The Economy

Dec. 21, 2004
The third wave of the technological revolution.

It is now becoming clearer that real GDP will rise at least 4% next year. While appropriate fiscal and monetary policy will continue to contribute to economic prosperity, these factors alone cannot explain the sterling performance of the U.S. economy during the last four years. Recent gains in technology not only have reduced the inflation rate but also have created at least $1 trillion in new wealth. Furthermore, most of the gains from this revolution lie ahead. The first wave of the current technological revolution started in the early 1980s when manufacturing firms started to use microprocessors to produce goods more efficiently. The changes in production methods were accompanied by better inventory control management. The net effect was to raise the growth rate of manufacturing productivity from 2% during the 1950s, 1960s, and 1970s to 3% in the 1980s, 3.5% in the early 1990s, and now 4%. Those gains kept manufacturing costs down and boosted capital spending, but had a limited impact on total growth. That's because to a large extent they were duplicated in many sectors of the world, resulting in an exodus of manufacturing plants to foreign locations. The second wave resulted in significant price savings to both businesses and individuals by developing more competitive markets over the Web. Even if only a small percentage of goods were actually purchased through the computer, the threat of lower prices also caused brick-and-mortar merchants and vendors to reduce their prices, too. Inflation as measured by the consumption deflator has fallen from an average of 4.0% in the 1987-91 period, to 2.7% for 1992-93, to 2.0% in 1994-97, to 1.5% for the 1998-99 period. At the same time that the inflation rate has declined, wage gains have remained relatively constant, which means almost all of the improvement reflects faster growth in productivity and technology. Furthermore, these gains are likely to intensify as Web sites continue to provide individual and corporate buyers with intensified price competition. Yet these improvements, as important as they are, could well be dwarfed by the third wave. That will feature the ability to channel precisely the required amount of required information to end users, hence permitting them to make decisions more promptly and drastically reducing the amount of back-office paperwork. Currently, users can find just about anything they want on the Web, but only after deciding which of 83,462 citations are the correct ones. There is a serious overload of financial information, making it extremely difficult for anyone with a limited amount of time to search through the haystack to find the appropriate needle. The flow of information for business also can be dramatically improved by reducing paperwork. Here again, Jim Clark, founder of Netscape Communications Corp., has the right idea. His latest brainchild, Healtheon Corp. (recently merged with three other firms to form Healtheon/WebMD Corp.), aims to cut back-office paperwork for the medical profession to the bone. Clark estimates this could save about $500 billion per year in medical expenses without reducing the quality or quantity of medical care. If that were to take place over a decade, it would slice about three percentage points off the annual increase in medical costs, which would also have significant ripple effects in terms of budget surpluses and wage rates tied to the cost of living. Similar savings should be available in other major areas of the economy when paperwork is reduced by that magnitude. Furthermore, the time saved by less record keeping and paper shuffling should be able to boost productivity growth by record rates. No one suggests this phase of the revolution is right around the corner, but even the first steps should keep the growth rate above average and the inflation rate below average next year. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].

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