Technology and the Productivity Boom:
A Policymaker's Regional
and National Perspectives
Philadelphia University and Greater Philadelphia
First (GPF) Cosponsored Presentation
Philadelphia University, Downs Hall
For delivery April 3, 2001 at approximately 1:40 p.m. Eastern (10:40 a.m.
By Robert T. Parry, President, Federal Reserve Bank of San Francisco
I. I'm very pleased to be back here at Philadelphia University. I spent
some very special years of my life here, and I have a deep fondness for
- Today I want to set the stage for our panel discussion by saying a
few words about technology and the productivity boom it helped generate.
- This productivity boom has played a crucial role in both the national
economy and many regional economies,
- and it also, naturally, has important implications for the way the
Fed conducts monetary policy.
II. Let me start with the national economy.
- Over the past five years, the average growth rate of productivity
has been a phenomenal three and a half percent.
- Why do I call it phenomenal?
A higher rate of productivity growth has tremendous positive effects
on the nation's economy.
- Because for a quarter of a century before that, the rate of productivity
growth averaged only around one percent, by most estimates.
- This suggests that we're operating in an environment with a significantly
higher trend growth rate of productivity.
Moreover, when the rate of productivity growth is accelerating,
- It means that living standards rise much faster.
- And it also means that the economy can grow at a faster rate
without igniting inflation.
Where did this productivity surge come from? The most natural place
to look for evidence is in the high-tech area.
- we get lower unemployment
- and lower inflation.
- First, businesses have invested heavily in the equipment that embodies
the new technologies.
Second, it appears that firms are using the new technologies to
change the way they do business.
- Business investment in information processing equipment and software
has risen at 20 to 30 annual percent rates over the past five years.
- And, presumably, firms are making these investments because they
I can give you a good example of how firms are both adopting new
technology and using it to do business differently with a first-hand
experience I had.
Improvements like these in production flexibility and real-time
information flows can help
- Some time ago, I visited a lumber mill in Oregon.
- They showed me how they used lasers to define the geometry of
a log coming down the conveyor belt.
- The information about the log's geometry then went into a computer
program that also had information about the latest prices for various
- So the program could determine how to cut the log to maximize
its potential value.
- For example, when there's a shortage of two-by-fours and prices
on them rise, the mill cuts more of that size and fewer of other
All this appears to be translating into faster productivity growth
for the economy.
- eliminate bottlenecks,
- streamline production,
- and fine-tune specifications.
- As a result, firms can better match customers' needs.
What does a faster productivity growth rate mean for monetary policy?
- As I said before, it means the economy can grow faster than we thought
without adding to inflationary pressures going forward.
- But let me mention two caveats.
- First, it's obvious from recent developments that the productivity
boom has not ended the economic fluctuations traditionally
associated with the business cycle.
- Real GDP growth slowed markedly in the latter half of last year.
Second, a surge in productivity like this one is unusual - the
last time we saw anything like it was in the 1960s.
- As you know, the Fed cut interest rates significantly to keep
the expansion on track.
- That means that the economic relationships we've typically depended
on for anticipating the future have become less reliable.
- This adds to the uncertainties in conducting monetary policy,
especially since our actions affect the economy and inflation
with a lag.
- And it suggests that the Fed has had to be more flexible in
interpreting economic developments in order to achieve our principal
goals of price stability and sustainable economic growth.
III. Now let me turn to technology and regional economies.
- While the adoption of new technologies has been widespread, certain
geographic areas have specialized more than others in creating and developing
- Surging growth in emerging fields like biotech, wireless communications,
and Internet services development has been a major economic driver in
metropolitan areas such as
And the expansion of more established sectors - for example, semiconductor
and computer manufacturing and software development - has powered growth
in cities like
- Boston, San Diego, and Washington, DC.
And here in Philadelphia, growth in the biotech and pharmaceuticals
industries has been a bright spot.
- Austin, Phoenix, Portland, and Seattle, to name just a few.
