Table of Contents
Preface
Introduction
CHAPTER 1
MYSTERIES, PUZZLES, AND PARADOXES OF THE NEW ECONOMY 1
The New Economy of the 1990s 1
Was the New Economy of the 1990s Real? 3
Why Were the 1990s So Great? 5
Is There Too Much Optimism or Too Much Pessimism? 7
Are We Heading for Deflation Like Japan in the ’90s or the U.S. in the ’30s? 9
Can the Future Be What It Used to Be? 10
CHAPTER 2
SOLVING THE MYSTERY: MISSING PRODUCTIVITY AND THE GREAT INFLATION MISMEASURE 11
Demographics: Baby Boomers, Working Women, and the Super Bull Market 11
Three Hits and a Miss 15
Where’s the Missing Productivity? 15
The Boskin Reports on the CPI 19
“Faster, Better, Cheaper”—The Parable of the Pink Caddy 21
The Intel–Microsoft Double Helix and John the Barber’s PC 23
The Consumer Knows Best 24
How the Government Counts Quality Improvement 26
Solving the Mystery of the New Economy 28
CHAPTER 3
THE THEORY OF DIGITAL DEFLATION: FASTER, BETTER, CHEAPER
Digital Deflation Is A Good Thing 31
Digital Deflation Defined 32
The Digital Drivers 35
The “Next Big Thing” 39
Is the Digital Revolution Better Than the Industrial Revolution? 40
The Laws of Digital Deflation 41
How Big Is Digital Deflation? 43
What’s Missing from the GDP Deflator? 47
The Lost Components 49
CHAPTER 4
WHY THE OLD MODELS DIDN’T WORK IN THE 1970s AND 1980s 53
Economic Models Work Best in Times of Stability and Few Surprises 53
The 1950s and 1960s: Existing Economic Models Worked Well 54
The Late 1960s/Early 1970s: Models Break Down with the Rise in Inflation 55
Internal Disruption from Wage-Price Controls 56
External Disruption from OPEC Oil Price Increases 59
The Late 1970s: Hyperinflation 59
The Demise of the Keynesian Dynasty 60
Monetarism Takes the Lead 60
The 1980s: Volcker to the Rescue 62
The Early 1980s: Enter the Supply-Siders 64
The Late 1980s: Market Price Rule Predictors 67
Demographics—Why the Traditional Models Didn’t Work 69
Demographic Forces Turn Positive in the 1980s and 1990s 71
CHAPTER 5
WHY ECONOMISTS HAVE DIFFICULTY EXPLAINING THE NEW ECONOMY 74
The Amazing 1990s—Strong Growth and Low Inflation 74
Information Technology, Productivity, and the New Economy 77
Overstated Inflation and Undermeasured Productivity 78
Was the Internet Driving the New Economy? 80
Digital Deflation—Why the Old Models Didn’t Work in the 1990s 80
Productivity from Digital Deflation Is About Quality, Not Quantity 83
What the Government Didn’t See… 86
…Consumers and Investors Could See 87
The Year 2000 Lockdown 88
The Wealth Effect—A Rising New Force in the New Economy 92
Is There a Corporate Wealth Effect? 95
Investor-Consumers 95
New Models Needed 96
CHAPTER 6
REDEFINING THE NEW ECONOMY 98
New Forces in the New Economy 98
What Is the New Economy? 99
Digital Deflation Redefines the New Economy 100
Old Economy Companies in the New Economy 103
The Importance of R&D 106
The Old Economy Will Lose Share and Profits to the New Economy 107
How the New Economy Lifts Productivity 108
Structural Productivity Gains 109
When Did the Government Start to Measure Digital Deflation? 110
How Did Computer Quality Improvement Boost Productivity in the Late 1990s? 112
Massive Implications for Productivity Across the Economy 114
Software Quality Improvements Are Elusive but Real 115
Communication Services Are Getting Faster, Better, Cheaper 117
The Huge Healthcare Quality Mismeasure 119
The Service Sector Is Grossly Undermeasured 120
The Service Sector Supply Chain 122
Solving the Mystery of Rising Capital Spending and Declining Productivity 124
The “Productivity Revolution” Is Under Way 126
Disaggregation into the New Economy and the Old Economy 128
CHAPTER 7
NEW MODELS FOR THE NEW ECONOMY 129
Better Models, Better Forecasting 129
I. Demographic Models 130
A Demographic Foundation for the New Economy 130
The Demographic–Inflation Model 131
The Demographic–Stock Market Model 135
The Demographic–Productivity Model 135
Demographic–Productivity Model Adjusted for Unmeasured Digital Deflation 136
Demographic–GDP Models 137
The Stock Market and Real GDP 137
The Stock Market and Corporate Profits 139
“Potential Productivity” 139
II. Productivity Models 140
The Capital Spending–Productivity Model Revisited 140
How Long Has the Government Undermeasured Productivity? 142
Productivity and Profit Margin Model 143
The 120% Profit–Productivity Rule of Thumb 145
The Over 3.0% Productivity Growth Rule 146
The New Economy Productivity–Profit Enigma 146
Are Quality Gains Empty Calories? 148
The Fed’s Productivity and Capital Decomposition Model 151
New Models for Predicting Information Technology’s Contribution to GDP and Productivity 153
III. Digital Deflation Models 156
Estimating the Undermeasurement of Digital Deflation 157
The “GDP Deflator-Digital Deflation” Model 159
