Gains Respect of
By STEVE LOHR
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
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."
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
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.
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
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."
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.
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.
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 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."
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
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
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.
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.
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.
takes longer than people think, but I still believe that we will
get a revival of productivity growth led by the spread of computing,"
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
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
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."