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Office of the Press Secretary

For Immediate Release April 5, 2000
                        REMARKS BY THE PRESIDENT
                          AND THE PARTICIPANTS

                             The East Room

9:25 A.M. EDT

THE PRESIDENT: Thank you and good morning. I want to welcome all of you here for this conference. And let's get right to work.

We meet in the midst of the longest economic expansion in our history, and an economic transformation as profound as that that led us into the Industrial Revolution. From small businesses to factory floors to villages half a world away, the information revolution is changing the way people work, learn, live, relate to each other in the rest of the world. It has also clearly changed the role of government and how it operates.

This conference is designed to focus on the big issues of the new economy: How do we keep this expansion going? How do we extend its benefits to those still left behind in its shadow? What could go wrong, and how do we avoid it? That's what I hope this conference will be about.

The roots of this meeting stretch back to our first Economic Conference in December of 1992, in Little Rock, shortly after I was elected President. Then some of the leading minds from around the country and across the economic spectrum addressed a challenge that, to all Americans, was immediate and clear -- unemployment was high; interest rates were high; the deficit was exploding; the debt had quadrupled; even an apparent recovery was generating no jobs, and inequality had been increasing for well over a decade.

Thanks to a strategy designed to bring down the deficit and convert it into surpluses, to expand trade, to invest in education, training and technology, and to establish conditions in which the new economies could flourish -- especially in the Telecommunications Act, which was passed about four years ago now -- the American people, American entrepreneurs, have given us a remarkable recovery.

The performance of the new economy has been powered by technology, driven by ideas, rooted in innovation and enterprise. It has opened doors of opportunity and challenged our very understanding of economics. I remember sitting around a table in Little Rock in 1992, asking my economic advisors how low unemployment could get without triggering inflation. The consensus was somewhere between 5.5 percent and 6 percent.

Now, bear in mind, these were people who were philosophically committed to low unemployment, and were willing to resolve doubts in favor of it. No one believed then we could have 4 percent unemployment on a sustained basis without inflation. No one believed that this economy could generate productivity rates of more than 2 percent a year on a consistent basis. Now, we're nearly at 3.

There is no single answer about how this happened. I think, clearly, the nature of the new economy and the strength of the American entrepreneurial system led the way. The fact that many of our traditional industries and workers increased their productivity played a role. I also believe the government's commitment to fiscal discipline, to expanded trade, to investment and people and technology, and to cutting edge research -- and, again, I say, to establish the conditions in which the new economy could flourish -- played a large role as well.

Now, one of the things that I think is important to focus on is just some basic facts. Information technology today represents only 10 percent of American jobs, but is responsible for about 30 percent of our economic growth. It accounts now for about half of business investment. And just as Henry Ford's mass-produced cars and the assembly line itself had broad spillover effects on the productivity of the American economy, these new technologies are doing the same thing, rifling through every sector of our economy, increasing the power of American firms and individuals to share broadly in its prosperity.

Today, information technologies allow industries to recognize instantaneously changes in demand, and to manage their inventories more efficiently and quickly. They are speeding the development of new products to market. Supercomputers, for example, have helped Detroit auto makers cut the development times of new cars by half or more. They've helped pharmaceutical companies cut down the development time for new anti-cancer drugs by several years.

Clearly, they will have a profound effect, information technologies, in biomedical sciences in the 21st century, as we see by the simple fact that in the next few weeks, we will announce for the first time the complete sequencing of the human genome, something that will have been literally impossible without information technology. And, of course, just contemplating the potential impact of nanotechnology on the biological sciences alone staggers the imagination.

Information technology clearly is also creating a lot of more mundane opportunities in e-commerce for traditional businesses, as well as the .com companies. And business-to-business e-commerce is growing even faster than business to customer commerce. In three years, it may reach a staggering $1.3 trillion in the United States alone.

We know all of this is just the beginning. So now we want to share the best ideas and ask the right questions. Economists, for example, like to talk about speed limits for the economy: Do we have higher speed limits today? Do they exist anymore? How do we measure the impact of technology in this economy? What will be the sources of tomorrow's growth?

We know when it comes to education that the right teacher and the right computer can give a student in the poorest neighborhood the same access to every library and every source of information as a student in the most privileged private school. But those who are left out will be left further behind. How do we close the digital divide? Can poor areas in the United States and entire developing nations leapfrog an entire stage of development, jumping ahead to cutting-edge technologies, avoiding not only the time it takes to go through the industrial economy, but also the unpleasant side effects, particularly of pollution and global warming. How can we best make that happen?

How important is information technology relative to other pressing needs of developing nations, such as health or education or improving agricultural productivity? Or do they go hand-in-hand?

Technology can allow nations to grow their economy without harming the environment. How do we convince people around the world, and even in the United States, that this is true?

I believe the computer and the Internet give us a chance to move more people out of poverty more quickly than at any time in all of human history. I believe we can harness the power of the new economy to help people everywhere fulfill their dreams. On my recent trip to South Asia I saw the beginnings -- just the beginnings -- of that potential.

But it is clear that none of our hopes for the new economy -- which are really hopes for a better society, one in which we are brought together, not driven apart; one in which we sustain our Earth, not exploit it; one in which we lift up the poor, as well as those of us who are better off -- that these developments will not just happen. They, too, will take new ideas, new initiatives, new innovation -- the kind of thing that so many of you have done for so many years now. I thank you for being here. I thank you for being part of this dialogue. And I'd like to get started.

Our first panel discussion is entitled, "Is the New Economy Rewriting the Rules on Productivity and the Business Cycle?" And I'd like to ask Abby Joseph Cohen, Chair of the Investment Policy Committee at Goldman Sachs, to begin.

Thank you very much. (Applause.)

MS. COHEN: Mr. President, thank you very much on behalf of all of us for this opportunity to come together in Washington and discuss these very important issues. As the first speaker on this panel, I feel something of an obligation to set a framework. Many of you know that my day job is as a stock market strategist. And for the past decade, we have been enthusiastic about the outlook for U.S. stock prices in the United States, and we remain so.

Over the last 10 years, the U.S. stock market has been propelled primarily by dramatic improvements in the U.S. economy. And of course, the starting point in the early part of the 1990s, was a stock market that was highly skeptical and cynical; a stock market that looked at the lowest profit margins that the U.S. corporate sector had generated in more than two decades; a stock market that looked at the largest budget deficit the United States had ever experienced; and a stock market that displayed that skepticism through stock prices that were perhaps 50 percent below where they should have been at that time.

Over the last 10 years, this economy has been blessed, I believe, by improvements in two broad categories -- number one, solid economic policy; and secondly, an improvement in the behavior of U.S. corporations. With regard to economic policy, the financial markets have benefited from so many aspects of policy it's hard for me to list them. But briefly, let us consider first the improvement in fiscal policy, where we went from a budget deficit equal to 6 percent of our GDP, to one where we now have a surplus.

On monetary policy, we have had a federal reserve that has focused on elongating this economic expansion and has also emphasized appropriate regulation of our banking institutions. We also have a nation that has promoted free trade, and when you are the world's most competitive nation, in so many of these important new areas of growth, what we should be supporting is free trade.

In addition, we've had an improvement as it relates to the openness of information. Our corporations, for example, are required to provide more disclosure and more transparency and we have moved in that direction. And if I could sound a slightly bittersweet note, we have not done an equally good job as it relates to government economic data. In many ways, our government data collection has fallen behind. As the economy has become more complex, as it has moved forward into the digital age, we have not fully reflected that in our own data collection.

