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Photons and Electrons Nourish Blossoming Economic Prosperity

June 2000
By Maryann Lawlor
E-mail About the Author

Staggering statistics paint a rosy picture, but observers wonder about sustainability.

The extraordinary growth of the U.S. economy since the mid-1990s has financial analysts loath to make predictions about the future and grasping for ways to assess and measure the very impetus contributing to the phenomenon—the pervasiveness of information technology. Business and government officials agree that technology has played a significant part in spurring on the sustained period of economic prosperity—from its contribution to manufacturing to its role in consumer purchasing to the impact on the work force. But success brings with it certain challenges. Companies as well as governments, while excited about today’s bounty, are scrambling to address those challenges before the bubble bursts.

Government statistics bear out the influence that information technology has had on the growth of the economy. While it provides only 10 percent of the jobs, it accounts for 30 percent of the economic growth in the United States. Declining prices of hardware, software and peripherals and the efficiency technology brings to the production and inventory process contribute to keeping the inflation rate down. The demand for workers from established companies and the growing number of start-up firms is holding unemployment down. And e-commerce is opening up a global marketplace to every entrepreneur. Some analysts believe that the economy will continue to grow but are skeptical that the growth rate seen in recent years is sustainable. Others contend that the United States, if not the entire world, is just at the cusp of what is being called the new economy.

There is no shortage of people keeping an eye on the economy—either trying to ensure that the growth continues or trying to find ways to take advantage of it. Earlier this year, a group of experts from government, industry and academia met with President Clinton at an economic summit. Information technology was at the heart of many of the discussions.

The summit sought answers to key questions: What is the speed limit for this new economy? How can the impact of technology be measured? And what are the sources for tomorrow’s growth? In addition, it sought input about roadblocks that could slow down or stop growth. Many participants identified the lack of data collection capabilities to adequately measure the economy. Others pointed out that the pool of qualified information technology workers, which appears to be shrinking, could push wages up, resulting in the old syndrome of tighter money and economic contraction. Increased support of education was discussed as one solution to this challenge, and conference participants agreed that there needs to be more emphasis on bringing technology into the classroom and supporting teachers. Education also was identified as one way to ensure that all segments of the population can take advantage of economic growth and that the digital divide does not widen.

Despite the impact information technology has had on the economy, some participants believe that it has not changed the business and economic rules entirely. Professor William D. Nordhaus, economics department, Yale University, offered that even the fastest computers can not tear up the rulebook and repeal the need for continued fiscal discipline, alert monetary policy and realistic expectations about future prospects. He pointed out that while many people focus on hardware, software and the Internet as major contributors to economic growth, the important contribution of information technology has been to traditional business processes such as scheduling and inventory control.

Conference participant Kim Polese, president and chief executive officer, Marimba Incorporated, a Silicon Valley-based spinoff of the Sun Microsystems Java team, agreed that some of the most exciting changes are exhibited in traditional brick and mortar companies that are using technology to improve established processes. However, the change in attitude by company officials, particularly in start-up firms, is contributing to the economy in another way, she added. Many new firms offer stock options to all employees, not just top executives. This gives them a stake in the company’s success and stimulates top performance.

Analysts at the U.S. Commerce Department are trying to get a handle on how to best evaluate the impact of information technology. In some cases, they are locked into using measurements that do not quite fit the new products and activities that are emerging. However, increases in the numbers for certain line items indicate the economic shift that is taking place. For example, figures released this spring show that private fixed investment in information processing equipment and software jumped from $356.9 billion in 1998 to $406.3 billion in 1999. Of this 1999 number, the largest sector was investment in software at $143.2 billion. The U.S. government’s consumption expenditures and gross investment in equipment and software also increased from 1998 to 1999, from $43.3 billion to $48.4 billion, respectively.

