Last year, capital spending for hardware alone exceeded investments made in every other major economic sector. This implies that IT was seen as offering an appropriate investment response to Y2k paranoia and Internet hysteria, as well as meeting the needs of a rapidly expanding economy. But IT investments don't yet account for the full costs of installing and maintaining IT. Each dollar of capital investment in IT requires at least another $2 to $3 in labor costs to maintain it. This amounts to a total IT budget last year of about $1.7 trillion, twice the total of all profits, and it's growing at more than 20% per year. That's four times faster than the recent rise in the gross domestic product.

Is this sensible? Is an economy competitive when it devotes almost half of its investments and twice its profits to IT? How much more information does the U.S. need to prosper? When the U.S. emerges from its current downturn, will recent growth patterns reappear? To answer these questions, let's examine the history of IT's share of business investments:

The blue line on the chart below represents actual spending in current dollars. But the agency that released the figures, the Commerce Department's Bureau of Economic Analysis, finds that current dollars are inapplicable for making historical comparisons because IT has been gaining in value over all other investments [Business Opinion, Jan. 8]. Therefore, the government sets a higher value for IT, shown by the red line.

Even if IT budgets were to maintain the same share of investment funds as they did last year, the value of computing relative to everything else would keep exploding. The economy would be plowing its capital surpluses to keep expending its information-processing power. That would dwarf the worth of every other capital investment such as real estate, transportation equipment and energy exploration. Doing so would leave a steadily diminishing supply of capital funds to finance a growing list of international and domestic economic challenges.

How much excess spending can be attributed to this recent IT capital investment bubble? Based on the 1996 rate of 31.9% for IT's share of all investments, total IT capital spending for the five years through 2000 would have been only $1.8 trillion, compared with actual spending of $2.3 trillion, making the IT investment excess worth about $500 billion. That money is sorely needed now as revenues and profits fall.

What's a reasonable prognosis on the future of IT investments? Just examine the blue line showing the rise of IT's share from 7% in 1946 to 39% last year. The growth comes in spurts, reflecting repeated cycles of "build-and-scrap" investments. As long as each successive cycle was affordable, it was prudent to discard old systems. But those days are over. We have reached a stage where the dismantling of client/server and enterprise systems is taking place even before they're fully installed. In the next few years, the prospects of an IT investment pace comparable to anything that has occurred during the past five years is unlikely. Spending will remain sluggish until IT payoffs become more attractive than those of other investments.