Computer and Semiconductor Digital Deflation “Lost” As Intermediate Goods 161
IT Industries Not Yet Measured for Quality Improvement, Including Computer Services, Software, and Communications 163
Non-IT Industries Not Yet Measured for Quality Improvement, Including Healthcare, Financial Services, and the Military 167
The Quality Improvement Quotient 172
The “CPI-Digital Deflation” Model 173
IV. Wealth Models 177
Household Tangible and Net Financial Assets 177
The Wealth Effect 181
The Consumer Wealth Effect 181
The Realized Capital Gains Wealth Effect 185
The Corporate Wealth Effect 186
CHAPTER 8
THE WEALTH IN OUR FUTURE 191
The 2020 Vision 191
A Wide Range of Possible Outcomes 193
Value Created from Digitally Driven Quality Improvement 194
Two More Decades of Value Creation 196
Value to Wealth: The New Economy’s Virtuous Circle 198
Measuring Wealth 200
Adjusting Wealth for Digital Deflation 202
A Strong Demographic Foundation for Generating Wealth 203
The Digital Deflation Wealth Multipliers 206
The Key to Wealth Is Low Inflation 207
A “Near Zero Experience” 208
Picturing Zero Inflation Will Be Difficult for Many 209
The GDP Deflator Adjusted for Digital Deflation 210
The CPI Adjusted for Digital Deflation 212
Why the CPI and GDP Deflator Will Diverge 213
Which Is the Right Inflation Rate? 214
Four Scenarios for the Wealth In Our Future 215
Fair Value P/E’s and Wealth 217
CHAPTER 9
THE NEW ECONOMY STOCK MARKET 218
The Importance of Equities 218
A “New Economy Stock Market Model” 219
Inflation, Interest Rates, and Fair Value P/E’s 224
P/E Ratio Forecasts for the Next Two Decades 228
Higher Productivity and Profit Margins in the Next Two Decades 229
New Economy Stock Market Projections 236
Two More Decades of Wealth Creation 236
A New Economy Wealth Model 239
Growth in Equity-Like Assets 240
How Digital Deflation Helps Homeowners Build Wealth 242
Digital Deflation Helps Tangible Assets by Driving Interest Rates Lower 243
The Enormous Upside Potential for Wealth Creation in the United States 244
On the Upside 245
On the Downside 247
Most Likely Scenario 248
The Surprising Importance of the Real Bond Rate 248
Stocks, Wealth, and the New Economy 252
CHAPTER 10
MONETARY POLICY: NEW “SPEED LIMITS” FOR THE FED 255
The Fed’s Challenge 255
A Tale of Two Economies 256
Avoiding a Repeat of the 1920s and 1930s 260
Learning from the 1920s and 1930s 265
Counting Quality Improvement Will Make the Fed’s Job Easier 266
New Speed Limits for the Fed 268
Running Out of Room at the Fed 273
Lessons from Japan’s Deflationary Slump 275
Productivity Gains in a Deflationary Economy 278
The Past and Future Fed 281
CHAPTER 11
FISCAL POLICY AND BETTER DATA IN A DIGITALLY DEFLATING WORLD 283
Wealth and Poverty in the New Economy 283
Wage Earners Will Earn More 286
The New Economy, Unemployment, and Crime 288
The “Politics Of Need” 290
Better Data for the New Economy 292
The New Economy and Budget Surpluses 294
The Dark Side of Demographics 295
CHAPTER 12
WISE INVESTING IN THE NEW ECONOMY 299
Real-World Investing 299
Real-World Results 301
Did the Internet Boom Spike the Punch? 304
Investing Wisely in the New Economy 306
Pointers for Investing in a Resurging New Economy 307
The Prelude to a New Era of Prosperity 312
CHAPTER 13
DIGITAL DEMOCRACY: GLOBALIZATION OF NEW ECONOMY 315
New Economy Entrepreneurship 315
Digital Democracy 316
Counting Digital Deflation and Productivity Properly 319
Japan and China Can Create Enormous Wealth 320
Europe Must Recognize Digital Deflation to Optimize It 322
Cowboy Capitalism and Wealth Creation 326
The Soviet Experiment 327
Digital Deflation and the Dollar 328
Global Prosperity Will Lift All Boats 330
CHAPTER 14
THREATS AND OPPORTUNITIES: MAKING THE WORLD A BETTER PLACE 331
Making the Digital Revolution Better Than the Industrial Revolution 331
The Politics of Better Data 333
Fixing the Third Rail 335
Better Healthcare from Better Data 338
Moving Faster with the Fed 339
How Much Does the Fed Know? 340
One Foot on the Brakes and One Foot on the Gas 343
Capital, Labor, and Technology 344
Managing Booms and Bubbles 346
Quality Improvement and Degradation 347
Making the World a Better Place 348
EPILOGUE
CLOSER TO DEFLATION THAN YOU THINK 355
FIRESIDE CHAT INTERVIEWS WITH CREATORS OF DIGITAL DEFLATION 357
Interview with Gordon Moore (Intel) 357
Interview with Richard S. Hill (Novellus) 363
Interview with Doug J. Dunn (ASML Holding, N.V.) 367
Interview with Michael Dell (Dell Inc.) 374
Interview with Irwin Jacobs (Qualcomm) 376
Interview with Stephen Fodor (Affymetrix) 381
APPENDIX A: Tanaka Capital Management P/E Conversion Table 392
APPENDIX B: Household Tangibles, Financial and Equity-Like Assets, and Net Worth 393
APPENDIX C: Decades of Growth in Equity-Like Assets 394
APPENDIX D: Wealth Models 395
REFERENCES 396
INDEX 407
ACKNOWLEDGEMENTS 417