"Computer Age Gains Respect of Economists"
[But, Stephen Roach remains skeptical that computers can significantly enhance productivity in the long term.]
By STEVE LOHR -- 4/13/99
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."
Copyright 1999 The New York Times Company |
