By Glenn Kessler
Washington Post Staff Writer
Wednesday, April 5, 2000 ; E01 

The "new economy" is turning out to be the economic equivalent of the collapse of the Soviet Union--a dramatic shift that might have ushered in a long-promised sense of security, but instead has brought about a period of messy change.

The economy, on one level, keeps surpassing expections. Unemployment plunges but inflation doesn't ignite. Wages are rising.  Budget deficits have disappeared and the nation is starting to pay off its debt.

But many of the old rules about the economy and financial markets no longer appear to work, leaving policymakers at the
White House and Federal Reserve struggling to find their way.

The pace of economic growth heated up at the end of last year--to a torrid 7 percent annual rate--even though the Fed
increased interest rates five times in the last nine months in an effort to cool it down. Stock values are out of whack, swinging
wildly most days, enriching and unnerving investors and making some Internet companies worth more than General Motors
Corp. The end of federal deficit spending has boosted the nation's overall savings rate, but Clinton administration officials are
puzzled that most Americans are saving at the lowest rate since the Depression.

Few presidents have owed so much of their political strength to the economy and the financial markets as President Clinton.
Today, he hosts a high-level conference at the White House to explore some of the lingering concerns and questions about the
so-called new economy--what are its strengths, how can it hurt the nation and who has it left behind?

Clinton, who shortly after he won the presidency in 1992 hosted an economic conference that focused on soaring deficits and
declining productivity, is scheduled to hear today from such speakers as Fed Chairman Alan Greenspan, Microsoft Chairman
Bill Gates and Goldman Sachs market guru Abby Joseph Cohen. The attendees are to include chief executives of major
corporations and academic experts.

White House aides insist the president will not take the opportunity to grab political credit for the nation's longest-running
expansion, but instead wants to generate debate and hear from a variety of voices.

"You would be amazed how much time we have spent over the last several years figuring out: How do you keep this going?"
President Clinton mused on Monday before technology executives in San Jose. "Because even though I think you have changed the nature of the economy, I don't believe that the silicon chip has repealed all the economic laws that govern nations."

There is little agreement among economists about the nature of the economy--even whether it is a new economy or merely a
very strong economy. It is easy to overemphasize the impact of electronic commerce, which the Commerce Department
estimated affects about 30 percent of the gross domestic product. But virtually everyone agrees that something different is
taking place.

"This is uncharted terrain," said Robert Reich, Clinton's former labor secretary. "The pilots of the economy have never been
here before. All of the old rules seem to be obsolete, and there are no maps and no guides."

For years, economic doctrine held that inflation would rise if unemployment stayed below a "natural level" of between 5 percent and 6 percent for a period of time. Alan Blinder, a Princeton professor who previously served as Fed vice chairman and a Clinton economic adviser, said economists are "still scratching our heads and grappling with" the fact that inflation has barely budged even though the unemployment rate has been below 5 percent for three years. "Most economists find it surprising and miraculous."

Has the Internet helped reduce prices on goods and thus kept inflation low? Or have workers been just as surprised by the
productivity gains as economists and thus aren't demanding enough pay for their work? The first possibility might indicate this
situation will continue for a while--while the second suggests it is only fleeting.

This sort of uncertainty makes it difficult for policymakers to plot their next steps. For example, economists were relieved that
wages for low-income workers recently began to rise after stagnating since the 1970s. But some wonder now whether the Fed rate increases will choke off growth just when the economy is reaching into the poorest neighborhoods. One panel will explore whether some of the tools of the "new economy," such as the Internet, can assist economic growth in the stubborn pockets of poverty.

Another panel will ask if a debt-free U.S. government is good for the nation's economic future. Clinton and members of
Congress have vowed to use budget surpluses to pay off the debt as quickly as possible. But that pledge has already roiled the market for Treasury securities, considered the lubricant for other markets and often an interest rate peg for student loans, home mortgages and other debt. Bond traders, used to dealing with a government agency that issues debt, have been unable to figure what it means when the government starts repurchasing debt.

Moreover, what happens when the debt is paid off? Presumably, the surpluses will keep coming. That would mean the
government could invest the money by buying assets--such as corporate debt, stocks or foreign securities. And once the
government starts spending billions of dollars buying things, it would obviously bid up prices and affect the economy in other
ways.

If Internet companies are responsible for a good part of the economic climate, a few missteps may make their impact decline as quickly as an out-of-favor Nasdaq stock.

Sung Won Sohn, chief economist at Wells Fargo Bank, said there is anecdotal evidence that less capital is being made available to Internet companies in the wake of accounting troubles and the Fed's tighter monetary policy. He noted that many Internet companies have high break-even levels because they have so many upfront costs, such as research, development and
marketing. This will make these companies more vulnerable to an economic downturn.

Peter Orszag, president of Sebago Associates in Belmont, Calif., and a former White House economic aide, said that the wildly fluctuating values in the stock market also make it difficult for policymakers to figure out the impact of the market on the
economy. The increasing number of Americans who have begun buying stocks for the first time also adds to the uncertainty
generated by a market decline. "It's very difficult to know what will happen," he said.

© 2000 The Washington Post Company 
 
 
 

Clinton Hosts Discussion on 'New Economy'

By Glenn Kessler
Washington Post Staff Writer
Wednesday, April 5, 2000; 1:39 PM 

President Clinton played host today at a wide-ranging White House discussion on the economy, where several specialists warned that unstable stock prices and other economic balances could hurt the current expansion.

Abby Joseph Cohen, market strategist at Goldman Sachs, said she has been enthusiastic about stock prices for a decade, and remains so. But former deputy treasury secretary and investment banker Roger Altman said, "There's going to be a correction, probably a strong one in the technology sector." But he added, "Should such a shake-out occur it does not signal we are not in a new economy after all."

James K. Galbraith, University of Texas economics professor, warned that rising interest rates were a danger because households have too much debt. In fact, he suggested the Federal Reserve's recent effort to slow the economy through interest rate increases was ill-advised. Instead, he said, the Fed should act to reduce borrowing to finance stock purchases, which is known as buying stock on margin. That would directly impact a stock bubble without damaging economic growth, he said.

William Nordhaus, a Yale University economics professor, countered that it is unlikely the United States can continue such economic growth without sparking inflation. He said stock prices are not only unrealistically high but damaging to the economy because investors feel so wealthy they aren't saving out of their current incomes.

Others at the session expressed concern about the U.S.'s record trade deficit. The conference will continue for the rest of the day with afternoon speakers to include Federal Reserve Chairman Alan Greenspan and Microsoft Corp. Chairman Bill Gates.

Earlier today, The Associated Press quoted President Clinton as boasting at the conference that America is enjoying its strongest economy in history.

"I believe the computer and the Internet give us a chance to move more people out of poverty more quickly than any time in all of human history," Clinton said. "I believe we can harness the power of the new economy to help people everywhere fulfill their dreams."

© 2000 The Washington Post Company