Internet Age vs. Industrial Revolution ; Computers Have Changed the World, but Is Their Impact Truly Bringing about a New Economic Era?

Article excerpt

The cartoon is a pointed one. It shows several office workers seated before their computers. One is downloading a new version of the videogame Space Kombat. Another is e-mailing a boyfriend. The third is browsing fall fashions.

The headline says simply: "Economists wonder why computers haven't boosted productivity."

The cartoon, accompanying an article in the normally unadventurous Journal of Economic Perspectives, hints at a debate that lies at the heart of the New Economy.

The fundamental question: How broad are today's technology- driven productivity gains and are they permanent?

The answer will help determine whether Americans will enjoy rising living standards, as well as what direction the Federal Reserve should take in trying to prolong the nation's record economic expansion.

Throughout history, inventions have come along that have dramatically boosted worker output - from electricity that helped advance the Industrial Revolution to automobiles that helped change how goods are transported.

But few have had the potential for changing how Americans work as much as computers, the Internet, and the explosion in telecommunications.

Some economists, in fact, now think that the Swiss-watch precision with which these technologies allow companies to control inventories and the other benefits they bring are creating a permanent improvement in productivity.

That, in turn, puts downward pressure on prices, making inflation less of a threat than the Federal Reserve may realize. Proponents of this theory say it's helping reinvent the economy - allowing low- inflation to coexist with relatively high growth.

But others believe the productivity gains are only affecting a narrow band of industries and that they are ephemeral: Once the economy turns down again, so will the dramatic rise in worker output.

Even Fed policymakers appear to be debating the issue. Last week, Fed Chairman Alan Greenspan argued in a speech to the New York Association of Business Economists that productivity gains were now not theoretical, but "irreversible."

"The effect of these technologies could rival and arguably even surpass the impact the telegraph had prior to, and just after, the Civil War," he said.

Let's not get too giddy about Internet

Some other Fed officials sound less hopeful. Governor Laurence Meyer and other policymakers subscribe to the school that recent productivity gains are cyclical, and thus the economy has reached its speed limits and needs braking to a slower pace.

The issue will face Fed policymakers when they meet June 27-28 to decide on the need for another hike in interest rates. Because of fresh signs of a slowdown in the economy, most Fed watchers are expecting the Fed to either raise interest rates slightly - by 0.25 percentage points - or not at all.

Others caution against reading too much into the productivity "revolution" as well. In his paper in the Journal of Economic Perspectives, economist Robert Gordon of Northwestern University in Evanston, Ill., argues that productivity has enjoyed a "dynamic explosion" in the manufacture of durables, such as cars and refrigerators. …


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