Digital Economy 2000 Report

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DIGITAL ECONOMY 2000 REPORT

In June 2000, the U.S. government issued the Digital Economy 2000 report, a follow-up to its previousEmerging Digital Economy reports published in 1998 and 1999. The report was based on research conducted by the Council of Economic Advisors (CEA), the Congressional Budget Office (CBO), the Federal Reserve, and outside economists. It announced that information technology (IT) industries were responsible for at least 50 percent of increased U.S. productivity rates, which grew at an annual rate of 1.4 percent from 1973 to 1995, and 2.8 percent thereafter. Although IT industries only accounted for an 8.3-percent share of the U.S. economy by 2000, they generated roughly 30 percent of overall U.S. economic growth. Electronic commerce (e-commerce) led growth throughout the new digital economy.

Digital Economy 2000 identified several significant IT-related business and economic trends. In general, businesses turned ever more frequently to the Internet to boost efficiency by shifting supply networks and sales online and relying on networked systems to streamline internal procedures. The resulting improvement in productivity led to lower inflation and higher real wages. However, the report indicated that this still was an emerging trend.

The number of workers in the software and computer services industries rose from 850,000 in 1992 to 1.6 million in 1998. By 1998, there were 7.4 million workers in IT-related positions nationwide, or about six percent of the total U.S. workforce. Hiring of the most highly skilled employees, such as systems analysts, programmers, and computer scientists, rose by nearly 80 percent to about 1 million positions during the same period. IT salaries averaged $58,000 a year, 85 percent higher than the average for the private sector.

IT industries invested heavily in new research and development (R&D). Their investments accounted for 37 percent of all American R&D spending from 1995 to 1998. In 1998 alone, IT-industry investment for R&D totaled $44.8 billion, or about one-third of company-funded R&D.

Worldwide, approximately 304 million people had Internet access by 2000, a nearly 80-percent increase from the previous year. In contrast, only 3 million people around the globe had similar access in 1994. Most of the growth occurred outside of the United States and Canada, which for the first time totaled less than half of those with online access. However, the number of American Web users still rose by 40 percent. In most other areas of the world, Internet access at least doubled. Access in Africa showed a 136-percent increase; Asia and the Pacific, 155 percent; Europe, 108 percent; the Middle East, 111 percent; and South America, 102 percent.

Dramatic decreases in the price of IT-related technology fueled phenomenal growth in Internet expansion and use. From 1995 to 1999, computer prices declined at a rate of 26 percent annually, rapidly making computer technology available to a widening percentage of the population. The report also identified falling IT prices as being directly responsible for lowering the U.S. inflation rate by an average of 0.5 percentage points per year.

Other studies corroborate Digital Economy 2000's findings. For example, a study of 3,000 IT industries conducted by the University of Texas-Austin, which was funded by Cisco Systems and issued on the same day as Digital Economy 2000, stated that the number of U.S. workers in Internet-related jobs doubled in 1999 to 2.5 million. At the same time, IT industry revenues grew by 62 percent to reach $524 billion in 1999, up from $322 billion the previous year.

Not of all Digital Economy 2000's conclusions were positive, however. As the report pointed out, a majority of Americans still lacked online connections at home. Those "on the wrong side of the digital divide," such as people in low-income jobs, those with a lower level of education, and members of minority groups, were falling further behind in reaping the benefits of the digital economy. Ironically, the runaway success of the New Economy also has created hardship in California's Silicon Valley, the epicenter of the IT universe. Astronomical increases in the cost of living there placed great hardships on many who lived and worked in the area, where many service-related employees earned an average $23,000 in 1999.

Not all IT-related industries benefited equally from the expanding digital economy. Outside of the IT industry itself, productivity increases were only discernible in goods-producing industries. But IT-intensive industries in the services sector actually witnessed a decline in productivity. In this sector, from 1990 to 1997 labor productivity fell by 0.3 percent. In contract, non-IT-related service sectors enjoyed an increase of 1.3 percent in productivity. Furthermore, when scrutinizing productivity at the level of individual firms, the study located no automatic correlation between investment in IT and growth in productivity. Such increases occurred only when major organizational transformations were implemented in tandem with IT investment. Thus, it appeared that decentralization emerged as an essential component in correlating IT spending and increased productivity.

The study also identified a very brief payback period for computer hardware investment in the United States. Thus, the high returns on IT investment did not constitute an unmixed blessing. Such returns must be high if they are to pay off, since hardware depreciation occurs so quickly.

It also is questionable whether the optimistic picture drawn for the digital economy can be realized fully outside the United States, since many of the conditions responsible for IT-related gains are specific to the United States. These include a large-scale IT supply industry targeted on high-value business, and favorable economies of scale. In addition, American business functions in a flexible investment environment that is amenable to risk-taking. Other parts of the globe, where more conservative and cautious approaches to business operations prevail, may be less favorably positioned to take advantage of the new information technologies.

Digital Economy 2000 concluded that "the U.S. economy has crossed into a new period of higher, sustainable economic growth and higher, sustainable productivity gains." Based on such conclusions, many economists adjusted their long-term economic growth forecasts upward, projecting a 3.1-percent annual growth rate for the first decade of the 21st century, instead of their earlier predictions of 2.5 percent. However, with the volatility of the stock market and the uncertain economic climate at the turn of the millennium, it remains to be seen whether Digital Economy 2000's forecasts will prove correct.