Message-ID: <29451919.1075843091428.JavaMail.evans@thyme> Date: Tue, 2 Nov 1999 15:35:00 -0800 (PST) From: levine@haas.berkeley.edu To: e201b-1@haas.berkeley.edu, e201b-2@haas.berkeley.edu Subject: Recent articles Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "David I. Levine" X-To: e201b-1@haas.berkeley.edu, e201b-2@haas.berkeley.edu X-cc: X-bcc: X-Folder: \Jeff_Dasovich_Dec2000\Notes Folders\Mba--macroeconomics X-Origin: DASOVICH-J X-FileName: jdasovic.nsf 1. For this week, please be sure you have read a story on determinants or costs of long-term or very high inflation and/or on very high or long-term unemployment. Later in the course we will examine changes in unemployment and inflation (and their relation) in the short run; this week we focus on definitions and long-run determinants and costs. (Hint: for unemployment, what has happened to the workweek in France?) 2. Concerning growth, you might want to look at: Report: Corruption Ruining Economies Of South Asia http://dailynews.yahoo.com/h/nm/19991101/wl/asia_un_1.html (a Reuters story) 3. Concerning measurement of "The New Economy," a fellow student recommends the Economist article at http://www.economist.com/editorial/freeforall/current/index_fn8276.html will all the pretty pics and graphs, or the plain text version below. E-xaggeration: The digital economy is much smaller than you think NEWSPAPERS and magazines are packed with stories about the digital economy, the information-technology (IT) revolution and the Internet age. That their pages are filled with advertising from IT firms presumably has nothing to do with it. Such firms account for a quarter of the total value of the S&P 500, and this week Dow Jones announced that Microsoft, Intel and SBC Communications will be included in its industrial average from November 1st. Not before time, many say, for high-technology businesses now account for a huge chunk of the economy. Actually, they don't. New figures published on October 28th by America's Department of Commerce appear to support the view that IT is very important to the American economy. The department now counts all business spending on software as investment (previously, it was a cost). This has both increased the apparent size of IT investment and boosted America's rate of growth in recent years. But measuring the size of the "new" economy is a statistical minefield. The most generous estimate comes from the OECD, which tracks the "knowledge-based economy". It estimates that this accounts for 51% of total business output in the developed economies-up from 45% in 1985. But this definition, which tries to capture all industries that are relatively intensive in their inputs of technology and human capital, is implausibly wide. As well as computers and telecoms, it also includes cars, chemicals, health, education, and so forth. It would be a stretch to call many of these businesses "new". A study published in June by the Department of Commerce estimates that the digital economy-the hardware and software of the computer and telecoms industries-amounts to 8% of America's GDP this year. If that sounds rather disappointing, then a second finding-that IT has accounted for 35% of total real GDP growth since 1994-should keep e-fanatics happy. Perhaps unwisely. A new analysis by Richard Sherlund and Ed McKelvey of Goldman Sachs argues that even this definition of "technology" is too wide. They argue that since such things as basic telecoms services, television, radio and consumer electronics have been around for ages, they should be excluded. As a result, they estimate the computing and communications-technology sector at a more modest 5% of GDP-up from 2.8% in 1990. This would make it bigger than the car industry, but smaller than health care or finance. In most other economies, the share is lower; for the world as a whole, therefore, the technology sector might be only 3-4% of GDP. But what, you might ask, about the Internet? Goldman Sachs's estimate includes Internet service providers, such as America Online, and the technology and software used by online retailers, such as Amazon.com. It does not, however, include transactions over the Internet. Should it? E-business is tiny at present, but Forrester Research, an Internet consultancy, estimates that this will increase to more than $1.5 trillion in America by 2003. Internet bulls calculate that this would be equivalent to about 13% of GDP. Yet it is misleading to take the total value of such goods and services, whose production owes nothing to the Internet. The value added of Internet sales-ie, its contribution to GDP-would be much less, probably little more than 1% of GDP. This is not to deny that the Internet is changing the way that many firms do business-by, for example, enabling them to slim inventories-but, in the near future, as a proportion of GDP, it is likely to remain small. A Luddite's lament If measuring the size of the technology sector is hard, calculating its contribution to real economic growth is trickier still, because the prices of IT goods and services (adjusted for quality) have fallen sharply relative to the prices of other goods and services. For example, official figures show that America's spending on IT has risen by 14% a year in nominal terms since 1992, but by more than 40% a year in real terms. This figure is so high partly because it is extremely sensitive to assumptions about the rate at which the price and quality of IT is changing. The Commerce Department calculates that the technology sector has contributed 35% to overall economic growth over the past four years. But because such figures are based on spending in real terms, the Goldman Sachs study reckons they are misleading. In nominal terms, IT has accounted for a more modest 10% of GDP growth in the past four years. Another popularly quoted figure is that business spending on IT has risen from 10% of firms' total capital-equipment investment in 1980 to 60% today. But again, this is based on constant-dollar figures, and so it hugely exaggerates the true increase. In terms of current dollars (and before the latest revisions), Goldman Sachs calcuate that business investment in computers accounts for 35% of total capital spending, not 60%. And even this exaggerates the importance of IT, because much of the money goes to replace equipment which becomes obsolete ever more quickly. The share of IT in additional "net" investment is much smaller. Computers still account for only 2% of America's total net capital stock. For years economists have been seeking in vain for evidence that computers have dramatically raised productivity. One explanation for the failure of productivity to surge may be that official statistics are understating its growth. Another is that much investment in IT has been wasted: hours spent checking e-mail, surfing the Net or playing games reduce, not increase, productivity. A third may simply be that IT is still too small to make a difference: for the moment, appropriately enough, you can count the digital economy on the fingers of one hand. That is changing, and firms are learning. And note this: if you add in all computer software and telecoms (on the widest definition), the share of IT in the capital stock rises to 10-12%. As it happens, this is almost the same as railways at the peak of America's railway age in the late 19th century. Railways boosted productivity and changed the face of Victorian commerce. Hype is hype-but the new economy may yet happen anyway. LINKS The Commerce Department's statistics on information technology spending are summarised in a press release . The complete text of Emerging digital economy II , issued in June 1999, has been released on the web. Details of the OECD's research on knowledge-based economies are available here . Forrester's latest e-commerce estimates are published as a chart and table . David I. Levine Associate professor Haas School of Business ph: 510/642-1697 University of California fax: 510/643-1420 Berkeley CA 94720-1900 email: levine@haas.berkeley.edu http://web.haas.berkeley.edu/www/levine/