The U.S. economy is undergoing a fundamental transformation at the dawn of the new millennium. Revolutionary technological advances -- powerful personal computers, high-speed telecommunications, and the Internet -- are helping to create a market environment variously labeled the "information economy," "network economy," "digital economy," "knowledge economy," and the "risk society." Together, the whole package is often simply referred to as the "New Economy."

The story of how businesses are changing in today's economy has been retold so often that it has become something of a cliche: The new rules of the game require speed, flexibility, and innovation. New, rapidly growing companies are selling to global markets almost from their inception, and established companies are forced to reinvent operations to stay competitive. This is the part of the New Economy that was born in Steve Jobs and Steve Wozniak's garage, at Bell Labs, Xerox PARC, and in the trunk of Michael Dell's car. It is Silicon Valley, Netscape, Yahoo!, and the next Big Thing. And, of course, it is Microsoft, with a market capitalization now second only to General Electric's.

But the New Economy is about more than high technology and frenetic action at the cutting edge. Most firms today are organizing work around technology, not just the companies actually producing it. The New Economy is a metal casting firm in Pittsburgh using computer-aided manufacturing technology to cut costs, save energy, and reduce waste. It is a farmer in Nebraska sowing genetically altered seeds and driving a tractor with a global satellite positioning system. It is an insurance company in Iowa using software to flatten managerial hierarchies and give its workers broader responsibilities and autonomy. It is a textile firm in Georgia using the Internet to take orders from customers worldwide.

The New Economy is also as much about new organizational models as it is about new technologies. It is the Miller brewery in Trenton, Ohio, producing 50 percent more beer per worker than the company's next-most-productive facility. It can do so, in part, because a lean, 13-member crew has been trained to work in teams to handle the overnight shift without oversight.

Yet while the social and political implications of the New Economy are vast, our system for tracking economic progress -- the set of indicators we use as a gauge -- has not kept pace. Our statistical system was essentially established to measure a stable economy with most of the output in agricultural and manufactured goods. Until the Great Depression, economic indicators were often measures of natural resources and commodity production. After the New Deal, our economic indicators began to focus on monetary measures related to managing the business cycle. For example, the first 15 pages of the Congressional Joint Economic Committee's monthly "Economic Indicators" are devoted to these sorts of measures. It is not until the 16th page that the report gets to arguably the most important indicator of economic well-being: productivity.

The Progressive Policy Institute recently compiled a "New Economy Index" -- a new set of indicators to try to illustrate what's actually new about the New Economy. Gathered from existing public and private data, it illustrates fundamental structural changes in the U.S. economy, shows what those changes mean in the lives of working Americans, and measures the nation's progress in several key foundation areas for future economic growth.

Structural Transformations

In one respect, beyond technological and organizational advances, there's nothing particularly new about the New Economy. We still work at jobs for a living, and we still buy, sell, and trade products and services just as we always have. Nonetheless, the key rules of the economy are changing, from the way we organize production, to our patterns of trade, to the way organizations deliver value to consumers.

Specifically, the data in the New Economy Index show four areas of structural change: industrial and occupational change; increasing levels of competition and economic dynamism; the progress of the information technology revolution; and globalization.

The global economic crisis that began in Asia in 1997 has caused growing concern that the trend toward globalization may in fact be a harbinger of financial chaos. But while globalization does make it more likely that business cycles will be worldwide in scale, the current problems in Asia and elsewhere are not endemic to the New Economy. In fact, one basic reason for the Asian economic crisis is that Asian economies have not fully adapted their economic institutions, business practices, and policies to the imperatives of the New Economy. In Japan, for example, slow growth in the service sector has hindered overall economic growth. Failure to dismantle barriers to imports and foreign direct investment, along with low levels of entrepreneurship, have limited competition. In turn, corporate and financial restructuring have been insufficiently encouraged. Moreover, low levels of investment in information technology have retarded the transition to a more digital economy and slowed the overall pace of change.

The fallout of the economic crisis, while painful in the short term, could eventually yield constructive change. The turbulence pressures governments to establish New Economy policy frameworks, industries to embrace new business practices, and societies to adopt new attitudes.

One key to the United States' recent strong economic performance is our willingness to embrace change. Nearly three quarters of all net new U.S. jobs are being created by 350,000 new fast-growing "gazelle" firms-- companies with sales growth of at least 20 percent per year for four straight years. Almost a third of all jobs are now in flux, either being born or dying, added or subtracted every year. This churning of the economy is spurred not only by new technology but also by increasing competition, a trend partly a product of increasing globalization. Between 1970 and 1997, U.S. imports and exports grew three and a half times faster than GDP in 1992 dollars.

