What High Tech Has Wrought

The unprecedented U.S. economic boom of the last half of the 1990s was propelled by investment in digital technology.

The unprecedented U.S. economic boom of the last half of the 1990s was propelled by investment in digital technology. Investors sank billions of dollars into dot-com startups. Billions more were invested to solve the Y2K problem. Conversion to the euro required still more billions. Together, these star-aligned events delivered an enormous economic stimulus. Between 1998 and 2000, capital spendings share of the economy was 23 percent higher than at the start of the 90s—and 18 percent higher than today. The weakened economy of the past three years represents the inevitable payback for that abnormal bulge.

The good news is that the present economic softness has been cushioned by new technology. Sophisticated information systems have allowed companies to manage inventories more efficiently. Today, aggregate nonfarm inventories in the United States, when measured against final sales, are 30 percent lower than the average for the past 40 years. So routine pullbacks in consumer spending should no longer be followed by severe inventory corrections, which worsen recessions. In fact, the brief, eight-month recession from March to November 2001 is the shortest of the nine recessions since World War II.

The bad news is that companies are using new technology to displace higher-cost human effort. Indeed, annual productivity is increasing by 2 percent, the economy is growing at 3 percent and the stock market is recovering, but unemployment is at 6 percent. Granted, thats below the average rate of 7 percent from 1979 to 1994, but its above the 5 percent average of the past nine years. As consumers, we appreciate the lower-cost, higher-quality goods coming from both U.S. and overseas sources. As shareholders, we applaud better corporate returns. But as wage earners, we are distressed at job insecurity and losses.

Given the unrelenting pressure on businesses to reduce costs to remain competitive, given the power of new technologies to displace workers, and given the lure of lower-labor-cost nations for offshore production and services, how can unemployment be minimized while the overall economy grows?

The only long-run solution is innovation. Innovative products and services are essential to generate new businesses and jobs so the economy can grow at the pace needed to absorb available labor: 4 to 5 percent. New work will require retraining because new businesses are likely to be heavily dependent on knowledge workers; there will be a premium on education. Whatever might be the new technologies that will stimulate economic expansion, they will depend on an educated work force. America must have the social and political will to address the educational demands of this high- technology-driven era.

Louis Lataif is dean of the Boston University School of Management. His e-mail address is lelataif@bu.edu. Free Spectrum is a forum for the IT community. Send your comments to free_spectrum@ziffdavis.com.