Did Technology Cause the Crisis?

I keep thinking about the title and abstract of this 2006 paper:

Are Technology Improvements Contractionary?

Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investmentf all sharply. Outputc hanges little. Witha lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall.

I haven't read the whole paper, and didn't understand all that I read, and from what I did read, I was feeling a little skeptical about their empirical approach. Yet I keep being haunted by the idea that they might be onto the real explanation of the boom.

Think about when the Great Depression happened. There had just been a wave of technological change. New appliances. Radios. Electrification. Above all, cars. The two decades before 1929 were the age of Henry Ford. The Grapes of Wrath, which I've just been reading, has a Luddite streak. Steinbeck is particularly savage against the Caterpillar tractors that made his Okie farmers redundant. Was Steinbeck onto something? Was new technology the heart of the trouble?

I went to a Borders bookstore recently that was closing, and bought some 30 books at 70-80% off. I fear being made redundant myself one of these days. Why pay a professor to lecture 40 students a week when there's Khan Academy? How many white-collar professionals, how many bookkeepers, have been made redundant by computers? Newspaper classified ads are made redundant by Craigslist. Etc.

Maybe the economy just takes quite a while to find new things for all those people to do. And it makes some mistakes along the way. Like building too many houses.

As in the 1930s, we've fallen into a trap where dissatisfaction with the slow process of recalculation has given an opening to interventionist politicians, who don't do any good at all. Capital is on strike. But this diagnosis of the current problem, if I'm right about it, points to optimism about the future. The new technologies will shape a new lifestyle, they'll penetrate everything and improve it, the internet age, the age of smartphones/smart-everything, will accelerate and spread until the rising tide finally lifts all boats.

Comments

[nato]

I think that the pace of recalculation has been fine; the problem is that people can't keep pace with it. Many companies and industries would like to expand but can't find the people to do so. If they could find the expertise they needed, it seems very likely that they would create a bunch of second-order jobs, but since the first part doesn't happen, neither does the other. If we made it easier for highly-skilled/agile foreign workers to come to the US to fill those holes, then it would probably create a lot of jobs here.

I think the housing bubble had mostly to do with a mistaken recalculation of relative risk due to financial innovations that hadn't really been tested.

[Nathan Smith]

Good analysis. The irony is that foreign and domestic labor would probably be even more complementary now than they usually are, and yet we're at the most nativist place we've been in a generation as far as policy and public opinion are concerned. There's a certain justice in it: from a cosmic perspective, anyone who writes their congressman to demand deportations (i.e., "enforce the law") probably deserves to be evicted from their home. But it is sad that the nation shoots itself in the foot this way.

[writing jobs]

It is so egoistic to blame technologies, when we use them regularly

[gray hair remedy]

It's the people who makes crisis not the technology.