Is High Tech Recession-Proof? Don’t Bet on It

The wild gyrations of the stock market in recent weeks, combined with the frightening turmoil in Russia, Asia and Latin America, have shaken many people in the high-tech industry. Uncertainty in the world economy has led some to question the widely shared view that high tech is immune to the business cycles that periodically plunge us into recession.

There are still optimists, of course. Esther Dyson and Donna Hoffman, two prominent technology gurus, told the magazine Industry Standard that the Internet’s economic growth is so strong that a recession won’t be significant for information technology firms or workers.

They and other industry analysts argue that whatever happens in the economy as a whole, information technologies have “crossed over” from luxury goods to necessities, and that the cost savings from electronic commerce and from restructuring enterprises around networks will offset any losses from depressed revenues.

But the recent jolts in the stock market should prompt some deeper thinking about the character of the “new economy.” It’s too facile to say that computers, software and the Internet have become necessities for individuals and companies; the high-tech economy is far more complex than that.

If we take a longer, bird’s-eye view, we can see that we’ve created a system with many strengths and an equal number of vulnerabilities. Some of these strengths and weaknesses have the same sources.

What is the nature of the high-tech economy in the last few years of the 20th century?

What we’ve witnessed over the last 20 to 25 years is the United States’ extraordinary ability to pile layer upon layer of “value-added services” on top of a mature industrial and agricultural base. For the last half-century, nearly all the productivity gains in the U.S. economy have come from manufacturing and agriculture, which now employ small fractions of the national work force--2% to 3% in agriculture, 15% to 16% in manufacturing.

The wealth generated by these two “basic” sectors of the economy has allowed us to develop and refine a service economy that now employs the majority of wage earners.

We began with an initial layer of applying computers to business problems. We soon added business-to-business solutions, then more general networking, then Internet ubiquity.

Microsoft, Intel and the major hardware manufacturers still thrive at the base of our pyramid of value-added services. But layered on top of this base are countless companies that constantly push technology and the character of value-added services, so that at the apex of this pyramid you find cutting-edge companies exploring technologies and ideas that only a handful of people have even heard of and whose mass-market appeal appears distinctly distant. At this apex we find obscure but “cool” Internet features, eccentric but potentially promising services, and intriguing ideas that may or not succeed in the marketplace.

This has been the great strength of the American economy, which no other country has even been able to approach, let alone compete with.

But this system also has significant vulnerabilities. Each layer of value-added services is dependent on the health and growth of the one beneath it. All of them are dependent on the perception of customers that the value offered is indispensable. The further up one goes in this pyramid, the more likely it is that the technologies and services are those that consumers could forgo in hard times.

Viewed one way, during good times, this pyramid of “value-added” is as strong as the stone pyramids of Egypt. Viewed another way, in an economic downturn, it’s a house of cards.

A related trend, again a feature of both strength and weakness, is globalization. The high-tech industry is, at the base, thoroughly global: You can find Dell, IBM, Compaq, Apple and, needless to say, Microsoft products in nearly every country in the world.

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Globalization creates another kind of pyramid, one of pure value, of simple wealth and influence. Bill Gates sits alone at the top of this pyramid, as the man with the most influence around the world because of the wide distribution and universal utility of his company’s products.

Fifty years ago, nearly every city or region had its own pyramid of value--its own industries and tycoons and distribution of wealth. Now, however, we have a single, global pyramid of value, a consolidation of formerly local economic units into worldwide competition. This sucks money out of many areas and deposits it wherever the winners happen to live and work.

Consequently, we have some famous regions in the U.S. that are overdeveloped and awash in money and talent--like Silicon Valley, Seattle, New York and Austin, Texas--while other areas are underdeveloped and sliding further behind, such as rural America. The effects of this trend are even more severe among the rural poor in other countries, the overwhelming majority of the world’s population.

These two “pyramid” phenomena feed on each other, producing both a winner-take-all economy that covers the entire globe and a corresponding concentration of technological development that is increasingly “baroque,” favoring over-engineered, feature-bloated products and superfluous services that are more and more remote from the basic needs of most consumers.

The growth of the U.S. economy in the last 10 years has been based on three factors: the willingness of Americans to accumulate consumer debt, now at a record $1.2 trillion; export-led growth, which depends on the health of economies overseas; and technological innovation, particularly in information, which now accounts for a staggering 40% of all capital investment in the U.S.

Each of these three growth factors is now threatened by worldwide deflation, which will squeeze debt repayments, depress overseas markets and cut research and development.

The precarious position of new firms on the cutting edge of technology may become even more precarious as customers decide they can do without innovations or upgrades and venture capitalists scale back their investments.

The root of nearly all of our economic problems is the deep, stubborn and expanding income inequality throughout the world, which will be exacerbated by all the trends described above, especially deflation. A global pyramid of value dependent on a small fraction of income earners, and on technologies that most people can live without, is built on sand.

This is the long-term threat to the “new economy,” one that most high-tech leaders seem unable to comprehend, let alone fix.

Gary Chapman is director of the 21st Century Project at the University of Texas at Austin. His e-mail address is gary.chapman@mail.utexas.edu.