27 September 2000

Text: Commerce Department Official on Future U.S. Growth

Robert Shapiro, U.S. under secretary of commerce for economic affairs, says information technology (IT) provides the innovation crucial to continued U.S. economic expansion.

"Some 40 to 50 percent of U.S. growth in the 20th century can be traced to innovation in its various aspects," Shapiro said in a speech to the Conference on E-Business Transformation in Washington September 27. "And clearly the predominant form of economic innovation in the 1980s and 1990s has been IT and the organizational changes associated with it."

Shapiro heads the Commerce Department's Economic and Statistics Administration, where economic and social change is analyzed and interpreted. He said the private Blue Chip 10-year forecast supports the Clinton administration's view that U.S. growth will remain strong. He said the Blue Chip economists' prediction that productivity growth will average more than 2 percent a year may be conservative.

He said rising productivity and innovation will create a new kind of business model in which workers will have greater independence and autonomy.

"Already, the fastest-growing segment of the American workforce -- one fifth of us -- are people who work but not for someone else, as independent contractors, self-employed, temps, and solo practitioners," Shapiro said.

He said the future IT work place will allow workers greater self-reliance, individual reward and freedom to manage the conflicts of work and home while providing less job security, fewer benefits and no permanent structure.

Shapiro said employment in the IT industry probably will grow 40 percent during the next eight to ten years and IT workers can expect to earn 85 percent more money than non-IT workers.

Following is the text of Shapiro's speech as prepared for delivery:

Address to the Conference on E-Business Transformation
Robert J. Shapiro, Under Secretary of Commerce for Economic Affairs

September 27, 2000 Washington, D.C.

One of the most important questions facing economic policy makers and analysts is whether the performance of the U.S. economy since 1995 has been a temporary aberration or something more long-term. Whether structural factors -- disinflation; the competitive forces associated with globalization; and the development, diffusion, and creative use of digital technologies -- have created the conditions for higher GDP and productivity growth, with low inflation and low unemployment, on a sustained basis.

This is a critical question for American politics, because strong, sustained growth is the prerequisite for accomplishing whatever tasks we set for ourselves in the next decade -- whether it's keeping social security solvent with either additional funds or large-scale reforms; or tax cuts, either sweeping or targeted; or how we extend health care coverage.

One practical test is whether the economy's extraordinary performance will continue in the next business cycle; another is whether other advanced nations create similar conditions, since any "new economy" worthy of the name cannot be confined to one country.

What is beyond doubt is that the economy entered a period of higher performance in the 1990s, and I would hold that this performance has been based largely on the impact of globalization and the diffusion of information technologies.

Certainly, this cycle looks different from others in the postwar period. As previous expansions have aged, productivity and output growth have slowed, inflation has risen, real wages have stagnated, and profits have declined. Not this time. As this expansion has matured -- and already lasted longer than any of its predecessors -- productivity gains has accelerated, from a 1.4-percent average rate in the early 1990s to 2.9 percent a year since 1995. Real GDP growth also has quickened, averaging about 4 percent in years seven and eight of this expansion, compared to 1.1 percent or less in the final years of the long cycles in the 1960s and 1980s.

Real hourly compensation is also growing, after a long period of relative stagnation, creating a record five consecutive years of income gains for average households. Even with that, profits have continued to grow. Moreover, strong output and profits have fueled vigorous growth in real business investment -- a record seven straight years of double-digit gains in investment in equipment, most of its IT hardware and software. Finally, inflation continued to fall through most of this period and even now, after several years of full employment, remains very moderate.

I have no doubt that technological advances have been a pivotal factor. Or rather, the convergence of many advances, including the enormous increases in computer power and data storage, year after year; enormous increases in the speed and carrying capacity of data communication systems, again year after year; and the great strides in the power and capacity of new software, year after year. And these advances have produced sharp and steady declines in the prices of computer and communications equipment, which in turn have driven both the sustained business investment and the surge in Internet activity.

This didn't occur in a vacuum. We cannot imagine the boom in business investment, for example, without our sustained commitment to fiscal discipline -- a notable change and an issue now being debated again, in the campaign. Nor do I believe that the enormous technological progress and business creation tied to it would have occurred as it did without the deregulation of financial markets and telecommunications.

From a company view, moreover, installing advanced IT is not enough. A growing body of firm-level evidence shows that IT-buying firms will not raise productivity unless they also rethink and change their organizations, to take full advantage of IT's capacities. And that's as good an explanation as any for why it took so long to see IT affect productivity, even as the IT capital stock per worker was growing by 20 percent or more a year since the early 1970s.

And finally, the private forecasters have noticed. The Blue Chip 10-year forecast edged up gradually from 1996 to 1999, from about 2.5 to 2.7 percent. Then last March, it jumped to 3.1 percent. Since the labor force grows about 1 percent a year, the new forecast means that the Blue Chip economists have raised their expectations of productivity growth to more than 2 percent year. And even that could be conservative.

Behind higher productivity and growth lie at least three key developments. First, there's capital deepening -- the acceleration in the growth of the capital stock that we've already noted. Second, there's the disinflationary forces that have held price pressures for more than a decade -- the forces of more intense competition associated with deregulation and with expanding world trade; the shift from easy to tight fiscal policies, here and around the world; and the falling prices for IT. And then the third factor in the productivity upswing is the power of innovation.

