Recovery Hinges on Productivity
Saturday September 1, 10:07 am Eastern Time
<<JACKSON HOLE, Wyoming (Reuters) - A rebound in the U.S. economy hinges on whether productivity stays on a solid track and the consequences should it derail are potentially dire, according to a paper presented to a meeting of top policymakers, bankers and academics on Saturday.
``Provided the productivity trend continues to be strong the economy should recover normally in a few quarters,'' said the paper prepared by Martin Baily of the Washington-based Institute of International Economics for a symposium on the New Economy that included Federal Reserve Chairman Alan Greenspan among participants.
``If the productivity trend collapses, however, the favorable performance of the 90s could unravel, with higher inflation, higher unemployment, slower growth, stock market weakness and a dollar that could drop sharply,'' he warned.
Productivity measures output per worker and a rising level is associated with an improvement in living standards.
The issue of productivity was much on symposium members' minds as they met to ponder the direction of the so-called New Economy. The New Economy, spurred by the technology revolution, has added huge amounts of information-processing capability to the economy over the past decade.
Baily, who served as chairman of the White House Council of Economic Advisors in the former Clinton administration, included some implicit criticisms of the Bush administration's policies in his remarks.
TAX CUTS ILL-TIMED
He said the large cut in personal income taxes that the Bush administration pushed through this summer was ''particularly bad policy'' when the United States already was running a big deficit in its current account, which measures trade in goods and services with the rest of the world.
``We need to increase national saving, not decrease it over the next 10 years,'' Baily said, noting there was considerable doubt about the future of budget surpluses amid the economic slowdown. In addition, the United States must prepare for a wave of ``baby boomers'' born after World War Two who will be retiring around 2010, he said.
Baily said he worried that, ``If productivity weakens, this will raise the possibility of stagflation, just as we saw in the 1970s when productivity slowed.'' The term refers to a lengthy period of slow or stagnant growth, accompanied by rising prices that are not offset by increased output.
While insisting that he was an optimist about the economy, Baily said the favorable conditions of the 1990s were unlikely to reappear in the foreseeable future.
``Even if the trend of strong productivity growth continues, it seems virtually certain that the dollar will weaken substantially, the stock market will perform less well and the unemployment-inflation trade-off will worsen,'' he said.
During the 1990s, Baily noted, Fed policymakers had the advantage of a steadily growing economy as a backdrop for adjusting interest rates. If productivity wanes in coming years, it may be more difficult to make the necessary changes.
``To bolster demand, sustained low interest rates would be called for, but the difficulty would be that, with slow productivity growth, the current pace of wage and compensation increases would not be consistent with the low pace of core inflation achieved in recent years,'' Baily wrote.>> |