But the purchase of hardware and software is only one contributor to the effect information technology has had on the economy. E-commerce, using the Internet as its sole medium, has affected the economy in profound ways, according to a study conducted by the Center for Research in Electronic Commerce at the University of Texas–Austin and sponsored by Cisco Systems Incorporated, San Jose, California. The study divides Internet economy indicators into four layers and compares revenue and growth from the first quarter of 1998 to the first quarter of 1999. It includes information gathered from 3,400 companies. Layer 1, the infrastructure indicator, showed a growth rate of 50 percent during the one-year period. The second layer, the application indicator, grew 61 percent, while layer 3, which refers to third-party companies that use the Internet to link customers with products or services from other firms, grew 52 percent. The final layer, Internet commerce, increased 127 percent, from $16.5 billion in the first quarter of 1998 to $37.5 billion in the first quarter of 1999. The study also states that the Internet economy accounts for 2.3 million jobs, a 78 percent increase during the designated time period.

Research also illustrates that despite stock market indications that investors are infatuated with Internet companies, they also strongly favor Internet-related companies and believe that firms that are not connected are behind the market curve.

According to Elliot E. Maxwell, special adviser to the secretary of commerce for the digital economy, e-commerce is driving businesses to use information technologies in innovative ways to develop and sell products online. “But that’s only a part of the picture,” Maxwell says. “The Internet has opened up new possibilities for businesses to streamline their internal processes and better manage relationships with suppliers and customers. Technology is making businesses more productive—letting them do more with less and letting them expand into new areas,” he adds.

These activities are not simply taking place among information technology suppliers. Long-established companies such as General Motors, General Electric and The Boeing Company, for example, are using the World Wide Web to streamline business processes, Maxwell points out. “The conventional wisdom suggests that wide-scale use of technologies, like the Internet, in supply chains and business processes will increasingly reduce error and waste, drive down costs, and will likely increase competition.”

One probable implication of these changes is lower prices. “If businesses do not have the power to increase prices because of competition, inflation will be held at bay. The Web’s ability to empower consumers also plays a role. The Web lets buyers—both individuals and businesses—comparison shop efficiently and inexpensively, which can contribute to keeping prices down,” he explains.

Commerce Department personnel in charge of monitoring and evaluating the economy agree that success belongs to companies that are leveraging information technology in all of their business dealings, both internally and externally.

Lee Price, chief economist, Economics and Statistics Administration, the Commerce Department, contends that “The economy has done remarkably well in the last four years. Every year, economists have predicted 2.3 or 2.4 percent growth, and every year it’s been over 4 percent. A lot of people think it’s because of IT [information technology], but at the same time that business was investing in IT, there were dramatic changes in hardware and software prices and capabilities. Some people mistakenly said it’s the Internet. But I would argue that it’s not having that profound of an effect on the economy, but it is riding the same wave. The real thing is that the companies that are succeeding are the ones who are using IT. These are winning out over those that are not,” he says.

However, Price believes that even though there is an apparent mandate to incorporate technology into a company to achieve success, companies must take a hard look at spending. “People can’t justify investing in IT unless there is a return immediately, and it’s more than just buying a PC. Unlike other investments like furniture or a building—all of those things that you draw out over time—you’ve got to get a bang that huge in the first place with the investments you’ve made in IT. And you can’t just buy the equipment. You have to invest in people and training. There is a soft side to this investment. If you take all of that together, IT still had a big effect,” he explains.

It is this soft side of technology that has been one of the topics of discussion at the Commerce Department’s Office of Technology Policy, Technology Administration. Last June, a group led by this office examined the digital work force and found that perceived shortages in available technical personnel is a challenge driven by the nature of information technology and its pervasive role throughout the U.S. economy. The demand for information technology workers has increased six times faster than the overall U.S. job growth rate. The computer and data processing services industry is projected to employ more than 39 percent of core information technology workers by 2006. In addition, the group found that California, Texas and Virginia are projected to have the largest core information technology work forces by 2006. While the team was able to make certain predictions, limitations on available data prevented it from establishing conclusively whether there is an overall information technology worker shortage.

