Central banks should gamble on productivity-improving technology

IN 1996 Alan Greenspan began asking why the flashy information technology spreading across America seemed not to be lifting productivity. He was not the first to wonder. A decade earlier Robert Solow, a Nobel prizewinner, famously remarked that computers were everywhere but in the statistics. But Mr Greenspan was uniquely positioned, as the chairman of the Federal Reserve, to experiment on the American economy. As the unemployment rate dropped to levels that might normally trigger a phalanx of interest-rate rises, Mr Greenspan’s Fed moved cautiously, betting that efficiencies from new IT would keep price pressures in check. The result was the longest period of rapid growth since the early 1960s. Despite his success, few central bankers seem eager to repeat the experiment and many remain blinkered to issues other than inflation and employment. That is unfortunate. A little faith in technology could go a long way.

Central bankers are not known to be a visionary bunch. Turning new ideas into more efficient ways of doing things is the job of firms. The capacity of an economy to produce—the supply side—is primarily shaped by things such as technological progress, population growth and the skill level of the workforce. Monetary policy is typically thought not to influence this process. Its responsibility is the demand side of the economy, or people’s willingness to spend. Central bankers typically see themselves as drivers who press on a vehicle’s accelerator and brakes. The state of the engine is someone else’s bailiwick.