But perhaps the best-known place among these technology-driven regions
is the San Francisco Bay Area and its Silicon Valley. In fact, it's
one of the most important high-tech centers in the country on a number
- It has a high concentration of tech-related jobs.
It's also home to a broad range of technology firms -
- For the San Francisco Bay Area as a whole, tech jobs account for
over 12 percent of employment.
- And for the Silicon Valley the number is over 26 percent
- This compares to just under four percent for the nation.
Finally, the Bay Area produces a large share of the nation's high-tech
- - such as Intel, Oracle, Sun, HP, and Genentech,
- as well as E-Bay and Pixar.
IV. The secret to the Silicon Valley's strength as a technology center
lies in a number of factors - aside from good weather.
- Interestingly, one of those is not special tax treatment.
One thing that does attract and keep these firms is the area's
vibrant research community.
- While some communities do provide special tax incentives to tech
firms agreeing to locate in their region,
- that's not why firms are in Silicon Valley
- and it's certainly not why they're in the city of San Francisco.
- The Bay Area has over a dozen world-renowned research centers, including
federal labs and universities.
- These centers are important because they're engaged in the basic
"R and D" - research and development - that has given
birth to advances in new technologies -
Many of the household names in the tech sector can trace their roots
to people and research at these institutions.
- - lasers, computer chips, genetic engineering, and much more.
But none of these firms, not to mention numerous others, could have
grown to such prominence without funding in their infancy.
- Hewlett-Packard and Cisco, for example, are linked to Stanford.
- And Genentech's founder, Herbert Boyer, was on the faculty of
U.C. San Francisco.
- These firms invested billions of dollars more in "R and D"
to turn the technological advances of the research centers into
the commercial products we use today.
- Quite frankly, because of the high degree of risk involved, start-ups
can't rely on traditional sources of funding, such as banks.
- Rather, early stage financing requires venture capital, or so-called
- Firms in Silicon Valley attract about 40 percent of all venture
capital distributed to high-tech businesses in the U.S.
- Last year, even with the shake-out among dot-coms, venture capital
in the Bay Area amounted to 25.4 billion dollars.
V. Being a leader in the nation's high-tech economy has brought substantial
benefits to the region.
- The Bay Area has enjoyed much faster economic growth than the nation
and an unemployment rate of about two percent.
- But emphasizing technology and being successful at it do not
insulate the region from economic fluctuations, nor do they ensure future
- After a blockbuster year in 2000,
- we've seen a marked retrenchment so far in 2001, largely due to
developments in the technology sector.
This ebb, however, should not dampen the potential long-term prospects
for the sector nor derail the economy in the Bay Area.
- Beyond the direct effects of the shakeout of the dot-coms,
- manufacturers of high-tech products are going through a process
Looking ahead, I'd say that success in the future - for the Bay Area
or for any other area -
- - will not depend so much on success in the past.
- Rather, it will depend on making the right investments and public
policy choices as a community.
- For a high-tech center like the Bay Area, that means
- having policies that support the research centers.
- It also means investing in education to provide a well-trained
- Finally, it means investing in infrastructure -
But these are the ingredients for successful business development
of any type.
- - roads, bridges, buildings, telecommunications, and the critical
systems for power generation and transmission.
- Indeed, we certainly could learn a few things from you in these
So perhaps there really aren't any secrets to what it takes to make
a diverse technology center thrive.
- For example, Pennsylvania has been much more successful than
California in deregulating electricity.
- We could use your help in re-designing our electricity market.
- In addition to a little luck, it takes
And here's something else that's no secret.
- a research community actively involved in basic "R and D,
- a private sector involved in "R and D,"
- a financial sector willing to fund the development of innovative
- but risky - ventures,
- an educated workforce,
- and an infrastructure that supports growth.
- There are always risks -
These risks can make the ride bumpy at times.
- - whether you're involved in creating the new economy
- or using technology to make the old economy better.
But that doesn't mean we shouldn't go for the ride!
Taking risks is what makes our economy dynamic,
- bringing growth and prosperity to our communities over the long
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