November 06, 2003

Greenspan Gives a Nuanced View

Alan Greenspan gives a nuanced view of the current economic situation.

He expects the economy to grow at a rate of between 3.5 and 4.0 percent over the next year or so, and expects employment growth to pick up (although probably does not expect significant falls in the unemployment rate):

Greenspan: Odds favor job growth, worries about deficit - Nov. 6, 2003: Greenspan... said "the odds ... increasingly favor a revival in job creation," which wouldn't come a moment too soon for the health of the broader economy.

But, he says, if employment does not start to grow, a return of slow-growth stagnation is very possible:

"Unless hiring picks up and layoffs ease, assuaging the latent job security fears of many of those currently employed, the share of income spent could decline, a development that would hamper the vigor of the expansion," the central bank chairman said.

The large wedge being driven between output growth and slow or zero employment growth is the result of what is amazingly good news about productivity--but future news about productivity is unlikely to be as bright:

Greenspan said the economy was able to grow in the third quarter at the fastest pace in nearly 20 years, while still shedding jobs because of "astonishing" gains in productivity, or output per worker hour, which grew at about a 7.5-percent annual rate in the second and third quarters. But productivity can't keep growing at such rates forever, and businesses may feel the need to rebuild their inventories, which were sapped during the summer's run of strong sales. If they do, and if demand stays strong, then hiring should pick up, Greenspan said.

Hence there is no hurry at all to raise interest rates: no reason to do so for quite a considerable period:

Though interest rates typically rise during such periods, Greenspan hinted the Fed could stay on the sidelines for longer than some market participants might expect.... "In these circumstances, monetary policy is able to be more patient," Greenspan said....

He also went on to say that the Bush administration and the Republican-led congress have committed serious policy errors in pursuing policies that lead to large long-run deficits:

The central bank chairman described in some detail his fears about what he saw as a dangerous deterioration in the federal budget. After posting a budget surplus in 2001, the deficit is likely to approach a record high of nearly $400 billion in 2003. Though some of the recent deterioration was probably unavoidable, due to the 2001 recession and the need for increased spending on defense and homeland security after the Sept. 11, 2001, terrorist attacks, Greenspan said he saw little sign that the Bush administration and lawmakers were serious about getting their fiscal house in order.

"Recent budget deliberations are not encouraging," he said. "The current debate appears to be about how much to cut taxes or how much to increase spending. No significant constituency seems to support taking the actions that will be necessary to move toward, and one hopes achieve, budget balance."

And such fiscal-policy fecklessness is more destructive to the American economy now than it was in the early 1980s because over the past twenty years the retirement of the baby-boom generation has drawn twenty years closer:

Greenspan warned that, as Baby Boomers begin to retire and draw down Social Security and Medicare payments within the next decade, the budget picture will get considerably worse, if current tax and spending policies are maintained. "Such a development could have notable, destabilizing effects on the economy," he said.

Posted by DeLong at November 6, 2003 09:50 AM | TrackBack

Comments

I agree about the nuances. However, headlines are important, and the "odds favor job growth" was the thing that hit the screens. And we don't think that wasn't part of the plan, do we?

Posted by: Mats on November 6, 2003 10:03 AM

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Darn darn. Alan Greenspan was last heard warning us about the surplus that would eat San Francisco. That was in 2001, when the issue was cutting taxes. Now, the deficit is the problem when taxes have been cut and cut and cut and there is no chance of reversal. What then are we to do?

We are in a terrific short term environment with a surge in productivity, rapid economic growth, and low interest rates. But, the deficit is really going to be dangerous. What should be cut?

Posted by: anne on November 6, 2003 10:06 AM

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So now Greenspan is sounding like Krugman. Oh, I wonder how chumps like Luskin will spin this.

Well anyway, does anyone think the economy will really improve? If so, by how much? I remember Brad saying that he expects it to get worse in the coming months. Why is that?

Posted by: Brian on November 6, 2003 10:10 AM

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I am not sure about productivity not continuing to grow. Maybe not at 7% but 5% or more is possible. The old notion that productivity gains come when fewer workers make the same number of widgets is not operational in this recovery. The current model is job loss in less productive endeavors replaced by jobs in more productive endeavors. Greater productivity results, but more from redirection of effort than increases in efficiency. Productivity is being influenced by structural changes as is job loss and job creation.

AG is saying that interest rates will remain low through the 2004 election.

Where is the AG apology for lending his blessing to the irresponsible 2001 tax cuts? An admission that he was wrong might help Congress be more responsible. The administration in hopeless.

Posted by: bakho on November 6, 2003 10:11 AM

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There is no reason to anticipate productivity growth slowing in the near term. Moore's Law is simply yet not running up against limits. We are in a productivity revolution and economic growth could be wonderful quarter after quarter with no worry of inflation, that is if the fiscal stimulus has finally spurred sufficient demand to get firms to hire. We will know more tomorrow.

Posted by: anne on November 6, 2003 10:22 AM

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My gut feeling is that round two of applied technology will be pure economic stimulation - but of the controlled release type of medication. It will also be interesting to track the development of the debate started by Nicolas Carr at Harvard whether Information Technology is entering an age of commoditization with a corresponding plateau in productivity increases or whether there remains additional productivity to be squeezed out of the technology. The IT community never fails to intrigue.

http://www2.cio.com/analyst/report1860.html


Posted by: AL on November 6, 2003 10:39 AM

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In reviewing Greenspan's comments, Berry of the Washington post notes that GDP growth in the 3.5%-4.0% range is not consistent with an acceleration in job growth unless productivity growth slows. He then points to a number of analysts (though he missed anne and bakho) who have doubts about productivity slowing, on trend, anyhow. The math requires either a slowdown in productivity growth (4.7% y/y in Q3), a pick up in output growth (4.1% y/y in Q3, in productivty-report terms) or no improvement in hiring. Given Greenspan is looking at 4%-ish growth, he needs something below 3% productivity growth to pull the jobless rate down, assuming the participation rate steadies. The the participation rate is already at its lowest level since 1991, there is so far no evidence it is steadying.

