Bearish Views on the 'Goldilocks Economy'

That soft hum coming from the computer on your desk is, to many economists, the sound of wealth in the making, for virtually every American.

It's the sound of the "New Era" for the American economy, inspired by technology, powered by quantum leaps in productivity.

But not every expert hums the same tune on America's new economy. Problem is, they say, there are no national data underpinning this brave new world.

Advocates of the New Era make a compelling argument. They see a second Industrial Revolution, with steady growth, low inflation, plentiful jobs, and strong productivity.

The notion of a New Era even won qualified support from Federal Reserve Board Chairman Alan Greenspan. It has apparently contributed to the Fed's decision to keep interest rates low since March.

Champions of the new age hatched their idea to account for the dazzling US economy. If the current six-and-a-half-year expansion lasts until the new year, it will mark the nation's longest period of peacetime growth.

Unemployment, at 4.9 percent, is near a quarter-century low, crashing several months ago through a level widely considered a trigger for inflation. Inflation remains weak at a 2.2 percent annual rate.

New Era adherents point to intensified trade curbing inflation (see related story, Page 1). The dismantling of trade barriers this decade has compelled US companies to hold down prices to compete with overseas rivals.

Holy War for economists

"The New Era is the stuff of a great novel, but it bears no relationship to the reality of the 1990s," says Stephen Roach, chief economist at Morgan Stanley in New York. "Anyone who says we are entering a new era - regardless of all their passion, conviction... - is just speaking futuristic fantasy," he says.

He and other critics see it as a passing phenomenon.

Such criticism flares often in what is perhaps the most vigorous economic debate of the decade. "It's month-by-month, house-by-house, urban guerrilla warfare going on," says Edward Yardeni, economist at Deutsche Morgan Grenfell in New York and an outspoken New Era prophet.

The debate is heated because the stakes are huge. A new Industrial Revolution would prompt new thinking on public and private spending. It would continue to energize stock markets, raise tax revenues, lower the deficit, and help revive federal programs like Social Security and Medicare.

Most important, it would spur broad-based wealth into the next century.

Inflation is tame, say proponents, primarily because of the payoff from huge corporate investments in computers, telecommunications, and other information technology (IT).

The bottom line for corporate America is fatter profits: more production with less staff.

That benefits the rest of us because it means less pressure to raise prices, which allows the Fed to favor lower interest rates.

It's been dubbed the Goldilocks Economy, because everything is "just right," and to some economists, it has the substance of a fairy tale.

But prophets of the New Era shrug off the fact that federal data fail to signal the end of a quarter century of sluggish growth in productivity, an important measure for future wealth.

They dismiss the "productivity paradox," the nagging fact that, for years, hefty corporate spending in technology has not significantly lifted federal measures of productivity in the service sector. The yardstick, they say, is flawed.

Indeed, Washington narrowly derives its productivity figures from output, or the total production of, for example, coal or cars. The data ignore productivity gains in many "knowledge worker" tasks that benefit substantially from technology.

Such intangible improvements - among, say, bank tellers, graphic artists, or editors - are vital as the US economy shifts from industry to information.

"Quality, variety, timeliness, and other intangibles are becoming more important," says Erik Brynjolfsson of the Massachusetts Institute of Technology.

Silicon utopia?

Companies that systematically apply IT squeeze out 0.5 percent more annual productivity growth than firms that do not, says Mr. Brynjolfsson, author of an eight-year study of 800 companies. Over time, that brings a big competitive edge (see story, below).

Still, New Era naysayers assert that computers must spread deeper and completely revolutionize workaday life before Americans can hail the rise of a silicon-paved utopia.

The skeptics also attribute low inflation to passing economic forces, rather than computer-created productivity. A strong dollar, a slowdown in health-care costs, robust trade, cheap energy, and slight wage pressures all keep prices low - for now.

Indeed, some economists say just one solid spike in inflation will burst the New Era. "We're in a sweet spot in the business cycle, and we shouldn't [assume] that no signs of inflation mean that inflation isn't necessarily building below the surface," says John Williams, chief global economist at Bankers Trust in New York.

A New Era might indeed lie before us - but a generation or two away, say some economic historians. Prior masterstrokes of innovation took decades to take hold.

The steam engine, for example, did not begin to enliven the broad economy until a century after its invention in 1709. The electric motor took more than four decades to raise productivity.

Like earlier inventions, computers can retard productivity until the new technology meshes with day-to-day business, say economic historians.

Indeed, some companies find that the benefits of computers fall short of their costs, including maintenance, training, and time lost to Internet-surfing and games, critics say.

Ultimately, technology must do more than raise productivity and profits. It must shake up the way businesses manage capital, resources, and labor, say economists. That takes lots of time.