There is a second broad area in which I think our nation has been blessed, and that has been the improvement in business behavior as well. Over the last decade, we have seen a surge in research and development; we have seen a surge in capital spending, loosely defined because it's no longer just buildings and equipment, it's also computer software and applications.

But let's keep in mind that the decade of the '90s can be loosely broken into two parts. And in the first part of the 1990s, things didn't look so good and they didn't feel very good for many of our workers. Corporations were cleaning the slate. They tried to boost profit margins by identifying those areas in which perhaps they were not very good -- areas in which profit margins were poor. These areas were restructured, they were downsized, they were eliminated. And while that did have an impact on those individual companies, the impact on the macro economy was not so favorable, because job creation suffered as a consequence.

But over the last several years -- let's say, since the end of 1994 or 1995 -- there has been a major point of inflection. While many of our corporations are still restructuring, they're still downsizing. As a nation, we have moved towards significant job creation. And if the United States economic performance of the late 1990s is contrasted to that of any major industrial nation, perhaps the single biggest difference has to do with how we have done in labor markets.

Over the last five years, the United States, on a net basis, has created 16 million new jobs. And that is after we net out, or subtract out, the jobs that have been lost through downsizing. And two-thirds of these new jobs pay above the median wage. If we contrast this to Europe, for example, a community that has a GDP larger than that of the United States and a population larger than that of the United States, their net job creation has been minus 1 million during the same period of time.

And so when we think back as to why the financial markets have responded in a favorable way, they've done so, we believe, appropriately. This economy has gotten not just bigger, but also better; not only have profit margins improved, but we've done an increasingly good job in terms of creating jobs and boosting incomes.

Now, when we think about what might go wrong, let me suggest to you the following. There's much discussion about a new economy. Let's keep in mind this is not the first time this has happened. If you go back over the last century, there are at least two other occasions when the economy was transformed sufficiently that there was much discussion then about a new economy as well.

Toward the end of the 19th century, the United States shifted from an agrarian-based economy to one that was industrially based, and as a consequence labor productivity rose, the standard of living increased. We saw a similar change at the end of the Second World War, when the U.S. industrial economy became far more sophisticated. And again, productivity increased, the standard of living rose.

And those two previous occasions in our economic history had one thing in common that distinguishes them, thus far, from the current period. And that was a change in government policy towards education. At the end of the 19th century, many of our state and local governments decided it was in their own best interest to have a large group of literate workers, and we provided free public education for the first time. The consequences and results were very clear and very positive.

At the end of the second world war, there was yet another shift in public policy towards education. Think of the GI Bill of Rights, which ensured a government education to anyone who had served in the Armed Forces. Think as well about the incredible surge in public spending in the public university systems through so many states of our great nation. In these two other opportunities in economic history, we as a nation stood up and provided the education so that all of our workers could participate in the new jobs that were being created, and in the new economies that were developing at that time. And I would suggest that that remains our greatest challenge in the coming years.

Mr. President, thank you.

THE PRESIDENT: Thank you very much.


MR. ALTMAN: I was thinking of ways I could make the biggest impact here this morning, and it occurred to me that if I could get Abby to tell me what her views on today's markets might be, I could just announce them and leave my own comments at that. But she turned me down.

My message this morning is that we are in a new economy, which is beginning to rewrite the business and economic rules, but that it's still very early to conclude that they will be entirely rewritten. But I want to make five basic points.

The first is, to what degree are we in a new economy? And if one defines that as an Internet-driven one, I think the answer is that we are moving rapidly into that, but that the conversion is not as far along as the financial markets and the financial press would suggest. Electronic commerce totaled about $150 billion last year, and that's in the context of a $9 trillion economy, so that ratio is still a small one. But that e-commerce base is expected to grow about 85 percent a year over the next four years. It will get to about $2 trillion on that basis. And obviously, it will get to a much more significant share of total economic activity in this country. But in other words, we're still in the early stages of converting to a new economy.

Second of all, is this conversion fundamentally changing the productivity growth rate of the economy. And let's remind ourselves of the importance of productivity growth; it's the primary driver of living standards. Over the long-term, productivity growth and real wage growth have to equalize, so the growth of real wages determines the rate at which standards of living rise.

It's too soon to conclude that the higher productivity growth rates we've seen over the past three years will persist over the very long term. But we certainly are witnessing a resurgence now. I was reminded yesterday that over the four years ended 1996, productivity growth averaged a little less than one percent annual rate. Over the past three years, that's tripled to about 2.7 percent. That's probably attributable to the stunning rate of U.S. technology investment during that past decade, because business fixed investment grew about 10 percent a year through '98. That's three times the economic growth rate over that period. Much of that went into computers and related equipment, and the results on productivity are probably quite connected there.

But we don't yet know whether our higher productivity growth rates will continue. Over 40 years, we've had surges like this before, and the long-term productivity trend line has not turned up. So whether this is just another periodic surge, Mr. President, or whether we've entered a new age, at least in regard to productivity growth, isn't yet clear.

Thirdly, the growth capacity of the economy itself. As long as this productivity growth differential persists, the U.S. can sustain a higher economic growth rate without incurring higher inflation. If we add, for example, the recent 2.7 percent productivity growth rate I mentioned to a 1-percent labor force growth, then the growth capacity of the economy would approximate 3.5 percent or a bit higher. And that's the rate, indeed, which the Federal Reserve system is projecting, for instance, for this year. That's also twice the growth rate of the 20-year period ending in the middle of this decade.

Of course, the U.S. economy recently has grown at even higher rates than that, including the amazing 7-percent-plus figure for the last quarter. And because the Federal Reserve Board considers such above-potential rates, coupled with the current 4 percent unemployment rate, to be inflationary, that's why it's been steadily tightening monetary policy.

Fourth, a word about the business cycle. As Alan Greenspan is fond of saying, and I agree, it has not been repealed. The pool of workers available and willing to find new work has become smaller and smaller, and unless demand cools, there's a limit to that labor shrinkage. And at some point, that will push up wage rates, and we still risk -- we still do risk -- the old syndrome of tighter money and economic contraction.

But the cyclicality of our economy certainly has moderated. We see it in the unprecedented length of this expansion phase of economic performance, which reflects, in my view, particularly the highest services share of the economy, improved methods of controlling inventory levels and a more sophisticated and more effective monetary policy.

And at the moment, there are not yet signs of the imbalances which typically signal incipient inflation. And on that basis, this expansion should continue nicely, particularly since the remarkable budget surpluses have been dampening what otherwise would be a great excess of demand over potential supply. And they also have helped finance the investment boom that I referred to.

And I do want to pay tribute to President Clinton for having led the nation into this previously unthinkable fiscal heaven. Those of us that remember the early days and all the forecasts that were then around -- if you counted up a thousand of them, you wouldn't have found one that would have projected surpluses at all, let alone this magnitude of surpluses.

Finally, a financial market perspective. And that may be particularly apt after yesterday's seismic market performance. There's going to be a correction, it's probably going to be a sharp one, at least in terms of technology equity values. Not all companies will be affected -- the Intels, Ciscos and Microsofts should be less affected. But we are already seeing all of the preliminary signs of that type of correction. And there's nothing new at all about the idea of such a correction, it's rather a classic flight to quality that you've seen in many markets over decades.

