In a Nation of technophiles,where internet millionaires are minted daily ,it seems heresy to question the economic payoff ffrom information technologyithe billions spent each year by companies and households on everything from computers to software to cellphones.
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.
For years, even as the computer revolutionised the workplace, productivity - the output of goods and services per worker - stagnated, barely advancing 1% a year. So it is easy to see how Solow's pithy comment became the favourite punchline of the economic naysayers.
Yet today, even renowned sceptics 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.
Long-awaited confirmation that the nation's steadily rising investment in computers and communications is finally paying off?
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% 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 heard presentations on information technology's effect on the economy from several academics during a private meeting in Washington recently.
Greenspan, for one, seems to believe a fundamental change is under way. He told Congress early last 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.
The government, after years of defending its figures, conceded recently 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% as productive as a bank in 1977. Yet that seems to take scant account of, say, 24 h 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 Labour 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 to 53%, 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 2500 manufacturing companies, conducted by PricewaterhouseCoopers, found that the number of factories with Internet links to customers and suppliers doubled last year.
Internet-based networks proliferate
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. 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 Bank America 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 websites 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% 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%, 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 modern productivity paradox
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 reorganise work around the industrial production line, the efficiency breakthrough of its day.
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, 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', fuelled 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 website. It's a lot more efficient that way."
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