CUT, ALAN, CUT :

Economic Production Best in 19 Years (Jeannine Aversa, May 31, 2002, Associated Press)

A crucial ingredient in the economy's long-term vitality, productivity, turned in its best performance in almost two decades during the first quarter of the year as hard-pressed companies produced more with fewer workers.

Productivity--the amount of output per hour of work--soared at an annual rate of 8.4 percent in the January-March quarter, after a strong 5.5 percent growth rate in the previous quarter, the Labor Department reported Friday.

The latest figures show that last year's recession didn't derail healthy productivity gains seen in the late 1990s and bodes well for keeping the nation's economic recovery on solid footing, economists said. [...]

In the long run, productivity gains are good for workers, for the economy and for companies, whose profits took a hit during the slump.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains. Productivity gains also permit the economy to grow faster without triggering price inflation. If productivity falters, however, pressure for higher wages could force companies to raise prices and thus worsen inflation. [...]

Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth.

He and other economists have suggested that the strong productivity gains seen in the late 1990s were more than a passing fluke related to the economic boom and big investments by companies in productivity-enhancing computers and other high-tech equipment. Rather, those gains, may reflect a more lasting change involving how companies are managed and structured and put technology to use. [...]

With strong productivity growth keeping a lid on inflation, economists said the Federal Reserve has the luxury of leaving short-term interest rates unchanged at 40-year lows through the summer.

At first blush it may seem that interest rates are unusually low, but we've had other periods (some extended) when they were just as low. Considering these technology driven productivity gains, the basically balanced federal budget, the deflationary pressures created by the globalized economy (with its freer flow and readier development of raw materials and the willingness of foreign workers to accept lower wages), and the 1% overstatement of the inflation rate that occurs because the basket of goods used to measure the rate is so outdated it is actually likely that interest rates are now, and have been for several years, far too high. This may seem impossible but Japan has hit zero with its interest rates at times in recent years and still hasn't been able to lend money. Similarly, when you see a car company offering zero % financing plus cash back, you're really being offered a negative interest rate--that is you are being offered money to borrow
money. Fed Chairman Greenspan seems to understand this at certain times but to be terrified of the idea at others--an understandable condition for a central banker whose adult years coincided with the horrendous inflation brought on by Great Society and Cold War spending. Right now he needs to be cranking rates down to turn this tepid recovery into the kind of boom that could help the rest of the world's embattled economies. Posted by Orrin Judd at June 1, 2002 8:20 AM