THE INFORMATION REVOLUTION--THE DIGITAL JUGGERNAUT

In every era, there is a group of industries that sets the pace for the rest of the economy. A century ago, the railroads were America's growth engine. In the postwar decades, manufacturing was the key to U.S. prosperity. During the 1980s, the driving forces of expansion were booming service industries such as health care, legal services, and retailing: All told, during that decade, the service sector accounted for practically all of the growth in jobs and corporate profits. Economists began to speak of the U.S. shift from a manufacturing to a service economy.

s Yet for all the vitality of services, many skeptics did not see how they could make the economy thrive over the long term. In fact, the shift seemed like a giant step backward, since service jobs paid lower wages on average than manufacturing and had significantly slower productivity growth. Moreover, services such as medical care and retailing were much harder to export than manufactured goods. The worry was that if the U.S. lost its manufacturing industries, it would have a difficult time selling enough services abroad to pay for its imports of cars, consumer electronics, and other goods. Fear not: Like adolescence, the service economy has turned out to be a temporary stage. Far more than most people realize, economic growth is now being driven not by services, but by the computer, software, and telecommunications industries. Indeed, according to the Commerce Dept., business and consumer spending on high-tech equipment accounts for some 38% of economic growth since 1990.

What's more, government statistics underplay the evolution of the information economy. Industries that depend on processing and moving information--such as financial services and entertainment--are prospering. And companies in every industry are using information technology to reengineer themselves and become more competitive. In short, ``the role of information is transforming the nature of economy,'' says Kenneth J. Arrow, a Nobel prizewinning economist at Stanford University.

In this regard, at least, the U.S. is leading the way for the rest of the world. Europe is deregulating its telecommunications industry in order to create jobs and stimulate development. Japan is mounting an intense effort to narrow the considerable edge the U.S. has built over the decade in personal-computer and network use. Even developing countries such as China, Hungary, and Thailand are investing heavily in state-of-the-art communications systems in an effort to leapfrog their way to prosperity.

America remains way ahead, however. And it's the place where the consequences of the new economy are first showing up. To a large degree, the news is turning out to be good. For one thing, unlike most services, information products such as software and entertainment can be easily exported. And whereas productivity in the service sector grew slowly, investment in information technology is boosting productivity across the economy.

Beyond that, the effect on work is less harmful than once feared. Far from becoming low-paid burger-flippers, the quintessential job of the service sector, many Americans are turning into computer jocks. Economic studies show that their wages are on the rise as a result. For example, earnings for male computer programmers have risen by 12% since 1990, compared with 6% for all male workers. For female computer programmers, the pay gains have been even bigger: a 21% rise since 1990, vs. 13% for all female workers.

The drawback is that along with the winners, there will temporarily be lots of losers. Higher productivity has led to big layoffs at many companies, especially in the telecommunications industry. Elsewhere, meanwhile, advancing technology is favoring skilled workers over unskilled, increasing the inequality in wages.

For better or for worse, this transformation is occurring at an astonishing rate. Look at business investment. Measured in inflation-adjusted dollars, computers and other information technology now make up nearly half of all business spending on equipment--and that doesn't include the billions that companies spend on software and programmers each year. Meanwhile, business spending on industrial machinery, which traditionally has been the guts of manufacturing, has fallen as a share of equipment investment from 32% in 1975 to only 18% in 1993.

At the same time, information technology and services are helping to drive the continuing export boom. The aircraft industry is often held up as the shining star among U.S. exporters. Yet America's overseas sales of information-technology equipment in 1993 were $62 billion, far more than the $33 billion in overseas aircraft sales. The U.S. is also the world's largest exporter of software, a fact that doesn't show up in the government's numbers. In 1993, major U.S. software companies sold $2.5 billion worth of personal computer programs in Western Europe, Asia, and Latin America, according to the Software Publishers Assn. Microsoft Corp. alone derives some 55% of its revenues from overseas sales.

The U.S. also is running a huge $3 billion trade surplus in computer-related services, such as data processing and information databases. It's nearly as easy now to send information to Europe or Japan as to the next state or across the hall. For example, Mead Data Central Inc., the company that runs the Lexis and Nexis services, which contain legal news and general news respectively, also has databases on French and British law that lawyers in those countries use. The location of these databases: Dayton, Ohio.

