Technology and America’s Good Times: An overview

By any standard, the American economy has performed extraordinarily well during the past several years. Inflation has been low and relatively stable. The unemployment rate has hovered in the neighborhood of 4 percent, a level not seen in a generation. Most remarkably, however, labor productivity-the output of goods and services divided by hours of labor required to generate them-has grown at a 3 percent annual rate since 1995, a pace that, if continued, will allow a doubling in the living standard of the average American worker in just 25 years. This growth far outpaces the 1.4 percent annual rate recorded between 1973 and 1995 and is even higher than the roughly 2.5 percent growth rate achieved after the end of World War II up until 1973, a period dubbed by many economists as the “golden age” of American economic performance. What is especially remarkable about post-1995 productivity is that it has surged while labor markets have been tight, or precisely the time when economists otherwise would have expected growth to slow down as firms hire the least productive workers. Just the opposite has happened during this, the nation’s longest-ever expansion, which-although slowing at this writing-shows no signs of ending, despite recent turmoil in the Middle East and volatility in the capital markets.

Will this good fortune continue, or will the American economy lapse into the slower growth to which we had grown accustomed just a few short years ago-when Princeton economist Paul Krugman urged us all to have “diminished expectations”? To some degree, the answer will depend on how our newly elected president and members of Congress handle the projected surpluses in the federal budget. In particular, if the surplus materializes-that is, if the economy does not plunge into recession-but is spent too quickly, the Federal Reserve is likely to offset the fiscal stimulus with higher interest rates, which will discourage investment and thereby slow the future growth of productivity and living standards. By contrast, a prudent fiscal policy that preserves the surplus will help keep interest rates low, thereby continuing to lay the foundation for solid investment-led growth in the years ahead.

In the long run, however, almost certainly the most important factor driving improvements in productivity and living standards has been and will continue to be the rate of technological advance. Technology not only makes workers more productive but, in the health sciences, also enables them to live longer. Technology also shapes our society. Adults today cannot imagine a life without the automobile, electricity, or the air conditioner-three of the many 20th-century technological wonders they take for granted that were not widely available in their parents’ generation. Similarly, our children certainly will be unable to imagine life without the computer, the Internet, and, when they grow old enough to realize its importance, the genetic revolution that is likely to prolong the life spans of the current and future generations.

As this nation welcomes a new set of leaders to political office, while ushering in a new century, it is timely and important to address the themes explored by the articles in this issue: how to keep the technology boom going and, in turn, how to respond to some of the vexing public policy issues that the Internet revolution in particular has raised.

Keep the Technology Boom Going

While new discoveries, new products, and industrial processes are typically invented and developed by the private sector, public policy plays an important role in encouraging innovative activity. Three key policy areas are addressed in this issue, and in each the authors either raise cause for concern or discuss new controversies that are best resolved sooner than later.

One important way in which the federal government, in particular, has stimulated technological advance is by funding basic research-often highly theoretical work that lays the scientific foundation for commercial applications down the road. Much of the information technology revolution-the hardware, the software, encryption techniques, artificial intelligence, and the Internet itself-owes its origins to federally funded research. A similar claim can be made for much of the commercial work that is now revolutionizing biotechnology.

Yet unlike applied and commercial R&D, whose benefits are largely captured by those who undertake it, basic research generally produces benefits that are later widely used, often in unanticipated ways. In the jargon of economics, basic R&D is a “public good” that, like such other public goods as national defense and a well-functioning legal system, will not be supplied to society’s fullest satisfaction without some degree of government support.

Supporting Basic Science

For much of the postwar period, driven by the nation’s rivalry with the Soviet Union, the federal government actively supported basic science, primarily in connection with military (and to a lesser extent, space-related) activities. Although this research has produced some welcome spin-offs-such as the Internet itself-the federal share in overall R&D has fallen since the end of the Cold War, understandably so. But as Linda Cohen and Roger Noll demonstrate, the government’s support of basic science- outside health-has become a smaller piece of the total research pie. It is tempting to dismiss this trend by pointing to the explosive increase in venture capital funding for all kinds of new business undertakings, especially in information technology. But venture funding primarily supports applied or commercial R&D, boosting ideas whose origins often spring from earlier basic scientific discoveries. Cohen and Noll express concern that unless federal support for basic science, especially in math, engineering, and the physical sciences, grows substantially in the years ahead, the intellectual cupboard that has been feeding the entrepreneurial drive of the late 1990s may grow increasingly bare, with disturbing consequences for future business formation and economic growth.

