[Economic Report of the President (2001)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CONCLUSION

Achievements and Challenges  in the New Economy



The past 8 years have been a period of extraordinary achievement for
the U.S. economy. With support from sound policies and strategic
investments in the future, the United States has experienced an
unprecedented economic expansion. This expansion is remarkable not
only for being the longest ever recorded but also for its breadth and
inclusiveness. Its benefits have been widely and generously shared,
raising Americans' average real income to record highs and creating
opportunities for groups that have long been left behind.

The economy this expansion has created is not just greater in sheer
size but ``new'' in its structure and performance. It is dramatically
more information intensive and more technology driven, more productive
and more innovative. Today's economy utilizes new, more efficient
business practices and has redefined many traditional relationships
between suppliers, manufacturers, investors, and customers to achieve
ever-greater efficiency. The cumulative result of these trends and
their interactions is a New Economy, one that is currently providing
Americans in all walks of life the benefits of high growth, low
inflation, high productivity, rising incomes, and low unemployment.

The New Economy did not emerge by chance. A policy strategy centered
on fiscal discipline, investment in education and technology, and
opening markets abroad has been key to its development. Prudent policy
choices, sustained over 8 years, have fostered the flourishing of
innovation and entrepreneurship. The combination of private sector
innovation, new technologies, Americans' hard work, and sound policies
and investments in the future has created vibrant economic growth.
On average since 1993, the economy has grown at a healthy 4.0 percent
per year. Core inflation has remained near its lowest rate since the
1960s. Meanwhile productivity growth has risen rather than stagnated
over the course of the expansion. Productivity has grown 3.9 percent
a year on average over the past 2 years, and it grew a robust 4.8
percent in the 12 months ending in the third quarter of 2000.

Importantly, the resulting prosperity has been shared in a remarkably
equitable manner compared with the previous expansion. There have been
solid, across-the-board income gains, with some of the strongest gains
realized among the least well off. Americans in the bottom 20 percent
of the income distribution have actually seen much stronger average
income growth than the average for all other income groups: a total
real gain of 16.3 percent since 1993. In the last 8 years the economy
has created more than 22 million jobs, more than 80 percent of which
are good jobs in industries paying wages above the median. The median
family income has increased by $6,338 since 1993, rising to $48,950
in 1999. Meanwhile 7 million Americans have been lifted out of poverty.
Home ownership reached 67.7 percent last year--the highest percentage
on record. Unemployment is at its lowest level in more than 30 years.
Unemployment rates for African Americans and Hispanics are at their
lowest on record.

This Report has explored the phenomena that together have come to be
known as the New Economy. It has examined the driving forces of
innovation, organizational change, and sound policy that have created
that New Economy. It has analyzed the effects those forces have had
on macro-economic performance, on business practices, and on our
ability as a Nation to address the longstanding challenges of reducing
poverty, improving education, and enhancing the long-term welfare of
all our citizens. Last but not least, the Report has considered those
areas where growth on its own may not meet all the challenges, and where
targeted government policies can help widen the circle of opportunity to
include as many of our fellow citizens as possible.

The United States today stands at a unique juncture in its own
history--and indeed in world history. It enjoys unprecedented prosperity
and therefore faces a unique set of opportunities as well as challenges.
Used wisely and cautiously, our prosperity can be harnessed in ways that
will further enrich all Americans for decades to come. We can and should
continue to strengthen research and development, to drive long-term
innovation and further productivity increases. We can and should continue
to invest in education and training, to build the skills and ingenuity
of our work force. And we can and should continue to shore up Social
Security and Medicare, to improve our ability to provide for the
long-term needs of our aging population. The right path, in short,
is one that continues the policies of the last 8 years. Those policies
have created a virtuous cycle in which fiscal discipline helps keep
interest rates attractive for investment, and strong, productive
investment in turn generates a healthy and growing economy, yielding
ever larger budget surpluses.

Today's economy is strong, but it is far from invulnerable. The virtuous
cycle can all too easily be broken if fiscal discipline is abandoned and
priority is given to large tax cuts for a few rather than long-term
investments for the country as a whole. Abandoning fiscal discipline
in favor of a large, permanent cut in tax rates would raise interest
rates and threaten investment and growth. Such a reversal of policy
would be particularly ill advised at a time when the country faces a
significant demographic challenge: over the next 40 years the share
of the U.S. population aged 65 and over will rise from about 12.5
percent to nearly 21 percent. This demographic shift alone implies that
retirement and health programs for the elderly will take up an increasing
share of Federal outlays. But in addition, the costs per capita of Social
Security and Medicare are expected to rise in the future, implying an
even more dramatic increase in spending on the elderly. The confluence
of these two trends means that spending on Social Security and Medicare
as a share of GDP will almost double over the next 40 years, from around
6 percent today to 11.2 percent in 2040.

