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FROM THE OFFICE OF PUBLIC AFFAIRS March 6, 2000LS-434 Remarks by Treasury Secretary Lawrence H. Summers Finance Conference on the New Economy Boston College Boston, MA Thank you. I am delighted to be here. Let me especially thank my friend Congressman Markey, and Father William Leahy, the President of Boston College, for inviting me to be with you for this event. Today I want to reflect for a few minutes on three fundamental questions for the future.
I. The Foundations of a New Economy Ten years ago in Chicago I called my wife - simply to tell her that I was in a car that had a telephone. Seven years later, traveling abroad, I was handed a mobile phone to talk to (then) Secretary Rubin about the IRS. And I did not give it a second thought. Even though I was sitting in a canoe two hours outside Abidjan at the time. That experience brought together some of the most important forces in the world today: technology, markets, global integration and the changing source of economic value. First, revolutions in technology Advances in information technology, transportation and communications are taking us to a post-industrial age, with profound implications for economies and societies. And I am convinced that the process of diffusion is far from complete. The sign that a technology has become pervasive is when you notice its absence rather than its presence. By that standard, connection to the Internet has some way to go. Perhaps 3-4 percent of the letters of congratulation that I received on my appointment as Secretary were in the form of e-mails. With the scale of business-to-business connections many times greater than individual-to-individual ones, it is likely that we understate their importance when we equate our day-to-day experience with that of the broader economy. What we can say, based on the evidence, is that the diffusion of new technologies is likely to be an accelerating rather than a decelerating process. I have been struck, looking at the business literature on these issues, by how many of the charts are in log scale. Second, the spread of market forces A second trend that has been creating this new economy has been the erosion of centralized economic controls and the spread of market forces. It cannot be an accident that Soviet-style communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. Increasingly, the balance of economic advantage has tilted in favor of systems in which economic power and opportunities are more decentralized - and the skills and ideas of the individual are given greater weight. At the level of individual businesses and national economies, flexibility is winning out over rigid controls. And the capacity to respond to change is winning out over the capacity to dictate it. Third, global integration A third and perhaps most spectacular recent development is the beginnings of a more truly global economy. When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets - about economies where more than three billion people live moving toward the market and seeing rapid growth in incomes. For the first time in human history, living standards for huge populations have quadrupled or more in a single generation. This is an event, I would argue, whose importance in economic history can be compared only to the Industrial Revolution and the Renaissance. Fourth, a changing source of economic value A fourth major trend is a change in the nature of what constitutes a good. We are moving from an economy in which the canonical product is an ingot of iron, a barrel of oil or a bushel of wheat- to one in which the canonical product is gene sequence, a line of computer code, or a logo. As Chairman Greenspan has often emphasized, in such a world, goods are increasingly valued for the knowledge that went into them rather than their physical weight. And what you know matters more than how much you can lift. Taken together, these trends perhaps capture what is new about the present moment. Parameters such as normal rates of unemployment and potential GNP growth surely have changed in the new economy. But many of the laws of economics, and all of the verities of human psychology, have not changed. That is why the new economy has to be built on old virtues. Which brings us to the question of explaining America's recent economic success. II. The Foundations of America's Recent Economic Success The exceptional performance of the United States economy in the 1990s has been fundamentally the result of the coming together of two elements: the advent of what Vice-President Gore has called the "information technology supply shock", and a return to old virtues in economic policies - fiscal policies particularly.
Our ability to take advantage of this supply shock has depended on the centrality of information technology to our economy - which, in turn, has depended in large part on the dynamism of the American financial system.
