Business Week Cover Story: The Next Downturn

The Next Downturn
Will a New Economy bust follow the New Economy boom?

Five years ago, BUSINESS WEEK led the way in writing about what was later called the New Economy. The idea was that America was undergoing an economic transformation. Technological innovation, combined with the globalization of business and a financial system that provided venture capital, were energizing the economy by boosting productivity. In this New Economy, we argued, fast growth would no longer lead to inflation, as it did so often in the old. The reason: Productivity growth from investment in technology would cut costs. And the opening of new markets around the world and fierce competition would further put a lid on prices and wages. The business cycle wasn't dead, we said, but it had dramatically changed.

Not surprisingly, traditional economists attacked the idea, arguing instead that the U.S. was simply experiencing a normal cyclical upturn that would soon fade. Rapid productivity gains were more fiction than fact, they said, and if the expansion continued to gather speed, higher inflation was a sure thing. They were wrong. Growth over the last five years has averaged well above 4% annually, and productivity is increasing at double the rate of a decade ago. Meanwhile, inflation has been tepid, even though the economy is in its 10th year of expansion, the longest in history.

There may be a downside to the New Economy, however. Michael J. Mandel, economics editor of BUSINESS WEEK, who spearheaded our New Economy coverage, argues in his new book, The Coming Internet Depression, that the growing importance of technology in the economy means that should this sector falter, it could drag the whole economy with it. Boom would turn to bust.

Here's Mandel's theory: Tech spending is slowing and will slow further. Venture capital, so critical in funding new technologies, begins to dry up. Productivity growth slips, and so does overall growth. Inflation, no longer held in check by rising productivity, accelerates. The Federal Reserve, focusing on rising inflation and a declining dollar, raises rates, thus intensifying the slowdown. The economy heads toward serious and prolonged recession.

Other BW editors dispute Mandel's views. They contend that tech spending, though slowing, is not about to fall off a cliff. Investment in such promising technologies as the mobile Internet will fill the gap. A slowing economy will not produce more inflation, and even if it does, the Fed is not about to make a colossal mistake in policy.

In this Special Report, we present both sides of the issue--and invite you to make up your own mind.