Computer Age
Gains Respect of
Economists
By STEVE LOHR
In
a nation of technophiles, where Internet millionaires are minted
daily, it seems heresy to question the economic payoff from
information
technology -- the billions upon billions spent each year by
companies and
households on everything from computers to software to
cell phones.
But for more
than a decade, most of the nation's leading economists have
been heretics.
They have not been much impressed by the high-tech
dogma -- embraced
by corporate executives, business school professors
and Wall Street
alike -- that regards the transformation of the economy
through the
magic of information technology as a self-evident truth.
"You can see
the Computer Age everywhere," Robert Solow, a Nobel
prizewinner
from the Massachusetts Institute of Technology wrote a few
years ago, "but
in the productivity statistics."
For years, even
as the computer revolutionized the workplace,
productivity
-- the output of goods and services per worker -- stagnated,
barely advancing
1 percent a year. So it is easy to see how Solow's pithy
comment became
the favorite punchline of the economic naysayers.
Yet today, even
renowned skeptics on the subject of technology's
contribution
to the economy, like Solow, are having second thoughts.
Productivity
growth has picked up, starting in 1996, capped by a surge in
the second half
of last year, after eight years of economic expansion. That
has drawn attention
because past upward swings in productivity typically
occurred early
in a recovery as economic activity rebounded. Once
companies increased
hiring, it slowed again.
But something seems fundamentally
different this time, something
apparently having a lot to do with the
increased speed and efficiency that
the Internet and other pervasive
information-technology advances are
bringing to the mundane day-to-day
tasks of millions of businesses.
The question, posed by economists,
is whether the higher productivity
growth, averaging about 2 percent in
the last three
years, roughly double the pace from 1973 to 1995, is the
long-awaited
confirmation that the nation's steadily rising investment in
computers and
communications is finally paying off. The evidence is
starting to
point in that direction.
"My beliefs are
shifting on this subject," said Solow. "I am still far from
certain. But
the story always was that it took a long time for people to
use information
technology and truly become more efficient. That story
sounds a lot
more convincing today than it did a year or two ago."
Another pillar
in the pessimist camp was Daniel Sichel, an economist at
the Federal
Reserve. His work, along with another Fed economist,
Stephen Oliner,
in 1994, and on his own in 1997, found that computers
contributed
little to productivity growth. But recently, Sichel ran similar
calculations
for the last few years and came to a different conclusion.
In a paper that
has just been published in the quarterly "Business
Economics,"
Sichel wrote that his new work points to "a striking step up
in the contribution
of computers to output growth." And the nation's
improved productivity
performance, he noted, is "raising the possibility
that businesses
are finally reaping the benefits of information technology."
The impact of
information technology on the economy is more than an
academic debate.
If, as some experts assert, the technology dividend is a
key reason for
the nation's extraordinary run of high growth, rising wages
and low inflation,
there are significant policy implications. If the recent
gains are not
just a temporary blip, it suggests that the Federal Reserve
can be less
fearful of inflation and keep interest rates stable rather than be
forced to raise
them to cool off what would otherwise be considered an
overheated economy.
Indeed, the Fed
chairman, Alan Greenspan, and the other Fed governors
are scheduled
to hear presentations on information technology's effect on
the economy
from several academics during a private meeting in
Washington on
Thursday.
Greenspan, for
one, seems to believe a fundamental change is under way.
He told Congress
early this year that the economy was enjoying "higher,
technology-driven
productivity growth."
The Fed governors
will hear a forceful case for technological optimism
from Erik Brynjolfsson,
an associate professor at the MIT Sloan School
of Management.
Brynjolfsson
asserts that the economic value of speed, quality
improvements,
customer service and new products are often not
captured by
government statistics. "These are the competitive advantages
of information
technology," he said. "We need a broader definition of
output in this
new economy, which goes beyond the industrial-era
concept of widgets
coming off the assembly line."
The government,
after years of defending its figures, conceded two
weeks ago that
productivity growth may be understated. The core of the
problem, government
economists say, is the increasingly complex
challenge of
defining and measuring output in much of the economy's
fast-growing
service sector, which includes the vast reaches of banking,
finance, health
care and education.
According to
the official statistics, a bank today is only about 80 percent
as productive
as a bank in 1977. Yet that seems to take scant account
of, say, 24-hour
automated teller machines, which clearly benefit
customers who
no longer have to wait in lines to be served by human
tellers during
regular "bankers' hours."
Edwin Dean, chief
of the productivity division of the Bureau of Labor
Statistics,
wrote in a new research paper that the agency was increasingly
concerned that
its measurements did not "fully reflect changes in the
quality of goods
and services" or "capture the full impact of new
technology on
economic performance."
Still, the government's
methods of measurement will not be overhauled
anytime soon.
"These are tough, tough questions and we are not going to
get instant
solutions," Dean explained in an interview.
American corporations
long ago made up their minds, voting for
technology with
their dollars. Investment in information technology --
computing and
telecommunications gear -- has quadrupled over the last
decade, rising
as a share of all business spending on equipment from 29
percent to 53
percent, according to the Commerce Department. And
that is only
the hardware. There have been similar surges in corporate
spending on
software, consulting, technical support and training related to
the field.
