ARCHIVE:: APRIL 2002 :: ECONOMICS

... And a Silver Lining
Technology Surge Made the Economy More Efficient and Resilient

By DAVID WESSEL
Staff Reporter of The Wall Street Journal

The 1990s are looking more and more like an economic mirage.

The bursting of the Nasdaq bubble killed scores of companies once deemed "promising."

Revisions of government statistics erased some of the widely celebrated growth in productivity, the amount we produce for each hour of work. Projections of endless federal budget surpluses are now scrap paper. And we learn daily that Enron, Global Crossing and others didn't make as much as they said they did.

Yet there's still good reason to be optimistic about the prospects for the U.S. economy over the next decade.

The economy of the 1990s wasn't as good as it felt. With the euphoria gone, it's clear that the economy, business investment in computers and stock prices grew at an unsustainable pace. And the '90s aura of American invincibility was a delusion.

Web Was Invented

But something substantial happened in the '90s, too. "The Web really was invented. Methods of business really did change. Computers allowed us to do new things," says Robert Gordon, a Northwestern University economics professor who spent much of the decade criticizing cheerleaders of the Economy formerly known as New.

"Consumption really did grow," he adds. "Lots of houses were built. Real wages rose at last. The bottom part of the income distribution shared in the gains. The unemployment rate really did decline much further than we had predicted was possible, partly because inflation was so tame."
And the pace of productivity growth, which had languished at about 1.4% a year for 20 years, really did quicken. Even after revisions, productivity grew about 2.6% a year between 1995 and 2000.

The key to the 2000s is determining how much of that productivity spurt was a coincidence of positive factors-a strong dollar, low energy prices, modest health-care inflation, soaring stocks, the explosion of the Net-and how much was lasting.

Productivity pros-including Mr. Gordon, Harvard's Dale Jorgensen and Fed Chairman Alan Greenspan's experts, Daniel Sichel and Stephen Oliner-say the underlying rate of productivity growth now is running at at least 2% a year, and maybe higher.

That's slower than in the late '90s, but still huge. Say productivity grows over this decade 0.6 percentage point faster than it did from 1973 to 1995. By 2010, that would be like getting an extra helping of all the goods and services produced in the state of Florida each year without doing a minute's more work.

Why believe the optimism of productivity pros, whose track record is so poor?

First, productivity growth held up during the recession. In most recessions, companies can't cut work forces as fast as they cut production. Output per hour of work fell by about 0.6% on average during post-World War II recessions, UBS Warburg economists calculate. But since the U.S. economy began slowing in 2000, productivity growth has averaged 1.7%. In the fourth quarter, the government estimates, productivity grew at a heartening 3.5% annual rate.

Airborne Inc. shows how it's done. The company, parent of Airborne Express, delivered 82,755 packages in the fourth quarter, 2.4% fewer than in the same quarter of 2000. But the company cut its work force even faster. In all, it used 9.3% fewer hours of labor in the recent quarter, partly because of the first layoffs in the company's 55-year history.

The result: Airborne shipped 4,218 parcels per employee in the fourth quarter, 7.6% more than a year earlier. Imagine what will happen when volume picks up.

Computers Did It

Second, the U.S. economy, though still weak, is proving so resilient that there's muttering inside the Fed that this downturn doesn't qualify as a recession.

Mr. Greenspan's hypothesis: Computers did it.

"Alas, technology has not allowed us to see into the future any more clearly than we could previously," he says. But thanks to information technology, businesses were quicker to realize that sales were faltering and inventories mounting, so they cut inventories much faster than in the past. The result: "Contractions initially may be steeper," but recessions "should be less severe overall."

Third, companies such as Microsoft and Wal-Mart embody some of what went right in the 1990s. Microsoft finally made a version of Windows that was more reliable and easier to use. Wal-Mart used information technology to become one of the world's most efficient retailers. They aren't standing still, and neither are their rivals. That bodes well for productivity advances.

The last several months have shaken Americans' economic self-confidence. The cockiness of the '90s is gone. But some of the forces that propelled the prosperity of that decade persist.