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Computers: Waiting for the Revolution

The Coming American Renaissance: How to Benefit from America’s Economic Resurgence

by Michael Moynihan
Simon and Schuster, 319 pp., $23.00

The Death of Distance: How the Communications Revolution Will Change Our Lives

by Frances Cairncross
Harvard Business School Press, 303 pp., $24.95

The Computer Revolution: An Economic Perspective

by Daniel E. Sichel
Brookings Institution Press, 152 pp., $16.95 (paper)

Education for What? The New Office Economy

by Anthony P. Carnevale, by Stephen J. Rose
Educational Testing Service, 36 pp. (paper)

1.

In early January, the Bureau of Labor Statistics reported data, including strong job growth in December, suggesting that the economy again grew rapidly in the last three months of 1997. This followed eighteen months in which the real Gross Domestic Product (discounted for inflation) had already grown by an annual rate of 4 percent, and unemployment had fallen to a quarter-century low of 4.7 percent. The output of goods or services per hour of work (known as productivity) had risen by 2.25 percent in the preceding twelve months, and nearly 2 percent a year since 1996, well above its historically slow annual growth trend of 1 percent since the early 1970s (though after revisions it will probably have slowed significantly in the fourth calendar quarter of 1997). All the while, consumer inflation had fallen to less than 2 percent, and Washington was exulting because rising federal tax revenues had nearly eliminated the budget deficit well ahead of schedule.

Short spurts in growth occurred before, in the 1970s and the 1980s, but they quickly subsided. But now, with inflation, unemployment, and the deficit reduced beyond expectations, the enthusiasm that typically accompanies even modest improvements in the economy is at a higher pitch than usual. To many newspaper and magazine writers, business consultants, and some economists, the surprisingly strong performance of the economy since 1996 suggests that the long-awaited “computer revolution” has at last taken hold. They argue that, because of the spreading use of computers, the economy has finally passed through a threshold which will enable it to grow rapidly once again after twenty-five years of historically torpid growth—thus, the “new economy.”

Vice President Al Gore is among the most ardent supporters of this vision. Last summer, he announced that he, like Alexis de Tocqueville a century and a half earlier, had taken a tour of the nation “to see an old economy once again giving way to a new one.” Gore and many others credit the computerization of business and society at large with a transformation that will rival the passage from an agricultural to a manufacturing age in the nineteenth century. It is “an economy driven by information, research, knowledge, and technology,” Gore went on. “During these three months, I have seen the new economy unfold in mammoth airplane hangars in Seattle, in the sunny cornfields of Iowa, on the streets of inner-city Detroit, in the high-tech labs of New England, and even in the far reaches of cyberspace…. I have seen the new economy, and I am here to tell you that it works.”

To such enthusiasts, the numbers speak for themselves. Where only about 40 percent of businesses invested in computers in 1977, according to one sample, more than 80 percent do so today. One out of two American workers is now likely to use a computer, compared to one out of four in mid-1987.1 In particular, the enthusiasts say the proliferation of computerized information technology, which makes unprecedentedly large amounts of information inexpensively and instantaneously accessible, should dramatically raise the productivity of most American workers. “The single greatest driver of growth and creator of wealth over the next two decades,” writes consultant Michael Moynihan in a recent book called The Coming American Renaissance, will be “the information superhighway.”

The normally sober Economist claims nothing less than that information technology represents “a change even more far-reaching than the harnessing of electrical power a century ago.” The Boston office of a US consulting company is discarding all of its paper-work and building a computerized Knowledge Exchange, “a vast on-line database containing the company’s accumulated wisdom, available…anywhere in the world seven days a week” on every worker’s PC. “Where once greater distance made communications progressively more expensive and complicated,” writes The Economist, “now distance is increasingly irrelevant.”2 Business Week concludes that the computer is “a transcendent technology—like railroads in the 19th century and automobiles in the 20th…. Forget 2% real growth. We’re talking about 3%, or even 4%.”3