Coming improvements in overseas communications will even make it possible to export such services as medical care. By this coming summer, doctors across sparsely populated South Dakota will be able to use a statewide telecommunications network to consult with specialists hundreds of miles away. The same expertise could be transmitted to Asia or Latin America just as easily. ``The information economy can breed a healthy economy because a lot of its services are exportable,'' says George Bennett, chairman of Symmetrix, a technology consulting firm.

Two other positive byproducts of the Information Age are greater efficiency and lower prices. During much of the 1980s, economists worried that they could not find any impact of computers on productivity. But more recent research shows that investments in computers are worthwhile. Economists Erik Brynjolfsson and Lorin Hitt of the Massachusetts Institute of Technology surveyed 400 large companies to gauge the effect of technology on output per employee. They found that the return on investment in information systems exceeded 50%. ``And most of these benefits are being passed on to consumers in the form of lower prices,'' says Brynjolfsson.

In fact, the productivity surge of the last two years--when nonfarm output per worker rose by 4.9%, its biggest two-year jump since 1976--may reflect the efforts of U.S. companies to finally take full advantage of the huge sums they've spent purchasing information technology. ``If I put technology in and nothing changes, and then later a business gets in a crunch and discovers that it can cut out all the middle management, what made it possible?'' asks Raymond Perry, chief information officer at Avon Products Inc. ``Well, probably the technology did. It's just that we weren't ready to take the people out until a later point in time.''

Even the recent productivity numbers probably far understate the critical role of information technology and services in driving growth. To put it simply: Government statistics track goods and jobs, not flows of information. That means the U.S. has a large and vibrant ``ghost economy'' that traditional economic indicators don't measure. Take the communications sector, which includes the telephone, broadcasting, and cable industries. According to government figures, communications is only 3.1% of the economy, up from 2.8% in 1984, at the time of the AT&T divestiture. Over the same period, minutes of telephone use--a key number tracked by the Federal Communications Commission--has grown only slightly faster than the overall economy.

Yet a closer look shows that the official statistics ignore many of the changes of the past decade. For one, a much greater percentage of the calls over the phone network are faxes and computer data going back and forth, rather than people talking. As much as 10% to 20% of the traffic across the AT&T long-distance network may be data, estimates Frank Ianna, the company's general manager for network services. That's up from 7% to 10% a few years ago. And because of time and language differences, about half of international calls are data, not voice.

These fax and computer messages pack a lot more data into a minute than they used to. Over the past few years, for example, the speed of a typical modem--which is used to transfer information between computers over phone lines--has quadrupled. That means the amount of information being pumped through the system has gone through the roof. The point is this: If the output of the communications sector is measured in terms of data transferred instead of the number of minutes it's in use, it would show far more dramatic growth than the published numbers indicate.

Prices in the communications sector have also likely fallen much more sharply than the government numbers show. According to the Bureau of Labor Statistics, the producer price index for interstate telephone service has risen by 2.4% over the past five years. Yet this figure doesn't take into account the discount calling plans that most long-distance companies now offer. Nor does it adequately track the cost and use of leased lines. The BLS hopes to remedy some of these problems with a new index for telephone prices, perhaps by January.

The information economy also has a much larger productive capacity than the current government statistics indicate. For the moment, the main measure of how close the economy is to its maximum operating rate is the Federal Reserve's industrial capacity utilization number. While this includes utilities that sell electricity and natural gas, it leaves out telecommunications. That means there is no good measure of the amount of spare capacity in the U.S. telecom network. That's an important omission, since many businesses have become increasingly dependent on reliable--and widely available--communications services.

Even the investment boom of the past few years understates the true value of the spending on information technology. According to Commerce Dept. figures, investment in communications equipment has barely risen since 1990. What these numbers don't say is that for the same price, companies have been able to buy vastly more sophisticated switching gear and other telecommunications equipment, with new capabilities such as call forwarding.

Beyond those hidden by the measurement problems, there are some fundamental differences between the information economy and its predecessors. In the past, technological improvements such as railroads, auto plants, and steel mills required vast amounts of capital. But because the price of information technology continues to drop so quickly, companies can spend less to get healthy improvements in productivity and quality. Indeed, in recent years, the productivity of capital--defined as the amount of output produced per dollar of plant and equipment--has gone up for the first time in the postwar era. ``As the U.S. becomes an information-oriented economy,'' says William Sterling, an economist at Merrill Lynch & Co., ``you may have less need for capital than you have in the past.'' For example, phone companies are able to boost the carrying capacity of their existing fiber-optic cables by simply upgrading the electronics at either end. That means they can add to capacity without having to go through the expensive process of digging up old cables and installing new ones.

