September 17, 1999

A recent Wall Street Journal article suggests the "new economy" hype may not be hype after all. Almost everyone, the story says, agrees that the revolution in information technology has probably played some part in the extraordinary valuations that stocks have reached in this decade. Perhaps technology has played a role, but stock valuations stem from more fundamental, powerful old paradigm forces, and empirical data illustrate this. Inflation, real GDP growth, and the level of the stock market all began their current trends not during the last decade, but as early as early Eighties and have followed those trends even more closely in the Nineties (Figures 1, 2 and 3). If there is a new paradigm, it started nearly two decades ago-about the same time Ronald Reagan entered office and reintroduced the nation (and the world) to classical supply side economics.

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