What's So New About the ‘New Economy’?

By Todd Scarth, 31 July 2000

I don't know about you, but I'm a bit uncomfortable with the idea that the very engines of our economy are now “virtual” companies, run by twelve year olds, that produce nothing, employ almost no one, and have nothing in the way of assets except a name that begins with “e-” or ends with “.com.”

Anyone who reads the papers these days can be forgiven for thinking that that is the case. According to legions of cheerleaders disguised as e-journalists, some time after the recession of the early 1990s pushed unemployment as high as twelve percent, but before Y2K left us cowering in our survival shelters, someone sneaked in and replaced our old economy with a shiny new one. Apparently, in this new economy, we all work with our brains, not our hands; matter doesn't matter anymore; tangible assets are merely a burden; and the industrial age has been replaced by the information age. In some parts of the world, you can't swing your arms without hitting a web designer, and everyone but me works in an office with a cappuccino bar. In short, we have entered—(trumpet fanfare)—a new paradigm!

While not everyone shares in the triumphalism found on the business pages, these assumptions about the “new economy” are quite widely accepted. Some of the people protesting the WTO on the streets of Seattle last November believe the new platitudes every bit as much as the right-wing think tanks who opportunistically argue that the growth of the internet signals the impossibility of regulating commerce.

At the risk of sounding antediluvian, I wonder about the obvious questions that aren't being asked publicly. How “new” is this economy, anyway? Where did the idea of it come from? How is it any different? And who's coming out ahead?

Even a quick look at the economic evidence shows that there is a lot of commotion over little real economic activity. As economist Jim Stanford points out, the most optimistic estimates are that Canadians will buy $3 billion worth of goods and services online this year. That works out to about one half of one percent of what will be spent in total—less than the statistical margin of error in the National Accounts data. In other words, the e-economy could completely disappear in a mouse click without even registering in official GDP statistics.

So while buying books or shoes over the internet may feel different from shopping in a mall, that's not an economic revolution. And it's not creating many jobs.

Less than 1 percent of Canadian workers produce electrical products, and that number has declined over the past decade. Even fewer work in computer programming and service jobs, which account for just 3.5 percent of the jobs created since the last recession ended in 1992.

None of this is to say that the economy is not growing. Canada has been riding the stunning growth of the US economy to solid gains and the lowest unemployment rates in decades. But what's most “new” about this growth may the way it is being—or not being—shared. David Robinson, policy analyst with the Canadian Association of University Teachers, has calculated that this is turning out to be one of the weakest economic recoveries since World War II for the majority of Canadian families.

The recession of 1981–1983 was the worst since the 1930s. Between 1984 and 1989, after-tax family income grew the fastest for lower-income people. During the recovery after the 1990 -1992 recession, this situation was reversed. The lowest-income families had the slowest growth in after-tax income, while the richest 20 percent of Canadian families were the only group that did better in the recovery of the 1990s than in the one a decade before.

No wonder Bay Street economists are feeling bullish—they've been cleaning up. Though there's nothing really “new” about that, is there?

Whether there really is a new economy or not, the e-hype can become a self-fulfilling prophesy. We have seen this phenomenon in the great dot-com investment bubble of the past few years.

Dot-Comedy?

Take Salon.com, a high-quality, professional “web magazine” that regularly publishes some of North America's most prominent mainstream writers and journalists. In other words, if any such publication should succeed, it would be Salon.com. The company “went public” in an initial public offering (IPO) one year ago this month.

Salon.com shares opened at $10.50, and several days later reached a high of $15.12. It has since falllen 92 percent from its high, to about $1.25 per share, and is struggling to survive.

The problem is that Salon.com's business plan was based on the groundless theory that advertising revenue alone could support “content” sites on the web, even when advertising costs and marketing alone exceeded total advertising revenue.

Like so many other “dot com” wonders, Salon.com should never have been dumped on the public in the first place. But Wall Street underwriters, who earn 7 to 8 percent commissions for every dollar raised in an IPO, happily stoked the dot.com investment frenzy. Gullible investors have since lost millions, but you can be sure W.R. Hambrecht & Co, Salon.com's underwriter, still has its original commission.

The leading Wall Street underwriter in business today is Goldman, Sachs & Co. If you bought one share, on its first trading day, of every internet IPO Goldman,Sachs has managed since they began with Yahoo! Inc in 1996, you'd now own shares in dozens of complete flops. Your stocks in eToys and PlanetRx.com and InsWeb Corp. would all be worth about 7 percent of what you paid for them. In total, your complete portfolio would be down about 8 percent. You'd have been better off hiding your cash under your bed. And this is the most successful firm going.

New economy? The greed and inequality look pretty familiar—like good ol' capitalism.