Whatever happened to the new economy? Given the current economic downturn, questions abound as to whether the "new economy" really means anything for states.

• Author: Kearns, Monica
• Position: Brief Article

With the country in the grip of recession, state policymakers are wondering if the growth bonanza of the 1990s holds any lessons for economic development. Or was the bounty of this "new economy" overblown? The answer depends on how you define the new economy, but it seems that some developments from the 1990s will have long-term positive effects.

WHAT IS THE NEW ECONOMY?

A core notion of the new economy is that information, ideas and technology are more important than ever. Information and ideas are represented by a firm's intellectual assets-educated workers and intellectual property such as patents. Physical assets like machines still dominate the finances of many businesses. But to be competitive, a company needs people who can use technology to sift through mountains of information, come up with new products and work out new ways of doing business.

An example of this is the "just-in-time" strategy for inventory management that uses Internet-based communications to link firms with customers and suppliers. Managers and workers can closely monitor customer demand and gauge production decisions to cut down on or even eliminate inventories. When a business has too much inventory, it slows down purchasing and this reduced demand stifles production at other firms. The overall effect is a damper on economic growth.

Of all the new technologies, those that dramatically lower the cost of communication have transformed businesses the most. Like consumers discovering the wonder of the Internet, companies of all sizes in all industries have benefited from e-mail, other Internet-based communications, pagers, mobile phones and the like.

Besides lowering costs, the massive, continuous flows of information increase the pace of production and competition, companies can find out about markets, strategies and competitors in minutes through the Internet instead of hours or days. In other words, economies of time have become as important as economies of scale.

Another tenet of the new economy is that the best way to pursue profits has changed. Historically, businesses focused on cutting expenses by operating where taxes and other costs of business were cheapest. This is still, of course, a concern. But over the long term, businesses may best maximize profits by using knowledge and technology to add value to their products and services. For instance, firms can review their customers' past purchases and use sophisticated databases to sell them something new.

IS IT STILL RELEVANT?

If key concepts of the new economy hold, it means that the new convergence of ideas, information and technology have changed the nature of economic growth. For proof, economists want to know whether investments in intellectual and physical assets (particularly high-tech equipment) are boosting corporate productivity and profits.

"The new economy arguments that make sense are about long-term growth, not about short-term business cycles," says David Wyss, chief economist of Standard & Poor's. "We believe the long-term growth of the economy has risen, partially as a result of technology shifts and partially because of better control of inflation." At the same time, he adds, "That does not mean you cannot have recessions.

Indeed, it seems that the feeblest claims related to the new economy were that the business cycle...