Better to invest in infrastructure than to cut taxes

May 21, 2001|By Edward Goldberg

NEW YORK -- The United States has been inundated with technological innovations in the past decade.

We have been on a wonderful technological shopping spree. Innovation and change have become almost a way of life. Yet have we fully realized how this past decade has transformed our economic behavior? Our economy possibly has been pushed into an uncharted orbit and we are still viewing it with pre-Internet eyes.

Clayton Christensen at Harvard University pioneered the concept of "disruptive technologies" -- new industries or technologies that replace existing ones because they are cheaper and more consumer friendly and, therefore, take over the market from the more established product or firm.

But what if we have entered a cycle of near-nonstop, rapid technological disruption? A period in which the rate of change, especially within our high-tech industries, has developed so quickly that, almost before a new product is deployed, a newer product is put on the market that questions the legitimacy of the current product.

Economically, the innovation immediately devalues the older investment. In previous cycles of innovation, the older product would have been used for some time and, in terms of balance sheet accounting, fully depreciated. Thus, the investment in the innovation would be truly a new investment.

Currently, however, because of the speed of the development cycle, technological innovation can cause a decrease in wealth since it destroys the value of the original investment before it has been fully used -- in effect, leading us into a period of deflation.

From a human perspective, the U.S. economy is suffering a dichotomy of newness.

On one hand, there is an oversupply of newness and on the other a lack of newness. Consumers and corporations are satiated with products. People have reduced their spending and the marketplace has become lethargic. Consumers have begun to feel a sense of paralysis caused by their inability to deal with excessive change.

At the corporate level, management clearly does not understand why it needs to make another investment in the newest of new systems. They question how much an investment in the latest innovation really adds to their bottom line. There needs to be time for absorption, a psychological breathing space.

Few disagree that some stimulus is needed in order to check this break in the U.S. economy. The problem is twofold: First, if we have reached a new level of economic development, will the traditional methods of stimulation have any real effect? Second, how do we stimulate purchasing while at the same time allowing for the human and industrial cycle to find equilibrium?

In order to give corporations and people time to assimilate the changes that have occurred, and at the same time prevent the economy from slipping, economic stimulus needs to be targeted.

In lieu of a broad tax cut, government investments need to be made in infrastructure, highways, school buildings and airports, as an example. This funding would be a catalyst to renewed growth without further devaluing the over-satiated segments of the economy. It would be an immediate antidote to the softening in capital investments that the Federal Reserve Board mentioned last Tuesday.

The idea of rapidly increasing government spending on infrastructure funding is ideologically incorrect at this time. If, however, we have reached a new, uncharted level in our economic development, we need to scrutinize how individual and corporate behavior is affected by rapid technological change and be willing to adjust government policy to that end.

Edward Goldberg, who studies international markets and economic conditions, is president of a New York-based division of a worldwide trading company.

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