Unfortunately, resolving the problem will take more than money. More scientific output will require more well-trained scientists. Yet on this count, Noll and Cohen report the disturbing fact that the numbers of American-born scientists and engineers have been static even as our population has grown. As a result, America increasingly has had to import foreign scientists, who although they make worthwhile contributions while they’re here, often return to their home countries (many of which are desperate to entice them back). The challenge for policymakers is to think long term: to support the training of a new generation of scientists, engineers, and mathematicians at the university level. Otherwise, throwing more money at basic science will simply drive up the salaries of existing professorial talent without necessarily generating new ideas in the process.

Patents and Competition

There is a tension between the next two policy instruments for stimulating private innovation. On the one hand, the Constitution guarantees inventors and developers of written material temporary monopolies-patents and copyrights, whose terms Congress may fix-to encourage the development of new ideas and works. Statutory and common law also protect trademarks and trade secrets for a similar reason.

On the other hand, the capitalist economic system rests on the virtues of competition to stimulate entrepreneurs not only to innovate, but also to cut costs, to stay a step ahead of the competition. The importance of competition has been enshrined in various antitrust laws, which give the government (both federal and state) the authority to stop mergers that may threaten competition and to halt business activities that frustrate competition, such as price fixing and other forms of collusive activity, as well as practices of dominant firms that are aimed at squashing competition and have little or no legitimate business justification.

How can the nation’s commitment to upholding intellectual property (IP) rights and competition-at the same time-be squared? Several articles in this issue wrestle with this question. At perhaps the simplest level, Jonathan Baker-a former antitrust enforcement official-argues that if IP rights are treated like any other property rights, there need be no conflict between the nation’s commitments to IP protection and antitrust. Holders of IP cannot merge with or cross-license each other to reduce competition in particular markets, while firms that earn monopoly positions fairly (by, among other things, exploiting the value of their intellectual property) nonetheless cannot be permitted to entrench their dominance by forcing consumers to deal exclusively with them (as Judge Thomas Jackson found Microsoft to have done). Subject to these constraints, however, holders of IP rights certainly have full ability to exploit them in most any way they see fit.

One of the hard questions, on which different views are expressed here, is how far policymakers should go in being willing to grant patents for certain kinds of innovation. Baker, as well as Cohen and Noll, expresses concern that the economic landscape is becoming littered with too many patents and copyrights, which make it difficult for new businesses, especially those seeking to use genetic information and certain business software, to enter markets unless they pay what can be hefty license fees to patent holders.

William Haseltine, the chairman of one of the nation’s leading biotechnology companies, takes a different tack, at least with respect to patents for genetically based medicines. Haseltine argues that strong patent protection will be required in this field to reduce the risks of the massive and time-consuming investments that companies must make to continue to deliver the dramatic reductions in cost and the life-saving improvements that genetically based drugs are just beginning to provide. For similar reasons, price controls on such new pharmaceuticals can threaten the access of these companies to the investment funds required to support their research and development.

Technology and the Environment

On a different note, technological advance has been blamed in some quarters for leading to undesirable outcomes: the automobile and electricity generation plants, for example, are major sources of pollution. The challenge society faces is not, however, to halt such advances, but to find ways to “internalize” these environmental costs so that producers and consumers take full account of them when making investment and purchasing decisions. In fact, federal environmental regulators have been trying to do precisely that by adopting such market-like devices as emissions trading to reduce pollution in a cost-effective manner.

David Austin and Molly Macauley demonstrate in their article how such incentives can encourage technology to lend a helping hand to environmental cleanup. Automobiles emit far less pollution today than they did 20 years ago because they are equipped with catalytic converters, and, most recently, with sensors that are dramatically improving the efficiency of auto engines. Fuel cells hold the promise of reducing the emissions of carbon dioxide, thought to be the main culprit behind global warming. Satellite technology is being used to improve crop yield and health while reducing the need for environmentally harmful chemicals. In short, technological change should be viewed not necessarily as the source of new environmental problems, but as a solution to the problems we have today.

New Policy Challenges

Just as technology is changing the way we live, it is also creating a variety of new challenges for policymakers. Articles in the balance of this issue address some of the challenges that arise from the hottest new technology, the Internet.

Consider first the vexing, and closely related, issues of security and privacy. Public opinion polls consistently show that more people would use the Internet if they felt more comfortable that the personal information they provide on it is secure and if they were given a choice as to how that information later could be used or to whom it may be transferred. In principle, both concerns eventually should be allayed to some degree by technological advances in browsers and software. More privacy legislation may be in the offing as well.