Occupational change is another striking structural characteristic of the New Economy. Between 1969 and 1995, virtually all the jobs lost in the production or distribution of goods have been replaced by jobs in offices. Today, almost 93 million American workers-- amounting to 80 percent of all jobs -- do not spend their days making things. Instead, they move things, process or generate information, or provide services to people.

The Challenge Ahead

Is all of this turbulence, change, and complexity temporary -- simply the byproduct of transitioning from the Industrial Age to the Information Era? Or are these intrinsic and permanent aspects of the New Economy? We believe that the latter is true and that the challenge now is to learn how to manage and govern in an era of sustained and constant innovation and adaptation. Some see the emerging New Economy as disruptive and threatening. Others celebrate it uncritically, ignoring the social strains it creates and rejecting any role for government. We subscribe to a third view, one embracing the inherent new possibilities born of unleashed entrepreneurial energy for technological and economic progress, while supporting policies that foster growth and innovation and equip all Americans with the tools they need to succeed. The New Economy is not an end in itself but the means to advance larger progressive goals: new economic opportunities and higher living standards, more individual choice and freedom, greater dignity and autonomy for working Americans, stronger communities, and wider citizen participation in public life.

Though the foundations for the New Economy are in place, widespread benefits haven't yet been realized. Despite job growth, low unemployment, and other notable signs of economic progress -- and despite gushing press accounts of fabulous new wealth and opportunities -- a central paradox of the emerging New Economy is that the 1980s and 1990s have seen productivity and per capita GDP growth rates languish in the 1.25 percent range, while income inequality has grown. Our challenge is to create a progressive economic policy frame-work to encourage a new era of higher growth, while promoting and enabling a broad-based prosperity to produce the widest possible winners' circle.

Old economic policy, shaped by the Great Depression, largely focused on creating jobs, controlling inflation, and managing the business cycle. The New Economy raises new concerns. Technology, as well as a highly competent Federal Reserve policy, may have lessened the importance and severity of the domestic business cycle. We have shown that we can create jobs -- more than nine million of them in the first five years of the Clinton administration. And as is generally agreed, increased competition and technology in the new global economy reduce the risk of inflation. The real challenge of economic policy now is to support and foster continued adaptation, including policies leading to a fully digital economy characterized by continuous high levels of innovation and a highly educated and skilled workforce.

Nurturing the Digital Economy

The nascent transformation to a digital economy, where an increasing share of economic value is a product of electronic means, potentially ushers in a new period of sustained higher productivity and wage growth in America. Most of the indicators of the transformation to a digital economy forecast steady progress. Computing and telecommunications costs have been falling dramatically, and the U.S. Internet economy is projected to be worth $350 billion by 2001 (when nearly 40 percent of U.S. households are projected to be online). But realizing the digital economy's potential will depend in part on regulatory, tax, and procurement policies -- at all levels of government -- aimed first at fostering and not hindering this transformation. Government also clearly plays a role in spurring the transformation by encouraging the electronic delivery of public services, though it has taken little more than baby steps in the right direction at this point.

New Economy economists have focused on knowledge, technology, and learning as keys to economic growth and have begun to focus on how policy can actually affect innovation. Investments to develop and commercialize research and technology play a major role in increased standards of living for Americans. However, indicators of innovation and investment suggest cause for concern. In the last five years, federal support for both basic and applied research has fallen precipitously. Industry investment in basic research has also declined. Similarly, over the last decade the stock of machinery and equipment that American workers use to be productive has fallen as a share of GDP.

Education is another economic foundation area showing a lack of sufficient progress. Corporate expenditures on employee training have fallen in the 1990s as a share of GDP. Meanwhile, K-12 performance has simply failed to keep up with the pressing need for a skilled workforce, in spite of continued increases in education spending. We need policies to ensure that American companies have the skilled workers they need to be productive -- and that American workers have the skills to navigate, adapt, and prosper in the New Economy.

The New Economy puts a premium on what Nobel Laureate economist Douglas North calls "adaptive efficiency" -- the ability of institutions to innovate, continuously learn, and productively change. In the old economy, fixed assets, financing, and labor were principal sources of competitive advantage for firms. But now, as markets fragment, technology accelerates, and competition comes from unexpected places, learning, creativity, and adaptation are becoming the principal sources of competitive advantage in many industries. Enabling constant innovation has become the goal of any organization committed to prospering and should also become the goal of public policy in the New Economy.

A progressive innovation-oriented policy framework for the New Economy should rest on four pillars: