the Soviet Union -- is weighing down the economy. The outlook is not bright.