But should such a shakeout occur, my point here is that it does not signal that we're not in such a new economy after all, nor that the higher growth potential and the milder business cycle effects are less likely. We've experienced an historically anomalous period of high equity returns, particularly in the tech sector, and as Abby Cohen says, or said a few days ago, the reassertion of historical rates of return is probably at hand.

So, to close where I started, we're in the beginning phases of a new economy which is beginning to rewrite the rules of business and economic growth and cyclicality, but it's still early days. Thank you.

THE PRESIDENT: Professor Galbraith?

PROFESSOR GALBRAITH: Mr. President, the question before this panel is, in effect, can full employment without inflation endure? According to the old rules and those who believe them, the expansion will not last. Growth is too rapid, unemployment too low, stocks too high. There are deep and somewhat mysterious reasons why wage inflation is sure to explode someday soon.

Even more mysteriously, some have even suggested that the rate of productivity growth is too fast. A second view holds that the new economy has changed the rules, cutting costs and creating opportunities that never existed before. In part, this is surely correct. The new technologies are today contributing 8 percent of employment and about 35 percent of growth, the Commerce Department reports. They are important, but they are not the whole story.

The third position is that the old rules were wrong all along. This viewpoint, which I hold, is that for the first time in 30 years we are now seeing the fruits of full employment. Many economists have lived for decades in fear of full employment. They imagined hidden terrors like runaway inflation. They did not sufficiently listen to those few, like the great Robert Eisner, a friend of mine, who taught that the real rules weren't so grim. Eisner did believe that growth could raise wages, and yet also spur investment and productivity -- in effect, that full employment in the old economy would bring the new economy to life.

Mr. President, the historic merit of your administration, and also of Mr. Greenspan's tenure at the Federal Reserve, was to put this proposition to the test. And now we know. In every year since 1993, unemployment has fallen, and real growth has regularly exceeded speed limits widely announced in advance. In almost every year, productivity has accelerated. Now we know.

Many also fret that today's prosperity was purchased by high inequality, and particularly that information technologies are inequality producers. But, in fact, since unemployment fell below 6 percent, pay gaps have narrowed. Improvements so far are modest, but the movement is in the right direction. Today we know, therefore, that rising pay inequalities are not a price of progress, nor are they a social cost of full employment.

Let us, therefore, set aside shopworn worries, and the self-immolating doctrine of the preemptive strike. If there is a ceiling for growth, or a floor for unemployment, or a limit to this expansion, the truth is that no one knows where they are. Why borrow trouble? Why not take a positive view? Full employment and strong growth are great achievements. Let us celebrate and defend them. Let no one say that the unemployment rate is too low; and, especially, let no one say that the productivity growth rate is too high.

Are there dangers? Yes, I believe there are. Inflation, apart from oil prices, is not one of them. High interest rates are a danger. American households, I believe, have too much debt; they will become vulnerable when interest rates rise. Stock market speculation is, I believe, a danger; margin lending, especially, has been exploding and those loans will be, are being, exposed as stock prices decline.

In my view -- and here I have to say I probably stand alone on this panel -- there is also a risk of overdoing the budget surplus. This is what economists used to call fiscal drag. I could be proved wrong on this, it would not be the first time. But for this reason, for fear that overdoing the budget surplus might slow the economy, I do not favor rapid reduction of the public debt as an economic objective for its own sake.

Can these dangers be managed? Yes, they can. We can offset household debt burdens and the declining personal savings rate by raising wages and family incomes. We should raise the minimum wage, expand the earned income tax credit as proposed, and support collective bargaining. On average, earnings should keep pace with productivity, a bit more at the bottom, a bit less at the top. We should also modestly expand public services -- education, health care and the environment especially, as we can surely afford to do.

For its part, and instead of setting off divided inflation that is the pure product of academic imaginations, the Federal Reserve could act on margin lending. Raising margin requirements is the direct approach to a stock bubble, more targeted than raising interest rates and more effective than jawboning the lenders. Should a crash come, sooner or later, a failure to have acted on margins will weigh on the record, and it would not be for the first time.

But a crash need not come. Despite the nervousness of the markets, these are good times. They are very good times. With the right leadership; with prudent policy changes when they are needed; with cooperation from all branches of government -- they can endure. We can continue to grow and prosper, to enjoy full employment, strong productivity growth, and a rapidly expanding new economy. Not forever, perhaps, but for years into the future. Another four? Another eight? Yes, we can do that. And we should.

Thank you very much.

THE PRESIDENT: Thank you. I promised myself I wasn't going to inject myself into this until we -- (laughter) -- until we heard from everybody. But I just want to throw out two or three questions, because I want to get -- after we hear from the panelists, I want Secretary Summers and our CEA Chair, Martin Baily, to say a few words. And then I want to have some questions.

But just -- all of you have raised a couple of issues. Let me just ask you to think about this, everybody. On this question of the business cycle, we've had, since the second world war and before the information technology revolution, generally a trend of longer expansions and shorter recessions. So that's, presumably, the product of generally better economic management. Is there something inherent in the technology revolution, as Professor Romer at Stanford and others have argued, that basically if it doesn't repeal the business cycles, it makes them far more elastic even than better economic management would warrant?

The second thing I think worth questioning is, have we avoided inflation due to wage demands because workers are smarter than they used to be and they understand that they're in a global economy and they can't ask for more than their company's profits will warrant?

And the third thing I wanted to just ask you to think about, since I was hoping Professor Galbraith would raise this question of whether I was making a mistake to try to get us out of debt -- because some of my good friends have accused me of practicing Calvin Coolidge economics. Let me tell you what my reasoning is, and I just want you all to think about this, because I'm prepared to have somebody say I'm wrong about this.

The reason that I wanted to continue to pay down the public debt is that private debt in this country is so high, both individual and business debt, and I worry in the same way you do about that coming down not only on individual firms and families, but also on the economy as a whole. So I figured what really matters is the aggregate savings rate or the aggregate debt-to-wealth ratio, and if I can keep bringing down the public debt, we could keep interest rates down and at least lengthen the time between now and some darker reckoning on that.

So the reason that I always thought it was important to pay down the public debt, once we got into surplus, is that private borrowing is so high in this country. And the debt-to-wealth ratio is not bad at all, because of the value of the markets. But still, the individual and firm debts are quite high. So I was trying to get the aggregate balance right, and that's been my logic all along, and why I think it's different from previous times when, I admit, the government's been in surplus when it should not have been.

Professor Nordhaus.

PROFESSOR NORDHAUS: Thank you very much. Mr. President, it's an honor to participate in this discussions on the shape of the new economy.

Now, I should say in my day job I'm a teacher. And in that role, my students often ask just the questions you've raised. And here's what I tell them. First, they often ask, are we in a new economy. And I say, definitely, yes. It's a new economy that's changing the numbers, but it's not rewriting the rule book.

Now, like most major economic revolutions in the past, it's centered in a specific area or technology, and in particular in this case, as people have discussed, it's an information technology, and that means computer hardware, software and communications. The most visible part of that to us is the Internet. But it's my view that the real -- which is like the tip of the iceberg -- but my view is the really important part is going on under the surface, where it's less visible in the business areas -- old-fashioned things like better scheduling, inventory control and new-era type activities like improved price discovery and on line auctions. But I think it's a real change in our economy.

Second question, can we see the new economy in our economic performance. And here again, the answer is definitely, yes. Many members of the panel have alluded to what I think of the dark ages of productivity, which was after the 1970s oil shocks, up until, say, the beginning of the 1990s, in which productivity grew hardly at all.

