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Online Extra: Mark Zandi: "Tech Will Return"


Economists are often accused of being slow to appreciate the impact of technology. Not so Mark Zandi, chief economist of the consulting firm Economy.com in West Chester, Pa. While he thinks the post-1995 surge in Web-related productivity growth will inevitably slow down, he says tech investment will continue to keep it at healthy levels. And "we're already beginning to see a rebound in tech investment," he adds. BusinessWeek's Timothy J. Mullaney recently picked Zandi's brain on a wide-ranging series of issues related to tech and the economy, today and tomorrow. Following are edited excerpts:

Q: Is the tech industry mature?

A: I don't think it's a mature industry, and I think technology gives companies tremendous comparative advantage. I think the flaw in Carr's [Nicholas Carr, author of a widely cited Harvard Business Review article titled "IT Doesn't Matter"] thinking is his analogy between electricity and railroads. Technology is rapidly evolving, not standing still. The same can't be said for railroads and electricity. Once invented, they didn't change by very much. What we mean by technology changes almost daily.

In tech, there's tremendous value to learning by doing. Unless you get down and dirty with the technology, you're not going to understand the strategic opportunities. This is changing and extraordinarily complex. Unless you're continuously investing, you will lose advantage.

The problem is thinking about technology only as a way to attack the cost structure. Companies have been forced to do it [by the recession]. Otherwise they'll end up in bankruptcy. But ultimately it's a mistake. The winners are going to be the ones who invest and take chances.

American corporations have said, "we don't have the will or capacity to innovate, so we'll treat tech as a way to cut costs rather than grow revenue." And that's what's wrong. The pendulum has completely swung from, "let's buy everything and not worry" to, "it's the end of history." And that makes no sense.

Q: Is this e-biz on a shoestring?

A: Yes, but each new chip enables new applications and new technologies, and those seem to be coming very quickly. And those will take e-biz to the place where the shoestring gradually goes away.

Q: Do buyers today feel duped?

A: I don't know that people felt like they got duped. They got carried away. Most realized going in that they were taking a step they didn't know what the results would be. Business leaders are now much more realistic about IT and understand it better.

But one problem Corporate America has is that it's run by people who don't understand technology at all. I don't think most senior managers or CEOs understand the power of the tech they have at their fingertips. I don't understand it. I don't think people are duped, it's just hard to get their hands around it.

If they blame anyone, it's the Street, not Big Tech. If they didn't show they were investing in tech, their stock would be pummeled, and they would be out of a job. And they knew it was a bunch of hokum. They knew they were making bad decisions, but they had no choice but to make them, The stock market tail was wagging the Corporate American dog. They made mistakes because they had to move quickly, and they had to make decisions.

But now they can take their time. And investment will pick up once the economy improves. Tech is no different than anything else business invests in.

Information processing investment is 48.5% of total capital spending in first-quarter 2003, and its bottom was first-quarter 2002, 45.5%. We're already beginning to see a rebound in tech investment. We're still living off the investment boom. It's key to the productivity boom now. But they're going to run out of ways to do it if they don't start investing. If it doesn't happen by year's end or this time next year, productivity is going to come down pretty sharply.

Q: How will the recovery be different from those in the past?

A: The coming rebound will be more subdued than recoveries past, in part because businesses will stay more cautious in their total spending. They won't come roaring out of the gate because of what they've been through. Real estate didn't get going [after its 1990-91 bust] until 1996-97. It took five years for the animal spirits to get going. It will take a good, solid five years from the '01 bottom before things really come roaring back, unless some pathbreaking new technology comes on that no one is anticipating.

Q: What are the greatest threats to a robust tech recovery?

A: The thing that concerns me the most is the potential that the rest of the global economy never really kicks in and provides a source of demand for U.S. tech production. Europe is arguably back in recession, Brazil is back in recession, Japan never really got out. Even heretofore healthy economies like the U.K., Canada, and Australia are struggling. U.S. tech companies are going to rely on stronger growth in other countries, and I don't know if they're going to get it.

Q: Will technology grow faster than the economy?

A: Tech will grow significantly faster than the economy. Real GDP growth should be about 3%, and tech should be at least twice that over the next five years. And that's a period of relatively subdued growth in tech because of the memory of what we've been through.

Q: Is 6% enough?

A: That will be a basis for nice growth in Silicon Valley and will support other tech centers across the country. Tech will return to being one of the leading growth sectors of the economy.

Q: Economy.com forecasts productivity growth to slow sharply this decade, by about 1% from 1995-02 levels. Why do you have productivity slowing down so sharply?

A: I see the world of productivity growth somewhere between what we experienced between 1973-95 and 1995-2003. We've had tremendous growth because of a confluence of events that won't be repeated: low cost of capital and a lot of tech coming at the same time. It's going to be tough to get those gains going again, but it will be substantially greater than most of what we've had post-'73.

Q: Will Silicon Valley come back when tech comes back, or will it lag severely and not really be the same?

A: I think its prospects are fine. It's a boom and bust economy that has busted and will boom again. Its fundamental strengths are its people and its institutions, like Stanford University. And I can't imagine a nicer place to live. So people will stay.


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