However, our ability to exploit these new opportunities has depended also and critically on President Clinton and Vice President Gore's determination to forge a new national consensus around sound macro-economic policies - and, especially, a new paradigm for the management of our nation's budget. Structural deficit policies give rise to vicious circles. With underlying deficits and rising debts and interest burdens, deficits tend to lead to rising interest rates - and so to falling investment and slowing growth, which reduce revenues further, increase deficits and start the cycle again. This process leads to steadily decreasing national saving and deteriorating economic performance - what we saw in the late 1980s and early 1990s. Deficits - and the vicious cycle that they set in train - are ever more costly in an environment of burgeoning opportunities for new investment. That is why it was so important for the United States to reverse a generation or more of public borrowing. And that is why fiscal policy has played such an important role in helping to sustain the current expansion. Surpluses give rise to a kind of virtuous circle of declining debt, increasing national savings, lower interest rates, and rising investment and growth - leading to further fiscal improvement and a continuation of the cycle. Indeed, American savers have had to absorb more than $2 trillion less in government debt since 1993 than they would have if the budget projections made in that year had been realized. That is more than $2 trillion dollars available for new investment in America's future. This has much to do with why the expansion has been investment led, capacity creating and long lived, with capacity utilization - even today - not far from historic norms. Real investment as a share of GNP is today higher than it has been at any time in the postwar period. III. Core Implications for Future Economic Policy If these judgments are correct - that the economy is new in the sense that it is driven by new technologies, the benefits are more global, it is more market-oriented, and the value of its goods is judged more by the ideas they embody than their physical mass - this has a number of implications for public policy today:
1. New Priorities for Economic Policy It is a characteristic of the "weightless" goods of this new economy that there will often be very high initial fixed costs and low, even zero marginal costs. In that sense, the cost structure of the canonical industry will be increasingly reminiscent of that for pharmaceuticals, publishing or the recording industry. In these new kinds of industries, growth should have a greater potential to snowball. Success may have greater potential to become self-perpetuating, as growth leads to rapid declines in prices, and so to further expansion in the market and further growth. We see an aspect of this today in the fact that orphan drugs cost much more than drugs with a larger market - and bestsellers cost that much less than academic monographs that very few people may read. There is the further point about these new industries, beyond the fact that costs fall as markets grow, that the value of networks will be increasingly important. The first fax machine could do very little. With one hundred fax machines, ten thousand connections are possible - with ten million machines the possibilities are almost limitless. This reality - that growing demand and growing markets and networks will tend to reduce costs and raise efficiency - makes successful economic management all the more important. It also points up the importance of making sure that we function with as large markets as possible.
2. The New Importance of Old Virtues At the same time, in this new economy some of the oldest lessons of economic science acquire even greater force.
IV. Concluding Remarks These are good times. The economy is working for most Americans. We have a great deal to be proud of. But let me conclude on a more somber note. Just as the world in 2000 looks very different from the world of 1990, so too did things look very different in 1990 than in 1980 - and so, just as surely, will 2010 look very different from today. We cannot know what this new economy will look like a decade from now. What we can know is that we are enjoying a very special moment, a moment that confers a special responsibility on public policy to work to broaden the base of our prosperity - and minimize future risks. Technology does provide Americans with remarkable opportunities. But they are not there for those who lack the basic means to take advantage of them. And it has been estimated that in America today, a child born of a single teenage mother who did not finish high school has an 80 percent chance of living in poverty at the age of ten. Male life expectancy in Washington, DC is several years below that in Mongolia or Belarus. If our success is to continue, if our economy is to be what it has to be, and if it is to be a secure prosperity that we enjoy, then we as a country have to do more to ensure that all are included. That is why expanding support for the working poor through the Earned Income Tax Credit is so important. That is why we need to take the steps contained in our New Markets Initiative to help to unleash the potential of our inner cities and other disadvantaged areas. And that is why we need to expand programs such as Head Start and the Child Health Insurance Program so that every child starts out in life with the core essentials. Many are rightly focused today on preventing a gaping digital divide. And we should remember that nothing does more to create that divide than the inability to read. Finally, technology is transforming our economy and our society. But we need to recognize that there are some things that many Americans would like to stay the same. As we work to build a modern financial system we have also to ensure that every consumer's right to privacy is properly protected. As we work to build a more global economy we have also to work to prevent a race to a bottom in the policies and protections that matter to us. As important as new markets, new technologies, and new global integration are, we have equally to recognize that their full potential will not be realized without the right kind of public purpose. Thank you. |
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