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To: Jim Willie CB who wrote (4632)	6/2/2003 9:52:50 AM
From: 4figureau	Read Replies (3) \| Respond to of 5423

The new economy may already be history By Dean Baker Published: June 1 2003 19:04 The core of the "new economy" has always been the sharp increase in productivity growth that began in the second half of 1995. Proponents of the new economy, led by Alan Greenspan, chairman of the Federal Reserve, have focused on this upturn in productivity growth as its defining feature. The US had a boom of investment, concentrated in information technology, which unleashed a surge in productivity growth unmatched since the 1960s. It is therefore striking that new data, suggesting that productivity is no longer growing rapidly, have received little attention. The most recent data from the US Department of Commerce indicate that over the past year, productivity growth has fallen back to the rate of the productivity slowdown of 1973-95. If productivity continues to grow at this pace, the new economy will prove to be just a blip in a longer period of slow growth. Mr Greenspan and other proponents of the new economy are justified in focusing on productivity growth because it is the most important factor determining living standards over the long run. If the economy could sustain a rate of productivity growth of 2.5 per cent annually - the general consensus for the new economy - living standards can double in little more than a quarter of a century. If productivity grows at the 1.5 per cent rate of the slowdown era, living standards would improve by less than 50 per cent. While part of the explanation for the neglect of the productivity data may stem from a desire to ignore bad news, a bigger factor is that the main issue is technical in nature. In the past decade, an increasing share of the economy's output has gone to depreciation - the replacement of worn-out or obsolete equipment - as short-lived equipment (for example, computers and software) has accounted for a growing share of investment. In the past year, the share of output going for depreciation has increased by 0.8 percentage points of gross domestic product. While necessary to sustain the economy, the resources that are used to replace depreciated plant and equipment do not directly improve living standards. If we use a net measure of output - which excludes depreciation - the increase in productivity over the past year would be approximately 1.5 per cent, just 0.2 to 0.3 percentage points above the rate of net productivity growth in the years before the arrival of the new economy. By contrast, the productivity numbers, which report gross productivity growth, showed 2.3 per cent for the last year, only slightly lower than the 2.5 per cent new economy average. But the gross productivity data conceal the fact that the share of output going to depreciation was increasing at a 0.3 percentage point annual rate in 1995. It is currently increasing at almost 0.8 per cent a year. In short, when the recent numbers on productivity growth are adjusted for depreciation, most of the new economy upturn disappears. It remains to be seen whether the share of output going to depreciation will continue to increase at the same rate but the gross measure of productivity growth may fall as well. Even before the latest productivity numbers, the new economy had already largely gone out of fashion. The days of ever-rising stock prices seem a distant memory. Plunging retirement plans have sent millions of older workers scurrying for part-time jobs at a point in their lives where they expected to be relaxing on the beach. The stories of oversubscribed dotcom initial public offerings have been replaced by stories of accounting fraud, as tumbling stock prices put an end to the investment boom. The loss of more than 2m jobs in the past two years has pushed the US unemployment rate up from 4 per cent in 2000 to 6 per cent today. As the labour market has weakened, workers who still have jobs have become far less secure. One result is that the healthy growth in real wages during the boom of the late 1990s has largely evaporated. Real wages are stagnating for most workers; increases are barely keeping pace with inflation and the gap in wages between high-end and low-end workers seems to be growing again. Even so, the upturn in productivity growth had appeared to persist into the recession and the subsequent period of slow growth. The new data indicate that this last pillar of the new economy may be collapsing. Yet the latest productivity numbers were barely mentioned in most reporting on the economy. It is important to note that productivity numbers are highly erratic and are often revised substantially. This means that years from now, when we have more complete data, the productivity picture for this past year may appear very different from what current data show. But, in the meantime, these data are all we have to go on. They show that the slower growth in productivity has now lasted for a full year, rather than just a single quarter. With four quarters of slow productivity growth behind us, economists such as Mr Greenspan should be asking if the new economy is history. If it is, America's economic slowdown may prove to be more persistent than many had hoped. news.ft.com

To: Jim Willie CB who wrote (4632)	6/2/2003 9:58:35 AM
From: 4figureau	Read Replies (1) \| Respond to of 5423

G8 Summit Grapples with Dollar Drop Mon June 2, 2003 05:28 AM ET By Guy Debache EVIAN, France (Reuters) - World leaders broached the dollar's recent tumble in exchange rate markets on Monday at a Group of Eight summit designed to shore up confidence in the shaky global economy. Dollar weakness versus the euro and yen, while good for U.S. exports and jobs as presidential elections loom there next year, has raised fears in Europe and Japan that what may help in the United States may choke recovery prospects in the European and Japanese economies. Delegates at the G8 meeting said the request for the currency debate came from the European side, despite noises from countries like Germany ahead of the summit that leaders would not touch on the issue during their three days in Evian, France. One delegate said on Monday that a specific G8 statement on exchange rates was not to be expected during the course of the day, even if commentary on the matter in the end-of-meeting communique on Tuesday was not ruled out. The G8 talks -- involving leaders from the United States, Germany, Japan, Canada, Italy, Britain, Russia and France -- were devoted to the economy on Monday morning. Fifty percent of the world's economic output comes from the G8 group. Several statements were expected on commitment to free trade and greater corporate responsibility in the wake of accounting scandals of the kind that brought down U.S. energy giant Enron. PRESSURE ON EUROPE, ECB With stagnation or worse threatening economies like Germany, Japan and Italy, Italian Prime Minister Silvio Berlusconi said on Sunday currencies would be discussed and also highlighted hopes of a cut in interest rates in the 12-nation euro zone. Berlusconi, whose country takes over the European Union's rotating presidency in July, said ahead of a key meeting of the European Central Bank's rate-setting council on Thursday: "A decision to cut rates might be in the air," he said. "And I think it's necessary." Many are arguing for a euro zone rate cut for two reasons -- the traditional one that it helps growth by reducing business borrowing costs; the second being that it could tame the euro's rise against the dollar. President Bush said in interviews ahead of the summit Washington continued to back a strong dollar even if financial markets seemed to be putting a value on the currency which went against the grain of that policy. Just what that policy is has never been officially spelled out since it was established in the mid-1990s, but financial markets feed on every word or expression, no matter how cryptic, for signals on when to buy and sell various currencies. So far the markets seem to be putting little faith in such comments and have instead been turning negative on the dollar, on the basis that soaring U.S. current account and budget deficits are now a real risk as well. The dollar, down more than 10 percent against the euro this year, hit an all-time low against the European currency in the weeks after comments by U.S. Treasury Secretary John Snow, who said when G8 finance ministers met in France in mid-May that recent currency movements had been relatively modest. In day-to-day trading, the dollar gained some ground against the euro EUR= on Monday morning, up about 0.7 percent, with traders saying the move was driven by better sentiment on U.S. share prices and the fact that G8 leaders were addressing the matter. Bush and French President Jacques Chirac, the summit host, were due to hold a face-to-face meeting of about 30 minutes on the summit sidelines, at about 1000 GMT. While the dollar fall poses new questions in Europe, it is an old problem for Japan. Prime Minister Junichiro Koizumi was expected to repeat at the G8 meeting Tokyo's worries that an overly robust yen was an obstacle to recovery in a country that has been stagnant or worse for a decade. reuters.com