From my Productivity Guy:

Jonah I haven’t read either the New Republic or Heritage articles, but since you were nice enough to make me productivity guy (not that anyone else wanted the job) I feel like I should chime in with a few points, so for better or worse here goes – and I’m particularly interested if you have any comment/reaction to the fourth bullet point below In general, you’re right to be skeptical of the claim that the “new economy” is heading into unchartered territory –pessimists like Chait now seem to be attracted to these arguments, but it was only about seven or eight years ago the optimists were saying the same thing. The result was the late 90s equity and economic bubble as investors dumped capital into new, unproven, unprofitable companies because they didn’t want to miss out on the next big thing. The “revolutionary” upside was overstated then and the downside is overstated now. To oversimplify a bit, the fundamental change brought on by the “new” information economy is that it processes and disseminates information more efficiently, which reduces the cost of transacting in the marketplace (e.g. the costs of communication, transportation, price discovery, processing transactions etc.) This has implications for the marketing and distribution of products, which will ultimately affect production (and of course it will also affect the labor employed at all these stages of the production process). While these changes are important, they do not overturn all other economic reality. And even more importantly, these aren’t new developments, they’re really just a continuation, and perhaps acceleration, of technological trends since the industrial revolution (for example, improvements in transportation technology and the development of railroad infrastructure which in the mid 19th century reduced the time it took to get from New York to Chicago from three weeks to three days – talk about making the World seem very Flat). It should also be remembered that whenever anyone talks about globalization and the downward impact on wages, they are only talking about tradable goods and services i.e. things that can be produced in one location and traded to consumers in another. Tradeability is essential for, say, US workers to be competing against labor in India. One implication of the “new” economy may be that more goods and services become tradable (e.g. call centers based in India). But many goods and services are not tradable and won’t be affected by any new economy trends. The best example is the biggest item in most consumers’ budgets – housing – which obviously depends on location, location, location and can’t be physically traded. There’s always going to be a demand for local residential and commercial construction, and for the well-paid skilled labor (carpenters, electricians, plumbers etc.) that is required. So if you’re a new/potential entrant to the labor force and not particularly good with language/math or otherwise suited to office work, some good advice would be “learn a trade.” Those jobs aren’t going away, but that is less true of well paying factory work. And on the issue of factory work, a similar principle applies – labor commodification and globalization becomes much easier for unskilled tasks. Factory jobs that involve specific skills that takes years to develop and hone (like producing a number of machine tools) can’t be easily or economically moved abroad and are therefore safer. Some economic trends brought on by the new economy also work in the other direction. One example is that new information technologies allow people to profit by being able to differentiate their “product” and/or the skills brought to their job. One prominent example of this could be….Jonah Goldberg. The internet gave you the ability to reach an audience much more directly and quickly than would have been the case with the legacy media, and it also gave you more freedom to develop a unique style of analysis/commentary. Of course this has led to more mainstream (and I’m guessing better paying) gigs at the LA Times, CNN etc., but this wouldn’t have happened without the new economy technologies. I suspect we’ll be seeing more examples like this as these technologies mature, as small businesses like specialty furniture makers, organic farmers, music producers etc. find new ways to bypass traditional communication and distribution channels and discover their audiences. In other words, the new technologies don’t just flatten and commodify, they also allow and reward specialization and differentiation. On the relationship between productivity and wages, I think this is being distorted by health care costs, which continue to grow at rates well above other inflation. The competition for workers in the labor market depends on total compensation, not just wages, and employer payments for health care are likely siphoning off cash that would otherwise be distributed as wage gains. To the extent that this is true, this is driven by factors such as the aging of our society and inefficiency of our health care delivery system and not the new economy per se. OK, I’ve gone on way too long, and I’ve got to bill a few hours before the day is over. This productivity stuff may be dry but it matters if you want to move beyond BS platitudes and get a better understanding of economic reality. One source I would recommend on the issue of the “new economy” … I don’t agree with everything they say, but there’s a lot of good stuff from two credible economists (even if they worked in the Clinton administration!) who communicate without resorting to a lot of technobabble or incomprehensible math (to non-economists and Derb, at least).