An unexpected surge in economic growth and productivity in the United States since 1995 has stimulated much discussion about a “new economy.” This paper examines the effect of information and communication technology (IT) on economic growth and productivity. Contrary to views that have appeared in the press and elsewhere, we emphasize that the effect of IT on recent U.S. labor productivity growth is more like a continuation of past trends than any great departure, and that it is not unique to the U.S. An equally unexpected acceleration in multifactor productivity (MFP) is also a major contributor to the acceleration in U.S. labor productivity growth. Although available industry-level data cloud the behavior of IT users’ MFP, we see no strong evidence that IT is the generator of U.S. MFP growth among users of IT. Finally, we contend that what is really different about the U.S. economy in the late 1990’s is the behavior of its labor market, a factor that has been given too little consideration in the “new economy” explanation of the late ’90’s U.S. economic success story.
The U.S. economy performed extraordinarily well in the 1990s. Unemployment has dropped to historically low rates; the federal government is awash with revenues, and after a quarter century of near stagnation, productivity growth is soaring. The unexpected economic strength has stimulated much discussion about the ‘new economy,’ and what the emergence of a new economy implies for the sustainability of the economic expansion in future years.
The ‘new economy’ discussion has been inconclusive, in part because the term ‘new economy’ means different things to different people. Some definitions of the new economy embrace a very broad notion—that the fundamental economic concepts that guided economic policy in the past have become irrelevant in an age of global competition and rapid technological change. Others have a more narrow focus—the role of information processing and communications technology (IT) in accelerating the economy’s trend rate of output and productivity growth