But in the late 1990s, the U.S. has enjoyed a remarkable improvement in its productivity growth. A number of earlier speakers mentioned this. Since 1995, productivity growth has grown at almost 3 percent a year. And the broadest measure of productivity growth, known as multifactor productivity, has actually tripled since the period of the 1970s and the 1980s.

A very close look at this record indicates that this productivity

boom is largely centered in this information technology part of the economy -- computers, microprocessors, software and communications. And I might say, one question is, well, didn't this happen before? Railroads, televisions, highways, things like that? The fact is that there is no time in recorded economic history have we seen the price and productivity movements in computers. It's absolutely unprecedented on economic record.

A more controversial question is, how widespread is the information technology revolution? And there is a big debate here. My reading of the evidence is that most of the productivity rebound is due to the production and use of information technology in these three big sectors I mentioned. There's some modest increase outside information technology, but up to now it's relatively modest, and part of it may be due to the strong business cycle.

So in terms of your question about speed limits, I think it's pretty clear the speed limits have been raised, the overall long-term speed limit for the economy, we used to think about 2.5 percent; it's now somewhere in the 3 to 3.5 percent per year range. We don't know exactly what it is or how long it will last, but it's pretty clearly higher than we thought it was.

Now, the productivity rebound is part and parcel of the remarkable economic recovery that we've enjoyed over the 1990s. It's kept price and wage growth down and allowed the long economic expansion to continue. And it's been not just by itself, though, because it's been combined with a prudent fiscal policy, not overdoing it in my mind, plus an intelligent and somewhat gutsy monetary policy, and this has brought good jobs to an increasingly large number of Americans. And I would agree with what Jamie Galbraith said -- a good job market, a strong job market and a low unemployment rate is the most progressive social program that we know.

Now, the third question -- are there any clouds on the horizon. Well, you know, for economists, there never is a sunny day -- (laughter) -- so I would just mention two clouds that I see. First, even though inflation has been well-behaved, it seems unlikely that we can continue the current growth rate without rising inflation. The speed limit has been raised, but there's still a speed limit. And we don't know when or where or how the economy will slow down. But I think the betting odds are long against another four years as strong as the last four years.

And, second, I'd like to echo the remarks of a number of the panel. It's my view that the current level of stock prices is not only unrealistically high, but I think it's also economically damaging. Inflated asset values make people feel wealthier than they are, and they reduce national saving. And I think that's one reason -- and I agree with what you just said, Mr. President -- one of the important reasons to have a budget surplus is to offset the lower private savings.

But coming back to inflated asset values, they also distort managerial decisions, they distort compensation structures, they distort job choices, and they increase inequality. They make us feel good, overvalued markets make us feel good, but they're not healthy for us.

So in summary, my view is, the new economy is real and it's impressive, but we can't let it cloud our judgment. I believe the history books will record that the Clinton-Greenspan team -- helped, to be sure, by the favorable winds of fortune -- has presided over one of the most successful periods of American economic history. But even the fastest computers can't tear up the rule book and repeal the need for continued fiscal discipline, alert monetary policy, and realistic expectations about future prospects. Thank you.

THE PRESIDENT: Kim? We thought we ought to have one of the actors in the new economy here. (Laughter.)

MS. POLESE: Thank you very much. I'm delighted and honored to be here this morning. Briefly, by way of introduction, I co-founded Marimba about four years ago with three other members of the Sun Microsystems Java team. And Marimba sells Internet infrastructure software to companies like Schwab and Home Depot and General Motors and NASDAQ and many others. We employ about 200 people. We have offices throughout the U.S., and we sell our products worldwide. So like many companies in Silicon Valley, we've had to scale very quickly.

I think perhaps we're a little unusual in that, however, we have real revenues, we were actually cash flow positive last year. (Laughter.) And, in fact, we may be in danger of turning profitable this year. So it's a bit of an anomaly.

I'd like to briefly share a few of my observations on a topic of the new economy, from the perspective of a Silicon Valley entrepreneur. And I actually think I, perhaps, come with two vantage point. One is being the CEO of a pre-IPO, and now post-IPO, company in Silicon Valley. The other perspective is that of working with the chief information officers of some of the largest companies in the world, companies that are really radically changing their businesses to adopt to the Internet and taking some very bold risks. And that has been fascinating to see and be a part of.

Three main thoughts came to mind when I considered the topic of the panel today. First, I believe that we've barely begun to feel the real impact that the Internet will have on our economy. We're still really in the start-up phase of this thing; I think we're maybe barely 10 percent into it, if that. Most businesses that we work with are just beginning to adopt these new technologies, to achieve new efficiencies in their businesses. And we really, again, haven't seen the impact yet on the economy.

And, furthermore, while most of the attention has been on .coms, I think the really exciting changes are happening interesting bricks and mortar companies, which are just now beginning to adopt the new technologies, creating these trading exchanges, to make logistics and supply chains more efficient. They'll have huge advantages in scale. And, again, that impact has not yet been seen. So when it comes to the new economy, I really believe we're at the point of departure, not at the point of arrival.

The second observation is that the new economy is really less about a revolution in technology or economic policies or accounting principles. And it's really more about a change in attitude. Certainly, Internet efficiencies are causing inventories to vanish, they're creating these transparent markets, which are driving prices down, all of which is resulting in greater productivity -- the impact of which we probably haven't created the tools yet to fully measure.

But, to me, the really exciting changes are the fundamental shifts in human behavior that we're seeing. For example, the way things get done in my company I think is very different from how an old industrial economy company might have worked. Certainly, we give stock options to everyone -- not just the executives, everyone has a piece of the company. And that means ownership, and that means top performance. And that's what results when people have skin in the game.

Another big change in behavior is the willingness to partner. The fact that many companies, certainly ourselves and, again, now, even the bricks and mortars companies are partnering very aggressively, even with competitors, reaching out from not a position of weakness, but rather a position of combined strength.

Another change is recognizing that great ideas can come from anywhere in an organization, and a real trend toward seeking out the best ideas, regardless of whose they are. We're also seeing companies adopt the policy of creating small teams that go out and figure out the next great idea or solve the new problems. That's how Java happened, that's how -- in fact, at Marimba, we have an advanced development team, believe it or not, that tries to figure out what the next development might be and what our competitor is doing. So we have to stay one step ahead of the competition, and teams are a very important part of that.

And, finally, another big change I'm seeing is the willingness to take risks. Certainly, we have to, as a company, and our customers are as well. And that means willingness to make mistakes, but then very quickly, a correct course -- make course adjustments and admit to mistakes, and then fix problems. And that's really a change that I think is fundamentally radical for these large companies. It's less about a 5-year plan or a 3-year plan, it's more about a one-month plan. You still have a long-term vision, but you have to be constantly adjusting your course to get there, and willing to do so.

So, again, it's about a change in behavior, and that's what I think the most profound change is we're seeing.

My third and final observation is that the new economy is not fleeting or ephemeral, this is a sustainable economy, it's a sustainable economy, it's a sustainable situation. And as has been observed on the panel, thus far, certainly the key drivers here have changed for good. For example, the shift from physical assets to being a knowledge-based economy; the fundamentals of pricing and distribution. All those things have changed.

I think a lot of the attention on the new economy has been focused on the pop in the stock market. And I think it's sort of seductive, perhaps, to focus on the run-up in stocks, and the IPOs, and so forth. But to me, new economy or old, success is still about building sustainable businesses that deliver innovative products that change people's lives for the better, and that return real value for shareholders. And that still matters in the new economy.

