Technology key to U.S. economy's future

By Bharat Jhunjhunwala

NEW DELHI (JP): It is clear that the unprecedented U.S. growth is propelled by new technological development of, in the words of U.S. Fed chairman Alan Greenspan, laser, fiber optics, satellite and computer technologies. But it is not clear whether this growth will ultimately create more jobs and buoy the world economy, or eat them away and drag it into a recession. For new technology has often both demand-creating and labor-displacing effects. Which of these turns out to be stronger will determine the sustainability of present U.S. buoyancy.

It is important to distinguish between the investment -- and consumption-led demand. New products create avenues of consumption and buoy the economy in the long run. But investment- led demand, especially in labor-displacing technologies, kills demand in the long run. Thus economist John M. Keynes said, "The consumption for which we can profitably provide in advance (by investment) cannot be pushed indefinitely into the future ... Each time we secure today's equilibrium by increased investment we are aggravating the difficulty of securing equilibrium tomorrow." The key question, then, is whether present technological developments are consumption creating or they are labor saving and therefore consumption reducing.

Bill Gates holds that computers will create more jobs. When printing was started and books began to be produced, he said, it was feared that "people will only read books all day instead of going out and doing things, they will be bookworms". At that time there was a very small group that could read. It took more than 100 years before literacy spread. "Now people are saying exactly the same things about the computer," he says, dismissing the fear that computers will eat jobs away.

But what about fiber optics? Will people consume more as a result? If the cost of a telephone connection is reduced as copper cables are replaced with optic ones, it is scarcely likely that Americans will do anything like that. They already have most of what they can use. The consumption of more phones will be a nuisance -- remembering more phone numbers, more wall space to hang them on, and so on. The net result of fiber optic technology may therefore be labor displacing. It may not be apparent though because immediately factories will be established for the production of optic cables. The crunch will come when a larger number of workers in the copper cable industry begin to lose jobs.

Most technologies cut both ways. Take genetic technology. The transgenic Bt Cotton creates no new product for consumption. It only reduces the demand for labor in weeding operations. The cotton shirt that is produced by the Bt seeds is no different. But transgenic technology makes it possible to order customized fruit. The loss in jobs in weeding may or may not be compensated by the latter. And that is the crucial question. If new demand, and jobs, in the customized fruit industry exceeds the loss in weeding, then the world economy is in for a period of growth. But should it turn out the other way then a recession would be inevitable. Once the investment in Bt Cotton seed production has been made, the total demand will shrink. Less workers would be required for producing the same amount of cotton.

Thus the significance of Alan Greenspan's testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs in February. Greenspan repeatedly stresses the importance of technology in fueling the present boom in the United States. Persisting technological advances "made capital spending more attractive. Business success in enhancing productivity buoyed public optimism about profit prospects, which contributed to another sizable boost in equity prices." This led to a rise in household spending "from the surge in wealth associated with a run-up in equity prices".

It is understandable that fiber optics technology may buoy stocks for the time being. But what happens when the factories have been built and require fewer workers? From where will demand then arise?

Should that happen, then the U.S. economy would come tumbling down like a house of cards. Stock prices would have eroded but the debt, both household and sovereign, would stay and one would not be surprised at finding Americans in a situation not much different than Latin Americans who are still paying for the capital flight of the 1970s and 1980s.

The crux of the matter is the impact of technology on consumption. If laser games, cheaper telephones, satellite-based TV programs and Internet movies do create additional demand then the present U.S. buoyancy will sustain, otherwise it will not.

The writer obtained his PhD in economics from the University of Florida. He taught at the Indian Institute of Management. Presently he is a freelance columnist based in New Delhi.