Although measuring the digital work force can be difficult, examining the impact technology has had on research and development that feeds the economy is somewhat manageable. According to Carl W. Shepherd, technology policy analyst at the Office of Technology Policy, Technology Administration, the Commerce Department, technology plays two important roles in the research and development arena. “Technology creation is one thing. The use of technology is the other side of the coin. The information age is bringing about greater synergies. Organizations can use models for all sorts of things, and they can be done at considerable cost savings when doing everything from designing airplanes to looking at atoms,” Shepherd says.

The booming economy has had a rebound effect on creating even better technologies, Shepherd believes. “It is a good thing that people are not exporting their jobs. I have heard that rents are higher in Silicon Valley, and this may be a good thing. In order to stay there, people have to be very inventive, so it is a good incentive to conduct business well and improve their products,” he contends.

In many cases, information technology is being used to explore what improvements can be made before investing in production. The National Institute of Standards and Technology (NIST), Gaithersburg, Maryland, has several programs that help companies use technology to improve processes or products through modeling and simulation. The National Advanced Manufacturing Testbed (NAMT), a division of NIST, offers a systematic approach for information-based manufacturing.

According to David C. Stieren, NAMT program manager, in 1996 engineers at NIST were beginning to see the role that IT could play in manufacturing. “One part is the integrated, distributed supply chain and leveraging capabilities of the supply chain into goods. Manufacturers would have problems with standards, so NAMT can pull out ahead of the problem,” he explains.

In manufacturing, the fundamental mantra is better, cheaper, faster, Stieren offers. “If companies can produce better, cheaper and faster than a competitor, it stimulates competition more than was possible 10 or 15 years ago. Technology allows them to do that,” he says.

Primarily, information technology has enabled a collaborative distributed environment that enables firms to work on projects from dispersed locations without the expense of travel. It also allows companies to focus on core competencies while establishing relationships with other firms that specialize in areas that are not part of their core competencies. “They can form closer partnerships with other organizations because information can flow between them just as easily as it flows within the company,” Stieren suggests.

Virtual manufacturing is another technology-supported effort. “With the power of software and computing, companies can prove out a concept in the virtual sense and cut bytes before cutting chips. They don’t have the typical trial and error testing that they had five or 10 years ago. This means that products are brought to market faster and applies to everything from airplanes to semiconductors that are produced cheaper and with higher quality,” he explains.

However, companies face a fundamental barrier when they try to use information technology—standards and measurements. While not at the forefront of technology discussions, Stieren contends that these two items are critical. “Measurements and standards is to information technology and the economy what breathing is to the human body. It is the invisible player,” he offers. NIST is working to address the need for relevant standards for this new approach to manufacturing.

At the same time, the Department of Commerce is seeking new ways to measure the economy as it grows in complexity with the relentless spread of today’s global marketplace. According to David K. Henry, senior industry analyst, Economics and Statistics Administration, Commerce Department, there is no evidence that the global nature of the economy has hurt U.S. firms. However, open markets and new product lines magnify the numbers his organization tries to track. “One problem is digital purchases, such as software. You have to change the way you look at the numbers, so we can’t operate the way we did in the past,” Henry says. The challenge, according to Price, is to count everything, but count it only once.

Henry and Price, along with other economic analysts, are reluctant to make predictions about how long today’s economic growth will continue in part because they are witnessing conditions and elements unlike any in the past. Henry points to other economic variables that could influence economic gains. “We don’t see any evidence that there’s an end to the growth yet, but a number of things can affect it—the price of energy, for example. The cost to companies will be higher, so the cost of doing business is higher. An international crisis, like the Asian crisis, then affects other things. Technology changes could affect growth, but technology creates competition, and competition is where there are cost savings,” he says.

Price agrees that the economic highs seen in recent years may not last. “Do we think that the underlying growth rate will continue to be sustained? Yes. But do I think that the growth rate will be above 4 percent? No, I don’t think so because even with the productivity that we’ve had lately and the low unemployment, you can’t sustain it. We can get to 3.5 percent, but we can’t get to 4 percent. The Federal Reserve is concerned that consumers are spending and not saving because their wealth is going up without saving. The stock market is up 20 percent a year, and profits are going up 10 percent. What is unsustainable is for consumption to grow that much faster than income,” Price offers.