Paul and all,
For those who want as view of the future - from the cover story on The 21st Century Economy in the current Business Week out today online:
businessweek.com@@S3eazmcAROqMYgAA/premium/35/covstory.htm
YOU AIN'T SEEN NOTHING YET
We're just at the start of a powerful surge in
technology that will boost economic gains into the
next century
In our society, ''mature'' is a euphemism for getting old. Consultants deride a
mature market as one without much potential. And a mature economy, as
economists use the term, can no longer sustain the high growth rates of younger,
spryer economies. Indeed, as growth slowed in the 1970s and 1980s, mature
was exactly the term that many economists applied to the U.S.
Boy, were they wrong. There's nothing old about the U.S. economy today.
Instead, there's been an explosion of creativity and entrepreneurial vigor that
puts U.S. competitors to shame. Seven years into the expansion, growth is
running at a 3.5% rate over the last year, and despite a small dip in the second
quarter, productivity is rising at a strong 1.9% rate.
There is growing evidence that the U.S. economy is in the early stages of a
powerful new wave of innovation. The leading edge is the information revolution,
which permeates every sector of the economy. Over the last year, for example,
high tech has taken half a percentage point off inflation and added almost a full
point to growth.
But there is much more to come. From the Internet to biotech to cutting-edge
technologies that are just now nearing commercialization, the U.S. is riding a
groundswell of innovation that could carry it well into the next century. ''We've
never had a period in which innovation has so permeated our lives as in the
1990s,'' notes Joel Mokyr, an economic historian at Northwestern University
who studies innovation. ''We have acquired knowledge in at least three or four
areas that will be truly revolutionary.'' Adds Arnold B. Baker, head economist at
Sandia National Laboratories: ''There's going to be a fundamental change in the
global economy unlike anything we've had since cavemen began bartering.''
WAGE SURGE. Welcome to the 21st Century Economy. Historically, periods
of major innovation have brought profound increases in living standards. The last
one, which started with railroads in the 1890s and lasted through the advent of
television and jet travel in the 1950s and 1960s, saw a quadrupling of real per
capita incomes, propelled by rising productivity.
The 21st Century Economy could see similar income gains, if the latest
innovative wave can boost long-term growth to 3%, rather than the 2.3% that
most forecasters predict. Even over a period as short as the next ten years,
faster growth dramatically changes the economic and financial landscape. Rather
than remaining almost flat through 2008, real wages would actually rise by 9%,
according to projections prepared for BUSINESS WEEK by Standard & Poor's
DRI.
Corporations and investors would prosper as well in this scenario. In the 21st
Century Economy, corporate earnings, adjusted for inflation, would rise by 54%
over the next ten years, compared with 25% in the slow-growth case.
Combined with 30-year interest rates below 4%, that's spectacular news for the
stock market.
The innovation boom, and the faster growth rate it could ignite, could make it
much easier to address some of the vexing social and environmental problems of
the 21st century. For example, a 3% annual growth rate will more than cover the
needs of baby boomers' retirement, since it will lead to a 25% bigger economy
in 2030. And expensive solutions to global warming, such as cutting carbon
emissions, will become easier to bear if the economy is growing faster.
Are such gains really possible? Certainly, the U.S. economy has done far better
in recent years than most economists expected, coming close to its spectacular
performance of the 1960s. The single best measure of this is the productivity of
nonfinancial corporations, which includes 75% of the business sector, from
Microsoft Corp. to General Motors Corp., while omitting small businesses and
financial companies. Since 1990, the productivity of nonfinancial corporations
has risen at a strong 2.1% rate, far above the 1.5% seen from 1973 to 1990,
and approaching the 2.4% of the 1960s and early 1970s. Manufacturing has
done even better: Since 1990, factory productivity has been soaring at 3.6%
annually, the fastest rate in the post-World War II era.
In the long run, the success of the 21st Century Economy will depend on
whether technological progress will continue to drive growth, as it has so far in
this decade. That would be a big change from the 1970s and 1980s. In those
decades of economic stagnation, technology contributed almost nothing to
growth, according to calculations by the Bureau of Labor Statistics. The
computer revolution had yet to take off, and earlier innovations such as jet travel
were no longer new.
But in the 1990s, the innovations have been coming thick and fast. This has
changed the calculus of policymakers, enabling Fed Chairman Alan Greenspan
to hold down interest rates even in the face of low unemployment. ''Signs of
major technological improvements are all around us,'' he observed in his July 21
testimony to Congress. ''The benefits are evident not only in high-tech industries
but also in production processes that have long been part of our industrial
economy.''
PAYBACK TIME. In part, the sudden re-emergence of technological progress
is the culmination of years of research in disparate fields that are finally reaching
critical mass. The Internet, which only became a commercial proposition in the
mid-1990s, is the direct descendant of ARPANet, which was based on
research funded by the Defense Dept. in the 1960s. The first successful
gene-splicing experiment was done in 1973, but biotechnology is only now set
to explode. Moreover, different parts of the innovation wave are starting to feed
and reinforce one another, as fast computers greatly accelerate the ability of
scientists to understand and manipulate genes. Conversely, biological techniques
now seem the best foundations for developing tomorrow's newgeneration
computers.
The innovation wave is also being given more force by the globalization of the
economy. Bright ideas developed in Israel or India quickly find world markets.
Technologically savvy immigrants propel high-tech companies in Silicon Valley
and elsewhere. And the ever-expanding markets offer the lure of mammoth
profits for a successful product that can be sold worldwide.. The result: It
becomes far more attractive to speed up R&D in hopes of getting a competitive
edge.
