probably played some role in these productivity gains. but probably more important, i suspect, were longer - term, structural changes arising from the boom in capital spending and the revolution in information technology. let me turn to the evidence on this point. technology change and productivity growth bob solow - - the mit economist who won the nobel prize in economics for his work on the theory of economic growth - - once quipped that you can see computers everywhere except in the productivity statistics. a few years ago that situation began to change, and we now have strong evidence that the faster productivity growth our economy has experienced is, in fact, due partly to newer technologies. research by federal reserve board economists steve oliner and dan sichel sheds some light on the sources of this faster productivity growth. the high ( and rising ) levels of business investment raised the amount of capital per worker and thereby boosted productivity. about 1 / 2 percentage point of the increase in productivity growth over the 1995 - 99 period can be attributed to this so - called “ capital deepening, ” most of which reflected greater spending by businesses on computers, software, and communications equipment. another 1 / 2 percentage point of the pickup in productivity growth reflected technological innovations in the actual production of computer hardware and semiconductors as well as better management - - perhaps assisted by these high - tech investments - - of the nation ’ s capital and labor resources. oliner and sichel estimate that the consolidated influences of high - tech investments account for about two - thirds of the acceleration in productivity since 1995. this research supports the view that fundamental changes are under way in our economy. what ’ s so special about this capital? that trend productivity has picked up and that high - tech investments are the source of the acceleration are important facts, but by now they are not new observations. perhaps at this stage it would be useful to explore in greater detail this positive “ shock ” to the ability of our economy to produce goods and services. what is so special about computers and other information technologies that they can have such a strong influence on our economy? let me highlight three special characteristics of high - tech equipment. first, computers and communications equipment depreciate at a very rapid pace. the current best estimate is that computers probably depreciate about 30 percent annually, although that estimate might be low, while other equipment probably depreciates at a rate of less than 15 percent annually. therefore, computers are retired, on average, after three years, and the useful

tale also requires an assessment of the economy ’ s productive potential - both its level and its rate of growth. unfortunately, potential supply cannot be observed directly, and inferring its behavior from variables that can be observed is a daunting task. but the task is essential nonetheless : changes in potential supply have been among the most important influences on the behavior of the economy over the past ten years. i should note that the course of aggregate demand is not independent of the course of potential aggregate supply. both economic theory and empirical evidence suggest that households and businesses make decisions about spending with an eye to future incomes and sales, so that a rosier long - term outlook tends to raise demand today. thus, as the fomc notes frequently in its statements, robust underlying growth in productivity is providing ongoing support to economic activity. nevertheless, owing to the restraints that i spoke of earlier, demand has fallen well short of potential supply during the past several years, as can be seen in the elevated unemployment rate, the depressed rate of capacity utilization, and the decline in inflation. certainly, potential supply appears to have increased at an extraordinary rate in recent years, even compared with the accelerated pace of the late 1990s. between 1973 and 1995, labor productivity in the nonfarm business sector increased at an annual average rate of 1 - 1 / 2 percent ; between 1995 and 2000, productivity climbed 2 - 1 / 2 percent per year ; and since 2000, productivity has jumped more than 4 percent per year on average. understanding the reasons for this surge is critical to judging the likely path of productivity and potential supply going forward. some of the step - up in productivity growth since 2000 probably reflects cyclical influences or factors that may offer only one - time improvements in the production process. for example, businesses ’ ability to find efficiencies on such a large scale in recent years probably stems in part from learning how to take better advantage of the large amount of capital equipment and new technology that they acquired in the late 1990s. moreover, in the past few years businesses have displayed unusual caution in their decisions not only about investment in capital goods but also about hiring. as firms have focused on controlling costs in an uncertain environment, they have naturally tried to avoid taking on new workers and have tried instead to extract the greatest possible output from their existing workforces. to the extent that these processes have revealed inefficiencies in production, they have raised the level of productivity on a permanent basis ; however, they are unlikely