The pace of technological change is accelerating and a large part of that is down to the rapid growth in specialised (AI) semiconductor chips. Faster chips were instrumental to the investment in information technology (IT) that drove the dotcom boom (1996 – 2000). The current IT cycle has lasted longer and may well have a number of years to run.
This has profound ramifications for economic policy. Record spending on information technology has gone hand-in-hand with low inflation and strong job creation. There is no need for central banks to panic every time there is a modest dip in growth in response to a perceived external ‘shock’.
Equally, there is no need for central banks to overreact, as the Fed did in 2018, when unemployment falls and growth appears to be ‘too strong’. Tech-driven growth is by definition non-inflationary.
Trump’s latest Fed nominee, Judy Shelton, is right in one key respect: central banks should widen their sights, setting targets beyond inflation and growth. Ms Shelton points to trade deficits as one possible target. Others may point to mitigating climate change as a necessary addition to the remit.
This commentary focuses on what is driving the technology boom: the rapid advances in semiconductors. It is an updated version of a commentary published on this topic in April 2017.
More sophisticated, idiosyncratic (AI) chips underpin a large number of today’s innovations. The shift towards specialised chips is advancing performance more quickly than projected by Moore’s Law. By removing software from the standard, central processing unit (CPU) and placing it in a separate processor, manufacturers have been able to optimise individual tasks and achieve huge increases in performance.
