It didn't make the world better. It wasn't supposed to.
The trouble with the term new economy is its McLuhanesque slipperiness. It means whatever you want it to mean. Too often, that has translated to wishful thinking: new rules, new paradigms, new riches.
But as those dreams dissipate in a haze of bankruptcies and book contracts, it's nonetheless clear that the US economy is fundamentally different now than just a few years ago.
The point is especially relevant now, as the economic downturn in the US enters its second year. With growth slowing to a stop, and unemployment creeping higher, whatever economy we are in, it's not better than the old one. It's just different.
Globalization, high productivity, a tendency toward deflation rather than inflation - the new economy is here, and we're living it. Few companies have felt the changes more profoundly than the 40 members of the Wired Index. Cisco, Schwab, and DaimlerChrysler, for example, may not be enjoying the effects - but there's no doubt they've been affected.
Take the business cycle. The old model was one of boom and bust - a burst of economic growth leads to inflation, prompting the Federal Reserve to lower interest rates, triggering a recession. Then a seductive new model emerged: real-time technology would perfect just-in-time inventories, and boom and bust cycles would disappear. That idea, ludicrous on its face, may well have been invented just to discredit the new economy. But if the business cycle isn't history, there's plenty of evidence that it is growing more compressed. In the second quarter of 2001, for instance, US businesses slashed inventories at an annual rate of $38 billion, a steeper pace than during the recession of the early 1990s. That in a quarter when the economy was still technically growing.
It's the same with productivity. Overall, companies are working more efficiently; productivity is rising, which means the economy can grow faster without high inflation. Productivity grew by 2.6 percent per year during the past five years, and by 2.1 percent in the second quarter of this year - still healthy for a quarter when the economy grew 0.2 percent and was just above the 2 percent average of the past 130 years. The industries that saw the biggest gains in the late '90s were those that spent the most on technology in the early '90s.
Even the causes of this downturn are different from those of every recession since the Great Depression. This time, the pop of a speculative stock bubble kicked things off - as the Nasdaq tumbled, chasing the new economy suddenly seemed optional. Old-line companies realized they didn't have to spend millions on new technology and Internet strategies to survive. Rather than function as a symptom, this time stocks were a trigger, and the Fed has been playing catch-up ever since.
The equity culture that preceded the downturn reflects another change: Companies turned to equity rather than debt to raise money, thanks in part to a stock market that became more democratic than it had been in previous decades. Live by equity, die by equity - either way, the stock market matters more than ever.
And by its very nature, today's economy is global in scale. Bitter battles over trade imbalances have given way to cross-border investments and trade agreements that integrate national economies. For the first time since the 1930s, a global recession seems a very real threat - a prospect that would be less likely if national economies were operating as independent entities.
These changes raise new challenges for policymakers and businesses alike. For starters, the Fed should abandon the pretense that it ignores the stock market. Every day, businesses make decisions based on their share price; the Fed would do well to acknowledge the same. Corporate leaders, for their part, would do well to follow the middle way paved by Wired Index members like Marriott, Wal-Mart, and FedEx. These firms have outperformed their downturn-stricken sectors at least in part because of their basic faith in information technology - without subscribing to the cult of new economy miracles.
In the end, what really bruised the notion of a new economy is the figment that, by definition, it was going to make the world better. The real new economy is merely agnostic: If business cycles are shorter, they are also sharper and more painful on the way down. Job cuts are likely to be deeper and more frequent. An economy driven by equity investment is more vulnerable to excesses of speculation. And while the world's economies have unified, the more emotional factors that define individual nations - like politics and culture - have not. The resulting tension won't be easily resolved.
Nobody ever said the new economy would be milk and honey. Or rather, no one should have said it.