It all sounds plausible. But it may surprise many readers of today’s financial pages that, despite the rapid growth of the last year and a half, the expansion of the economy that began in the early 1990s has remained the slowest in the post-World War II period. The expansion hasn’t even reached the slow pace of growth of the 1970s and 1980s. Historical comparisons should be made over comparable business cycles, which include a recession as well as a recovery. As of the end of the third quarter of 1997, the average annual growth rate of real Gross Domestic Product (discounted for inflation) has been only 2.2 percent since the last business cycle peak in 1990.4 By contrast, the long business cycles of the slow-growing 1970s and 1980s produced average annual rates of growth of about 2.75 percent and 2.95 percent respectively.

Such differences between current and past performance have huge consequences. If there had been an annual rate of growth of 2.95 percent in the 1990s, the economy would have generated another $400 billion or so in goods and services in 1997 alone, and gradually lesser amounts in each of the preceding years. Similarly, by 1997, federal tax revenues would have been higher in each year, with perhaps $80 to $100 billion in additional federal tax revenues in 1997 alone, easily pushing the budget into surplus last year. In the 1950s and 1960s average annual rates of growth, of course, reached 3.5 percent and 4.5 percent.

There may be a computer revolution, but it has not yet transformed the economy to the extent the visionaries have promised, and in my view there are reasons to wonder whether it ever will. The enthusiasts surely underestimate just what it would take to return America to a fast rate of growth. Some argue, for example, that low inflation and interest rates and a subsiding federal deficit mean that the expansion is now so well-balanced that the economy can avoid a recession indefinitely. This overlooks the historically high levels of stock prices and consumer borrowing. Even so, unless real GDP grows significantly faster than 3 percent a year for quite a few years to come, the slow-growth era that began in the early 1970s will not have ended. If real GDP grows at an annual rate of 2.5 percent without a recession until 2010, which is what most economists think is the best possible rate of growth, the rate of growth between 1990 and 2010 will have been lower than it was between 1973 and 1990. The annual rate of growth over those years, which included the two most severe recessions of the post-World War II period, was 2.6 percent, nearly a full percentage point below the average annual rate of 3.5 percent since the Civil War.5

With the unemployment rate at a quarter-century low of 4.7 percent, how can this be? Labor productivity, or, roughly, real GDP per hour of work, is the heart of the matter. It is the source of any nation’s economic growth and rising standard of living. But the recent 2.25 percent rise in productivity is not nearly enough to raise productivity growth above the average of 1 percent growth per year since 1973. In fact, the growth of productivity in the 1990s expansion has been even weaker than during the slow-growth cycles of the 1970s and 1980s. By comparison, productivity grew at a rate of nearly 3 percent between 1948 and 1973 and more than 2 percent a year on average in the hundred years after the Civil War.

Nor is a 2.25 percent spurt in productivity growth during a single twelve-month period by any means unprecedented in the slow-growth era that began in 1973. Productivity rose faster in 1986, for example, which was also late in the cycle of expansion when productivity growth normally slows down. (The average annual growth rate over the two years, 1985 and 1986, was nearly 2 percent.) There were equally rapid rises in the late 1970s as well.

One major consequence of such slow productivity growth has been to keep wages and salaries from rising the way they once did. The one especially bright spot in employee wages—a 1.5 percent rise after inflation in the average wage of production and non-supervisory employees in 1997—is certainly welcome but so far not more than a minor blip in a long downward slide. Despite the recent rise, which is the result of the falling unemployment rate and a higher federal minimum wage, average hourly earnings, when discounted for inflation, remain about $1 an hour below the 1973 rate of nearly $9, and even remain below the high in the mid-1980s of more than $8 an hour. Broader measures of compensation, which include all workers and also take account of corporate benefits such as pensions and health insurance, are rising no more quickly in the current expansion of the economy than in the Seventies and Eighties.6