Even connecting all of the nation's homes to the Information Superhighway may cost less than expected. In California, Pacific Telesis Group and AT&T are estimating that it will cost an average of $800 to wire each of 1.5 million homes with a combined fiber-optic/coaxial cable network that can carry the most advanced services. That compares with $1,600 for the electronics and labor needed to run a fiber cable all the way to the home. ``The fiber-only estimates were scaring everybody off,'' says Robert Clark, vice-president for marketing and sales at AT&T Network Systems. ``We've been able to see another way of getting all the services.''

If these lower estimates turn out to be right, it won't come as a total surprise: On a comparable basis, the price of information-technology equipment has dropped by 23% over the past five years, according to Commerce Dept. numbers. This trend, if it continues, will have important implications for interest rates. If companies need to borrow less money to finance their investment in high-tech equipment, that will keep overall rates lower than they would have been otherwise. And that will benefit homeowners, the government, and other borrowers.

Still, there's the matter of those losers from the shift to the information economy. At the top of the list are the workers who have lost their jobs as companies reengineer their businesses. The reduction in staff can be enormous. At USAir Inc., 650 people were once needed in the revenue accounting department. Now that much of the process has been automated, only 350 people are needed to do the work, says Senior Vice-President and CFO John W. Harper. And at many companies, the downsizing isn't over. ``Where will all these people be employed?'' asks Lester Thurow, an economics professor at MIT and former dean of the university's Sloan School of Management. ``It's not at all obvious.''

Ironically, some of the biggest staff reductions have come at computer and telephone companies, which are at the heart of the information economy. Competitive pressures play a role, but these cuts are being driven mainly by technological advances that let the phone companies, for example, do with fewer operators, maintenance people, and other workers. NYNEX Corp., which supplies local phone service in New England and New York, announced plans last January to pare its workforce by 22%, or 17,000 people, by the end of 1996. Overall, employment in the telephone and computer manufacturing industries has already dropped by 154,000 since 1988, with more cuts to come.

Also at sea in the information economy are unskilled workers and people who can't keep up with technology. Indeed, recent studies suggest a hefty payoff for workers who feel at home in the digital world. Princeton University economist Alan B. Krueger estimates that people who use computers at work earn 10% to 15% more than colleagues in similar occupations who do not use computers. Says Lawrence Katz, chief economist at the Labor Dept.: ``There is very strong evidence that people who work with computers earn higher wages.''

Still, even if some people are being left behind, the information economy is creating thousands of new businesses and jobs. For example, the Home Shopping Network--which sells jewelry and other merchandise on cable TV--has grown to employ some 5,000 people, up from 600 in 1985. At the other end of the spectrum are startups such as SandPoint Corp., a Cambridge (Mass.) maker of software that helps people track down information in databases. Over the past year, SandPoint has grown from 15 to 32 employees, and it's still expanding. Overall, the number of jobs in the software, data processing, and information retrieval industries has risen by 31% since 1988, and these industries now employ more people than the auto industry.

Besides creating jobs, the information economy may even make it a bit easier to match workers to existing jobs. The Online Career Center, based in Indianapolis, provides job and resume listings on the Internet. Since it went on-line in June, 1993, observes Director William Warren, it has become one of the most popular databases on the system, with 13,000 to 14,000 job openings listed and nearly as many resumes. Ultimately, nationwide listing services such as this could make labor markets more efficient and help lower unemployment.

The effects of the information economy are even reaching into rural areas by shifting development away from congested urban regions. With more and more parts of the country having access to high-capacity telecommunications, companies can now put jobs such as order-taking in remote locations without losing touch with the rest of the business. ``What telecommunications allows you to do is put the right facilities with the right labor,'' notes Ken Kuhl, a consultant with Moran, Stahl & Boyer, a business relocation firm.

Technological advances will have an even more profound impact on the vitality of rural areas by bringing big-city services and amenities to small towns. For example, the telecommunications network operated by the state of South Dakota enables rural schools to offer Spanish classes via interactive TV--something they would never have been able to do on their own. The information revolution, says South Dakota Governor Walter D. Miller, ``is going to change the face of South Dakota as much as rural electrification did.''

That's an apt parallel. Just as the U.S. economy today would be unthinkable without electricity, so will tomorrow's economy be spurred by the free flow of information. Judging by the explosive growth of information technology so far, the juice is only starting to flow.