Speech

A St. Louis Fed Perspective on Long-Term Economic Growth NationalAssociationofManufacturersBoardofDirectorsMeeting LoewsVentanaCanyonResort Tucson,Arizona April16,1999 In the United States today we have in front Smithwasthefirsttoarguewithclaritythat of us exciting news on economic growth. anation’swealthwasintheoutputofitspeople, It now appears that the painful period of notthegoldinitsvaults.AndSmithcertainly unusually slow productivity growth in understoodthetremendousimportanceofproducthe 1970s and 1980s is behind us. The increase tivitygrowth;hesoughttoconvincehisreaders of output per hour of labor input has been high thatcompetitivemarketsgeneratedwealthand enough over the last few years that it is increas- thatmanyrestrictivegovernmentpoliciesmade inglyreasonabletobelievethattheUnitedStates Englandpoorer. has indeed turned the corner on productivity Ihaveanintenseinterestingrowthbothasa growth. This picture is reinforced by the exten- citizenandapolicymaker.Asacitizen,I’dlike siveanecdotalreportsfromallacrossthecountry. toseehigheroutputperworkertoenrichthelives But—andthisisanimportant“but”—thereisstill ofpeopleeverywhere.Newtechnologiesare considerable uncertainty about this conclusion, removingsomeofthedrudgeryfromourjobsand and in any event we have to be very careful to makingworkmoreinteresting.Idonotscoffat be realistic about the magnitude of the increase materialimprovementssuchasthesecondcar, in productivity growth. My purpose today is to thevacationhome,andsoforth,butIdowantto discuss this issue of productivity growth and emphasizehowimportantimprovementinmatethe implications of higher growth for monetary rialwell-beinghasbeenforvastlygreaterparticipolicy. pationinculturalactivitiesthathavehistorically beenenjoyedbyonlyasmallsegmentofthe Aswithsomanyothertopicsineconomics, population. theplacetostartiswithAdamSmith.Morethan Inshort,I’mgoingtotakeforgranted,in 200yearsago,inhisWealthofNations,Smith today’sremarks,thatgrowththatpeoplewantis explainedwhereeconomicgrowthcomesfrom: agoodthing.I’mnotgoingtogetboggeddownin Theannualproduceofthelandandlabourof philosophicalargumentsoverhowmuchgrowth anynationcanbeincreasedinitsvaluebyno isinfactgoodforus. othermeans,butbyincreasingeitherthenum- BeforeIgetintotheseissues,itisimportant berofitsproductivelabourers,ortheproducthatIissueadisclaimer.TheviewsIexpresshere tivepowersofthoselabourers...Theproductive aremyownanddonotnecessarilyreflectofficial powersofthesamenumberoflabourerscannot positionsoftheFederalReserveSystem.I’vehad beincreased,butinconsequenceeitherofsome alotofhelpwiththeseremarksfromcolleagues additionandimprovementtothosemachines andinstrumentswhichfacilitateandabridge intheResearchDepartmentoftheSt.LouisFed; labour;orofamoreproperdivisionanddistri- theydeservecreditforthestrengthsofmyargubutionofemployment. ment.I’llretaincreditfortheerrors. 1

ECONOMICGROWTH WHY GROWTH MATTERS Apropositionuniversallyacceptedbymonetaryeconomistsisthatmonetarypolicyhasrela- Theimportanceofeconomicgrowthiseasy tivelylittletodowithlong-termeconomicgrowth, todemonstrate.Duringthe1950sand1960s,outaslongastheinflationrateremainsmodest.I putperhouroflaborinputgrewbyabout3percent believethatlowinflationisbetterthannot-so-low peryear.Atthatrate,outputperhourwould inflation,butIamnotonewhomakestheextravadoubleinabout23years.From1973to1990, gantclaimthatzeroinflationyieldsenormous outputperhourinthenonfarmbusinesssector benefitsoversomemodestrateofinflation.Monegrewatarateofonly1.04percentperyear.At tarypolicycancontributetogeneraleconomic thatrate,ittakes67yearsforoutputperhourto stability;andastable,lesscyclicaleconomy double.Currently,itappearsthatoutputperhour probablyraiseslong-termgrowthsomewhat,and isgrowingatarateofabout2percentperyear, isinanyeventdesirableforitsownsake.Central whichdoublesin35years.Evenasmallamount banksalsomakevaluablecontributionstothe ofextragrowthyieldsastonishinggainsforthe efficiencyandsafetyofthepaymentssystem, UnitedStates.Withanextraquarterpercentage whichisanessentialpieceofinfrastructurefora pointofgrowth,GDPwouldbeabout$300billion moderneconomy. higherafteralittlemorethan10years.Theimpact Still,asimportantasthesecentralbank onthefederaldeficitalonewouldbeontheorder responsibilitiesare,itisclearthatthecentral of$60billion. government’sactivitieshavefarmoretodowith