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Technology Stocks : COMS & the Ghost of USRX w/ other STUFF -- Ignore unavailable to you. Want to Upgrade?

To: DMaA who wrote (13047)	2/24/1998 1:18:00 PM
From: DMaA	Read Replies (1) \| Respond to of 22053

What Greenspan doesn't get ( but we do ). Why Greenspan Doesn't Get It ESBURY Date: 2/24/98 Last year's drop in inflation needn't be a mystery. Just as the Rosetta Stone let archeologists decipher Egyptian hieroglyphics, today's economic enigmas can be deciphered by looking at productivity. Federal Reserve Chairman Alan Greenspan gives the Fed's yearly economic forecast to Congress on Tuesday. But he's carrying some heavy baggage with him - baggage packed by other members of the Federal Reserve Board. For over a year now, the Fed's governors have used words such as ''mystery,'' ''puzzling'' and ''surprising'' in referring to the drop in inflation in '97. In the Fed's view, it's impossible for the jobless rate to fall below 5%, while gross domestic product, wages, profits and stock prices rise as rapidly as they have - impossible, that is, without a rise in inflation. Remember, Greenspan told Congress in February last year that the Fed predicted real GDP growth between 2.0% and 2.5% in '97, with consumer prices rising between 2.75% and 3.5%. In fact, real growth in '97 was 3.9%, while consumer prices rose just 1.7%. Such errors aren't terrible. But the Fed's forecast is the most important in the country. Until recently, the Fed has not only leaned toward tightening money supply but also has been vocal about fears of rising inflation. This tightening bias has kept interest rates higher than they should be. But Greenspan and the rest of the Fed's board are missing the real story. Productivity is being driven upward by the new networked economy. Production, distribution and design are being tied ever closer as the cost of information plummets. And the distance between consumers and producers is shrinking every day. In fact, it's getting harder to tell the difference between the two. Small-business starts are surging, and patents are being issued in record numbers. Why? The computer deserves the lion's share of the credit. The jump in productivity and efficiency is the direct result of high-tech innovation. That has allowed economic growth to speed up while inflation falls. Still, productivity is not easy to decipher. Productivity statistics, especially in the service sector, are often terribly understated. After all, how do you estimate the productivity of a Michael Jordan? Points scored, rebounds and assists don't come close to measuring the value of his international fame. U.S. pro sports have changed from local or national contests into international events. This is a dramatic increase in entertainment value that isn't captured in productivity statistics. Even with understated numbers, overall nonfarm business productivity grew 2.2% in '97, twice as fast as its historical average going back to the '70s. More importantly, through the first 27 quarters of this current recovery, manufacturing productivity has risen 24.9% - record growth for any postwar economic expansion. Typically, productivity surges early in a recovery and then falls off as the recovery ages. But this recovery has been different. (See chart.) Gains in manufacturing productivity began slowly, but have surged ahead of the average during the past six expansions. Technological innovation, greater deregulation and globalization are the reasons. The period of economic history that most resembles today's economy occurred at the turn of the century. Between 1869 and 1911, real economic growth averaged 4.1% per year, while consumer prices fell an average of 0.8% annually. That was also a time of spectacular technological advance. Inventions included the telegraph and telephone, the electric light, the electric motor and the automobile. Those innovations boosted productivity and allowed strong growth and falling prices to coexist. All the evidence suggests that the U.S. today is experiencing similar conditions. But the Fed sees growth and low inflation as the result of temporary factors such as insecure workers and falling import prices. Such explanations are steeped in a Phillips Curve view of the world. And that's wrong. The real Rosetta Stone of this economy is high-tech productivity growth. Only by understanding this can the Fed avoid the forecasting mistakes that keep it fixated on inflation and force it to hold interest rates too high. Brian S. Wesbury is vice president and chief economist of Griffin Kubik Stephens & Thompson Inc., an investment bank in Chicago. (C) Copyright 1998 Investors Business Daily, Inc.