ALAN GREENSPAN warned the other day that the worst is yet to come in the current economic slowdown. In testimony before the House Financial Services Committee, the Fed chairman noted that corporate profits were still weak, that more layoffs and unemployment were likely, and that the economic risks were still more on the side of recession than inflation.
The geniuses who claimed that the new economy was recessionproof are eating a good dose of humble pie. The stock market is going nowhere fast, which is not surprising given the feeble corporate earnings.
It was only about a year ago that a lot of wise guys were saying that earnings didn't matter much. The sky was the limit with dot-com companies.
But the new economy turns out to follow most of the rules of the old economy. Companies have to turn a profit in order to make them sound investments. Giddy investment mania can result in overbuilding, whether the fad is railroads or Web sites, semiconductors, and optical fiber. Stock market players are still vulnerable to bouts of euphoria, and a capitalist economy is still vulnerable to cycles of boom and bust.
One of the factors deferring a strong recovery is the fact that so much overbuilding took place in so much of the high-tech economy. It will take more than a few months to work that capacity off. And one factor preventing a steeper recession is the reality that most economic activity, mercifully, remains in the old economy.
There, at least, was not giddy overbuilding during the boom phase, so the recession is not so steep during the bust.
Even so, there are some genuinely new things about this economy. One is that the economy's productivity is growing faster than it has in three decades thanks to new technologies.
Another is that the new technology gives the economy more flexibility than it used to have. Those two factors mean that the economy really is capable of higher rates of growth and fuller employment than a lot of economists thought possible.
The high growth and full employment of recent years, especially in the years 1997-2000, finally began improving real wages for the bottom half of the workforce. And it did so without generating inflationary pressures. Unemployment for African-American men came down into single digits for the first time since statistics were kept.
Now, as part of the slowdown, unemployment is rising again. After bottoming out below 4 percent, it is back at 4.5 percent, and Greenspan says it could go over 5 percent. If that happens, it will be the relatively low-skilled and low- paid workers who feel the effects.
The new economy may not be capable of 20 percent stock market gains year after year, but it truly is capable of sustained full employment. So it would be an absolute shame if we again tolerated needless high unemployment just when the effects of the boom are finally trickling down.
Greenspan's Fed has cut interest rates six times this year, and the Fed chairman hinted that they may cut rates again before the downturn is over. But while lower interest rates would be helpful, they are not sufficient.
Consider again the dynamics of this slowdown - excess business inventories, too much capacity, and weak profits, leading to worker layoffs and declining consumer demand.
If you are drowning in semiconductors or optical fiber and orders are off, you are not going to produce more no matter how much the Fed cuts rates. And if you just lost your job, rate cuts may ease your credit card debt slightly, but they will not induce a new buying spree.
What the economy needs is a good economic stimulus in the form of public investment and tax cuts for lower-income Americans.
The Bush program has it exactly backwards. Public outlay is being reduced, the tax cuts go mostly to the rich, and they don't begin having significant effect until after 2004, when the downturn will probably be over.
The only good thing about the tax bill is the fairly modest $300 universal rebate that we will begin receiving in a few weeks. This measure, which was added at the Democrats' insistence, is at least tilted in the right direction - but it is too small to make much difference as a general economic stimulus.
The other thing the new economy hasn't changed is government's necessary role in a prolonged economic downturn. If George W. Bush doesn't wake up to that fact, he will reap the consequences in the elections of 2002 and 2004.
Robert Kuttner's is coeditor of The American Prospect. His column appears regularly in the Globe.
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