Until Wednesday, we had no idea how last month's terrorist attack and heightened security in its wake would impact the US economy in the long run.
Now we know. Federal Reserve Chairman Alan Greenspan, exercising his open option to testify before the Joint Economic Committee of Congress, told us the accelerated pace of productivity growth witnessed during the last half-decade of the 1990s was still intact.
"For the longer term, prospects for ongoing rapid technological advance and associated faster productivity growth are scarcely diminished," Greenspan said.
PHOTO: AP
He did concede in his prepared remarks a "one-time downward adjustment as our economy adjusts to higher levels of perceived risk." However, productivity growth should resume its elevated pace witnessed in the post-1995 period, he said.
What he didn't say was how using resources currently for things like increased security "would allow us to be more productive tomorrow," said Paul Kasriel, director of economic research at the Northern Trust Corp in Chicago.
After all, spending on bombs and missiles and scanners will increase growth in the short run but will sap the private sector of resources necessary for the capital investment that enhances our long-run efficiency and standard of living.
And the issue of how much of the productivity increase in the last five years was cyclical -- the result of strong growth -- and how much was structural -- the result of changes in the way the economy operates (Greenspan's contention) -- is still open for debate, along with the role played by information technology.
Management consultant McKinsey & Co weighed in with their view in a study released Wednesday, US Productivity Growth, 1995-2000. They found that the 2.5 percent growth rate of labor productivity between 1995 and 2000 was real. They also determined that half of the acceleration -- from 1.4 percent in the prior 20 years to 2.5 percent recently -- was sustainable. The surprise was the finding that only six sectors of the economy (retail, wholesale, securities, telecom, semiconductors, and computer manufacturing) comprising 30 percent of GDP contributed 99 percent of the productivity growth acceleration.
"Productivity growth did not accelerate in many other sectors, in spite of significant increases" in information technology investment, McKinsey said.
Like all the other uncertainties Greenspan talked about, the productivity conundrum won't be solved anytime soon.
Greenspan went up to Capitol Hill armed with his usual sheaves of data. He walked us through recent economic history -- before, in the immediate aftermath of, and one month following the Sept. 11 attack on the World Trade Center and Pentagon. He said very little and took a long time to say it. The bottom line is that there are many "uncertainties" surrounding the economic outlook.
Many economists thought the Fed chief wasn't candid about the current state of the economy.
"He said [prior to the Sept. 11 attack] he saw that a nascent recovery from a recession he failed to acknowledge had taken hold," says Bob Barbera, chief economist at Hoenig & Co in Rye Brook, New York.
Part of the pleasure in viewing any Greenspan congressional testimony is the show itself. Committee members come prepared with their questions for Greenspan, the consummate insider, seeking his seal of approval on one or another of their pet personal economic fixes.
Should they cut taxes? If so, which ones for maximum effect? How big should the stimulus be? Is there anything missing in the package under consideration? What about short-term versus long-term stimulus? Greenspan managed to answer the questions graciously without every answering them, which is probably why they ask him to testify all the time.
Jon Corzine, Democratic Senator from New Jersey, tried to get Greenspan to agree with his view that since the risks to the economy are all weighted toward further weakness, Congress should err on the side of enacting a stimulus plan that was larger rather than smaller.
While conceding that public infrastructure improved the level of private productivity, Greenspan said "the propensity to create projects has not always been directly related to enhancing private productivity." Besides, government spending tends to be "pro-cyclical, rather than counter-cyclical," he said.
That won't deter Congress from acting during bad economic times. Lawmakers may profess the desire to do nothing that will endanger the economy's long-term economic health, but their healing horizon extends as far as Nov. 5 of next year (election day).
Did Congress get the guidance they sought Wednesday? No. Did we learn anything about the economy or Fed policy? No, except that it works with a variable lag.
We did learn, although hardly for the first time, that Greenspan's faith in the New Era is unflappable.
"High-tech equipment investment at elevated rates of return will, most likely, resume once very high uncertainty premiums recede to more normal levels," the converted one said.
"Maybe I'm a stickler, but I thought tech spending had been under substantial pressure well before the World Trade Center attack led to higher uncertainty," Barbera said.
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