Profits still matter. And so do the hallmarks of so-called old economy companies -- things like hard work and commitment, trust, real results. All that stuff might sound maybe a little old-fashioned, but that's what matters to us at my company, and I think it's a view that's actually shared by many in Silicon Valley.

I think at the end of the day what really matters is how we put this wonderful new technology to work to change the human condition for the better. And I think we have some huge challenges ahead of us, as has been noted. Education is one. Access to this technology is another, for all. And shortage of talent. I think our generation has an incredible responsibility to get this thing right. And when it comes to the impact of the new economy, to me, that would be the greatest achievement of all. Thank you.

THE PRESIDENT: Thank you. They did a great job, didn't they? Let's give them all a hand. Thank you. (Applause.)

I would like now to ask Secretary Summers, and our CEA Chairman, Martin Baily, to make a few brief remarks, and then I will open to the audience and the panel for discussion.


SECRETARY SUMMERS: Mr. President, what a different world it is than when I first had the chance to meet you in Little Rock in 1992, and we discussed whether unemployment could be reduced below 6 percent; we discussed whether the deficit could be reduced $200 billion; we discussed whether the United States would have any prospect of competing with Japan and Europe during the 1990s.

I think there are many aspects of all of this, but I would just highlight four themes that came out of the discussion that we've just heard. The first is that the new economy is new, but has to be built on old virtues. For us in government, that means respect for markets and it means paying down debt and increasing savings.

However important that used to be, increasing national savings and paying down debt becomes much more important when we have the staggering high quality investment opportunities that we have today. It becomes more important to take savings out of the sterile asset of government paper and put them to work in these new investments.

Second, we have to manage what the Vice President likes to call this information technology supply shop. In the 1970s, we had a key input to the rest of the economy go way up in price, and everything bad happened -- inflation went up, unemployment went up, productivity growth went down; we had what people called "stagflation."

Today, we've had a key input go way down in prices and we've seen the reverse -- inflation down, unemployment down, productivity way up. Somebody needs to coin a term for the opposite of "stagflation." But we have to work to maintain and harness this information technology supply shop.

Third, in an economy where jobs are looking for people as much as people are looking for jobs, social policies become economic policies. Helping people get from welfare to work, helping those with disabilities to take their part in the workplace, creating family-friendly workplaces so more moms are able to work -- these were always important social issues. In an economy where a key bottleneck is the supply of labor, something we all ought to be able to agree on is the importance of expanding that effective supply of labor, and that makes the social policies all the more important.

The fourth point that I would highlight, and in some ways it may be the most important because it's forward-looking, is that we can be proud, but should never be satisfied or complacent. That is, I think, important in two respects. One, we need to think about having that circle of prosperity be as wide as we can, and we in this country have to worry about those who have been left behind in this country, and we have to worry about our role in the world and the vote on China in the next several months will be a crucial test of our country's international sentiment.

But we also need to avoid complacency in a different sense. As satisfying as the remarkable progress that we have made is, I think we all need to maintain an awareness that the risks and uncertainties of economic life continue, and that the old virtues on which a new economy is build need to include prudence, need to include recognition of risk and need to include hard-headed realism in the formation of any and all spending, borrowing, or investment plans. If we can keep our focus on those things, the new economy can work well for all our citizens.

THE PRESIDENT: That's good.


MR. BAILY: Thank you. It's a privilege to be here. One of the things that is helpful in having this conference is that at the Council of Economic Advisors, along with other members of the economic team, we're responsible for making the economic forecast. And this is a time of very great, I think, uncertainty, very great difficulty, to make 10-year projections or even the kind of longer-term projections that are needed for Social Security and Medicare planning.

I was instructed by the panel, but I guess they didn't come down in quite one place. I guess Jamie Galbraith is sort of of the let-it-rip philosophy, and other members of the panel pointed to the fact that speed limits may have increased, but they're still there. And I think that means they still have to be taken into account in the forecasts that we make.

So as we look at our forecasts, I think we have to bear in mind both the optimism that's justified by this new economy, but the importance maybe of not letting that optimism go to our heads as we recognize the uncertainty going forward.

I'm going to give weight a little more of the optimistic side of myself in the other comments that I'm going to make. We've talked about this new economy, but it really is striking if you make a comparison of this expansion to earlier expansions, that there are some striking differences. Of course, previous expansions, by the time they got to this point, they were already dead, so there's one obvious difference between this one and the earlier ones. (Laughter.) But, perhaps, more amazing is this expansion doesn't even look geriatric, it doesn't look like it's getting old.

In the past, as past expansions matured, investments slowed, R&D spending slowed, capacity got strained, core inflation started to rise and productivity growth slowed. In this expansion, there are really no -- none of these tell-tale signs of aging are visible. And most striking has been referred to several times is the actual rapid growth, and even slight acceleration in productivity growth that we've seen.

So what's different about this expansion. I agree with the President and with Secretary Summers on the importance of paying down the debt -- not only for the future, but I think it's been an important part of the success that we've had and why this expansion looks so young. The paying down -- the reduction of the deficit, the shift to surplus, the beginning of paying down the debt has helped make room for the investment which has contributed to this productivity-led expansion.

In terms of it continuing and looking at the danger signs, I'm encouraged to hear and I agree with the sentiment that's been expressed that this technology has a ways to run; that we really haven't exhausted the potential of information technology. In fact, many of its changes are really in their infancy and we're going to see those benefits coming forward.

I think the next thing I'd say about what's different about this expansion -- and Jamie Galbraith referred to it -- is that it is the beginning of a sign that we're getting more equal growth. From the period of '73 to '93, not only did we have slow growth, but it was very unequal. We had a substantial rise in inequality. Over the five years from '93 to '98, and it is a short period, we've had broad income growth. Family income across all income groups has grown about 2 percent.

And I think there are some lessons from that. The first is that technology, itself, has sometimes been blamed for the rise in inequality, has somehow been a force separating us. And yet, in this period of rapid technological change, we've been able to combine that with more equal growth.

So technology need not be always the enemy of more equality. And one reason for that has been mentioned, also, and that is that we've had not only fast technological change, but a full employment economy, so that people have been out looking for workers, have been training those workers, and that has helped bring the people at the bottom up.

But I would also mention, perhaps, and I'd be interested in the discussion of this, maybe the technology itself has become a bit more user-friendly so it can spread to a broader group in the work force, and they can get the benefits from it.

Finally, let me say that if this is a new economy, if this is a new era of productivity growth, let's make sure, as Secretary Summers says, that we have the policies that move this down throughout the work force. We need to make sure that workers at every level are given opportunities, that firms are encouraged to do the training that they need to do, and they're supported by education and training programs. We think there are real structural changes going on in this economy -- in the way businesses compete, in the way they structure their own work forces. We need to make sure that workers adapt, and have the ability to adapt, to this change that is taking place on the business side.

I think the policies that are being encouraged -- the training programs, the EITC -- these are exactly the kind of things to make sure that the technological, the stuff that's coming on at this level, also comes down to the people at the bottom, and gives them the skills and the incomes that they need. Thank you.

THE PRESIDENT: Thank you very much. (Applause.) Anybody in the audience like to make a comment or ask a question to any of our panelists? Yes, ma'am. If you could stand and identify yourselves, and then I'll just move around the room as best I can.