"The payoff from
information technology is unquestionably there with
individual companies
and we're seeing it over and over again," said
Chuck Rieger,
a senior consultant at IBM's services division.
Of course, anecdotal
evidence from individual companies is no proof of
broad-based
benefits in an $8.5-trillion economy. But what many experts
find encouraging
is that the rapid introduction of low-cost Internet
technology means
most companies can now afford to set up electronic
links with customers
and suppliers. For example, a recent survey of
2,500 manufacturing
companies, conducted by
PricewaterhouseCoopers,
found that the number of factories with
Internet links
to customers and suppliers doubled last year.
At more and more
companies, these Internet-based networks are
already streamlining
the mundane chores of business life like invoicing,
purchasing and
inventory control. This is not the glamorous side of
Internet commerce,
occupied by Amazon.com and others selling
consumer products.
Yet if a technology dividend in productivity is at
hand, the place
to look is in the back offices of business. "That is where it
will be," Solow,
the MIT economists, said, "in the wholesale automation
of corporate
transactions."
This business-to-business
commerce over the Internet is projected to
jump from $48
billion in 1998 to $1.5 trillion by 2003, according to
Forrester Research
Inc. During the same period, the research firm
estimates that
consumer sales over Internet will rise from $3.9 billion to
$108 billion.
The service sector
of the economy is where productivity gains appear to
have been especially
sluggish and where experts are looking most closely
for evidence
of an efficiency payoff from technology.
In Chicago, Michael
Rushmore, a banker, speaks of how Internet
computing has
"fundamentally changed the way we do business" over the
last three or
four years. Take the way corporate loans are syndicated
among many banks,
notes Rushmore, a managing director of
Nationsbanc
Montgomery Securities, the securities arm of BankAmerica
Corp.
Until about two
years ago, syndicating a large corporate bank loan meant
distributing
a lengthy offering document, often running more than 200
pages, to 50
to 100 banks. It was, Rushmore recalled, a nightmarish,
inefficient
process that involved waves of overnight mail, constant faxing
and armies of
messengers.
Today, much of
that process is handled over the Internet on bank Web
sites that other
banks tap into to read and download the offering
document, ask
questions and exchange views. Rushmore estimates that
the Internet-based
system trims 25 percent from the time it takes to close
a deal, not
just improving the ease of the transaction but also saving an
immense amount
of hours of work.
About a year
ago Booz Allen & Hamilton began using the Internet to bill
several federal
agencies that are its clients. Booz Allen estimates that it
has saved $150,000
a year by eliminating the paper handling on its $10
million in monthly
billings to the government. The greater speed and
efficiency of
the electronic billing also means that the consulting firm is
being paid 30
percent, or six days, faster than before.
"Getting that
money into the bank much more quickly is probably the
biggest benefit,"
said Mark Arnsberger, an assistant controller for Booz
Allen &
Hamilton.
The rapid spread
of Internet-based computing, experts say, promises to
compress the
time it takes for any new technology to enhance economic
welfare in general.
The classic study of the phenomenon, "The Dynamo
and the Computer:
An Historical Perspective on the Modern Productivity
Paradox," by
Paul David, an economic historian at Stanford University,
was published
in 1990.
The electric
motor, David noted, was introduced in the early 1880s but
did not generate
discernible productivity gains until the 1920s. It took
that long, he
wrote, not only for the technology to be widely distributed
but also for
businesses to reorganize work around the industrial
productionline,
the efficiency breakthrough of its day.
"The process
takes longer than people think, but I still believe that we will
get a revival
of productivity growth led by the spread of computing,"
David said.
His is a misplaced
faith, according to the dwindling band of
techno-pessimists
whose own beliefs remain unshaken. Sure, they
concede, there
has been surprisingly strong productivity growth for the
last three years.
Could this represent a break in the trend? Possibly, they
grudgingly admit,
but only a tiny shift at best, they insist.
The real problem,
they explain, lies in the composition of the nation's vast
service economy.
More than half of all white-collar workers are what
they term "knowledge
workers" -- managers, executives and
professionals
like doctors, lawyers, teachers, even economists.
"The work they
do does not lend itself to technology-driven
improvements
in productivity, and any gains are really difficult to eke out
and are glacial,"
said Stephen Roach, chief economist at Morgan Stanley
Dean Witter.
"Paul David's electrical motor has nothing to do with the
knowledge-intensive
process of work in a service economy."
The real technology
cynic at the Fed meeting on Thursday will be Paul
Strassmann,
a former chief information officer of Xerox and the
Pentagon. Strassmann,
author of "The Squandered Computer," published
in 1997, believes
that corporate America's spending spree on information
technology amounts
to an "economic arms race," fueled by misguided
management theories.
The recent improvement
in productivity, according to Strassmann, is
mainly attributable
to the lower cost of capital because of low interest
rates. His summary
view, though at odds with those of technology
optimists like
Brynjolfsson of MIT, may also be received warmly by the
Fed.
"The explanation
for the productivity improvement is interest rates, not
information
technology," Strassmann said. "The hero here is not Bill
Gates. It's
Alan Greenspan."
Yet even Strassmann
finds the technology undeniably useful, if not a
productivity
elixir. When asked a detailed question, he replied, "Just look
it up on my
Web site. It's a lot more efficient that way."