The cartoon is a pointed one. It shows several office workers
seated before their computers. One is downloading a new version of
the videogame Space Kombat. Another is e-mailing a boyfriend. The
third is browsing fall fashions.
The headline says simply: "Economists wonder why computers
haven't boosted productivity."
The cartoon, accompanying an article in the normally
unadventurous Journal of Economic Perspectives, hints at a debate
that lies at the heart of the New Economy.
The fundamental question: How broad are today's technology-
driven productivity gains and are they permanent?
The answer will help determine whether Americans will enjoy
rising living standards, as well as what direction the Federal
Reserve should take in trying to prolong the nation's record
Throughout history, inventions have come along that have
dramatically boosted worker output - from electricity that helped
advance the Industrial Revolution to automobiles that helped change
how goods are transported.
But few have had the potential for changing how Americans work as
much as computers, the Internet, and the explosion in
Some economists, in fact, now think that the Swiss-watch
precision with which these technologies allow companies to control
inventories and the other benefits they bring are creating a
permanent improvement in productivity.
That, in turn, puts downward pressure on prices, making inflation
less of a threat than the Federal Reserve may realize. Proponents of
this theory say it's helping reinvent the economy - allowing low-
inflation to coexist with relatively high growth.
But others believe the productivity gains are only affecting a
narrow band of industries and that they are ephemeral: Once the
economy turns down again, so will the dramatic rise in worker
Even Fed policymakers appear to be debating the issue. Last week,
Fed Chairman Alan Greenspan argued in a speech to the New York
Association of Business Economists that productivity gains were now
not theoretical, but "irreversible."
"The effect of these technologies could rival and arguably even
surpass the impact the telegraph had prior to, and just after, the
Civil War," he said.
Let's not get too giddy about Internet
Some other Fed officials sound less hopeful. Governor Laurence
Meyer and other policymakers subscribe to the school that recent
productivity gains are cyclical, and thus the economy has reached
its speed limits and needs braking to a slower pace.
The issue will face Fed policymakers when they meet June 27-28 to
decide on the need for another hike in interest rates. Because of
fresh signs of a slowdown in the economy, most Fed watchers are
expecting the Fed to either raise interest rates slightly - by 0.25
percentage points - or not at all.
Others caution against reading too much into the productivity
"revolution" as well. In his paper in the Journal of Economic
Perspectives, economist Robert Gordon of Northwestern University in
Evanston, Ill., argues that productivity has enjoyed a "dynamic
explosion" in the manufacture of durables, such as cars and