Engineers & the new economy

Engineers & the new economy

McGraw, Dan

Information technology has revolutionized the way America does business, and engineers are a vital cog in the new economic machine.

The term “new economy” has been bandied in the 1990s by journalists, academics, and policy makers in such vague and diverse contexts that the term itself has become synonymous with everything from greater yields on Kansas wheat farms, to better inventory control at Midwest auto parts factories, to billion-dollar IPOs for Silicon Valley dot-com companies. But whatever the application of the term, the fact remains that the United States’ economy has changed greatly during the decade, and engineers-the leaders in the new information technology revolutionare a major force in the new economic order.

The theory of the new economy is basic in its assumptions. Advances in technology have permanently improved the economy’s efficiency and productivity. Faster computers and new software enable everyone-from manufacturers to retailers to farmers-to access information quickly and cheaply, cutting costs and improving worker productivity. The result has been unprecedented growth rates without the accompanying inflation that has burst the high growth cycles of the past.

[Where IT’s At]

Federal Reserve Chairman Alan Greenspan, in testimony before Congress this year, pointed out that “information technology has begun to alter, fundamentally, the manner in which we do business and create economic value, often in ways that were not readily foreseeable even a decade ago.

“As this century comes to an end,” Greenspan continued, “the defining characteristic of technology is the role of information. Prior to this IT revolution, most of the 20th century decision making had been hampered by limited information. Owing to the paucity of timely knowledge of customers’ needs and of the location of inventories and materials flows throughout complex production systems, business required substantial programmed redundancies to function effectively.”

In other words, the lack of speedy information left companies relatively unsure of what their customers needed, and without efficient channels to get their goods and services to those customers in a timely manner.

In the past, the conventional wisdom among economists held that an annual economic growth rate of more than 2 percent would cause high inflation, thus slowing down the growth. But a study this year by Macroeconomic Advisors, a St. Louis forecasting firm, found that beginning in 1995 growth in productivity had accelerated so sharply that the rate now “rivals that of the 1950s and 1960s, the period in which [the growth rate] grew faster than any other time in modem U.S. history.” Macroeconomic Advisors estimates that the U.S. economy should be able to grow by 3 percent a year during the coming decade without creating inflationary pressures.

[Inflation Fears]

Skeptics of the new economy paradigm-most notably Massachusetts Institute of Technology economics professor Paul Krugman-argue that the economy’s recent performance can be explained by “temporary factors”: the recent increases in productivity are too recent to determine long-lasting trend; the soaring dollar has made imports cheaper, thus counteracting inflation; lower interest rates in the 1990s have pumped up profits at inefficient companies; and tight labor markets will soon fire up wage inflation.

There is a historic precedent for what is happening in today’s economy, and one needs only to look at the end of the last century to draw important parallels. In the 1870s, agriculture accounted for roughly 35 percent of U.S. economic output. But the advent of manufacturers, utilities, and railroads-and the innovations of automobiles, electricity, and the telephone-moved this new industrial sector far beyond the farming sector in jobs and productivity. The result was bankruptcies and impoverishment in many rural communities.

The same dynamic is happening today, albeit in a less dramatic fashion. Real wages in new economy compar-des—software, media, or financial services to name a few-are up 11 percent since 1994. Wages in the rest of the economy are up just 3 percent in that same period.

Clearly, the riches awaiting workers in this new information-based economy have greatly increased demand for those with expertise in science and engineering. Between now and 2005, the demand for scientists and engineers is expected to increase three times as fast as the demand for other occupations. Much of this increase has come from the demand for computer scientists and programmers, who increased as a share of all scientists and engineers from 23 percent in 1983 to 36 percent in 1997. Many of these U.Strained engineers are foreign born. While just 1.3 percent of all Ph.D. scientists and engineers in the United States who have had their degrees for more than 25 years are foreign born, almost one-fourth of those who have earned degrees in the past five years are foreign born.

[Something Old, Something New]

The challenge for engineering schools and their educators is to provide the needed brain power and innovation to not only information-based companies, but also those that operate in what we might call the “old economy”-the companies that make “things” rather than just move information. Tom Byers, an associate professor at the Stanford School of Engineering, recognizes that broad-based education in all economic sectors, and not just the gilded Internet companies, is the key to sustained economic growth. I “Everyone knows that Stanford was the place where Yahoo was created and the place where many Internet billionaires came from,” Byers says. “But the measure for success is whether we are educating engineers on all levels. That will help assure productivity in all areas of the economy.”

