Reply #3: Raising Red Flags About Productivity

[ozymandius]

It has practically been an article of faith at the Federal Reserve (news - web sites): Fueled by the Information Revolution, strong productivity growth is here to stay. Fed policymakers once again called the underlying growth rate of productivity "robust" as they bumped up interest rates for the fourth time this year, on Nov. 10.

But behind the scenes, some Fed policymakers are questioning how much longer the efficiency miracle can go on. They see signs of a slowdown in the torrid pace of technological innovation in the computer and chip industries, advances that have propelled productivity in the last decade. And they wonder if those are harbingers of less vigorous gains ahead.

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What's critical is whether this slowdown is symptomatic of a permanent downshift. Most experts aren't too concerned. They see it as only a temporary response to the ups and downs of the business cycle and point to a host of innovations in the tech industry. Indeed, they peg the underlying growth rate of productivity at 2% or better.

So what exactly is making some Fed worrywarts antsy? Their concerns have been triggered by changing pricing patterns in tech. Between 1992 and 2002, the quality-adjusted price of new computers as compiled by the government fell at an annual rate of 18%. Those sharp dips mainly reflected the pace of technological progress and faster productivity growth. The rapid improvements in technology spurred stepped-up computer buying by businesses, spreading the productivity miracle throughout the economy.

http://story.news.yahoo.com/news?tmpl=story&cid=66&ncid=1203&e=2&u=/bw/20041111/bs_bw/nf200411113418db016