Technology and the Productivity Boom: A Policymaker’s Regional and National Perspectives

Speech Info

Philadelphia University and Greater Philadelphia First (GPF) Cosponsored Presentation Philadelphia University, Downs Hall, Philadelphia, PA For delivery April 3, 2001 at approximately 1:40 p.m. Eastern (10:40 a.m. Pacific) 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 the community.

  1. 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.
  2. This productivity boom has played a crucial role in both the national economy and many regional economies,
  1. and it also, naturally, has important implications for the way the Fed conducts monetary policy.

II. Let me start with the national economy.

  1. Over the past five years, the average growth rate of productivity has been a phenomenal three and a half percent.
  1. Why do I call it phenomenal?
  1. Because for a quarter of a century before that, the rate of productivity growth averaged only around one percent, by most estimates.
  2. This suggests that we’re operating in an environment with a significantly highertrend growth rate of productivity.
  • A higher rate of productivity growth has tremendous positive effects on the nation’s economy.
  1. It means that living standards rise much faster.
  2. And it also means that the economy can grow at a faster rate 
    without igniting inflation.
  • Moreover, when the rate of productivity growth is accelerating,
  1. we get lower unemployment
  2. and lower inflation.
  • Where did this productivity surge come from? The most natural place to look for evidence is in the high-tech area.
  1. First, businesses have invested heavily in the equipment that embodies the new technologies. 
  1. Business investment in information processing equipment and software has risen at 20 to 30 annual percent rates over the past five years.
  2. And, presumably, firms are making these investments because they improve productivity.
  • Second, it appears that firms are using the new technologies to change the way they do business.
  • 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.
  1. Some time ago, I visited a lumber mill in Oregon.
  2. They showed me how they used lasers to define the geometry of a log coming down the conveyor belt.
  3. The information about the log’s geometry then went into a computer program that also had information about the latest prices for various cuts.
  4. So the program could determine how to cut the log to maximize its potential value.
  5. 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 sizes. 
  • Improvements like these in production flexibility and real-time information flows can help
  1. eliminate bottlenecks,
  2. streamline production,
  3. and fine-tune specifications.
  4. As a result, firms can better match customers’ needs.
  • All this appears to be translating into faster productivity growth for the economy.
  • What does a faster productivity growth rate mean for monetary policy?
  1. As I said before, it means the economy can grow faster than we thought without adding to inflationary pressures going forward.
  2. But let me mention two caveats.
  1. First, it’s obvious from recent developments that the productivity boom has notended the economic fluctuations traditionally associated with the business cycle.
  1. Real GDP growth slowed markedly in the latter half of last year.
  1. As you know, the Fed cut interest rates significantly to keep the expansion on track.
  • Second, a surge in productivity like this one is unusual – the last time we saw anything like it was in the 1960s. 
  1. That means that the economic relationships we’ve typically depended on for anticipating the future have become less reliable.
  2. This adds to the uncertainties in conducting monetary policy, especially since our actions affect the economy and inflation with a lag.
  3. 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.

  1. While the adoption of new technologies has been widespread, certain geographic areas have specialized more than others in creating and developing new technologies.
  2. Surging growth in emerging fields like biotech, wireless communications, and Internet services development has been a major economic driver in metropolitan areas such as 
  1. Boston, San Diego, and Washington, DC.
  • And the expansion of more established sectors – for example, semiconductor and computer manufacturing and software development – has powered growth in cities like 
  1. Austin, Phoenix, Portland, and Seattle, to name just a few. 
  • And here in Philadelphia, growth in the biotech and pharmaceuticals industries has been a bright spot.
  • 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 of counts.
  1. It has a high concentration of tech-related jobs.
  1. For the San Francisco Bay Area as a whole, tech jobs account for over 12 percent of employment.
  2. And for the Silicon Valley the number is over 26 percent
  3. This compares to just under four percent for the nation.
  • It’s also home to a broad range of technology firms –
  1. – such as Intel, Oracle, Sun, HP, and Genentech, 
  2. as well as E-Bay and Pixar.
  • Finally, the Bay Area produces a large share of the nation’s high-tech output.

IV. The secret to the Silicon Valley’s strength as a technology center lies in a number of factors – aside from good weather.

  1. Interestingly, one of those is not special tax treatment.
  1. While some communities do provide special tax incentives to tech firms agreeing to locate in their region, 
  2. that’s not why firms are in Silicon Valley 
  3. and it’s certainly not why they’re in the city of San Francisco.
  • One thing that does attract and keep these firms is the area’s vibrant research community.
  1. The Bay Area has over a dozen world-renowned research centers, including federal labs and universities.
  1. 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 – 
  1. – lasers, computer chips, genetic engineering, and much more.
  • Many of the household names in the tech sector can trace their roots to people and research at these institutions.
  1. Hewlett-Packard and Cisco, for example, are linked to Stanford.
  2. And Genentech’s founder, Herbert Boyer, was on the faculty of U.C. San Francisco.
  3. 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.
  • But none of these firms, not to mention numerous others, could have grown to such prominence without funding in their infancy.
  1. Quite frankly, because of the high degree of risk involved, start-ups can’t rely on traditional sources of funding, such as banks.
  2. Rather, early stage financing requires venture capital, or so-called “angel” investors.
  3. Firms in Silicon Valley attract about 40 percent of all venture capital distributed to high-tech businesses in the U.S.
  1. 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.

  1. The Bay Area has enjoyed much faster economic growth than the nation and an unemployment rate of about two percent.
  2. But emphasizing technology and being successful at it do not insulate the region from economic fluctuations, nor do they ensure future success.
  1. After a blockbuster year in 2000, 
  1. we’ve seen a marked retrenchment so far in 2001, largely due to developments in the technology sector.
  1. Beyond the direct effects of the shakeout of the dot-coms,
  2. manufacturers of high-tech products are going through a process of adjustment.
  • This ebb, however, should not dampen the potential long-term prospects for the sector nor derail the economy in the Bay Area. 
  • Looking ahead, I’d say that success in the future – for the Bay Area or for any other area –
  1. – will not depend so much on success in the past.
  2. Rather, it will depend on making the right investments and public policy choices as a community.
  3. For a high-tech center like the Bay Area, that means 
  1. having policies that support the research centers.
  2. It also means investing in education to provide a well-trained work force.
  3. Finally, it means investing in infrastructure –
  1. – roads, bridges, buildings, telecommunications, and the critical systems for power generation and transmission. 
  • But these are the ingredients for successful business development of any type.
  1. Indeed, we certainly could learn a few things from you in these areas.
  1. For example, Pennsylvania has been much more successful than California in deregulating electricity.
  2. We could use your help in re-designing our electricity market.
  • So perhaps there really aren’t any secrets to what it takes to make a diverse technology center thrive.
  1. In addition to a little luck, it takes
  1. a research community actively involved in basic “R and D, “
  2. a private sector involved in “R and D,”
  3. a financial sector willing to fund the development of innovative – but risky – ventures, 
  4. an educated workforce, 
  5. and an infrastructure that supports growth.
  • And here’s something else that’s no secret. 
  1. There are always risks –
  1. – whether you’re involved in creating the new economy 
  2. or using technology to make the old economy better.
  • These risks can make the ride bumpy at times.
  • But that doesn’t mean we shouldn’t go for the ride!
  • Taking risks is what makes our economy dynamic, 
  1. bringing growth and prosperity to our communities over the long haul.

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