If the wishes of federal and state economic
development officials all came true, U.S. industry would be
a high-tech, white-collar paradise. Billions of dollars in subsidies,
municipal land-use policies strikingly skewed toward IT business,
and the unprecedented state sales-tax moratorium Congress recently
bestowed on the Internet show how profoundly our government
has bet on a dot-com future. But that narrowly defined future
can -- and likely will -- contract.
For their part, new-economy entrepreneurs, on whom regulatory
affection is being lavished, aren't complaining. "New York,"
gushed a high-tech lobbyist this spring, when the city expanded
its Internet subsidy program, "is standing out on the information
highway and showing a little leg."
It's easy to see why. Since 1993, new-economy enterprises have
allowed the richest 1.5 percent of U.S. citizens to pocket a
whopping $600 billion of the nation's $1.2 trillion taxable
income growth -- one of the most impressive high-end wealth
increases in history. The subsequent flood of capital gains
and income tax revenues rescued virtually every public budget
in the country, and government fell hard for anything Internet.
But, even now, with evidence of the possible pitfalls of IT
emerging, obsessed public policy is apparent. The economies
of regions that foster primarily white-collar service and technology
jobs grow far more slowly than those that support a full complement
of industries. Moreover, when elite IT employment crowds out
everything else, overall educational performance and income
Why, for example, should Latino K-12 students in Texas dramatically
outperform their California counterparts on standardized tests?
There are many cultural and political explanations for this,
but it's quite possible that the most important factor is that
Texas generates the nation's widest range of working-, middle-
and upper-class employment opportunities. California's relatively
tepid growth, in contrast, is heavily dominated by high-end
service sectors. Low-income Latinos living in cities such as
Houston and Dallas have far more opportunities to support their
children's education than those in high tech-infatuated San
Jose, Calif., or Los Angeles.
The Internet and high-tech growth seem to generate elitist
politics. Today's new rich are quick to adopt the conceits typical
of such privileged groups as Hollywood actors. When high tech
turns entrepreneurs into new millionaires, they quickly become
avid advocates of quality-of-life politics, espousing slow growth
and other exclusionist policies.
These sentiments predominate in such new wealth centers as
San Francisco; Seattle; Austin, Texas; Raleigh-Durham, N.C.;
and even Manhattan. And broad-spectrum economic development
is almost always the primary casualty. With constraints on the
supply and development of commercial, industrial and residential
land, rents and business expenses skyrocket. Unsubsidized, "old-economy"
sectors -- especially blue-collar manufacturing -- get chased
into more hospitable, less costly regions, if not overseas.
Mesmerized by Silicon Valley's success, few economic planners
care that the price of high-tech development will likely be
a narrow industrial base, massive wealth differentials and substantially
slower growth. But they should. To thrive in the long term,
IT, like all other industries, needs to interact and grow with
the rest of the economy.
Consider, for example, the recent productivity boom. Since
1995, U.S. output per labor hour jumped suddenly after more
than two decades of stagnation. Faster productivity growth is,
of course, a very good thing. It stimulates rapid expansion,
coupled with low inflation and unemployment.
Most economists and financial advisers attribute that improvement
in performance to the diffusion of IT throughout the economy.
But according to Northwestern University economist Robert J.
Gordon, there's scant evidence that technology is leading the
way. All the productivity gains, in fact, have occurred in durable-goods
manufacturing, which comprises only 12 percent of the nation's
economy; computer production accounts for the lion's share of
that growth. At the same time, productivity actually has declined
in the nearly 90 percent of our economy that is not making
The data suggest that during the 1990s, America's focus on
a narrow range of policy-preferred sectors artificially segregated
IT businesses from the rest of the economy. Trouble is, the
overwhelming majority of companies and industries that have
not yet joined in the nation's productivity boom comprise the
natural market for IT. It is shortsighted indeed to foster an
economy that builds up novel technical capacities and solutions
but simultaneously reduces the customer base for such products.
All too soon, our giddy public officials may taste the downside
of the unbalanced economy they've helped build. If stock markets
don't sharply recover, the capital-gains windfalls now feeding
public budgets will evaporate. The lesson should be obvious.
Government and IT sectors alike should expand our industrial
options and potential markets for the new economy. Now, while
we can afford to do so.