Now a word from the Master Dillweed himself! -g-
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June 14, 1999
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Greenspan Casts Doubt on Ability
Of Productivity to Curb Inflation
An INTERACTIVE JOURNAL News Roundup
WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Wall Street may be too optimistic in its expectations that U.S. productivity gains will continue to insure rapid economic growth without stoking inflation.
See the full text of Greenspan's speech on high technology.
In a speech Monday to Congress' Joint Economic Committee, Mr. Greenspan said history suggests investors should be cautious. "The rate of growth of productivity cannot increase indefinitely," he said.
"While there appears to be considerable expectation in the business community, and possibly Wall Street, that the productivity acceleration has not yet peaked, experience advises caution," he said.
Economists have attributed the U.S. climate of fast growth and low inflation to rapid gains in the productivity of workers, which have allowed companies to hold down prices. U.S. productivity grew at a 3.5% annual rate in the first three months of 1999.
But Mr. Greenspan said economists can't be sure those gains will endure.
"History is strewn with projections of technology that have fallen wide off the mark," he said. "There is little reason to believe that we are going to be any better at this in the future than in the past."
Mr. Greenspan noted that productivity, the amount of output per hour of work, has been growing at an annual rate of around 2% since 1995, double the annual gains of the previous two decades. He credited these gains in part to a surge in business investment in a variety of high-technology products from computers to fiber-optic cable.
Productivity is considered the crucial element in raising living standards because it allows employers to pay their workers more without triggering inflationary pressures by having to raise the cost of products.
Mr. Greenspan, who in 1996 worried that investors' "irrational exuberance" may have pushed stock prices too high, reminded the committee that he has warned a number of times about the dangers in believing that the world has entered some new economic era because of breakthroughs in technology.
Modesty in Forecasting
"Despite the remarkable progress to date, we have to be quite modest about our ability to project the future of technology and its implications for productivity growth and for the broader economy," he said.
Mr. Greenspan's testimony was one of two appearances he will make this week before the Joint Economic Committee. Monday's subject was technology. Mr. Greenspan is scheduled to testify Thursday on monetary policy.
The Fed last month announced it was leaning toward raising interest rates to forestall inflation. Though most analysts assume that central-bank policy makers will raise rates when they meet June 30, financial markets have grown worried that particularly inflationary economic data, or warnings from Mr. Greenspan, could signal that a series of rate increases are in the offing.
Mr. Greenspan's comments extended a series of warnings he has issued recently about the ability of the U.S. economy to continue growing without an outbreak of inflation. They are likely to fuel speculation, already widespread in the U.S. and international markets, that the Fed is poised to raise interest rates this month for the first time since March 1997.
Mr. Greenspan said improvements in technology have made capital investment "distinctly more profitable." That, in turn, has led to a surge in investment that has increased industrial capacity faster than factory output. The result has been "greater competitive pressure on businesses to hold down prices."
Falling international trade barriers -- another outcome of technological improvement -- have also helped to restrain inflation, he said. "All else equal, the enhanced competition in tradable goods enables excess capacity previously bottled up in one country to augment worldwide supply and exert restraint on prices in all countries' markets."
But Mr. Greenspan said the gains in U.S. productivity that have helped restrain inflation can't be attributed solely to technological innovation. For example, productivity in Europe and Japan hasn't yet caught up to U.S. levels, although those regions have had the same technologies that are available to the U.S.
One possible reason for the discrepancy, Mr. Greenspan said, is that regulations in Japan and Europe don't permit companies to fire workers easily.
"One hypothesis is that unnecessary conditions for information technology to increase output per hour is a willingness to discharge or retrain workers that the new technologies have rendered redundant," Mr. Greenspan said. "Countries with less flexible labor markets than the United States enjoys may have been inhibited in this regard."
Mr. Greenspan said the actual causes of productivity gains may need to be studied further. "But at this stage, one lesson seems reasonably clear," he said. "As we contemplate the appropriate public policies for an economy experiencing rapid technological advancement, we should strive to maintain flexibility in capital markets."
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