Q Esther Dyson. I think I actually have a word for Larry, and it's "stockflation." My question is, if you -- you talk about the privatization of debt. We've also in some sense got privatization of the management of the money supply when people like Goldman Sachs -- thank you, Abby -- are issuing IPOs all over the place. And I remember learning about M1, M2, et cetera. What does -- it's not just assets, somehow. It's moving into the income supply. People are being paid in stock. What's the impact of that for the economy?

MS. COHEN: I think there are several people at this table who might like to respond. Let me make just a couple of points, Esther.

First of all, yes, we have indeed seen a very active equity issuance calendar. Let's keep in mind that it has a different flavor in this economic cycle than in previous ones. In earlier economic cycles, equity issuance was often dominated by secondary issuance -- that is, new stock being offered by older companies. And they often were very large companies and we often got to the point where gross issuance could be as much as 3 or 4 percent of market capitalization.

What we have today are many more issuers, but the relative amount of equity that each one is issuing is far smaller. And we see that gross equity issuance in aggregate is still not quite near the peak levels we had seen previously.

Q (Inaudible.)

MS. COHEN: You raise a very interesting point, but I think there are other aspects to it, as well. For example, I'm sure the folks at the Federal Reserve might like to address it in terms of what this really means, in terms of growth in the aggregates and so on.

I think all of us would agree that there has been a broadening out of the liquidity in this marketplace. And from a theoretical perspective, one could say that as long as that capital is being allocated efficiently, we're all better off. We're all better off if it is, in fact, going to those companies that can generate jobs, that can generate income and so on. What we all have to decide as a marketplace is whether that capital has been allocated efficiently.

THE PRESIDENT: The gentleman in the back.

Q Bill Spriggs, research director with the National Urban League. Jamie, I'm going to challenge your optimism on two points. One is, no one seemed to mention the new labor force. This is actually really a different labor force, generated by affirmative action. Today, women make up a much bigger share of our labor force than the '70s economy, even the '80s economy that generated the rules that you talked about. The African American labor force today is better educated than the white labor force of the 1970s.

So that's a big difference. In fact, one of the things about this shortage of labor, the African American labor participation rate today is virtually statistically equal to that of whites, mostly because of this new economy, and because the President has made a big push on defending what has been a big backlash against affirmative action.

So, one question, Jamie, is, as this backlash to affirmative action continues, are we going to threaten this new labor force, which is much more equally educated than what we had in the past, and has introduced many more workers at a much higher participation rate than we had in the past? And the other question, Jamie, is, we talked about how recessions used to be shorter, in part because a lot of our income support were entitlements. And so we had what we used to call automatic stabilizers to instantly kick in. What happens now that most of those income supports are not entitlements, if we have another recession? Are you still as optimistic?

PROFESSOR GALBRAITH: Well, I think that affirmative action came into being with very broad political support at a time when inequality was considerably less in the pay structure than it became in the 1980s. And the opposition to affirmative action was in part a function of increases in inequality -- that is to say, there were fewer highly favored positions to compete for, and there began to be a vociferous opposition to making those slots widely available.

If the expansion continues, and inequality continues to improve, as Martin Baily also alluded to, it seems to me that the tide will turn on affirmative action, which I strongly favor, and that we can look forward to a period where, in a sustained expansion, we continue to broaden access to the best opportunities. So I'm afraid I'm still optimistic, if policy is conducted in the correct way.

The second part of your question was predicated on the occurrence of a recession. And while, again, I would modestly correct Martin's characterization of my views, I'm not in favor of a let-her-rip policy. I'm not necessarily in favor of an expansionary policy, I'm merely opposed to a contractionary policy. I'm opposed to putting on either the monetary or the fiscal breaks in such a way that could threaten the expansion.

It seems to me that if you are simply vigilant and do not do this, the most likely outcome is that the expansion will continue. The American economy is an extremely robust animal. Even a serious attempt to slow it down will take time and will take really severe measures, which may be coming, for all we know.

But it seems to me that if we avoid those measures, we will continue to test the limits of what our advance sectors are capable of producing, and also, Bill Nordhaus made this point very effectively -- of all the improvements in organization, inventory management, production process that the older sectors are capable of -- and I'm inclined to think, just to get back to the original point you made, that even though we are upgrading our labor force or our population considerably, our education standards are higher than they were 30 years ago -- I don't think that most Americans are as productively or as effectively employed as they could be. I think there is a great deal of potential still to exploit, and we may come to a limit in five or 10 years, but ask me then. I'm not better at predicting this than anybody else.

THE PRESIDENT: I would just like to make a couple of observations just very briefly about this. Even though the participation of women in the labor force is the highest it has ever been, the unemployment rate among women is the lowest in 40 years. That's the good news. The bad news is there is still about a 25 percent pay gap.

The unemployment rate among African Americans and Hispanics is the lowest we've ever recorded, although, we've only been disaggregating it for, I think, just a little less than 30 years. But, still, it's much lower. But the per capita income is still quite -- there's a lot of difference.

The poverty rate has gone down dramatically among African Americans and Hispanics, but not as much for Hispanics as African Americans -- I suspect because we have more first generation immigrants coming in still, who are classified as Hispanics in all this data collection that we do.

I would just like to posit -- first of all, my sense is -- and I've fought this battle hard for all these years -- that the opposition to affirmative action is easing again, as the middle class members of the majority feel a little more secure. But what I am interested in is how do we take these hopeful numbers and sort of translate them into genuine economic parity.

For example, we're debating in the Congress now how much we ought to raise the cap for the H1b visas, basically to get the high-tech workers in the Silicon Valley into the Washington, D.C. area and other places. And I basically -- I'm a pro-immigration person, generally. I think it's made our country stronger, and I'm not against this. But we don't still have, in my judgment, a comprehensive enough strategy to move a lot of African Americans and Hispanics who are in the work force now -- so they have x level of education, but they're not yet in the new economy, so that they're fully participating.

And I think this is still a continuing challenge for us. Two years ago, African American high school graduation rates equaled white graduation rates for the first time in history. That's the good news. And all these things you've said are absolutely right. But we're still not there on college-going, college graduation, and participation in the new economy. And we need a lot of focus on it.

The second question you asked is, what happens the next time there's a recession? I'd like to point out, if I might defend the position I took, briefly, in welfare reform. We basically -- welfare reform, in terms of the money that welfare recipients got, was already a state-determined entitlement before welfare reform, because the states got to set how much they were given. So the rate for a family of three varied everywhere from $187 a month, roughly, in Mississippi, and about that much in Texas, to $655 a month in Vermont, before welfare reform.

We kept the national requirement for food stamps and for medicine. And what we're trying to do is find more efficient ways to move people into the work force. We have done that. The great unanswered question is, if there is high unemployment again, what do we do with the work requirements and how do we make sure people get a good income stream when they literally can't go into the work force? And that's a challenge that will have to be addressed. But the tools are there to do it.


Q I'd just like to make the comment that the new economy is really a global phenomenon. We've been really focusing on the U.S. In China, for example, they're creating an -- culture very rapidly. There are now 80 million shareholders, versus 65 million members of the Communist Party. (Laughter.)

THE PRESIDENT: That's good.

Q Where, still, you have the highest -- rate in the world -- almost 50 percent, between 48 and 50 percent. So I think as you are talking about -- if we just focus on the United States, without looking at our competitive position around the world, and not realizing that some of the greatest wealth, the greatest opportunities, might be outside the United States -- like to get a reaction to that.

THE PRESIDENT: You guys want to talk about that?

