International Security Studies

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Information Technology, Productivity, and the Post 9/11 Economic Slump

January 22, 2002 // 11:00pm

Summary of symposium with: Daniel Sichel, Senior Economist, Board of Governors of the Federal Reserve System; Marilyn Manser, Associate Commissioner for Productivity and Technology, Bureau of Labor Statistics; Rhett Dawson, President, Information Technology Industry Council; Leslie Simon, Public Policy Scholar, Woodrow Wilson Center

For many years economists found little or no contribution to labor productivity growth from technology at the national level. Some attributed this to inadequate tools. Others believed that information technology (IT) was simply too small a factor in the economy to show up in the numbers.

But by the late 1990s, the U.S. Commerce Department started to release a series of reports on the emerging digital economy that seemed to put the issue to rest. Information technology, it reported, accounted for 35 percent of U.S. economic growth in the years 1995-1998 with information technology-using and producing industries leading the pace in worker productivity growth. Earlier this month, two economists at the meeting of the Atlanta Federal Reserve Bank predicted a continuation of "New Economy" productivity growth over the next decade.

Daniel Sichel underscored the critical importance of labor productivity, noting that a 1.3 percent rate will double living standards in 54 years, whereas a seemingly minor increase to 2.5 percent will shorten that doubling period to 28 years. A recent study by Sichel indicates that despite the shrinkage of IT investments in 2002, the IT contribution to productivity growth will be strong and that overall growth will be in the 2-2.75 percent range. From 1991-2001, labor productivity accelerated by .9 percent (from 1.5-2.4 percent) and IT accounted for .8 percent of that total.

Marilyn E. Manser stated that in the 2001 recession labor productivity growth has remained strong, coming off a period of rapid growth in 1995-1999 where IT made a major impact. In particular, productivity growth was especially strong in three sectors – computers, communications, and electronic components. But major measurement issues remain in service industries and with respect to the contribution of electronic commerce.

Rhett Dawson said that government data on labor productivity are old and inaccurate – they are "industrial age rather than digital age data." Dawson underscored the tremendous increase in the performance of IT products and the creation of new products, even as unit prices for those products was sharply dropping. He argued that this penetration of IT into society was not accurately reflected in the productivity growth data. One key IT area in which economic growth is being hampered by inadequate access across society is broadband technology, which is currently in only 11 percent of American homes. Increasing the penetration of IT in society will maintain the momentum in labor productivity increases. But achieving this will require government and business to address a range of pending public policy issues ranging from broadband to the tax system to export controls.

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