Economic Policy Issues of the New Economy

Contents

Jürgen Stehn: Macro- and Microeconomic Policy in the New Economy: Introduction and Overview.

I. Macroeconomics in the New Economy

Kevin J. Stiroh: New and Old Economics in the New Economy. — Dale W. Jorgenson: Information Technology and the U.S. Economy. — Catherine L. Mann: The New Economy: End of the Welfare State?

II. Microeconomics in the New Economy

Norbert Berthold, Rainer Fehn: Labor Market Policy in the New Economy. — Aaditya Mattoo, Ludger Schuknecht: A WTO-Framework for the New Economy. — Eli M. Salzberger: Cyberspace, Governance and the New Economy: How Cyberspace Regulates Us and How Should We Regulate Cyberspace. — David T. Llewellyn: Financial Intermediaries in the New Economy: Will Banks Lose Their Traditional Role?

Abstracts:

Kevin J. Stiroh discusses the pros and cons of two distinct interpretations of the new economy. A moderate interpretation acknowledges that the new information and communications technologies are contributing to recent economic gains, albeit in ways consistent with conventional economic theory. New economy extremists, on the other hand, believe that something more profound has happened, arguing that the new economy follows a new set of economic rules. With special regard to the recent success of the U.S. economy, Stiroh concludes that much of the new economy discussion is not really new and remains squarely based on old economic theories and models. A moderate interpretation of the new economy can recognize the important contributions of technology, globalization, and competitive forces to the success of the U.S. economy without mandating radical changes to our understanding of how the economy actually works.

Dale W. Jorgenson analyzes whether information technologies (IT) have produced a funda­mental change in the U.S. economy, leading to a permanent improvement in growth prospects. He shows that the foundation of the American growth resurgence is the development and deployment of semiconductors resulting in a decline in IT prices. This technology has also reduced the cost of a wide variety of other products. The accelerated IT price decline in the 1990s signals faster productivity growth in IT-producing industries. In fact, IT-producing industries have accounted for about half the upsurge in productivity growth since 1995. However, faster growth is not limited to these industries.

Catherine L. Mann sketches out the forces on two dimensions of government business and government relationships: (1) Tax and expenditure systems, and (2) the issue of privacy and use of personal in­formation. She shows that transaction-based tax regimes will be stressed by the forces of the new economy and will need to evolve in response to the more complex and global nature of production. Moreover, the extent to which public expenditures focus on moderating the outcomes of structural change versus supporting the transformation of activities will have to change in order to gain from the dynamics of the new economy. With regard to privacy, she concludes that in this area government intervention is required but must preserve the private sector's incentive to innovate.

Norbert Berthold and Rainer Fehn analyze the challenges of the new economy for labor market policy. They argue that the IT revolution and the omnipresence of computers in firms have fundamentally transformed the production process in favor of flexibility, teamwork, and multi­tasking. Specialization of employees on certain well-defined tasks as in the Tayloristic or Fordistic mode of production is increasingly obsolete. Thus, in the age of the new economy, labor market policy must primarily be aimed at two key objectives. First, the institutional framework in the labor market must be designed to at least come close to fully exploiting the potential for productivity and employment growth which is created by the new economy. This affects in particular the degree of centralization of wage bargaining and decision-making within firms. Second, it is sometimes argued that the new economy could trigger a digital divide between those who are successful in the new economy and those who are not up to mastering its challenges. Labor market policy should aim at preventing such a damaging development. However, providing people with the respective skills and qualifications via active labor market policies is at most a second-best policy instrument. The foundations for being successful in the new economy are laid much earlier, namely, when children are attending the education system and when being educated by one's parents.

Aaditya Mattoo and Ludger Schuknecht address two broad questions: (1) What categories of international trade are particularly conducive to realizing the benefits of the new economy and how important is such trade already? (2) How well developed and liberal is the international trade regime, and what are the main challenges ahead? Their analysis elucidates that trade in new-economy-related products is large, accounting for 15–20 percent of world trade in goods and services, and growing rapidly. As regards trade in goods, the Information Technology Agreement (ITA) has secured far-reaching liberalization of market access. The rules governing trade in goods are well developed and contingency protection is not being applied much against new economy products. As regards software and other digitizable media products, a decision needs to be taken on whether to treat internet-based trade in such products as services or as goods. In the services domain, market access commitments and rules need to be further strengthened so as to provide a secure and liberal environment for international trade.

Eli M. Salzberger examines the characteristics of markets in cyberspace and analyzes possible market failures in comparison to market failures in the nonvirtual world. He shows that, on the one hand, some of the nonvirtual market failures induced by the lack of information and by the existence of externalities or transaction costs are of diminishing importance in cyberspace. On the other hand, cyberspace creates some new market deficiencies that are almost unknown in traditional markets. Costs in verifying information as well as the technological race between distinct enforcement measures are prominent examples for virtual market failures.

David T. Llewellyn poses a series of fundamental questions about the future of banking in the new economy. He shows that the related pressures of competition, declining entry barriers, deregulation, financial innovation, and technology have eroded some of the comparative advantages of banks. With the exponential development of information, trading and delivery technology, the value added in the banking business is increasingly passing away from banks to specialist technology companies. Moreover, banks are no longer the exclusive suppliers of banking services: there are many traditional activities of banks that can now be undertaken equally well by markets and other types of financial and nonfinancial companies. Banks face competition from a wider variety of competitors (including niche players) whose underlying economics are different from established firms. Smaller firms and new entrants are also able to challenge the scale advantages of incumbents through outsourcing.