I was hoping Federal Reserve Chairman Alan Greenspan would have something to say so I'd have something to write about.
Unfortunately, he didn't. After a week of priming the system with bank reserves, lowering the target overnight interest rate by 50 basis points to 3 percent and the effective rate to just over 1 percent, Greenspan gave a short pep talk to the Senate Banking Committee.
The economy will suffer in the short run, not in the long run, Greenspan said. The flexibility of the US economy has made it "increasingly resilient to shocks." Unlike a hurricane, earthquake and other natural disasters, terrorism strikes at the "roots of our free society," raising the level of uncertainty about the future, he said. The potential result is a "pronounced disengagement from future commitments," lessening the current level of activity.
What Greenspan appearance would be complete without his usual productivity pitch? Productivity made an appearance in Monday's announcement of a 50 basis-point rate cut, even though the Fed's action had nothing to do with the long term and everything to do with making sure the payments system functioned in the short term.
Greenspan is clearly married to the productivity miracle.
Like all good captains, he'd rather go down with his ship than man the lifeboats.
The slump in economic activity has already wreaked havoc with productivity growth. Non-farm business productivity rose 1.5 percent in the four quarters ended in the second quarter this year compared with a 4 percent increase in the preceding 12 months.
Putting aside the cyclical component of productivity -- productivity rises and falls with the economic cycle -- the events of Sept. 11 are negative for long-term structural productivity growth.
Why? Because more of our scarce resources are going to be allocated to the public sector -- to enhance airport security, for increased military expenditures, to expand surveillance and intelligence activities -- than they were before.
"You're going to have two well-trained people on every plane, dressed like tourists and carrying Uzis," says Bob Barbera, chief economist at Hoenig & Co in Rye Brook, New York.
Fewer resources will be available for the private capital stock, which means a lower future or potential growth rate for the economy.
The New Era of productivity growth was already starting to fray around the edges when two hijacked airplanes plowed into the twin towers last week. Benchmark revisions in July lowered real gross domestic product growth for the 1998 to 2000 period. With output reduced, output per hour worked -- also known as productivity -- was revised down as well.
Looking at the productivity growth rates on an industrial production peak-to-peak basis for various business cycles, what's remarkable is how unremarkable the 2 percent annualized rate from the third quarter of 1990 to the third quarter of last year was, according to Paul Kasriel, director of economic research at the Northern Trust Corporation in Chicago.
While better than the 1979 to 1990 cycle's 1.3 percent annualized rate, productivity growth in the most recent period matched that of the 1973 to 1979 period and fell well short of the 2.7 percent annualized rate from 1959 to 1969 and the 2.4 percent rate during the 20-year peak-to-peak period from 1959 to 1979, Kasriel says.
"In terms of productivity growth, the recent period fell short of a boom," he says. "Neither was profit growth of new-era proportions." In fact, the only thing that was of new-era proportions was "the market capitalization of equities relative to net worth," which is a nice way of describing a bubble, Kasriel says.
Last week's terrorist attack on the World Trade Center will probably be the precipitating event for a recession -- just like the jump in oil prices was the villain in the 1990 to 1991 recession (even though the economy was already in recession when Iraq invaded Kuwait). The New Era's foundations were already wobbly, however, before the terrorist attacks.
"The wild [price-earnings ratios] were based on the framework that everything would go right forevermore," Barbera says.
In the span of a week, the landscape has been dramatically altered in a way that's not positive for productivity growth.
While Greenspan was doing his best to be cheerleader for the New Economy and lender of last resort to the financial system during a crisis, he was dispensing economic advice to Congressional leadership as well. Yesterday, the data-driven Greenspan urged Congress to proceed slowly with any fiscal stimulus plan until policy makers could better assess the economic impact of the terrorist attack.
There is nothing lawmakers like more than peppering the monetary authority with questions on fiscal policy. However, this is one of the few instances where they seem disinclined to take his advice.
"He's not up for reelection," Kasriel says. "Congress doesn't bow down to him as much as it used to." Until this year, Greenspan had advocated debt reduction uber alles. Tax cuts were only to be enacted if Congress was planning to fritter away the surplus on useless spending projects.
Greenspan had an epiphany once George W. Bush was elected president. With a straight face the chairman testified to a rapt audience that a tax cut was necessary because there would soon be no more federal debt for the government to buy back! One crisis and next year's projected surplus of US$176 billion is on the verge of becoming a deficit, according to some private-sector economists.
Even the mighty Greenspan will be unable to stop the fiscal locomotive.
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