Clicking on banner ads enables JWR to constantly improve
Jewish World Review June 19, 2001/ 29 Sivan 5761

Lawrence Kudlow

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Productivity Revolution: The Next Wave -- WITH the Nasdaq petering out after its explosive April-May bounce, an "I-told-you-so" sense of self-satisfaction over the supposed demise of the technology revolution hasbecome the order of the day among keepers of conventional economic wisdom.

Tech skeptics who always doubted the economic potential of the information technology boom of late last decade, even as it was driving productivity gains to levels not seen in ageneration, appear to have won vindication of sorts. Friday's industrialproduction report, showing capacity utilization in the tech sector dropping to25-year lows at 70.3%, seemingly put another nail in the technology coffin.

Thus, the hackneyed notionthat the current economic slump is explained in large measure by a massive andunsustainable splurge of "overinvestment" in high-tech capital goods now goesmostly unquestioned in the opinion centers of media and finance. The tarnishedcredibility of the rigid neo-Keynesian consensus that "sustainable" growth isalways subject to arbitrary limits has by all surface appearances beenrestored.

"It's clear now thatbusiness gorged on investment spending in the late 1990s, and the economy isnow paying the price," the Wall Street Journal's front-page Outlookcolumn pronounced last Monday. The corporate sector is "pretty much teched-up,"one leading economic thumb-sucker was quoted saying. "It's not so much theycan't afford it. It's more they don't need it."

Even as such dubiousanalyses are being printed and broadcast, however, leading-edge IT advances arecontinuing apace, with the promise of sustaining waves of productivity-boostinghigh-tech capital formation through the second decade of this new century.Perhaps the most profound of these recent technological improvements surfacedlast week with Intel's breakthrough announcement that it has developed theability to produce semiconductors that will exponentially improve silicon-chipefficiency.

Intel reported on newresearch that will enable production of chips with 23 times the number oftransistors as its current Pentium 4 model, and operate at speeds of 20 gigahertz, compared to today's top capability of 1.7 gigahertz. The Intelannouncement effectively banishes any doubts suggesting the Moore's lawprescription for a doubling of microprocessor cost effectiveness every 18 monthsmight face near-term limits.

It should help pave the wayfor a whole new generation of wealth-creating innovations and entrepreneurshipas enterprises throughout the economy devise and adapt means for capturing theproductivity gains implied by the rise in semiconductor efficiency. Like theadvances of last decade, the major economic payoff from this technological leaplikely will come from spillover applications that spread far and wide, raisingthe economy-wide rate of return.

As it is, the argument thatcompanies "over-teched" with their late-1990s investments, and that the currentdecline in capital spending is the inevitable result, has little grounding inreality. Up to the point when the economic slowdown hit with such surprisingforce late last year, planned growth in IT investments remained at double-digitlevels.

The "buildout" offiber-optics and Internet-based business networks are still considered to be intheir early stages. Most companies have yet to completely retool theiroperations to realize the full benefits of the technological changes. Even withproductivity growth having doubled in the second half of the '90s from thepaltry average rates of about 1.5% the previous two decades, the best was yetto come.

These investments, however,only made sense to the extent that expected returns justified the heavy capitaloutlays, which totaled close to an estimated $800 billion in 1999. With thesudden downdraft of growth expectations, which amounts to a concomitant rise inthe cost of capital, the economic justification for scores of projects werejust as quickly rendered null.

Thus has the conventionalanalysis gotten cause and effect exactly backward. The economy didn't go into atailspin because the tech sector tanked. The tech sector tanked because theeconomy went into a tailspin, caused chiefly by an excessively tight Fed and aratcheting up of energy prices that amounted to a major tax hike on businessesand individuals.

That also suggests, though,that once these obstacles are lifted, the path to resumption of tech-led gainsin productivity and wealth remains clear cut. Periods of fundamentaltechnological innovation tend to bring on long-wave, secular eras of elevatedproductivity growth, and this one is likely to prove no different.

Even Fed Gov. Laurence Meyer -- a Phillips curve truebeliever and New Economy skeptic if ever there was one -- emphasized this pointin a recent speech. If current trends hold true to historical form, Meyer said,it's likely that productivity growth in a 3% range will be sustained goingforward for about another 20 years. Meyer cited research developed by the Fedstaff showing that, on average, periods of above and below-average productivitygrowth tend to run in 24-year secular trends . With the currentperiod dating to 1995, that suggests a trend rate of about 3% productivitygrowth being sustained until late in the next decade.

As far as the immediate obstaclesare concerned, energy prices appear to be heading in the right downwarddirection. It's absolutely essential, though, that the Fed, once and for all,overcomes its deflationary bias, which imposes outsized risks on debt-financedinvestment, as deflation increases the real burden of debt repayment. On thatscore, with gold fluctuating in ranges around $270, up from $255 in earlyApril, it's clear that policy is now at least moving in the right direction,although at this point the job remains incomplete.

One more thing. It'sirrefutable that the technological innovations which came on stream in thesecond half of last decade were immeasurably aided by the 1997 reduction in thecapital gains tax from 28% to 20%. By increasing the after-tax rewards to successfulrisk taking, the cap gains cut unleashed a torrent of risk capital, including aflood of venture capital, breathing financial life into entrepreneurs andinnovators who would otherwise have never had the opportunity to test theirideas in the marketplace of ideas. At this point, another cut to 15%, as is nowbeing discussed among a bipartisan group on Capitol Hill, would very likelyhave a similarly energizing effect, speeding deployment of a new generation oftechnological advances that at this moment exist only in the realm of the imagination.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


Kudlow Archives

©2001, Lawrence Kudlow