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A new economy still can face old-style bad times

Very early in my life my mother told me that I needed to save to have some reserve funds in case of emergencies. Her example was always that a hospital might not treat you when you had a broken leg unless you could prove that you had the funds to pay for treatment. And if I did not save a lot of my income in addition to those emergency funds, she warned, I would live very uncomfortably in my old age.

She monitored my brothers and me to make sure that some of the money we earned from doing after-school jobs went into a postal savings account. (In those long ago days, banks did not have children's bank accounts for small amounts of money, so one opened up a savings account at the post office -- something the post office no longer does.)

Today, I know that my unused credit card balances give me an emergency fund and that a rising stock market will take care of my old age. But to the horror of my mother and those of her generation, America's personal savings essentially have vanished in the 1990s.

Recently there has been a debate as to whether the United States does or does not have a ''new'' economy. Are the old rules for personal, corporate and national economic management gone?

At the operating level, there is indeed a new economy. In a wide variety of fields (microelectronics, computers, telecommunications, new materials, biotechnology and robots) technology has, and is, making quantum jumps. Internet sales are transforming retailing. CAD/CAM (computer-aided design, computer-aided manufacturing) have led to major changes in the way we design and manufacture products. Biotechnology is revolutionizing agriculture. Human transplants from transgenic pigs are just around the corner.

I believe that our period of time will come to be seen by historians as the third industrial revolution, steam being the first and electrification being the second.

Revolutionary new technologies give us new products and services, but the opportunities to do new things in new ways also provide us with unusual opportunities to get rich. Think of the number of multi-millionaires created in the late 19th century (during the second industrial revolution) and the number being created now. In contrast, multi-millionaires were created at a far slower pace in the century between these two revolutions. It wasn't that Americans were less interested in money, less talented or less entrepreneurial in the 1950s, '60s, and '70s. In normal times there are simply fewer opportunities to get rich. Lots of new wealth is, in fact, a strong piece of evidence that something unusual is happening.

New technologies are creating a global economy that is slowly supplanting existing national economies. Thirty years from now, few of us will think of ourselves as working in the American economy.

Global economies are different from national economies. The big difference is that national governments cannot control them. So governments will have to start to think of themselves as platform builders. Can they build the platforms based on education, infrastructure, and research that will allow their citizens to successfully compete in the new global economy?

Our economy is less inflation prone. It is an iron law of economics that if costs fall, prices eventually will follow them down. In energy, raw materials, agricultural products and many industrial goods, technology is pushing costs down. Prices are following. This does not mean that inflation is impossible, but it is much less likely to occur.

Personal savings rates have fallen from more than 8% in the early '70s to 2% at the end of the 1990s. (We thought they were negative until the government recently revised their statistics.) Given a booming economy and rising investment rates (investment in plant and equipment has risen from 10% of GDP at the end of the 1980s to 14% at the end of the 1990s) perhaps economists are wrong to worry about the lack of personal savings.

With a booming stock market, the American family can get by saving less, but the American economy cannot. Stock market wealth gives the family what it needs -- wealth that can be sold to finance future consumption -- but it does not give the economy what it needs: the real resources necessary for investment in new plants and equipment. What one American sells, another American buys.

In the short-run, America has gotten by without personal savings because the rest of the world has been willing to invest in the United States and provide us with the resources necessary to finance our higher investments in plants and equipment. In the long run, either foreigners won't be willing to do so (there probably are limits on how much of their wealth they want to hold in the United States) or they will end up owning much of America. Whether the latter is a problem depends upon whether you think that who owns what is important. American capitalism can survive without American capitalists.

What clearly hasn't changed is the possibility of recessions and financial meltdowns. Investment-led recessions become less likely because new technologies lead businesses to invest even if their sales are not rising sharply. But if Americans at some time in the future decide that their current savings rates are too low, the cutbacks in their consumption that will result from this decision will lead to a consumption-led recession.

In boom times such as ours, financial meltdowns and the recessions that follow become more likely. Internet stocks are only one example. Pessimism replaces optimism; stock prices fall sharply; household health declines; being poorer, families cut back on their purchases and a recession emerges.

It is in this scenario that my mother's worries become real worries. With the stock market down, I don't have the funds I expected to have for my old age. Maybe I don't starve as she envisioned, but I don't live that upper-income retired lifestyle that I have come to expect. With a financial meltdown and a recession under way, my consulting opportunities have vanished and the need to repay my outstanding credit card balances out of a smaller income have cut my current standard of living.

Not an impossible, or even unlikely, scenario despite the fact that we live in a new economy.

Lester C. Thurow, a professor of economics and former dean of MIT's Sloan School of Management, is a member of USA TODAY's board of contributors.

-- Egalitarian (egalitarian@mail.com), February 24, 2000

Answers

Now I KNOW there's something wrong with me.

I actually agree with Lester (Less than) Thurow.

His Zero-Sum society book was plainly misguided. He has since seen the light and heralded a new industrial age. The Zero-Sum society was stuck in the old age and published in 1979 it appeared at the beginning of the new revolution. I guess you can't really blame him for missing it, but it was Reagan's dropping of marginal tax rates which enabled the venture capitalists to find the new industries.

Is the business cycle dead? Not by a long-shot.

-- nothere nothere (notherethere@hotmail.com), February 24, 2000.

I generally like Thurow's stuff, but this installment is yet another regurgitation of the Globalist, New Era claptrap the media repeats ad nauseam.

There is "no inflation" because Thurow, like so many contemporary economists, doesn't know, or refuses to acknowledge, what inflation actually is.

There are many more millionaires, not because of trumped-up productivity statistics, but because the world is awash in dollars.

The savings rate is negative, not because people are thriftless, but because a dollar isn't really worth saving. A negative savings rate and/or borrowing binge is emblematic of an over-supplied, inflating currency. Better to spend the dollars you have now, or even borrow more and pay them back with cheaper future dollars, than to watch their value waste away earning miniscule interest in pathetic "savings" accounts.

Maybe one can stay ahead of inflation chasing the stock market -- oops, that's hugely inflated too now. Oh well, that's a good thing, right? That's what the TV says. Anyway, the excess money had to go somewhere. Close your eyes, sleep, sleep...

-- Nathan (nospamwh@tsoever.moc), February 24, 2000.