MS. COHEN: If I can make one comment, we often talk about the enormous advantages to the U.S. consumer that may come about as different companies use the Internet and other aspects to improve their distribution systems. Well, we already have a fairly efficient distribution system to the U.S. consumer, and as we look around the rest of the world, perhaps the greatest beneficiaries will be those consumers and nations with very inefficient distribution systems, such as those in Japan, where there are layer upon layer of intermediaries between the producer and the ultimate consumer and user of those goods.


Q Thank you. First, I'd like to reinforce Abby's point at the beginning about education. It's going to be very hard for U.S. business to remain competitive if we don't have a competitive educational system. And we have a two-tiered system now, the top is very competitive -- universities are very competitive -- K through 12, unfortunately, is not. And a lot of other countries are going to be moving ahead very dramatically in that area and leave a lot of our workers behind if we don't catch up.

Britain suffered the same problem, was ahead in the industrial

revolution in the 1800s. It neglected education, particularly the education of its poor, lower-class people in urban areas, which was a big problem, which led not only to the weakening of the economy, but the certain class divisions which Britain still suffered from.

So that complacency about education, I think, is particularly important to deal with. We dealt with it in the early part of this century through what was called "the high school movement," where, as Abby said, local governments made a major effort to bring kids off the farm into the new economy. If we don't do that now, we're going to lose -- we'll get further and further behind other countries, which are placing a lot more emphasis on building the work force for the next decades.

The second point particularly relates to intellectual property. In this knowledge-based revolution, protection of intellectual property is extremely important. One of the problems that occurred, as you know, Mr. President, after your statement with Tony Blair about patenting of genes, which I think was badly misinterpreted, was the impression was created that somehow the U.S. was not as strong in protecting intellectual property and patents as I know it is. And, therefore, to the degree that you could clarify that over a period of time, particularly as the genome sequencing becomes more obvious and is announced, that would be very helpful in demonstrating that this government does, both domestically and internationally, attach a great deal of importance to protection of intellectual property, which I think is critically important for a lot of the research and development that is critical to the knowledge revolution.

THE PRESIDENT: Since we want to hear from everybody, I can't possibly answer the education question, but I will give you one sentence on it. Every problem in American education has been solved by somebody somewhere. There are public schools performing at an astonishing level with children from very diverse backgrounds, in terms of income, race, ethnicity and first language.

The big challenge in American education is nobody has figured out a mechanism to make what works in a lot of places work everywhere, which is why we're trying to change the law to stop giving out federal money to people who don't produce results, and spend it based on things that we know will work.

This is not a cause for despair. There are success stories everywhere, under breathtakingly difficult circumstances. The problem is we haven't figured out how to replicate it, or we don't have enough incentives to replicate it. And that ought to be something that we focus on. Plus bringing opportunity out there. In New York City you've got kids going to school in buildings that are heated by coal. We have schools that are too old to be wired for the Internet. We've got a lot of physical problems and we have to continue to invest in. But we are moving on that.

On the patent thing, you know, Tony Blair and I crashed the market there for a day, and I didn't mean to. (Laughter.) But I think what happened is -- when the market has recovered, I think what happened is, people actually read the statement instead of the headlines or whatever.

I think in the biotech area, our position ought to be clear. General information ought to be in the public domain as much as possible about the sequencing of the human genome. And where public money contributed to massive research on the basic information, we ought to get it out there. If someone discovers something that has a specific commercial application, they ought to be able to get a patent on it. And the question is always going to be, are you drawing the line in the right place? But I believe we've got the people together with the skills and the experience to draw the line in the right place. And I think that's the right policy. I'm quite confident it is. And what we really need now is to make sure it is implemented in the right way.

Fred? And then we'll just keep going.

Q Fred Bergsten from the Institute for International Economics. I strongly share the optimism of the panel, and want to just note that one might even give some credit to globalization for some of the impact. Abby Cohen talked about the new attitude in business; a lot of that has to do with the pressures of globalization. And when we're drawing up a globalization balance sheet, you have to put that down on the positive side.

But lest this be too euphoric, I want to say that I think there is one big imbalance in the economy that nobody has mentioned, somewhat to my surprise. And that's the huge and growing trade deficit. The trade and current account deficits both hit an annual rate of 4 percent of GDP in the last quarter. They are rising sharply. They are clearly into zones where in the past there has been a sharp reaction, including a reaction in the exchange market for the dollar.

A sharp decline of the dollar would push up inflation, would push up interest rates. That in turn would push down the stock market. That triple hit could be the speed limit that we're worried about. The U.S. has experienced a shortfall in the dollar, once a decade in the postwar period, and so we can't ignore it.

So the question to the panel -- do you think the new economy and the new economy rules will repeal the concern that the exchange markets, the international markets have had in the past, which countries as diverse as the U.K., Italy, Mexico, Thailand and Korea thought they could ignore in the last decade, but obviously couldn't. Can we ignore that, or is that a potential speed limit that we better pay more attention to?


PROFESSOR GALBRAITH: Again, I considered mentioning the trade deficit and decided not to because I wouldn't want to encourage the idea that we should react to it preemptively by cutting demand, raising unemployment, and attempting to cut our imports that way. It seems to me that would be a very counterproductive approach, because it would simply bring the rest of the world economy further down.

The structural problem that we have is that in a globalized environment, we really haven't figured out a way to assure stable growth in the developing and emerging economies, which are our major markets for advanced exports. Some of them, like China, have enjoyed extraordinarily rapid growth over decades, and are now major purchasers of such things as aircraft and other advanced products that we build.

But in the case, of course, of the Asian economies, a period of rapid growth over three or four years was then followed by a very, very sharp crisis. In Latin America, growth has been well below potential, really since the 1980s, with only very limited periods of strong growth.

So it does seem to me that we have a problem of construction. That is to say that we need to work on the system of international institutions that need to bear some responsibility for managing and stabilizing growth and development processes.

I know, Fred, that you just served on a commission to advise on these questions, and I read your very eloquent statement in the report of that commission. It seems to me that our task really is not to tear down the institutions that we have, but to build effective institutions that can address the instabilities that really are depressing the growth rate, the potential growth of our exports in the world markets in the long run.

PROFESSOR NORDHAUS: I think my answer would be -- it's actually to this as well as some of the earlier comments that -- what we're witnessing is real, but it's not going to repeal the basic laws of economics. But we have many problems which continue. I would say things like distorted investment, which has been mentioned. I think the distortion in asset markets is considerable. I think distortion in career choices is something I worry about a little bit. When I talked to my students a generation ago, they would go into a wide variety of professions, but now they've all got a gleam of gold in their eye and are heading off to either the new economy or the areas that finance the new economy.

So we still have some structural problems. But I think, my own view is that this improvement gives us kind of a breathing room to do some things that we need to do, like improve the budget situation, increase national saving, run this tight labor market for as long as we can -- and nobody knows how long it will be, and I hope it does continue. But there are still these pockets of concern, some of which are quite considerable, that we have to keep our eye on.

THE PRESIDENT: If I could just make one comment about this. I'm worried about it, the size of the trade deficit. But I would like to just make two counter arguments that you should all consider.

There is no question in my mind that the openness of our markets in the last seven years has kept inflation down and enabled us to grow more. And I could give you lots of very specific examples when we began to see tightening of supplies, and various products and services where there would be a little spike and it would come down.

The second thing is, we had a very strong economy, stronger -- more growth than our friends in Europe and Japan did, both at the time of the Mexican crisis, which imperiled all of Latin America, and at the time of the Asian financial crisis. Now, I think those things happened for reasons that all of us could debate until the cows come home, and I think there have been some improvements in the international financial architecture which will minimize the likelihood of the recurrence of that.