Economies grow over the long term mainly not by increasing their capital or labor, but by finding new ways to combine them that are more productive. Some 40 to 50 percent of U.S. growth in the 20th century can be traced to innovation in its various aspects. And clearly the predominant form of economic innovation in the 1980s and 1990s has been IT and the organizational changes associated with it.

These technologies do have certain qualities that seem to make a real difference. Most obviously, they provide new ways of managing a resource common to every part of economic life -- information. Compared to refrigeration or jet propulsion, information technology is a general-purpose innovation that potentially can be applied to every sector and part of the economic process. So productivity gains directly associated with the capacity to process information faster can mount up.

Another difference is that many information technology markets exhibit what we call "network externalities or effects": That is, the more the technology is deployed, the greater its value. Compare a computer application to an automobile. If you buy a Saab, the car is worth basically the same to you whether there are 5,000 other Saab's on the road or 100,000. When you buy Windows or a new graphics program, its value may increase as more people buy it, because that increases your ability to communicate and interact. In a certain sense, network effects can create increasing rates of return, since as the innovation spreads, its productivity benefits can increase at a faster rate than simply arithmetically.

Finally, as industries apply IT to their businesses, we see evidence of what I call cascading innovation. Productivity gains come not just from firms processing information faster, but also from changes in the way a firm operates and from additional technical advances made possible by IT. Moreover, as IT spreads and its potential is widely recognized, it generates demand for even faster processing -- another round of innovation in IT itself -- which in turn creates the potential for more innovation. This demand forms the economic basis for Moore's Law, under which the computing capacity of chips doubles every 18 months. And these enormous and regular increases in chip power provided the technological basis for the Internet, which in turn is now generating more innovations in how businesses operate and what they produce.

IT can support higher rates of productivity and growth, then, so long as IT price declines and innovations persist. No one can know the future, but it does seem plausible.

Once again, it's not so much the IT investment, but what new businesses and workers do with it. And here we can see the shape of a new model for the digital economy -- a network model. The key tasks for firms integrated into the digital economy involve putting together a network of special goods and services, entering a network that ultimately will produce or support a final product, or providing the goods and services that support the network itself.

In a simple example, the big three auto makers announced that they are moving their supply chains on to the web -- hundreds of billions of dollars a year from many tends of thousands of suppliers. This process is more advanced among IT companies, such as Cisco, which last year received 78 percent of its orders and handled 80 percent of its customer-service issues via the Internet. Cisco also out-sources most of its production, so it can focus on product design and innovation.

Further, as firms develop expertise in putting togther and managing networks to provide their inputs, the businesses providing them become more specialized. Why hire a big advertising agency when a web-based data miner can tell you the demographics of those who use your product on weekends? Why assume that your gasket supplier is the best source of the industrial solvents that come in contact with the gasket, when a reverse auction on the web can produce 150 solvent producers with comparative performance data?

IT and the network model may have other large implications, including more people working not for a single company over an extended time, but hired independently as part of a team constructed by the buyer for a particular task. Already, the fastest-growing segment of the American workforce -- one fifth of us -- are people who work but not for someone else, as independent contractors, self-employed, temps, and solo practitioners.

A word of caution is in order here. If the present conditions of these workers is the future for others, it will probably not only include more self-reliance, individual reward and freedom to manage the conflicts of work and home, but also less job security, fewer benefits and no permanent structure.

IT appears to be driving other changes in how we work. For example, researchers in my office ranked US industries according to their degree of IT-intensity; that is, the ratio of IT equipment per worker, and then divided the list into two groups. One group included the more IT-intensive industries, which produce 50 percent of all income in the U.S. non-farm business sector; the second encompassed the relatively less IT intensive industries that produce the other 50 percent of total income.

They found that most of the employment growth of the last decade occurred in the less IT intensive industries. In fact, the more IT-intensive half of the economy accounted for only 12 percent of the growth in total employment between 1987 and 1998. This may suggest that IT capital is substituting for labor in those industries.

Nevertheless, we expect IT industry employment to grow 40 percent over the next eight-to-ten years; and the number of workers in core IT fields -- today, roughly 2.4 million computer scientists, engineers, systems analysts and programmers -- to nearly double. Moreover, workers in the IT industry earn about 85 percent more than other workers.

The network model may also affect the business cycle. In the past, a slowdown in overall demand has led to sharper slowdowns or even declines in investment, as inventories became excessive. On average, adjustments to inventory during the six recessions since 1960 cut GDP growth by 1.6 percentage points more than the change in final sales. By improving the supply chain, IT has helped manufacturers cut their inventory ratios from 16.3 percent of shipments in 1988 to 12 percent in the last year. That could cushion the next slowdown.

Not everyone agrees that all this is so very new. Robert Gordon, for example, argues that the increase in productivity has centered almost entirely in the 12 percent of the economy that produces durable goods, and that IT has not been very productive in the rest of the economy. These conclusions have been challenged by economists at the Commerce Department, the Federal Reserve, and by others such as Dale Jorgenson. Still, we will not know for sure until we have gone through this business cycle, and until we develop more compelling evidence. That's one reason why this project and conference are important.

In conclusion, a skeptic would say that the final verdict is still out, and the skeptic could be right. But in all frankness, we don't think so. Thanks you.

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