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By Sue Kirchhoff, Globe Staff
WASHINGTON - Is it real or just a passing fling?
Enormous advances in computer manufacturing, accompanied by sharply falling prices, have fueled what some economists call a productivity miracle: five years of dramatic improvement in worker efficiency and higher living standards. But even those who believe in miracles aren't sure this can last.
The current business slowdown and a recent drop in productivity have reignited a fierce debate about whether information technology has produced an inherently different, more efficient ''new economy'' - or just temporary gains that cannot be continued over the long term due to the limits of innovation and declining business investment.
Federal Reserve chairman Alan Greenspan is the most notable advocate of the idea that higher productivity is real and sustainable, despite the current downturn. Northwestern University professor Robert J. Gordon, using a broad gauge of productivity, has argued that advances have been overblown.
Fed governor Laurence H. Meyer suggests the United States has historically seen waves of productivity, followed by periods of sluggish growth. Others say technology is creating efficiencies that have not been captured by government statistics or private analysis - for example, companies that reshape their management systems to incorporate computers.
''There's a very simple way to think about the way information technology affects labor productivity, and that's to think about it like any other capital. With more capital, workers are more productive,'' said Brookings Institution scholar Jack Triplett, former chief economist at the US Bureau of Economic Analysis.
''It's just one more form of machine,'' Triplett said of information technology. ''It does what machines have done since the dawn of creation.''
Discussions of productivity usually refer to labor productivity, defined as real output per hour of work. From the 1950s through the mid-1970s, US labor productivity averaged about 3 percent. That was followed by two decades in which efficiency was sluggish at about 1.5 percent, and many had become resigned to the notion it would remain so.
Then, from about 1996 through 2000, the rate of increase in US labor productivity nearly doubled. Even more intriguing to economists, the gains began near the middle, not the beginning, of the 1990s business boom, a possible sign they were more than an expected cyclical phenomenon.
''This revolution is only just beginning,'' said Rob Atkinson of the Progressive Policy Institute, a Democratic think tank. ''This technology has a long way to go before it permeates all sectors, all segments of our economy.''
The policy institute considers the issue so vital that it has created a technology and productivity project, which Atkinson heads, to seek increased government research funding and other changes.
While the increase may appear slight, it is huge. With productivity at 3 percent, living standards double in slightly more than two decades; at 1.5 percent, it takes twice as long. Productivity is a key determining factor in the economy, fueling higher wages and economic expansion. And by reducing the cost of manufacturing goods or providing services, productivity also keeps inflation under control.
Assumptions about productivity are fundamental to the Fed's management of the economy. They are used by the government to forecast everything from Social Security solvency to the expected size of the budget surplus. The Congressional Budget Office, using a cautious approach, has gradually increased its productivity estimates, adding nearly $1 trillion to the projected 10-year surplus, now at $5.6 trillion.
In a study last year, Federal Reserve economists found that rapid increases in business spending on technology and advances in computer manufacturing accounted for nearly two thirds of improvements in productivity. Computer spending increased about 40 percent a year in the latter part of the 1990s, while prices fell nearly as fast.
Initial skepticism about the productivity increases turned over time to celebration by analysts who saw a more recession-proof economy in which increased efficiency would keep inflation low, bolstering profits and stocks.
But after sustained, robust growth, gains in labor productivity began to droop near the end of last year as the economy slid. It then dropped 1.2 percent in the first quarter of 2001 - the biggest decline in eight years, according to the Labor Department.
To some, the fall is evidence the new economy was overblown. To others, it is a natural development given a lackluster economy that will slow but not stop gains. Productivity numbers tend to vary widely from quarter to quarter, fluctuating by large percentages even during the recent boom years.
Northwestern's Gordon, using a wide measure of productivity, asserts that most of the recent gains were concentrated in the computer industry, comprising a small sliver of the economy. He plays down the idea of a new industrial revolution, saying much of the Internet duplicates existing activity, and many of the gains rely on a rate of growth in computer spending that is unsustainable.
''The jury is still out as to whether this is going to be cyclical or long-term,'' Wayne Ayers, chief economist of FleetBoston Financial Corp., said of the recent Labor Department productivity report. ''I don't think the cyclical slowdown [in productivity] has come as any surprise. ... The question is, will we return to a higher trend growth?''
Fed governor Meyer, in a speech last week, suggested the economy had gone through a long series of historical cycles, where technological innovations brought about periods of high productivity trailed by sluggish growth.
''So what happened to the new economy? The answer, I believe, is that we are still in the new economy,'' Meyer said. ''The shape of the slowdown has the new economy written all over it, just as the shape of the earlier expansion did.... There is no guarantee that a high-growth economy is less vulnerable to recessions.''
Meyer and others suggest the advances in technology that fueled - and possibly overheated - the boom were also part of the reason for the swiftness and suddenness of the downturn. Businesses, with computerized, real-time inventory systems, responded quickly and dramatically to a falloff in demand. A spate of Internet start-up companies created a frenzy of stock market speculation and a sudden market fall as investors lost confidence.
Analysts are poring over the data not only to divine the reasons for the productivity surge but to guess at what happens next. If technology has wrought a fundamental change in the economy, productivity should settle at a level comfortably above the lag years of the 1970s and 1980s.
''There's a very substantial spillover effect'' on other segments of the economy, said Gordon Richards, economist at the National Association of Manufacturers, who has just completed a paper examining the link between technology and productivity. ''The spillover effect is going to get larger and larger over time.... Computer quality is making research and development more efficient. You're getting more bang for the buck for dollar of R&D, and that's going to continue.''
Despite lagging semiconductor and computer sales, there is evidence business executives think they are nowhere near the limits of technology-based advances. A recent InfoWorld magazine survey of 200 companies, the bulk of them non-technology concerns like the discount brokerage Charles Schwab & Co., found 60 percent were increasing their investment in their technology budgets by an average of nearly a third.
Professor Erik Brynjolfsson, director of the Center for eBusiness at MIT's Sloan School of Management, argues dollars and cents investments in computer technology tell only part of the story. Even larger investments by companies in retraining and retooling their management are having a major impact on productivity that may not be felt for some time, he believes.
Sue Kirchhoff can be reached by e-mail at mailto:%20kirchhoff@globe.com.