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are technology improvements contractionary ?

### Are Technology Improvements Contractionary?

In the often optimistic narrative surrounding technological advancements, the idea that they could be contractionary (i.e., have a negative economic impact) might come as a surprise to many. However, a series of economic studies and analyses, particularly the work by Susanto Basu, John Fernald, and Miles Kimball, shed light on this paradox. Their research, initially published in the American Economic Review in 2006, suggests that in the short term, technological improvements can indeed have contractionary effects on an economy.

#### The Initial Contractions

Basu, Fernald, and Kimball’s study constructs a robust measure of aggregate technology change while accounting for various factors, including variations in capital and labor utilization, non-constant returns, imperfect competition, and aggregation effects. According to their findings, when technology improves, there is an immediate and sharp decline in the use of inputs and non-residential investment. Remarkably, during this transitional phase, output remains relatively unchanged.

The reasons behind this seemingly counterintuitive phenomenon are multifaceted. One explanation is that in response to the arrival of new technologies, firms first reduce their reliance on existing inputs, such as labor and capital, knowing that they can do more with less thanks to technological improvements. This initial reduction in input usage creates a temporary economic contraction.

#### The Long-Term Gains

However, and perhaps more importantly, the long-term impact of technological improvements is overwhelmingly positive. The research indicates that over a period of several years, inputs return to normal levels, and output experiences a significant upward surge. The efficiency, productivity, and broader economic benefits derived from technological advancements ultimately outweigh the short-term contractions.

#### The Role of Adaptation

The transition period, during which the economy adjusts to new technology, is critical. Firms and workers must retrain and realign their strategies to fully leverage new technological capabilities. Government and regulatory bodies can facilitate this process by investing in skills development and creating an environment that encourages innovation and adaptation.

#### The Broader Economic Context

The question of whether technology improvements are contractionary is not solely about the technology itself but also about the broader economic context. Economic conditions such as the state of the labor market, the availability of credit, and the policies of governments and central banks can all influence how technology affects the economy. In a highly competitive and dynamic market, the initial contraction due to technology improvements is often less severe and more transient.

#### Conclusion

In conclusion, while the arrival of new technology can lead to short-term contractions through reduced input use and investment, the long-term benefits are substantial. Technological advancements are a cornerstone of economic growth, driving productivity gains, innovation, and overall development. Understanding and navigating the transition phase is key to making the most of technological improvements. Policymakers, businesses, and individuals must remain adaptable and forward-thinking to reap the full rewards of technological progress.

For those interested in diving deeper into the subject, the original research papers by Basu, Fernald, and Kimball provide a comprehensive analysis. Additionally, resources from the National Bureau of Economic Research (NBER), the American Economic Association, and the Federal Reserve offer further insights into the complex relationship between technology and economic growth.

So, while the initial impact of technology improvements may be contractionary, the long-term outlook remains profoundly positive for economic expansion and prosperity.