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Technological Revolutions & Macroeconomic Risks: A Modern Taxonomy

This paper by J. Bradford DeLong explores macroeconomic vulnerabilities in the 21st century, such as confidence shocks, monetary policies, and debt-deflation mechanisms. It delves into the impact of technological revolutions on productivity growth and highlights potential effects on vulnerabilities. The discussion covers asset price volatility, labor market dynamics, governmental capacities, and regulatory challenges in an era of sophisticated financial markets. The conclusion poses questions on the magnitude of vulnerabilities and the evolving landscape of macroeconomic management strategies.

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Technological Revolutions & Macroeconomic Risks: A Modern Taxonomy

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  1. Macroeconomic Vulnerabilities in the Twenty-First Century: A Preliminary Taxonomy J. Bradford DeLongU.C. Berkeley and NBERJuly 2002Draft 2.0: Conference Draft

  2. Old Macroeconomic Vulnerabilities • Confidence shocks that reduced investment. • Overly contractionary monetary policies. • Self-reinforcing debt-deflation mechanisms. • Loss of central bank reputation. • Persistent deficits and political need for the central bank to finance the government's deficit.

  3. Magnitude of Our Current Technological Revolutions • Industrial Revolution in textiles: 10% per year productivity gain. • Second Industrial Revolution in electric power: 9% per year. • Today (Nordhaus): 58% per year. • Salience of new technology: at between 5% and 7% of gross expenditure, two to three times as salient as was steam or the electron

  4. Five Possible Effects on Macroeconomic Vulnerabilities • Uncertainty and asset price volatility. • Inventories and information technology. • Institutions of macroeconomic management. • Labor market rigidities and productivity growth. • Financial market sophistication and regulatory surveillance.

  5. Uncertainty and Asset Price Volatility

  6. Inventories and Information Technology

  7. Productivity Growth and the Labor Market

  8. Governmental Capacity • Capacity to manage the macroeconomy • Example of Japan • Administrative capacities not used atrophy quickly • Capacity to regulate financial markets • Increasing sophistication of instruments • LTCM

  9. Conclusion • Three things we think we know: • More asset price vulnerability • Reduced inventory mistakes • Greasing the wheels of the labor market • Three things we don’t know: • Magnitudes? • Degraded macro management capability? • Dealing with more sophisticated financial structures?

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