The need, then, is to balance technological gains for both the new and old economic sectors, and to have those gains translate into real wage increases for workers. In general, higher productivity means higher wages. In manufacturing, for example, companies that make computers, communication equipment, and semiconductors have seen their worker productivity increase by 30 percent annually in recent years, according to the U.S. Bureau of Labor Statistics. Consequently, wages have moved higher in those industries. But productivity in non-high-tech manufacturing has risen just 2.5 percent annually in recent years, and wages in those industries have stagnated.

[New Game, Same Rules]

The lesson is that the new economy is not a re-invention of the rules or a break from basic economic models. While the Internet and e-commerce are certainly cornerstones of the new economy@the Internet generated $300 billion in revenue and 1.2 million jobs in the U.S. last year, according to a University of Texas study-its influence is still the proverbial drop of water in the ocean, accounting for only a small percentage of the nation’s gross domestic product.

Thus, while the Internet speeds information and drives productivity and the creation of wealth, the Internet age is not so much about technology Rather, it is about basic marketing and selling goods and services to customers. That is a paradigm that has not, and will not, shift. Once the gains of information technology slow-as proliferation of technology becomes more standardized-the way the tool is used becomes more paramount.

For example, car makers will be able to use new information-based models to build cars to order, rather than produce inventory that they hope will sell. In the world of higher education, distance education through Internet delivery of instruction will help lower costs and provide access to more and more people. Cattle ranchers will be able to run more efficient herds by tracking everything from feeding schedules to blood lines, all from a transponder chip in each bovine’s ear.

Author Kevin Kelley, in his book New Rules for the New Economy, points out that the fundamental shift is based on gathering information from the bottom side of the economy-directly from consumers-rather than from speculative forecasting. “We have spent centuries obsessed with top-down governance,” he writes. “Its importance remains. But the great excitement of the new economy is that we have only now begun to explore the power of the bottom, where peers hold sway. It is a vast mother lode waiting to be tapped. With the invention of a few distributed systems, such as the Internet, we have merely probed the potential of what minimally centralized networks can do. At present, there is far more to be gained by pushing the boundaries of what can be done at the bottom than by focusing on what can be done at the top.”

Does this shift mean that the so-called new economy is recession-proof, as some have theorized? Hardly. Just because consumers order books or groceries online does not mean the efficiencies created will keep businesses from making errors, especially when the diminished returns from technology prevail as it becomes more standardized. Basic economic models will still hold sway “Both logic and history tell us that when workers are very scarce and jobs very abundant, employers will start bidding against each other to attract new workers, wages will rise rapidly, and real growth will give way to inflation,” writes MIT’s Krugman. “That means that while the economy can grow faster than 2-point-whatever percent for a while, in the long run, that growth rate cannot remain higher than the rate that keeps unemployment constant.”

[Cautious Optimism]

To keep this new economy strong, basic economic principles need to be adhered to. Combined investment and R&D spending, which has risen from 13.9 percent of GDP in the 1950s to 15.5 percent of GDP in the 1990s, needs to continue to grow or keep pace. Engineers must be educated to consider all sectors of the economy, and not be swayed by Internet startup wealth. And as much as journalists and Wall Street financiers feel tempted to throw out the old rules, the old rules still very much apply. “The growth of investment depends very much on the continuing belief that new products are waiting to be discovered, invented, and created, and the accompanying belief that such products will prove to be profitable,” says Leonard Nakamura, an economic advisor to the Federal Reserve in Philadelphia. “If the expected rate of return to investment were to decline, the investment would slow.”

And as Federal Chairman Alan Greenspan rightfully points out, now is the time to be cautiously optimistic about the new economy, and his testimony before Congress this year echoed his famous line about “irrational exuberance” when discussing economic changes based on new technology. “The rate of growth of productivity cannot increase indefinitely,” he said. “While there appear to be considerable expectations in the business community, and possibly Wall Street, that the productivity acceleration has not peaked, experience advises caution …. History is strewn with projections of technology that have fallen wide of the mark. With the innumerable potential permutations and combinations of various synergies, forecasting technology has been a daunting exercise.”

Dan McGraw is a senior editor at U.S. News & World Report.

Copyright American Society for Engineering Education Nov 1999

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