The fall in the rate of inflation to below 2 percent is also cited as evidence that a technological revolution is underway, making business so much more efficient that it need not raise prices. But some conventional economic explanations readily account for the low inflation rate. For one thing, much of the recent economic growth has been caused not by productivity gains but by new jobs and by the greater number of hours worked by those already employed. Workers are “coming out of the woodwork” as jobs become available, so the pressure to raise wages and therefore prices has been dampened. The work force seems to be both larger and more flexible than was previously realized, which is another way of saying that the unemployment rate was really higher than reported, and may still be. Two decades of surplus labor have also kept workers too docile to demand serious wage hikes. We are also all aware of what has happened to the power of organized labor, which once represented one third of all workers and now represents about one tenth of them.

In addition, prices of imported goods, which account for nearly 15 percent of what Americans buy, have been falling for several years, and are currently well below their 1992 level. Just as important but rarely commented on is that there may be an oversupply of services in the US. Consider the large numbers of health care and financial institutions, in addition to retail outlets such as coffee shops and department stores. This highly competitive environment keeps companies from raising prices rapidly. The problem for future rates of growth is that none of these conditions is likely to be permanent. The unemployment rate cannot fall indefinitely, for example. This is why few economists believe that a rate of growth of more than 2.5 percent or slightly higher at best can be sustained indefinitely.7

2.

Nevertheless, the sudden upturn in productivity in 1996 and 1997, coming so late in an economic expansion, is worthy of attention. It is certainly reason to examine more closely what the supporters of the new-economy thesis are saying. Most of these analyses are limited to short, largely anecdotal newspaper and magazine pieces. But a few books treat the subject at length. Michael Moynihan’s The Coming American Renaissance is designed for easy reading by businessmen, but when he avoids the hyperbole so common to such books he makes some worthwhile points. The most important of these, I think, is that America’s market size and mobile labor and capital markets put it in a better position than most other economies of the world. One important reason America grew more rapidly than did its overseas competitors since the mid-nineteenth century was the continent-wide, single-currency market that could support unrivaled economies of scale and efficient domestic trade. Despite the European common market and the growth of Asian economies, this remains an American advantage. In addition, there are still regions in the US, such as the Southwest, where costs are relatively low. These regions provide places for business to expand economically within the country; and such possibilities are typically not as available to the chief competitors in Europe and Japan.

  1. 1

    From samples cited by Bill Lehr and Frank Lichtenberg, “Information Technology and Its Impact on Productivity: Firm-level Evidence from Government and Private Data Sources, 1997- 1993,” forthcoming, Canadian Journal of Economics, pp. 13-14.

  2. 2

    Frances Cairncross, “A Connected World,” The Economist, September 13, 1997.

  3. 3

    Stephen B. Shepard, “The New Economy: What It Really Means,” Business Week, November 17, 1997.

  4. 4

    All data are computed as of the third quarter, 1997.

  5. 5

    Even real GDP per capita—that is per man, woman, and child in the US—has grown at historically slow rates in the 1990s. Also, measured from the trough of the recession in 1991—in other words, just the years of recovery and expansion—the 1990s have turned in the weakest performance of the post-World War II period.

  6. 6

    The Commerce Department’s total compensation measure for all workers, which includes benefits such as pensions and health care, has risen more quickly than most other measures of compensation in the 1990s. But over the current business cycle, average compensation has grown after discounting for inflation by only 0.33 percent a year, compared to 0.63 percent in the 1981-1990 cycle and 0.28 percent in the 1973-1980 cycle. In the so-called “golden years” of the 1950s and 1960s, total compensation rose by an average of 2.5 percent a year to 3.5 percent a year.

  7. 7

    Those who claim that there have been hidden increases in productivity that are keeping inflation down while the nation grows at current rates typically misunderstand how these data are calculated. Any unmeasured rise in productivity would mean that GDP is actually higher than is reported. In other words, hidden productivity would mean that GDP is growing even more quickly at current low rates of inflation.

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