The emergence of the New Economy provides a precious opportunity to
continue to build for the future, educate our children, secure the
well-being of older generations now and for decades hence, and make the
investments that will fuel the engines of innovation, enterprise, and
productivity in our economy. Defining and pursuing the right priorities
for continuing the expansion will be critical to the Nation's long-term
welfare.

Technology's Role in the New Economy

At the heart of the New Economy is a bubbling cauldron of creativity
and innovation. Advances in computing, information storage, and
telecommunications have proliferated, yielding whole arrays of new
products, services, and industries. Discoveries in all these fields
have been decades in the making, but for most of that time they
proceeded on separate tracks, with little joint impact on productivity
and output. Recently, however, the paths of these technologies--
telecommunications, computers, and the Internet--have converged, opening
the way to a whole new range of capabilities previously unimagined.

Through the dynamic interaction of these powerful innovations, the
economy has become ``lighter,'' shifting toward products that embody
more knowledge capital and less physical capital. Spending on information
technology has played a leading role in the acceleration of economic
growth. Although it accounts for an estimated 8.3 percent of GDP,
information technology contributed almost a third of output growth
between 1995 and 1999. Investment in information processing equipment
and software now makes up more than a third of all private nonresidential
fixed investment. Between 1990 and 1997 the number of information
technology firms increased by 120 percent.

Technological innovation has been particularly important to the New
Economy for two reasons. First, the information technology sector
itself is highly productive, and as this sector has grown, its
improved productivity performance has boosted that of the economy
as a whole. Second, the adoption of information technology by other
sectors of the economy has led to performance gains there, making other
inputs--both physical and human capital--more productive through changes
in the way firms do business. Manufacturing plants are increasingly
automated. Workers are being given more flexible job assignments and
stronger incentive pay. Supplier relationships are becoming more
closely integrated through the use of computer systems that coordinate
the various aspects of production and warehousing, allowing firms to
slash their inventories. Firm boundaries are also shifting rapidly, as
firms outsource noncore businesses and move toward flexible,
collaborative relationships such as strategic alliances with suppliers,
customers, and even rivals.

But technology alone is just a tool. It is only when firms use
technology wisely that it becomes a transforming agent. Performance
improvements are most likely to be realized when firms use information
technology to bring about changes in basic business practices, job
design, organizational structure, interactions with customers and
suppliers, and human resource practices.

One example of how technology is inspiring changes in business practices
is the use of the Internet to reduce companies' procurement costs.
On-line business-to-business exchanges now offer a range of transaction
tools, such as on-line auctions, billing, insurance, information, and
other custom services, that make procurement far more efficient. One
on-line exchange claims to have saved customers $2 billion during its
5 years in operation. These kinds of improvements, in turn, help make
the economy more resilient: more efficient procurement and inventory
management have greatly reduced the tendency toward inventory overhang
in the economy as a whole, thus reducing the likelihood that a period of
slowing growth will tip into a recession.

The Role of Policy in Supporting the New Economy

The surge in innovation and entrepreneurship that is driving the New
Economy has been fostered by supportive government policies. First and
foremost, policy played a critical role in boosting national saving,
which provides the fuel on which the New Economy runs. The Federal
budget deficit had ballooned to $290 billion in 1992, the largest ever,
and it was projected then to grow to more than $455 billion by fiscal
2000. These massive deficits placed a huge drain on investment capital,
and partly as a consequence, economy-wide productivity growth had fallen
to anemic levels. However, with the program of fiscal discipline that
President Clinton and Vice President Gore put in place in 1993, the
fiscal balance has improved 8 years in a row. The surplus in fiscal
2000 was $237 billion, the largest as a share of GDP since 1948.

These mounting surpluses mean that the government, rather than draining
resources away from private investment, is now freeing them up. And
indeed, the last 8 years have seen a dramatic increase in investment.
From the first quarter of 1993 to the third quarter of 2000, investment
grew at an average rate of 13 percent per year. This long investment
boom has been key to the increasing productivity growth we have seen
over the course of the expansion, which, in turn, has enabled the
economy to continue on a path of strong yet noninflationary growth.

The ascent of the New Economy was also helped along by strong,
pro-competitive policies that allowed innovation to flourish. The
Telecommunications Act of 1996, for example, opened up competition among
local telephone companies, long distance providers, and cable companies.
That competition, in turn, helped spur innovation not only within
telecommunications but also in computer technology and related sectors
that have been key drivers of the New Economy. The act also provided
guidelines to ensure that the benefits of increased competition would
be harnessed so as to increase the circle of opportunity. It established
the E-rate program, through which schools and libraries gained access
to discounted telecommunications and Internet connections. Today 95
percent of public schools are connected to the Internet. This program,
paired with a massive increase in Federal funding for education technology
(to $872 million in fiscal 2001, up from just $23 million in fiscal 1994)
constitutes a long-term investment in the technologically skilled work
force needed to sustain economic growth.

