Economic policy affects innovation and long-run economic growth in many ways. A stable macroeconomic environment; sound public finances; and well-functioning financial, labor, and product markets all support innovation, entrepreneurship, and growth, as do effective tax, trade, and regulatory policies.

During 2001 and 2002, anecdotal reports suggested that many firms saw no need to upgrade equipment because no compelling new technology or application had been released, which would have tended to lengthen the replacement cycle. If replacement cycles since then have remained longer than in previous decades, firms would respond with a lower level of gross investment.

Because technology feeds into various macroeconomic aggregates--including household and business spending, productivity, and inflation--its implications for the U.S. economy will continue to necessitate careful observation, improved measurement, and study...A significant slowing in the pace of technological change could have inflationary consequences. Accordingly, monetary policy makers will remain alert, carefully monitoring technological developments that have the potential to mitigate inflationary pressures as well as developments that could raise the risk of overheating.

In the 1990s, home bias began to decline discernibly, the consequence of a dismantling of restrictions on capital flows and the advance of information and communication technologies that has effectively shrunk the time and distance that separate markets around the world.  The vast improvements in these technologies have broadened investors' vision to the point that foreign investment appears less risky than it did in earlier times.

There is a fundamental congruence between the effects of trade and technology on labor market outcomes. Both can displace workers and force them to make the transition to other sectors. But both ultimately elevate standards of living. Few seriously propose impeding technological progress for the sake of jobs. We should be equally hesitant to impede trade.

I have argued that trade-related job losses are fundamentally no different from job losses arising out of the ongoing turbulence of technological change. It’s hard to see why one set of transitioning workers should be singled out for favorable treatment, except perhaps to reduce political opposition to trade liberalization.

Understanding the causes and consequences of economic change are vital to creating a broadly accepted belief in the benefits of technological innovation, unrestricted trade, and the other drivers of economic progress.

Business investment spending might well show a temporary slowdown in the first quarter after the expiration of the tax incentives, but should resume expanding at a robust pace shortly thereafter, reflecting assessments that substantial opportunities remain to enhance efficiency by installing new capital goods, particularly IT and communications equipment.

The hastening of the adjustment to emerging imbalances is generally beneficial. It means that those imbalances are not allowed to build until they require very large corrections. But the faster adjustment process does raise some warning flags. Although the newer technologies have clearly allowed firms to make more informed decisions, business managers throughout the economy also are likely responding to much of the same enhanced body of information. As a consequence, firms appear to be acting in far closer alignment with one another than in decades past. The result is not only a faster adjustment, but one that is potentially more synchronized, compressing changes into an even shorter time frame.

While technology has quickened production adjustments, human nature remains unaltered. We respond to a heightened pace of change and its associated uncertainty in the same way we always have. We withdraw from action, postpone decisions, and generally hunker down until a renewed, more comprehensible basis for acting emerges. In its extreme manifestation, many economic decisionmakers not only become risk averse but attempt to disengage from all risk...But even when decisionmakers are only somewhat more risk averse, a process of retrenchment can occur. Thus, although prospective long-term returns on new high-tech investment may change little, increased uncertainty can induce a higher discount of those returns and, hence, a reduced willingness to commit liquid resources to illiquid fixed investments.