Originally created 08/14/97

Finding the computer link in a good economy



WASHINGTON (AP) - The billions of dollars that American companies are pouring into computers and other high-tech gadgets should be making workers more efficient. No less an authority than Alan Greenspan says the country could be on the verge of a once-in-a-century leap in productivity.

There's a problem, however: The productivity can't be found in the government's official statistics.

Therein lies a mystery with big implications for American workers. Without healthy gains in productivity, a nation's standard of living stagnates. And if it hasn't been rising, Federal Reserve chairman Greenspan and his fellow economists find themselves unable to explain the current good times.

Unemployment is down to levels not seen in almost a quarter-century. Inflation rests at a three-decade low. The stock market has soared into the stratosphere.

Productivity - the amount of output per hour of work - is the single factor that could tie all this good news together.

Yet the Commerce Department reported this week that productivity rose just 0.6 percent in the spring quarter, in line with the pathetic performances of the past four years.

The puzzle has split economists.

One group believes the country has entered a "new age" of rising productivity that government statistics miss because the improvements occur in harder-to-measure service industries such as banking and health care.

The opposition scoffs, arguing that good inflation news is the result of good luck, not a new world order. Temporary factors such as falling oil prices, a strong dollar and a slower rise in health costs are the reason inflation is tame, they say.

Some even grump that computers' efficiency gains are overrated.

"Don't forget that rapid turnover of hardware and software keeps us perpetually in the learning mode, that people spend countless hours mindlessly exploring the Internet and playing amusing computer games," Princeton economist Alan Blinder wrote recently.

The debate may seem esoteric - but it matters to real people.

The economy could face serious dangers if pessimists are right. Inflation could suddenly take off, forcing the Federal Reserve to jack up interest rates. That could send the highflying stock market crashing and in a worst-case scenario bring on a recession.

Those are the fears behind the periodic swoons on Wall Street such as Tuesday's 101-point sell-off. Stocks dive whenever traders detect a whiff of bad inflation news, only to rebound on reassuring statistics.

Optimists insist the worries are unfounded. They argue that productivity must be headed higher because of the billions of dollars companies have spent to buy the latest computers and telecommunications equipment.

When workers become more efficient, they can turn out more goods and services for a given hour of work. That translates into wage gains for workers and rising profitability for companies. That is what happened right after World War II when the economy boomed and living standards soared.

But the opposite is also true. If productivity doesn't rise, then companies can't reward workers with higher wages without passing on the costs in higher prices - and more inflation.

Those pushing "new age" theories believe the economy has fundamentally changed after years of painful corporate restructuring often involving mass layoffs.

"How can we have an economy in which corporate earnings are very strong, in which real wages are rising and there is no inflation without having a lot more productivity than is showing up in the official data?" asks Bruce Steinberg, chief economist at Merrill Lynch in New York.

In his midyear report to Congress, Greenspan devoted 11 of 19 pages of testimony to "new age" ideas, saying that the flood of money into high technology could lead to a "once or twice in a century phenomenon that will carry productivity trends nationally and globally to a new higher track."

But skeptics remain, and even Greenspan repeatedly stressed the jury is out.

"I don't think you could call Chairman Greenspan a card-carrying member of the New Age Economists' Club. But he is at least looking into membership," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

The real answer may lie somewhere in the middle, said Roger Brinner, chief economist at DRI-McGraw Hill Inc. Big growth in computers could result in a delayed payoff that will soon start showing up, but not to the extent "new age" economists expect.

"If you have more and better machines and more modern facilities, then productivity will improve," Brinner said. "We are going to see a modest improvement. We just haven't seen it yet."