Posted by: K Harris on November 6, 2003 11:43 AM

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Oops, forgot:


http://www.washingtonpost.com/wp-dyn/articles/A7936-2003Nov6.html

Posted by: K Harris on November 6, 2003 11:44 AM

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K Harris

Fine comments as usual.

Well, I am "trying" to be an optimist but my guess is productivity growth continues to be 5%, while GDP growth slows to 4%. That means job creation does not keep up with growth in labor supply. There was a typical surge in layoff notices in October, that will effect us the rest of the year. Also, there is no reason to think out-placing to Asia and Latin america will slow.

By the way, why is no one wondering what we can cut to trim the federal deficit? Alan Greenspan was surely not opting for higher taxes. Where are the budget cuts to come from to prepare for the dread aging of America? Where indeed.

Posted by: anne on November 6, 2003 11:58 AM

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So far, the magic of productivity growth is pretty lop-sided. Unit profits for non-financial corporations were up 17.6% y/y in Q3, while real compensation in the sector was up just 1.1%. For all non-farm workers, compensation is up just 0.5% on the year, despite a 4.7% rise in productivity. From a year ago, durables output is up just 0.1%, while hours are down 5.6%. Overall, output is up 4.1% while hours are down 0.6%. I suppose that helps explain the imbalance in earnings shares as a result of this latest productivity "miracle".

K Harris

This is important enough to post several times!

Posted by: Anne on November 6, 2003 12:33 PM

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"I think financial crisis, and then how it falls out is 50-50"(Paul Krugman).I personnally do share the same opinion.When, that's a different question.

Posted by: Bernadette on November 6, 2003 01:16 PM

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Anne,

5% yearly productivity growth is a doubling in under 15 years! So I think that's only possible for short periods of time. It sure would be nice though. If the benefits made their way to the average consumer (which I believe they do over time) then a Walmart cashier supporting a family of 4 would be quite comfortable in three decades. And the baby boomer retirement problem would turn out not to be a problem at all.

Posted by: snsterling on November 6, 2003 01:21 PM

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We may be giving the Fed to much attention. Over the past decade the correlation between fed funds and bond yields has been less than 0.5 versus 0.9 from 1955 to 1990. Meanwhile the correlation with foreign interest rates has risen sharply.
Maybe as we have become more dependent on foreign capital US bond yields may be more a function of foreign yields rather than fed funds. If you try to model Canadian rates the first thing you but in the model is US rates. The US may be starting to be like that. In my bond model I use the average of the British, German & Japanese bond and it is displacing fed funds in the equation.

Just another thought along that line, in 2002 the stock mkt pe fell despite lower bond yields & a supposedly easy Fed. Real money supply and contracting bank reserves explained that plunge.
Just an example that at 1% fed funds, fed funds may not be the key variable to watch as it was in
earlier years. Maybe you need to watch some of the fed policy measures we use to watch before we knew what the funds target was.

Posted by: spencer on November 6, 2003 01:37 PM

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"My gut feeling is that round two of applied technology will be pure economic stimulation - but of the controlled release type of medication. It will also be interesting to track the development of the debate started by Nicolas Carr at Harvard whether Information Technology is entering an age of commoditization with a corresponding plateau in productivity increases or whether there remains additional productivity to be squeezed out of the technology. The IT community never fails to intrigue."

A commoditization of IT could help productivity in the rest of the economy, by making IT usage cheap, easily deployable and improving data exchange.

Posted by: Barry on November 6, 2003 04:08 PM

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"My gut feeling is that round two of applied technology will be pure economic stimulation - but of the controlled release type of medication. It will also be interesting to track the development of the debate started by Nicolas Carr at Harvard whether Information Technology is entering an age of commoditization with a corresponding plateau in productivity increases or whether there remains additional productivity to be squeezed out of the technology. The IT community never fails to intrigue."

A commoditization of IT could help productivity in the rest of the economy, by making IT usage cheap, easily deployable and improving data exchange.

Posted by: Barry on November 6, 2003 04:11 PM

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anne wrote, "Moore's Law is simply yet not running up against limits."

So what? You're making the assumption that the bottleneck is CPU speed.

Barry wrote, "A commoditization of IT could help productivity in the rest of the economy, by making IT usage cheap, easily deployable and improving data exchange."

I couldn't agree more. But then how would people in the IT industry collect their precious rents?

Posted by: Stephen J Fromm on November 6, 2003 04:52 PM

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Didn't Greenspan basically roll over and enable the last few rounds of tax cuts with his Congressional testimony? It's amazing to me how the Bush+Republican Congress regime are spending money three times faster than Clinton did, and effectively raising taxes on the next few generation. "It's your money" indeed.

Posted by: xian on November 6, 2003 05:37 PM

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Barry wrote, "A commoditization of IT could help productivity in the rest of the economy, by making IT usage cheap, easily deployable and improving data exchange."

As long as monopolies like Microsoft are around to "manage" new innovation, it won't happen.

Posted by: bakho on November 6, 2003 06:19 PM

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snsterling- with the emergence of China as a producer and consumer of goods, there is opportunity for trade and restructuring of other economies. If we were talking about doubling output per worker within the same industry in under 15 years, it would be a stretch. However, restructuring can add to the average productivity gains within emerging industries.

Posted by: bakho on November 6, 2003 06:23 PM

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