I invite everyone to read this article on Greenspan.
This says what I have been trying to say for months.
dailynews.yahoo.com
Saturday April 8 10:22 AM ET
Greenspan Theories Don't Tell Real Story
By Pierre Belec
NEW YORK (Reuters) - ``New economy' enthusiasts say Federal Reserve Chairman Alan Greenspan is living on a different planet and needs to go back to the drawing board to really figure out what makes this economy tick.
Through words and deeds, Greenspan has launched a series of interest-rate increases to put the brakes on the economy and head off inflation.
But some critics say Greenspan subscribes to academic theories that are quickly losing popularity
They believe the Fed is in too much of a rush to link theories and policies on inflation before it sees the whites of inflation's eyes. Its pre-emptive money policy, which has spurred five interest-rate hikes since last June, has cast a big dark cloud over the economy and the stock market.
Greenspan has the unique job of being able to say that he must act now to head off a possible problem that could slam the economy nine months from today. And, if the supposed problem does not occur then, he can claim that his pre-emptive move did the trick. Nice job if you can get it.
The central banker has been spinning theories and the economists have been peddling their nostrums in increasingly more worried tones that a low jobless rate can cause inflation and a booming economy will inevitably lead to demand that outstrips supply.
It isn't so, some analysts say.
What is happening, they say, is that there has been an important shift in the way the economy works, which is something that the Fed may not have noticed. Or perhaps, the old guard at the central bank prefers to ignore the profound changes that have been going on in the new economy until they become more widely accepted.
The Fed, analysts say, is applying ``old economy' rules to the technology-powered new economy, prescribing interest-rate increases as antidotes to snuff out inflation pressures that have yet to show up on the radar screen. Higher interest rates have traditionally been used to dampen inflation, which can heat up in a rapidly growing economy.
For a quarter century, economists have clung to the belief that the trigger for inflation is a jobless rate of 6.0 percent or less. Unemployment is hovering at a 30-year low of 4.1 percent, yet, there is still no inflation.
The traditional central bank view also says the booming economy, which is about to extend its growth to a record 109th month, will create shortages of goods. People are scratching their heads, looking for evidence of any supply shocks.
The Fed chairman is queasy about the productivity rate. The stuff that raises the nation's living standards jumped 6.4 percent in last year's fourth quarter and the fear is that productivity gains may eventually be lost to rising labor costs.
What makes the productivity numbers so impressive is that they are rising while labor costs are remarkably restrained and the labor market so tight.
``Greenspan might become apoplectic if he realized that actual productivity is rising three times that fast,' said Richard Salsman, chief market strategist at InterMarket Forecasting Inc., in Cambridge, Mass.
Based on Salsman's calculations, the U.S. government is short-changing the American workers' productivity rate and blurring Greenspan's view of the economy.
Salsman said that from 1988 to 1998, productivity soared 6.2 percent per year, which is in sharp contrast to the Bureau of Labor Statistics' own estimate of 1.7 percent.
The BLS also said Americans were only 18.6 percent more productive in 1998 than they were 10 years earlier in 1988.
``By our measure, we are 82.4 percent more productive,' Salsman said.
Why the gaping difference?
The government hasn't found a yardstick to measure the productivity of the service industry, which is a big factor in today's economy. The truth, though, is that that sector is nearly impossible to measure.
``In trying to estimate nationwide productivity by dividing a crude measure of real output by a still cruder guess of the total hours we all work, the agency's sophisticated sampling methods are hopelessly overwhelmed by the vast and dizzying complexity of our modern economy,' Salsman said.
``The Bureau of Labor Statistics is good at measuring the number of cars and ingots and widgets, but they haven't been able to measure such things as the productivity gains from an airlines' reservations system,' Salsman said.
Computer users can relate to the productivity of the spell-check function of word processors. It's an incredible productivity booster in spotting typos and misspelled words.
``Consider the elusive nature of the concept 'hours worked,' Salsman said. ``In a distant age of factory whistles and time clocks, that concept might have been relevant. But in today's 'flex time' world of in-home offices and deals done by cell phone from train stations and ski slopes, to tabulate 'hours worked' is a futile, even silly, exercise.'
Salsman said he went about measuring productivity using the aggregate, pre-tax operating profits per employees of the companies in the Standard & Poor's 500 stock index (^SPX - news). The companies' numbers are crunched by objective CPAs who use strict accounting standards.
But what about the productivity of the little guys, the companies that are not in the S&P 500 stock index?
``We do know that the 'best effort' by the BLS doesn't provide an accurate result,' Salsman said. ``And if, as we suspect, non-S&P firms are enhancing productivity at least half as rapidly as their larger brethren, their gains are still far greater than the BLS measures imply.'
Productivity is the measure of output per man-hour. For example, a car maker's productivity would be trending higher if its employees, working a set number of hours, produced 100 cars per week and the following year, the same number of workers boost their output by another 25 cars within the same time frame.
What about the Fed's concern that the tightest labor market in three decades could lead to wage-led inflation as companies boost prices to make up for higher salaries?
``My analysis of wage changes has shown that they actually follow the Consumer Price Index,' said Salsman. ``Wages do not go up excessively until after the CPI has gone up.'
So it's a chicken or egg thing.
``Why? The people who negotiate wage increases will often point to the rise in the index for their cost-of-living adjustments,' Salsman said. ``So the conclusion is that workers do not get wage increases beyond productivity growth unless they already see inflation showing up in the CPI.'
In fact, the work force has been remarkably quiet because extreme competition has held down most wage pressures. And, the benefits of higher productivity are being passed on to consumers in the form of lower prices.
For the week, the Dow Jones industrial average was up 189.56 points at 11,111.48. The Nasdaq composite index fell 126.39 to 4,446.44 and the Standard & Poor's 500 index rose 17.77 to 1,516.35.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com). |
