October 8, 2000
ECONOMIC VIEW
In a Productivity Surge, No Proof of a 'New Economy'
By LOUIS UCHITELLE
NOTHING has been harder for economists to explain than the prosperity that burst upon the United States with magical suddenness in late 1995. In the absence of explanation, there was phrase- making. A "new economy" had arrived, and the words became a banner for all sorts of optimism. Only now is a realistic definition of the new economy coming into focus.
The computer, of course, is at its heart — but not as a miracle machine spinning a golden future comparable to the industrial leap forward that came in the late 19th and early 20th centuries. Then, the electric motor, the light bulb, the internal combustion engine, petroleum, natural gas and numerous new chemicals all came on the scene — rearranging the economy and making it vastly more productive. The electric motor alone made possible the factory assembly line and mass production.
Enthusiastic voices today — in business, politics and journalism — proclaim that the computer and its offspring are giving America a similar great leap forward. That is not true, at least not yet. What the latest data and the most recent research show is this: Computers have indeed lifted the economy, but mainly through the manufacture of the computers themselves and the production of semiconductors, communications equipment, software and other computer-related devices.
"You have this relatively small sector — collectively known as information technology — that is enormously productive," said Kevin J. Stiroh, an economist at the Federal Reserve Bank of New York and co- author with Dale W. Jorgenson of Harvard of one of several recent studies on the subject. All of them find that the new economy is still narrowly focused on the computer industry and its siblings.
The ripple effect across the broad economy, in sum, is still rather small, although it might be much greater a decade or two from now. Biotechnology is an example of that effect, a new science that computers facilitate, and it may in time bring huge advances in medicine, the sort of radical change that developed from the cluster of inventions that appeared a century ago.
Or, the new economy may be much more modest. The phrase may come to mean simply a speeding up of what we were already doing. Computers ease or automate shopping, ticket buying, hotel reservations, information gathering, banking, data processing, trade, manufacturing. But these activities always existed.
No one can know what the future holds. All this column can do is inject some skepticism into the current euphoria by chronicling what has happened so far. The latest contribution to our collective knowledge has come from the Bureau of Labor Statistics. In a report last month, the bureau listed the reasons for the surge in productivity since 1995, to an average annual rate of 2.5 percent or so, after more than 20 years of never rising above 1.6 percent.
Productivity is all-important. What lifts an economy is the output of its workers. The more they can produce without working longer hours, the more an economy can grow without shortages and excessive inflation. Workers increase their output through new tools, like a faster computer or more robots, or through a new way of organizing work, like the assembly line. Sometimes a new technology, like the internal combustion engine, also has the ripple effect of creating a new industry, like trucking. Trucks in turn expanded the marketplace. A bicycle factory could step up production, confident that the new trucking industry and the growing highway network could deliver bicycles quickly and inexpensively to stores and customers in more cities.
The report from the Bureau of Labor Statistics made clear that the recent surge in productivity came not from such broad ripple effects, but narrowly from computers. Only about 25 percent of the robust productivity growth since 1995 came from the use of computers, software and other information processing equipment. This is the ripple effect — computers applied to biotechnology and e- commerce, for example.
The biggest shot in the arm came from within the computer industry itself, mainly from the manufacture of ever faster, more powerful computers and semiconductors. This was the source of more than 40 percent of the nation's accelerated productivity growth. Ways were found, for example, to etch more circuits onto tiny chips without adding manpower or cost to the manufacturing process. As a result, computer power plummeted in price, and sales soared.
"Wherever productivity is surging today, it is narrowly related to computers," said Robert J. Gordon, a Northwestern University economist.
What is ahead? Well, information technology is now everywhere, and even if prices stop falling and computer power levels off, just making better use of all the new equipment already in place should continue to give some boost to productivity "until everyone is fully adapted," said Joel Mokyr, an economics historian at Northwestern.
Mr. Mokyr, an optimist, expects information technology to be the source of another great leap forward. Ultimately, however, the new computer-based technologies might not pack the wallop of the electric motor and the internal combustion engine. "We won't know," Mr. Mokyr said, "until 50 years from now, when we can look back." |
