Bernanke on IT and Productivity

After Ben Bernanke was appointed to his first term as chairman of the Federal Reserve, he gave a commencement speech on the connection between information technology and economic prosperity to the class of 2006 at his alma mater, the Massachusetts Institute of Technology. The man that President Obama on Tuesday reappointed for another term as chairman observed three years ago that IT investments don't always translate into productivity gains immediately.

Today, one has to wonder whether the same will be true of the current administration's investments in electronic health records, next-generation electric grids, federal cloud computing and other innovations. Here's an excerpt from Bernanke's 2006 speech:

"Often a significant amount of time passes between the initial development and diffusion of new technologies and the realization of the associated productivity benefits. Computers were first commercialized in the 1950s, for example, and personal computers came into widespread use in the early 1980s. But until the mid-1990s these developments had little evident effect on measures of productivity. Indeed, MIT's Robert Solow famously said in 1987 that "computers are everywhere except in the productivity statistics." Moreover, despite the sharp decline in information-technology investment after the meltdown of tech-sector stocks earlier this decade, the growth rate of productivity actually increased further in recent years, as I mentioned. These long lags raise additional questions about the nature of the links between new technologies and the resulting productivity gains.

Perhaps the answer lies in taking the longer view. Some research by economists has drawn an analogy between modern information and communication technologies and earlier so-called general-purpose technologies such as the steam engine, the electric motor and the internal combustion engine. General-purpose technologies have broad application and thus have the potential both to revolutionize methods of production and to make a host of new goods and services available to businesses and consumers. For example, when smaller electric motors replaced single-power sources, such as steam or water power, in manufacturing facilities, it became feasible to reorganize the layouts of plants to optimize the flow of materials rather than the distribution of power. And the advent of air conditioning significantly expanded opportunities for economic development in the warmer regions of the United States and the rest of the world. However, in all cases, developments evolved over a long period and required firms to make collateral investments in research and development, organizational structure and employee training. These investments in learning how to make the best use of new technologies have been dubbed intangible capital, to distinguish them from investments in physical goods like new equipment and machines.

In the case of information and communication technologies, new economic research suggests that the investments in the associated intangible capital - that means figuring out what to do with the computer once it's out of the box -- are quite important. In my view, important investments in intangible capital remain to be made, as much still remains to be learned about how to harness these technologies most effectively. Thus, it should not be surprising that the benefits of these technologies have taken awhile to show up in the productivity statistics. But this research also suggests that the current productivity revival still has some legs, as the full economic benefits of recent technological changes have not yet been completely realized.