November 1999, Vol. 122, No. 11
Précis
Millennial
challenges
The
States and the new economy
Today's
dynamics
The final issue of the National Association for Business Economics newsletter, NABEnews, posed several economists the question, "What will be the most challenging thing facing the economy in the new millennium?" Some of the responses included:
"Technological change will be extremely rapid and, as a result, so will sociological change. Some of today’s striking transformations—information revolution, organizational redesign, job elimination, growing educational requirements—will accelerate." (David A. Levy, The Jerome Levy Economics Institute)
"Adjusting to secular low inflation will be the economy’s biggest challenge early in the new century. Low inflation brings enormous benefits but also dramatically lowers nominal income and profit growth. . . . [I]f personal income growth remains in its recent four to six percent range, servicing recent rapid additions to debt could well require a sustained period of less exuberant consumption." (Maureen Allyn, Scudder Kemper)
"The greatest challenge facing the economy in the new millennium will be adjusting to and utilizing the accelerated flow of new technology. This challenge reflects a recent development in U.S. science and technology: since the early 1980s, and for the first time since the data were developed, private sector research and development outlays have exceeded public sector spending on R&D. The gap has been widening steadily, in favor of business-oriented new products and new processes. This development will present a continuing combination of threats and opportunities to American business as well as to its overseas suppliers, customers, and competitors." (Murray Weidenbaum, Center for the Study of American Business)
The States and the new economy
A report, The State New Economy Index: Benchmarking Economic Transformation in the States, recently released by the Progressive Policy Institute explores the differences among the 50 States in the degree to which their economies are structured to operate in the "New Economy."
According to the report’s authors, the defining characteristics of such an economy are "a fundamentally altered industrial and occupational order, unprecedented levels of entrepreneurial dynamism and competition, and a dramatic trend toward globalization—all of which have been spurred to one degree or another by revolutionary advances in information technologies." The index they construct to reflect the States’ strength in the foundations of the "New Economy" uses 17 State-level statistical indicators in five broad categories: "knowledge jobs," globalization, economic dynamism and competition, transformation to a digital economy, and technological innovation capacity.
The report’s authors, Robert D. Atkinson, Randolph H. Court, and Joseph M. Ward, while acknowledging the difficulties of constructing an index to gauge an economy that is less stable and predicable than in the past, have ranked the States in terms of their adaptation (or, perhaps, adaptability) to the new order of the economy. Massachusetts ranked first, followed by California, Colorado, and Washington. The States they characterized as most firmly rooted in the old economy were Mississippi and Arkansas.
One of the indicators used to measure economic dynamism in the State New Economy Index was "job churning." While the actual data used were rates of business startups plus business failure—and thus represent a measure of establishment churning—a recent report from the American Management Association (AMA) indicates that job churning at the firm level exists in today’s economy and certainly has not slackened off recently. According to AMA’s report, 77.2 percent of the large and mid-sized firms they surveyed in June reported creating new jobs in the past year, up from 72 percent in last year’s survey. Meanwhile, 49.6 percent reported eliminating jobs in the year ended in June 1999, up from 40.9 percent in 1998. Fully 36 percent of surveyed firms both created new jobs and cut existing jobs in the most recent 12-month period, up substantially from 27.1 percent previously.
Among the half of the respondents that reported job elimination, 70 percent did so for reasons that had little to do with current or anticipated demand conditions. Decreased demand was behind factors such as business restructuring and reengineering. Significantly, these same factors were far more likely to be a reason for job creation than had been the case in the past. According to study author Eric Rolfe Greenberg, "Five years ago, organizational restructuring and business process reengineering were cited far more as a rationale for job cuts than for job creation. That gap has closed dramatically. Today, as many companies report creating jobs due to process reengineering as report cutting jobs for the same reason, and the numbers on restructuring have also narrowed."
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