Becausethegrowthinrealwagesand,theregrowththananythingthecentralbankdoes.The fore,thestandardofliving,dependsonproducsoundnessandefficiencyofthelegalsystem,the tivitygrowth,theseintervalsforproductivityto degreeofsafetyofcitizens,taxpolicy,government doubleatvariousgrowthratestranslatequite spendingandregulation,allaffectlong-term easilyintopercapitaincome.Itmakesanenoreconomicgrowthtoavastlygreaterdegreethan mousdifferencetooursocietywhetherincome central-bankpolicy. isdoublingevery23years,orevery67years. Long-termeconomicgrowth,however,ister- Individuals,andsocietyasawhole,aremuch riblyimportanttomonetarypolicyinadifferent betteroffwhenthemedian-incomefamilycan way.HereisthemonetarypolicyissueasIseeit. enjoyastandardoflivingthattheupper-income Ifweknewhowtosettherateofinflationdirectly, familyenjoyedagenerationortwoearlier. thenweshouldjustchooseazerorateandbedone withit.(Myguessisthatzeroinflation,properly measured,translatestosomethinglike1to11/2 MONETARY POLICY AND percentannualincreaseintheconsumerprice ECONOMIC GROWTH indexastheBureauofLaborStatisticsconstructs SinceAdamSmith’sday,we’vefilledinsome thatindextoday.)ButtheFedcan’tsettherateof ofthedetailsonhowtheeconomygrows,and inflationdirectly;thatisnotpossibleinamarketamassedahugeamountofempiricalinformation. basedeconomy. Wehavenot,however,improveduponSmith’s Suppose,though,thattheFedcouldsetthe fundamentalframeworkforunderstandingeco- rateofinflationdirectly.Interestrateswouldthen nomicgrowth.Growthcomesfrommorelaborand riseandfallascreditdemandsfluctuated.Fluctucapital,improvementsincapital,andimprove- ationsininterestrates,aswithfluctuationsin mentsintheorganizationoftheproduction individualpricesandwages,areaninherent process.Aswithsomanythings,Smithhadit featureofanefficientmarketeconomy. right.Theonlyamendmentflowingfromadvances Here,then,istheproblemtheFedfaces.Given ineconomicknowledgethiscentury—anditisan thattheFedcannotdirectlycontroltherateof importantamendment—isourgreatlyincreased inflation,itmustfocusonsomepolicyinstrument understandingoftheimportanceofhumancapital. itcancontrolandadjustthatinstrumentasbest 2

ASt.LouisFedPerspectiveonLong-TermEconomicGrowth itcantoachievealowandsteadyrateofinflation theintendedfederalfundsratethanheorshe andastableeconomy.TheFedhaschosentofocus doesfeel.Thebottomlineisthatinthecourseof onthefederalfundsrate;attheendofeverymeet- fulfillingourFOMCresponsibilities,wehaveto ing,theFederalOpenMarketCommittee,the judgetheprobablestrengthorweaknessofthe Fed’smainpolicymakingbody,setsanintended economy.Wewanttheeconomytogrowasfast fedfundsrate.Toadministerthefederalfundsrate asitsresourcesandproductivitypermit,butto policy,wemustformanopiniononthegrowth formaviewontheappropriatefedfundsrateI prospectsfortheeconomy.Wehavenochoice. havetoformaviewontheeconomy’sgrowth Whydowehavenochoice?Imayboreyou prospects. withafamiliarproposition,butwehavetogetit onthetabletobesurethattherestoftheseremarks makesense.SupposetheFedfixedthefederal HOW FAST CAN THE U.S. fundsrateatanunchanginglevel.Ifthatlevel ECONOMY GROW TODAY? weretoolow,theinflationratewouldstarttorise. Manyhavearguedrecentlythatthelong- Asinflationrose,therealrateofinterest—the rungrowthpotentialoftheU.S.economyhas differencebetweenthe(assumed)fixednominal improved.Someevenclaimrevolutionary federalfundsrateandtherateofinflation—would improvement.Oneofthereasonseconomicsis fall.Thelowerrealrateofinterestwouldaddto calledthe“dismalscience”nodoubtiseconoborrowingdemandandpushtheinflationrate mists’propensitytothrowcoldwateronthemore evenhigher.Inanefforttoholdtheinterestrate glamorousandattention-gettingtheoriesabout atthetargetlevel,theFedwouldcreateadditional theeconomy.Ifeelcompelledtodoalittleof liquidity.Moneygrowthwouldrise,andthen thatsometimes,buttodayIwanttotellyouwhy risesomemore.Thepricelevelwouldexplode Iregardmyselfasarelativeoptimistaboutgrowth. withoutlimit. Wemustattheoutsetbeclearaboutthenum- Thereverseisalsotrue.Ifthefundsrateis bers.Optimistsandpessimistsamongserious settoohigh,thepricelevelwouldimplode,and studentsofeconomicgrowtharenotasfarapart therealeconomywouldendupindepression. asthepopularpresswouldhaveyoubelieve. Ofcourse,thefederalfundsrateisnotfixed. Pessimistsbelievethattheunderlyinggrowthof ButiftheFederalReserveadjuststheintended laborproductivityremainsboggeddownatabout