Globalization and the New Economy

Globalization has also played a crucial role in promoting the
technological innovation and organizational changes that have yielded
a New Economy. Globalization turns national markets with few competitors
into worldwide markets with many competitors. The resulting, more intense
competition induces firms to innovate. That innovation contributes to
increased productivity and economic growth. Globalization, by expanding
markets, also gives producers greater scope to specialize in what they do
best. And with open markets, they are able to use the best and most cost-
effective inputs from sources around the world to lower their costs.

Improvements in information technology have spurred deeper integration
between the United States and the world economy. Indeed, it is no
coincidence that the New Economy emerged in the United States at the
same time that U.S. participation in the global economy has reached
new heights, because globalization and the recent advances in information
technology are integrally linked.

Over the past 8 years, fostering globalization and its benefits has been
a high policy priority. The United States has been a partner to more than
300 trade agreements, including the North America Free Trade Agreement,
the Uruguay Round multilateral trade agreements, the accord establishing
permanent normal trade relations with China, the international moratorium
on tariffs on e-commerce, and multilateral agreements in
telecommunications, information technology equipment, and financial
services. At the same time, U.S. trade policy has taken pains to ensure
that these agreements safeguard global natural resources and respect our
values, including our commitment to core labor standards.

The effects of globalization and improved communications and technology
are evident in the record of U.S. international transactions. Trade in
capital goods has soared since 1996, with particularly strong growth in
products that are central to the New Economy, such as computers, semi-
conductors, and telecommunications equipment. Exports of services have
also grown, in particular in those service industries where valuable
innovation has taken place, such as professional, business, technical,
and financial services.

Harnessing the New Economy

For all the power and promise of the New Economy, we cannot take for
granted that its benefits will flow spontaneously to all. That is where
policymakers have played a critical role in harnessing the dynamism of
today's New Economy to benefit all Americans, including groups that have
too long been left behind.

A robust economy that creates 22 million new jobs certainly provides
broad-reaching benefits. Unemployment rates for African Americans and
Hispanics, for example, have hit record lows during this expansion. But
rather than rely on the pure market effects of an economy running on all
cylinders, this Administration has enlisted additional means to empower
and assist struggling families. Among the accomplishments thus far have
been two hikes in the minimum wage, an expansion of the Earned Income
Tax Credit, a more than doubling of funding for child care for working
parents, and the extension of health insurance coverage to a greater
number of low-income children and working families. Together with the
effects of the strong economy, these measures have helped 7 million
people move out of poverty since 1993.

Over the past 8 years, the welfare rolls dropped by more than 8 million,
or nearly 60 percent, to their lowest level in 32 years. Recent data
submitted by States competing for high-performance bonuses available
under welfare reform show that 1.2 million welfare recipients nationwide
went to work in fiscal 1999 alone. Seventy-seven percent of those who got
jobs were still working in the next quarter, and average quarterly
earnings were up 31 percent from the first to the third quarter of
employment: from $2,027 to $2,647. And as more people move off of
welfare, into the job market, and out of poverty, their greater
economic participation has a positive feedback effect on the economy
as a whole, lessening the burden on the budget and on taxpayers and
increasing the productive force in the economy.

Here, too, technology can make important contributions, by improving
the delivery of many social services. In health care, such innovations
are yielding new treatment methods that can directly improve the quality
of life for many. In education, new Federal programs are bringing
computers and the Internet into the classroom, narrowing the digital
divide, helping improve teacher effectiveness, and reducing class size.

Despite vast improvements in the quality of life experienced by many
Americans, challenges remain. There are still substantial disparities
in economic well-being across regions. Minority groups and residents
of central cities and rural areas suffer disproportionately high rates
of poverty and unemployment.

Our health care system also presents challenges. We need to control
health expenditures and ensure that care is affordable to all. Issues
related to managed care and the appropriate way to align incentives
must be resolved so that health care is neither overly restricted nor
overly prescribed. Even after these problems are brought under control,
many Americans may continue to lack health insurance. If this is
allowed to happen, they will be unable to take advantage of the
quality care available to the majority.

Finally, one side effect of the New Economy is that certain parts
of the country, especially the perimeters of some of our large cities,
have experienced enormous growth in jobs and population. Such growth,
when left unchecked, has led to sprawl and serious environmental
consequences.

Even at this moment of great prosperity, then, great challenges remain
to be confronted. We have a unique opportunity today to harness the
power of the high-technology, high-productivity, high-growth New Economy
in a way that sustains the current prosperity and uses it to improve the
lives of all Americans. The challenges of the future--from saving Social
Security, to improving education, to expanding health care coverage, to
paying down the national debt--are significant and will require concerted
effort. The tools and capabilities of the New Economy, combined with the
right, targeted policies, can provide a powerful solution toward
addressing these challenges as a Nation.