To be sure, the emergence of the 21st Century Economy does not put an end to
recessions, financial crises, or the other ills that afflict market economies. Quite
the contrary: Times of intense technological change are often volatile, as
corporations and workers try to adjust to new technologies. Indeed, some of the
deepest downturns in American history have come during periods of rapid
productivity growth such as the first half of the 1900s. And, as the Asian crisis
shows, the global economy exposes countries to risks that they did not face
before.
Many economists are skeptical of claims that the sustainable growth rate has
permanently increased. For one thing, they argue that the low inflation of recent
years may simply be the result of a few lucky events, including falling oil prices,
rather than any permanent structural change. Most important, they say,
government economic statistics do not yet present a clear-cut case that
technological progress has accelerated. The biggest productivity gains have
come only since 1995, which means that a few bad years could still easily wipe
them out.
Skeptics believe that today's hot technologies--the Internet, biotech, and so
forth--are inconsequential, in economic terms, compared with past
breakthroughs. Fundamental innovations such as electricity and the internal
combustion engine, argues Robert J. Gordon of Northwestern University, one of
the most articulate critics of the New Economy, ''made possible a half-century of
rapid growth in productivity that far exceeds what occurred before, what has
occurred since, or what is likely to occur in the foreseeable future.'' And Paul
Krugman, a Massachusetts Institute of Technology economist who has
consistently attacked the New Economy, recently wrote: ''The truth is that we
live in an age not of extraordinary progress but of technological disappointment.''
Other economists echo Krugman and Gordon's sentiment. ''A lot of the easy
wins have already been had,'' says Martin N. Baily, a productivity expert at the
McKinsey Global Institute and a former member of Clinton's Council of
Economic Advisers. ''It's harder to push out the frontier.'' Adds Robert M.
Solow, Nobel laureate from MIT: ''You can't expect the great old days to come
back.''
The experience of the 1970s and 1980s gives some weight to this lack of faith in
technology. The productivity slowdown was caused in large part by the failure of
some innovations to live up to their early promise. Nuclear energy was supposed
to be the big breakthrough of the postwar era--a source of cheap and limitless
power. If the so-called Atomic Age had worked out as expected, the oil price
rise of the 1970s would have been far less damaging. Indeed, the utility industry
was one of the biggest contributors to the productivity slowdown of the 1970s.
Meanwhile, the space program--identified by President John F. Kennedy in
1961 as America's top scientific priority--absorbed a stunning 25% of the
nation's civilian R&D dollars in the 1960s. But even though it reached its goal of
putting a man on the moon, the program has not yet generated the economic
benefits to justify the huge investments--though the increasing importance of
communications satellites may change that.
These flamboyant flameouts may be leading the skeptics to underestimate the
power of today's technological changes--just as the Great Depression created a
generation of economists and investors who worried that another crash was just
around the corner. But today's innovations have a better chance of succeeding
because they are being developed by the private sector in response to the profit
motive, which automatically gives an incentive to seek out technologies that are
economically viable. Nuclear power and the space program, by contrast, were
creatures of government and of heavily regulated industries, which had no such
incentive.
In information technology, profits motivate both buyers and sellers. Businesses
are devoting more of their investment spending to computers and information
technology, something that would make sense only if managers thought they
were getting a real payoff. Over the last four years, business spending on
computers has risen by 86%, far outpacing the 40% rise for all other types of
investment. Certainly the productivity impact of computers is starting to show up
in the numbers. For example, a new analysis from two Conference Board
economists, Robert H. McGuckin and Kevin Stiroh, argues that manufacturing
industries that use computers heavily have shown a brisk acceleration in
productivity growth, from an annual rate of 3.2% in the 1980s to 5.7% in the
1990s.
Even so, much of the benefit of the information revolution is not being captured
in the productivity data. Beyond manufacturing, the computer and
communications explosion is totally transforming industries that move and
process information, such as finance, media, entertainment, communications, and
business services. Together, these industries make up about 25% of the
economy--yet they are also very poorly measured by government statisticians.
After all, how can you count the gains from having 24-hour access to your
money at ATMs, or from being easily able to make calls from your cellular
phone?
TINY WONDERS. New technologies coming to market will have equally
pervasive and radical effects on other parts of the economy. Biotech, now
beginning to take off, will have a strong influence on health care, agriculture, and
the output of nondurables, such as chemicals and petroleum products--and these
things account for a further 15% of the economy. And while many of today's
biotech products are expensive, the history of technological innovation suggests
that their prices will rapidly fall as production ramps up. Especially in health care,
pharmaceutical companies will be under heavy pressure to find treatments that
cut costs.
Just ahead are a set of innovations that could transform the economics of a wide
range of industries. Microelectromechanical systems (MEMs)--a commercial
toddler--will enable tiny sensors, motors, and pumps to be built right into
microprocessors, which could have a big impact on transportation, food
processing, and home appliances. And scientists are learning how to build up
new materials atom by atom, which could transform the entire manufacturing
sector, among others. What is exciting, says Peter M. Will of the Information
Sciences Institute at the University of Southern California, is the ''potential to
fundamentally change matter, to create things and materials that can never exist
otherwise.''
Of course, it's hard to predict which innovations will succeed and which won't.
Technologies that look good in the laboratory or on the drawing board can fizzle
out due to unforeseen complications, as did nuclear power.
But history says that the odds are good. Out of the last 10 decades, eight have
been periods of strong innovation. In the end, the slow-growth 1970s and
1980s will look like the exceptions, not the rule. On the edge of the 21st
century, the U.S. economy is anything but mature.
By Michael J. Mandel in New York
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