As I recall around the last time Greeenspan testified, he said too much productivity leads to inflation because incomes go up before production can be increased. Never did understand the logic. However, using that approach, the slowdown in productivity should be a positive, not a negative as the jerks on CNBC parleyed it.
Quote from Feb Humphrey Hawkins:
"
Yet those profoundly beneficial forces driving the American economy to competitive excellence are also engendering a set of imbalances that, unless contained, threaten our continuing prosperity. Accelerating productivity entails a matching acceleration in the potential output of goods and services and a corresponding rise in real incomes available to purchase the new output. The problem is that the pickup in productivity tends to create even greater increases in aggregate demand than in potential aggregate supply. This occurs principally because a rise in structural productivity growth has its counterpart in higher expectations for long-term corporate earnings. This, in turn, not only spurs business investment but also increases stock prices and the market value of assets held by households, creating additional purchasing power for which no additional goods or services have yet been produced.
Historical evidence suggests that perhaps three to four cents out of every additional dollar of stock market wealth eventually is reflected in increased consumer purchases. The sharp rise in the amount of consumer outlays relative to disposable incomes in recent years, and the corresponding fall in the saving rate, has been consistent with this so-called wealth effect on household purchases. Moreover, higher stock prices, by lowering the cost of equity capital, have helped to support the boom in capital spending.
Outlays prompted by capital gains in excess of increases in income, as best we can judge, have added about 1 percentage point to annual growth of gross domestic purchases, on average, over the past five years. The additional growth in spending of recent years that has accompanied these wealth gains as well as other supporting influences on the economy appears to have been met in about equal measure from increased net imports and from goods and services produced by the net increase in newly hired workers over and above the normal growth of the work force, including a substantial net inflow of workers from abroad. "
So the slowdown in productivity should by AG analysis been good since our expeectations have been lowered Based on my portfolio decline my expenditures will decline $40,000 over the next year - which will be interesting. That means according to Greenspan's theory, it will cost me nothing to live over the next year - because $40K is about as much as I spend a year on my routine needs. My landlord is going to be really p.o.ed, when I tell him that under the AG theory, I don't have to pay rent this year because of the negative wealth effect. |
