Myths of the U.S. New Economy

Alarm bells are ringing about the U.S. economy, whose gross domestic product tops $10 trillion and which accounts for one fourth of the global economy. After an unprecedented decade of prosperity since 1991, U.S. economic growth slowed sharply to an annual rate of 1.4 percent in the fourth quarter of last year from 5.6 percent in the second quarter.

The U.S. economy had shown signs of trouble at other times. In the second quarter of 1995, its growth dropped to 0.8 percent and the economy slowed for two straight quarters. Concerns about the economy taking a downturn also prevailed in the wake of the financial crisis that swept through Asia, but the United States continued to attain high growth, exceeding an annual rate of 4 percent since 1997.

This long-term prosperity was attributed to the advent of the so-called New Economy. Do the recent signs of an ailing economy then signal the demise of the New Economy in the United States?

A capital economy inevitably experiences recurrent cycles of business fluctuations. This is unavoidable, but the government tries to stabilize the economy through currency and fiscal policies aimed at reducing the severity of fluctuations and preventing a prolonged economic downturn. When the global economy entered a phase of marked depression after the 1997 Asian financial crisis and the bankruptcy of the Russian economy in August 1998, the central banks of advanced countries, including the U.S. Federal Reserve Board, tried to spark the economy by cutting interest rates to make money cheaper to borrow. The policies helped the world economy make a rapid rebound. At the same time, however, they touched off concerns about the bubbles in the U.S. stock markets bursting and, as a consequence, the possibility of the U.S. economy making a hard landing.

From the end of June 1999 until last May, the U.S. Federal Reserve Board chairman, Alan Greenspan, raised interest rates six successive times to selectively ward off inflationary pressures and promote a gentle adjustment of the stock markets. Eighteen months later, in January of this year, the Federal Reserve reversed course. Declaring that the U.S. economy was now approaching a zero growth rate, Mr. Greenspan lowered interest rates by 100 basis points during a single month, taking account of the weakening inflationary pressures owing to the expectations of dropping and stabilizing oil prices and the easing of tight conditions in the labor market. The latest interest cut was not only unprecedentedly big but also represented a swift response to the signs of economic troubles.

Leading economic indicators, such as industrial production, retail sales, manufacturing activities and consumer confidence, have been fast weakening since the second half of last year. Why is the U.S. economy entering a sudden downward spiral?

First of all, I wish to point out that even the U.S. economy cannot be completely spared business fluctuations. The New Economy boomed in the United States because of the zooming information and communications industry, the corporate restructuring pursued steadily since the 1980s, an efficient financial service market and a flexible labor market. Nevertheless, it had been expected for some time that the U.S. economy was going to undergo certain degrees of business adjustment, regardless of whether it was engineered to make a soft landing. Unless the U.S. economy rearmed itself by improving productivity once more, there were limits to its ability to sustain a phase of growth, due to the shocks deriving from last year's increases in international oil prices, depressed consumer spending caused by tumbling stock markets, excessive loans by businesses and shrinking corporate profits. However, the troubled U.S. economy is projected to assume a different aspect from that of the Japanese economy, which has been in the doldrums for a decade since its bubble economy collapsed. The U.S. economy is not only based on an extremely flexible market system, but the government also pursues timely and appropriate economic stabilization policy measures. The Federal Reserve Board lowered interest rates early this year at the first signs of economic slowdown, and there is also the tax cut the new Bush administration intends to lose no time in introducing.

Massive layoffs and faltering growth in the information and communications industry, the driving engine of the New Economy, appear inevitable over the short term, because of diminishing investments. Even so, the United States will be able to find the key to reviving its troubled economy in higher productivity, as Mr. Greenspan pointed out.

Korea should also look for the answers to cope with its economic crisis in promoting greater productivity and establishing the framework of a flexible market economy, instead of wasting time in unproductive debates over the prospects of the economy.