For release: July 19, 2001
Contact: Charles B. Henderson, (314) 444-8311

The Microchip: Has It Led the Way to a Productivity Boom?

ST. LOUIS -- Some pundits believe the microchip has ushered in a new era of rapid productivity growth for the U.S. economy. Two economists at the Federal Reserve Bank of St. Louis say the evidence tends to support that conclusion, but other research they cited indicates that government policies and the quality of education may be just as important in establishing and maintaining economic development.

The economists are Kevin L. Kliesen and David C. Wheelock, writing in the July issue of The Regional Economist, the St. Louis Fed's quarterly journal of business and economic subjects.

Since the 1981-82 recession, the United States has enjoyed more than 18 years of almost uninterrupted growth. Seeking to explain this unprecedented era, proponents of the "new economy" often cite technological advances stemming from the microchip.

Kliesen and Wheelock noted that productivity booms in America's past typically have

followed technological breakthroughs. "The industrial revolutions of the 18th and 19th centuries were associated with the introduction of new 'general purpose technologies,' such as the steam engine and electric power, which had numerous applications throughout the economy," said Kliesen and Wheelock. "The computer also appears to be a general purpose technology and an important source of the recent increase in productivity and economic growth."

Kliesen and Wheelock emphasized that the computer is not "new" technology, however, because the first microchips appeared in 1970, and they noted that economists have been puzzled by the fact that U.S. productivity did not begin to accelerate until 1995. Fortunately, economic history may provide a clue.

"In many ways, the absence of immediate productivity improvements with the advent of information processing technology is not unlike earlier experiences with general purpose technologies," said Kliesen and Wheelock. "During past industrial revolutions, information and technologies had to spread out into all sectors and reach a critical level before widespread gains in manufacturing productivity occurred."

Kliesen and Wheelock acknowledged that the invention and application of new technologies during the industrial revolutions of the 18th and 19th centuries were carried out by private individuals and firms without government subsidies or direction. Yet, they point out that government can still have a powerful effect on a nation's economic growth.

"The rule of law ¾ specifically, secure property rights ¾ provides the freedom and incentive to take economic risks, to invest in new technologies and to look for ways to use economic resources more efficiently," said Kliesen and Wheelock. "They also reduce the cost of market transactions and limit uncertainties associated with arbritrary confiscation of property or incomplete enforcement of contracts."

In addition, they noted that government support of research and development activities can promote technological progress. "In effect," they said, "government support provides an environment in which technological breakthroughs, such as the microchip, can occur."

Regarding a well-educated workforce, Kliesen and Wheelock cited several economic studies that indicate a positive statistical relationship between educational achievement and per capita income growth.

Kliesen and Wheelock said it's uncertain whether the productivity surge of the past five years will continue. Nevertheless, they concluded: "If the so-called computer revolution has permanently altered the growth paths of the U.S. economy, it also appears to have opened up old debates about how government policies can encourage economic growth and rising living standards over time."

Subscriptions to The Regional Economist are free and can be obtained by calling (314) 444-8809.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. In addition to serving as a bank for depository institutions and the U.S. government, each Reserve Bank monitors economic conditions in the District, participates in formulating monetary policy, and supervises state-chartered member banks and bank holding companies to foster safety and soundness of the District's banking and financial institutions and to protect the credit rights of consumers.

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