The Net Will Raise Us from Recession

An economy propped up by federal spending belongs to the past. This time, online efficiencies will be the power driving the next upturn

By Christopher Farrell

When it comes to the economy, the worst is yet to come. The Conference Board's index of consumer confidence, mostly reflecting developments from before the terrorist attack, recorded its largest decline in a decade. And the stock market is down some 26% since the beginning of the year, a drop that includes the 6% drop following the heinous terrorist strikes on Sept. 11.

The troubling combination of crumbling consumer confidence and falling equity prices sends a clear signal that the U.S. economy is in for negative growth. Wall Street veterans and savvy economists are now worried that a financial crisis lurks in a deteriorating global economy, reminiscent of the threat posed to world capital markets in 1998 by the collapse of the debt-laden Long Term Capital Management hedge fund. "The longer the economy is struggling, the more the risks rise of a financial time bomb going off," says Mark Zandi, chief economist at

Finding a silver economic lining in this dark global cloud is tough. The bad news is obvious and accumulating. But here's one possible long-term outcome that would be both positive and unexpected: The legitimate concern that the government will get bigger and private-sector productivity will stagnate in post-attack America may be misplaced.


  It's true, enhanced security is driving up the cost of doing business in the private sector. And yes, the government will increase the nation's military capability, as well as push for more surveillance and intelligence authority. But like your grandfather's Oldsmobile, the image of an America debilitated by national security concerns belongs to a different economy and an earlier generation.

Instead, business and government alike will race to embrace the Internet and the efficient economics it creates, a shift that could lead to far higher levels of productivity throughout the economy. "The Internet model is both more difficult to attack and a high productivity model," says Grady Means, managing partner of the Washington Consulting Practice of PricewaterhouseCoopers and author of MetaCapitalism: The Design of 21st Century Companies and Markets.

The Internet is a global market made up of computers, network connections, and databases. It allows businesses, such as auto makers and consumer-product companies, to offer customers higher quality goods at lower prices by organizing and managing global supply chains without tying up huge sums of human and investment capital. And the Net makes it easier than ever to share knowledge across regions and borders while being extremely difficult to disrupt for any length of time.


  Today, all companies are under pressure to increase their security. But with deflationary forces gathering momentum in a weakening world economy, most industries will not be able to pass the higher deadweight costs of security guards and surveillance systems on to their customers. Corporate America will turn to local, national, and global networks to cut costs and share information. Wall Street firms, delivery companies like United Parcel Services, and other companies in hard-hit industries demonstrated the power of decentralized decisionmaking and high-tech savvy by quickly getting up and running against enormous odds following the Sept. 11 disaster.

There's no question that the government will play a bigger role in some areas of the economy, such as defense. But no one wants to return to the days of huge federal budget deficits, let alone the era of big government during the cold war. So government also must use the Internet to cut its costs.

One intriguing idea would be for the feds to emulate business-to-business (B2B) exchanges by using the Internet to coordinate and exchange information among agencies more effectively. Means estimates that the gains from sharing information over the Net would enable the federal government to reduce its outlays by 20% to 25% in discretionary programs and by 10% in mandatory programs -- to the tune of about $200 billion a year. "The government will move toward a more decentralized model," says Means. "We will move toward an Internet model."

Of course, none of this can happen overnight. The productivity expansion of the late 1990s followed a long gestation. Nevertheless, both management and labor are moving up the "experience curve." The push for achieving even greater efficiencies through the potent combination of Internet-based technology and Internet-inspired organizational savvy will only intensify throughout society. The probable payoff: Sustained productivity increases that could return the economy to a noninflationary growth path like the 4% average annual rate of expansion between 1995 and 2000.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online

Edited by Thane Peterson