The Death of the Dot-coms Proves the Internet Was Overhyped
Don't overreact. Sure, the dot-com stock bubble has burst, helping to cut the market value of stocks traded on the NASDAQ in half. It would be a mistake, however, to extend such stock-market negativity to the economic impact of the Internet itself. After all, no one disputes the transformative impact of the railroad and the automobile even though thousands of such companies that were once in business aren't any more. Competition winnows out the few firms that are able to survive, ensuring that the benefits of new technology are passed on to consumers.
But forget about all those start-ups for a minute. New technologies do more than just create new firms and consumer products. They change the way that firms throughout the economy do business. The potential cost savings for firms that take advantage of the Internet are significant, maybe more significant for the mainstays of the old economy than for the nimble little outfits that drove NASDAQ up in the 1990s.
The Internet makes it cheaper to design products remotely; reduces the need for vast inventories; provides a better means to target, communicate with, and service customers; cuts the costs of delivering many services and entertainment; and helps companies remove layers of bureaucratic fat. How much will all this add up to? Consider the impact in the United States alone: A study I am completing with fellow Brookings Institution scholar Alice Rivlin and a team of researchers from major U.S. universities suggests that within five years, the Internet may save Americans as much as $200 billion annually. In a roughly $10 trillion economy, this 2 percent savings translates into a potential annual productivity improvement of 0.4 percent. Doesn't sound like much? Think again. If cumulated over 10 years, an annual improvement of 0.4 percent would increase the income of the average American by 4 percent, or roughly $1,600 -- an amount larger than most of the tax-cut plans bandied about during the 2000 U.S. presidential campaign.
Similar productivity gains are possible, even probable, in other industrialized countries, according to a recent study by the United Nations Conference on Trade and Development (UNCTAD), which suggests a gain of almost 5 percent over the long run. UNCTAD is more pessimistic about the potential gains from the Internet in the developing world, although it is conceivable that the Net will jolt the inefficiencies out of firms in these countries and thus produce even larger cost savings. Already, the Internet is making big inroads in countries like Brazil, where banks are radically changing the way they do business by encouraging more customers to go online. Expect financial institutions elsewhere around the world to follow.