Central Bank Incompetence Makes Luddites Correct

Miles Kimball found that central banks often operate under the false assumption that productivity-enhancing technology, like these airport check-in kiosks, hurts the economy.

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There’s often a folk belief that more productivity-enhancing technology—airline check-in kiosks, taxi dispatch apps, etc.—will lead to job loss and economic decline by reducing the need for human labor. Economists generally view this as a fallacy. Over time, better technology leads to higher productivity and more social wealth. But Miles Kimball reports that central banks blunder when technology improves, thus bringing luddite fears to life:

Let me illustrate the importance of what the Fed does by pointing to the short-run effects of technology shocks. All economists agree that, in the long run, technological progress raises GDP—more than anything else. Yet, in our paper “Are Technology Improvements Contractionary?” which appeared in the scholarly journal American Economic Review, Susanto Basu, John Fernald and I showed that, historically, technology improvements have led to short-run reductions in investment and employment that were enough to prevent any short-run boost to GDP, despite improved productivity. (Independently, using very different methods, many other economists, starting with Jordi Gali, had found the negative short-run effect of technology improvements on how much people work.)

How can something that stimulates the economy in the long run lead people to work and invest less? It is all about the monetary policy reaction. Historically, in the wake of technology improvements, the Fed has cut interest rates somewhat, but has failed to do enough to keep the price level on track and accommodate in the short run the higher level of GDP that eventually follows from a technological improvement in the long run.

Kimball moves on to discuss other things, but this strikes me as a very important finding and a very harmful practice. It’s harmful in the first instance simply because output gaps and recessions are very bad. But in a larger sense, this risks a dangerous political feedback loop. As people become habituated to thinking of productivity improvements as leading to short-term economic decline, it becomes that much harder to build support for policy improvements in the future. If central banks do their jobs right, innovation should lead to investment booms and new opportunities for people. But in practice, it doesn’t.