Yet other security concerns associated with the Internet directly conflict with privacy, as Michael O’Neil highlights in his article. In particular, criminals are using encryption software to protect the security of their Internet transmissions, thereby avoiding the use of the telephone, which law enforcement officials can easily monitor with a search warrant. The FBI has tried to level the playing field with plans to monitor e-mails and other web traffic through a remote “sniffing” device called “Carnivore”-a prospect that has aroused strong concerns about privacy and caused Attorney General Janet Reno to order a review of the whole idea. In the meantime, the government probably will have to intensify the use of its own hackers to try to crack encrypted messages sent by suspected criminals, while toughening penalties against those who deliberately plant viruses and disrupt Internet traffic.

Copyright and the Internet

A second set of policy issues spawned by the Internet-or more precisely, by the Napster software program developed by then 19-year-old Shawn Fanning-is how, if at all, to protect copyrights on the Internet. Napster is used by tens of millions of people in the United States and elsewhere around the world (probably including many readers of this magazine) to swap digital recordings. At this writing, the legal fate of Napster is unclear, with continued wrangling in the courts expected for some time. But the prospect that file-sharing technologies like Napster, of which there are now many, may allow unlimited copying not only of recordings, but also of videos, books, and software programs, has unleashed a highly contentious debate between those who see the technology as a boon to consumers (and also unstoppable) and those who view the technology as threatening the distribution of any kind of new, original content on the Internet.

Jonathan Band and Cary Sherman take opposing views on this subject in their articles. Band argues that recent legislation, coupled with new encryption or copy controls likely to be available soon, will provide content providers with overly broad copyright protection, inhibiting “fair uses” of recordings and other copyrighted works, to the detriment of libraries in particular. Sherman responds by defending the recording industry’s legal fight to prevent file-sharing programs from eroding the value of copyright and thereby reducing incentives for artists to compose and perform music in the future. Similar logic would apply to other types of content capable of being distributed on the Internet. Both authors agree, however, that ultimately technology will solve the “Napster problem”-a “solution” that nonetheless cannot be guaranteed-although they differ on the desirability of that outcome.

The Digital Divide

The so-called digital divide and how to close it is yet another policy issue associated with the Internet. In fact, the growing popularity and usefulness of the Internet-as a way to learn, connect with other people, and purchase goods and services at lower cost or with greater convenience-is the reason many support a national commitment, backed with suitable policy instruments, to provide something akin to universal access to the Internet.

In 1996, Congress took a step in this direction by authorizing a national program for subsidizing Internet access for schools, hospitals, and libraries. But access at home is far less universal, on the order of 50 percent (and even lower in most other countries). Robert Crandall nonetheless takes a skeptical view of the need and appropriateness of the government doing more to subsidize ownership of hardware and regular Internet service for individuals (let alone broadband service, which is now taken by only 3 percent of all households). Prices of various Internet access devices (not just personal computers) have been falling like a rock, and they are now available for $400 or less. Some providers now offer Internet access for free. To be sure, computer ownership and Internet access are substantially lower among African-American and Hispanic households than among white households, but once account is taken of income, location, household size, and some other demographic variables, Crandall finds that Internet usage in these households is not significantly lower than for other groups. The digital divide, he suggests, should close naturally, as incomes grow, market forces make Internet access even cheaper, and households more widely appreciate the value of having it.

Another issue closely related to the digital divide is making effective use of the Internet in the classroom. It is one thing for classrooms to be hooked up to the Internet-a goal that is nearly accomplished after four years of subsidy through the telephone rate system-but quite another for teachers to be able to use the new technology effectively in teaching students. Craig Cunningham notes that on this score, the nation has a long way to go. Most teachers are not equipped to make full use of the Internet, nor are their classroom materials yet fully taking advantage of the interactive nature of the medium. There are a few shining examples where computers and the Internet are being used with significant effect, but the nation has a long way to go, he argues, before this success is widely replicated.

Innovation and Economic Growth

Technological advance is much like the proverbial goose that continues to lay the golden eggs of economic growth. But the process cannot and should not be taken for granted. Decisions policymakers take-to fund research, to grant IP rights, and to enforce the antitrust laws, among others-strongly influence the pace of technological advance and the form it takes. In turn, new technologies lead to new policy challenges.

In the concluding article in this issue, a research team from Harvard provides some survey evidence indicating that, on the whole, Americans are highly optimistic about the emergence of new technologies-especially new medical discoveries-and by large majorities believe that the benefits of scientific research outweigh any disadvantages. Similarly, most believe that the computer revolution has had a favorable impact on society-despite some of the downsides (concerns about privacy, availability of pornography on the Net, and security).

These views are not surprising. Technological advance means change, and change is not often a comforting experience. But it is primarily through continued innovation that living standards here and elsewhere are able to improve and thus to keep the good times rolling.