FRB Vice Chairman Addresses Impact of Computer and Software Technology on Productivity Gains
October 24, 2002. Federal Reserve Board (FRB) Vice Chairman Roger Ferguson gave a speech at the London Business School titled "Productivity Growth: A Realistic Assessment ". He offered his analysis of why productivity has grown in recent years, and even during the recent economic downturn. His analysis is based in large part on developments in, and adoption of, computer and software technologies.
Ferguson stated that "Productivity is a cyclical variable that typically falls in recessions. However, during the most recent downturn, productivity never declined and instead continued to grow at a fairly strong pace. ... output per hour in the nonfarm business sector has grown in excess of 5 percent over the last four quarters."
He said that "I believe that trend labor productivity in the United States accelerated in the mid 1990s. That acceleration reflected several factors not tied to the strong business expansion: notably, an apparent pickup in the pace of technological progress -- especially in the so-called high tech sector -- as well as a surge in capital spending by businesses. But other factors were also at work, including well aligned monetary and fiscal policies that created an economic environment conducive to noninflationary economic growth. In addition, our economy continued to benefit from past actions by the government to deregulate industries."
Citing a study by FRB economists Steve Oliner and Dan Sichel, Ferguson (at right) stated that "From 1995 to 2001, labor productivity grew at an annual pace of 2-1/4 percent." He continued that the Oliner Sichel study found "that about half the acceleration in productivity can be attributed to capital deepening. As you know, providing workers with more equipment improves their efficiency. At the aggregate level, the high levels of business investment raised the amount of capital per worker and thereby boosted productivity. Also, most of the faster capital deepening reflected spending by businesses on high-tech equipment, mainly computer hardware and software. The other half of the pickup in productivity growth reflected technological innovations in the actual production of computer hardware and semiconductors as well as better management--perhaps assisted by these high tech investments -- of the nation's capital and labor. Oliner and Sichel estimate that, if one consolidates all the influences of high tech investments, they fully account for the acceleration in productivity over the 1995-2001 period."
Ferguson also used this speech to address recent developments in the high tech sector, and its prospects for recovery.
He said that "In the 1990s, the high tech boom appears to have been sparked by the confluence of three key trends: the rapid growth in computing power generated by explosive advances in semiconductor technology; the advent of new networking technologies that permitted computers to communicate more easily with each other in private networks and through the public Internet; and the development of software programs that facilitated these interactions and greatly expanded the uses of personal computers. During such a period of rapid change, the rate of return to investing in these new technologies and applications seemed to be very high. The spectacular financial returns from investing in leading edge technology companies induced new firms to enter these markets, supported by investors eager for windfall financial gains. As these new firms set up or expanded their operations, capital spending surged. For a time, investors seemed to think that high-tech companies were low risk, high return investments. But, as we all now know, they were wrong."
He explained that "Ultimately, more businesses entered the high tech field than could be supported by the substantial growth in demand in this sector. Businesses overinvested in high tech equipment, and when profits failed to materialize, many of these firms went bankrupt. In the end, the economy was left with an overhang of high tech capital, which is exerting a drag on economic activity to this day."
He then turned to the future of the high tech sector. He asked rhetorically, "Does this experience call into question the economic potential of these new information technologies?" He responded, "I don't think so. In the exigencies of the moment, one can easily lose sight of how much progress has been made over the past decade as a result of these new technologies. It is true that rates of return to high tech investments were not as high as the most optimistic once thought. However, these technologies have truly changed the way businesses operate, and I believe that they will continue to do so in the future."
He continued that "I will assert that its economic prospects still seem positive over the long run. The capital overhang -- especially in the telecommunications industry -- obviously must be eliminated before any meaningful expansion can occur, and some additional consolidation may be necessary if businesses are to be profitable in the long run. But I, like many other observers, think such change is occurring and is likely to bear fruit in the years to come."
FRB Chairman Alan Greenspan gave a
speech on productivity gains on October 23. See also, story in TLJ Daily
E-Mail Alert No. 534, October 24, 2002.