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March 19, 2001 |
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Greenspan Gives IT Credit-And Blame-For The Economy
By Larry Kahaner
he language of monetary policy makers can be arcane, but Federal Reserve chairman Alan Greenspan is a clear communicator, one who chooses his words carefully. And there's no mistaking his point of view on the role that information technology plays in business. He believes that IT makes companies more efficient, causing a ripple effect throughout the economy.
When explaining why the economy did so well for most of the 1990s, Greenspan has been an unabashed supporter of technology and its benefits. More than any other factor, Greenspan cites technology as the dominant driver of productivity in the economy. It's a subject he touched on in his Feb. 28 testimony to Congress (for the full text of his speech) and one that's been a recurrent theme in his public remarks for the past several years.
"New technologies have made capital investment more profitable, enabling firms to substitute capital for labor far more productively than they would have a decade ago," he said in testimony before the Senate in February 1999. Greenspan's point then, as now, was not just that businesses have replaced labor with capital--something they've been doing since the Industrial Revolution--but that this substitution is both more profitable and productive than ever before.
Those IT-driven benefits have ramifications, such as the displacement of unskilled workers, a point not lost on the influential policy maker. Speaking before a business group in Minneapolis in September 1999, Greenspan noted that, "There is little doubt this transition to the new high-tech economy is proving difficult for a large segment of our workforce."
His biggest fear, inflation, can also be spurred by rapid technological change. To Greenspan, inflation is the bogeyman of the economy; it causes uncertainty, which stifles consumer and business spending, potentially leading to recession.
In Greenspan's logic, as jobs become more skilled, the economy can suffer if there's a shortage of highly trained workers. Supply-and-demand dynamics take over: Competition for fewer workers leads to higher wages, and ultimately higher spending, and voila--inflation. Real-estate prices increase, as do the costs of other consumer goods. It's a scenario that has already played out in high-tech corridors such as San Francisco and Seattle.
Greenspan's testimony last month warned of another concern that he's hinted at in the past but that seems to have become more prominent in his thinking: What happens when people reach the limit in their ability to adapt to the rapid change that's been taking place? Web sites, E-mail, personal digital assistants, voice mail, and other technologies deliver a never-ending flow of new information, with the expectation of immediate response.
"While technology has quickened production adjustments, human nature remains unaltered," he said. "We respond to a heightened pace of change and its associated uncertainty in the same way we always have. We withdraw from action, postpone decisions, and generally hunker down until a renewed, more comprehensible basis for acting emerges."
That appears to be what's happening now among both consumers and business and technology managers as spending slows and stock prices drop.
Ironically, if technology gets credit for the health of the economy when things were going well, it has also accelerated the downturn. "This retrenchment has been prompt, in part because new technologies have enabled businesses to respond more rapidly to emerging excesses," Greenspan said.
These same forces are also prompting the Federal Reserve itself to act and react more quickly. Some observers expect the Fed to lower interest rates this week--a direct response to the economic forces that have been unleashed in large part by IT.--Larry Kahaner, contributing writer
Larry Kahaner is the author of "The Quotations Of Chairman Greenspan: Words From The Man Who Can Shake The World" (Adams Media, 2000).
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