But I believe that America keeping its markets open, even absorbing a bigger deficit, helped Asia to recover more quickly, helped Mexico to recover more quickly, and over the long run, therefore, was good for the American economy as well as being the responsible thing to do. So I'm worried about it, but given the historical facts surrounding each of the last four or five years, I don't know that we could have avoided it.

Q I'm Barbara Simons and I'm President of ACM, which is the oldest scientific and educational society of computer professionals. And I wanted to pick up on two issues raised by a previous questioner. One is the education issue. I live in Silicon Valley, and one of the things that's really neat about living there is all of the foreign nationals who are working there. But of course, one of the reasons there are so many foreign nationals working there is that we are not doing an adequate job of educating our students in math and science.

And ironically, the new economy is working against this, because the public schools can't compete for the people who have knowledge in this area with these companies that we are creating today. And I worry that unless we do something really dramatic, it's going to get worse and, with all due respect, sir, I think that wiring the schools is not sufficient. It's important, but we need to provide our teachers with adequate training and the technical support because, as we all know, using a PC is not necessarily a trivial thing to do.

And we also, I think, need to really focus on reaching out to minorities and women. If you look at my field, the number of women entering computer science baccalaureate programs dropped precipitously in the '80s and it has not gone up to where it was. And minorities are very under-represented.

The second point I want to raise is relating to intellectual property. I would like to respectfully disagree with the questioner who raised that point. One of the things that worries many scientists and academics is that intellectual property is going to be too tightly controlled in the future in terms of copyright and protections, for example, for databases. And if we create too tight controls, we will basically kill the goose that laid the golden egg.

THE PRESIDENT: If I could just make one observation. I think another thing we're going to have to make up our minds to do if we want the schools to function well is to pay the teachers enough to get good teachers. California has just passed a very impressive reform proposal that will allow very large bonuses to go to teachers that actually produce results. And I'm going to be very interested to see whether it meets with the support of the people and actually produced improved learning and outcomes.

But teachers in California actually are going to make a decent living as a result of the reforms just adopted by the legislature that the Governor supported. So I think you all have to come to terms with this. We've got the biggest student body in American history, the most diverse one, and 2 million teachers are about to retire. So for all of our reform prescriptions, if you want good people to go into these classrooms, they're going to have to be paid.

Q I'd like to direct these questions to Professor Nordhaus and Kim. The first question is, we are correctly celebrating productivity gains, but a couple of things worry me. Number one is computer prices. Inflation rate has been kept down to a significant extent because of the decline in computer prices. Without that, we find that really the productivity gains are not as high as it is. And the question really is, can we continue to count on the precipitous decline in computer prices to support productivity gains? That's the first question to Professor Nordhaus.

A related question, the other thing that worries me, is to really Kim, is, our research shows that many of these high-technology companies have a high break-even point, because of software development costs, infrastructural plan and equipment, and marketing and et cetera. So in an economic downturn, because you have a high break-even point, could technology companies actually accelerate economic declines? And I guess that is really the second question.

PROFESSOR NORDHAUS: I think you raise an important point, which is that much of the productivity upsurge since roughly 1995 has been due to -- well, it's actually not just computers, but what I call the information technology sector of computer hardware, software and communications. A rough guess is that about two-thirds of the upturn has been due to those. And we don't really know what the other third is, whether it's cyclical or whether it's the numbers, or whether it's what's going on in other sectors. And we don't know how long it's going to continue.

But just because it's computers doesn't mean it's not real. I mean, that is leading to real gains in the way we conduct our lives, and the goods and services that we produce and we consume. My own guess is that we are -- I don't expect that to rise enormously, but I don't see any reason why it can't continue for the foreseeable future -- which is not very far.

MS. POLESE: With regards to your second question, I think actually competition -- I think prices of PCs are going to not only continue to drop, but what we're going to see is appliances that really replace PCs across the board. And what I see when I work with companies out there is now so many, many new companies getting into the business of creating these new Internet appliances that will be basically delivered to consumers, that will be either free or extremely cheap -- and those prices are going to continue to go down.

What's going to be -- the fees are going to be the transaction or service fees that people pay to subscribe to the financial portfolio management service or the game service or information services, whatever they may be. So, in fact, I see the trend continuing, the drop in PC or hardware prices. And I see that becoming less and less of an issue, because the pricing shifts from the physical asset to the services that companies deliver and competition is only just beginning there.

THE PRESIDENT: I want to call on the gentleman over on the left, and then I'm going to have to call this session to a close, because we've got to go to breakout sessions and we have two more panels and we'll all be able to continue this conversation.

Go ahead, this is the last question.

Q Mr. President, I would like to go back to a question that was raised about regulation. I see regulation, particularly conflicts among regulations at the federal and state level, as a real risk to the new economy. And I wonder whether you would have any comments or at least perhaps later in the day you might have some discussion of it, particularly on raising the question about the increased tendency of states to step in to regulate activity which previously had been regulated at the federal level.

Several examples -- for example, in California, the regulations regarding clean air are clashing with the federal regulation concerning clean air and is imposing quite a burden on transportation and other kinds of pollution developments.

In the area of regulation of telephones, air lines, in the past these have been federal regulations. And I wonder whether you would have any comments on the extent to which the states are now intruding more and more into this area. And in my judgment, this might have severely adverse impact on the emergence of innovations in the future.

Thank you.

THE PRESIDENT: What I'd like to do is give our panelists here a chance to comment. I have some thoughts on it, but we're going to have a panel, the last panel of the day is going to deal with the impact of the new economy on governance. And it's a very, very important issue, so I hope you will all hang around for it. But I'll defer what I have to say until then. But would any of you like to talk about this?

Go ahead.

PROFESSOR NORDHAUS: Just a brief word. I think there is a fair amount of devolution of regulation from the federal government to the states and some of it well-designed and some of it not. But there is a fundamental difference between federal and state regulation. As Americans, we can't escape federal regulation, but we can escape badly designed state regulations. And so, particularly in industries like this, which are relatively footloose and can migrate, it's not that we don't worry about it, but the state of California does not have a monopoly of American technology, so if it or Connecticut or other states do is, there will be migration of economic activity.

So it's not something that we want to encourage, obviously, but it's less worrisome than it would be if it were done at the federal level.

THE PRESIDENT: Let me say before we leave, since a couple of you mentioned the global aspect of this, I just got a note that I think is very good news. The Speaker of the House, Dennis Hastert, announced this morning that he scheduled a vote on permanent normal trading relations with China, which would open their markets to our goods and services, for the week of May the 22nd, and this is very good news.

This agreement slashes tariffs by about half on everything from automobiles to agriculture, to telecommunications, and it also slashes those tariffs which protect the state-run industries in China which, in large measure, have been the instrument of single-party control there. So I think it will lead to an opening of the society and a rise in freedom and personal choice.

We're talking about the new economy. Two years ago, there were 2 million Internet users in China; last year, there were 9 million. I think this year there will be somewhere between 20 million and 25 million.

So I think that this is very, very important. And I want to thank the Speaker and the leadership of the House for doing this. And I assure you, I will do what I can to pass it. I think it's not only in our economic interest, this is a profoundly important national security interest for the United States. So we end the panel on a piece of good news.

Thank you very much. Let's go into our breakout session. (Applause.)

END 10:46 A.M. EDT