federalfundsratetooslowly,thentheprocessI thelevelofthe1970sand1980s.Thatrateisin havejustsketchedworksthesameway.During inflation,therealrateofinterestfalls,increasing therangeof1to11/2percentperyear.Optimists believethatthegrowthrateofproductivityhas inflationarypressures.Duringdeflation,thereal raterises,increasingdeflationarypressures.The risentothe21/2to3percentrange,whichtranslatesintoaverageGDPgrowthinthe3to4perfederalfundsratepolicyinstrumentmustbe centrangeoverthenextfewyears.AlthoughIam adjustedintimelyfashionformonetarypolicyto anoptimistongrowth,myinstinctsasapolicyyieldastableeconomy.Thispropositioniswell makercompelmetoconcentrateonthemidrange supportedbybotheconomictheoryandactual ofinformedopinion.Thattomeistheappropriate experience.So,putverybluntly,weknowthata basisforpolicydecisions. federalfundsratefixedforalltime,oradjusted tooslowly,isaninvitationtodisaster. HowdoestheFeddecidethetimingand DECOMPOSING GROWTH degreeoffedfundsrateadjustments?Iwilltell youthatthereisfarlesssciencebehindourdeci- LetmeputAdamSmith’scommentsabout sionsthanIwouldlike.IthinkIcansafelysay growthintomoremodernlanguage:Thereisbroad thateverymemberoftheFOMCwouldliketofeel agreementamongeconomiststhatthemainfactors morecertainaboutwhenandhowmuchtoadjust thatenableaneconomytogroware: 3

ECONOMICGROWTH • Thegrowthofthequantityoflaborinput. and1997,outputintheprivatebusinesssector • Thegrowthofthequantityofcapitalinput. grewbyafactoroffive.Increasingquantitiesof laborandcapitalaccountedforroughly60percent • Therateofimprovementintheprocesses ofthatincrease,leavingabout40percentofpostthatturninputsintooutputs. wargrowth“explained”bygrowthofthismyste- It’snothardtounderstandthatthetotalvalue rioustotalfactorproductivity.Thesplitisroughly ofwhataneconomyproduceswillincreaseif thesameformanufacturing. thenumberofpeopleworkingincreasesorif Onthelaborside,acoupleofimportant somepeopleacquirevaluableskillsthroughedueventsneedtobefactoredintoourthinkingabout cationoron-the-joblearning.Similarly,providing thenextdecadeortwo.First,ofcourse,wasthe workerswithmorephysicalcapitalwillincrease theiroutput;aworkercandigalongerditchina babyboom,whichgreatlyincreasedlabor-force daywithabackhoethanwithashovel.Economists growth.Butthatsourceoflaborgrowthisno haveaprettygoodhandleonthesethings,both longerinthepipeline. conceptuallyandquantitatively. Second,wesawadramaticincreaseinwomen Themysteryliesinthatthirdcategory, enteringthelaborforce.JustafterWorldWarII, “improvementsinprocesses.”Onemightcallit only31percentofwomenwereinthelaborforce. “technologicalprogress”or“innovation,”butthat Thatnumberisnowmorethan60percent.A doeslittlemorethanrenameit.It’sabitdifferent back-of-the-envelopecalculationsuggeststhat thanoutputperhour,whichiswhatpeopleoften thissinglefactoraccountsforaboutatenthof meanbyproductivity.Output-per-hourdatacompostwargrowth.Althoughwomen’slaborforce binetheeffectsofinvestmentandtechnological participationratesarestill15percentagepoints improvements. I’dliketokeeptheseeffectsseparatetoday, belowmen’s—about60percentcomparedto75 becausetheyarereallytwoseparatethingsto percent—theyhaveflattenedoutinthelastfew economists.Wehavenodirectwaytomeasure years.Evenifthewomen’sratedoescatchupto thecontributionofthatthirdcategoryotherthan themen’sinthelongrun,wearenotlookingatthe bysubtractingthecontributionsofincreased kindofboostwegotfromthissourceduringthe quantitiesoflaborandcapitalfromoutput.That last50years.Bottomline:we’reunlikelytoseea exercisegivesustheresidualcategorythateconburstofgrowthfrommorepeoplegoingtowork. omistscall“totalfactorproductivity.” Businessinvestmentinplantandequipment Whatendsupinthatresidualcategory?Well, hasbeenabitmoreimportantcontributortopostit’salittlelikeart—weknowitwhenweseeit. wareconomicgrowththanlaborinputs.Moreover, Totalfactorproductivitysoaksuptheeffectsof theprospectsforinvestmentasasourceofgrowth everythingfromrearrangingawarehousesothat appearfavorable.Ingeneral,Ithinkthereiswide popularitemsareneartheloadingdocktosweepingchangesintroducedbyinnovationslikeelec- understandingthatbadpolicy—taxpolicy,finantricityorcomputers.Itshouldn’tsurpriseusthat cialpolicy,environmentalpolicy,tradepolicy— itisdifficulttomeasurethecontentsofthepigeon- canprofoundlyaffectafirm’sincentivetoinvest holewherewedumptheeffectsoffuzzybutpro- inproductiveassets.Tooofteninthepast,confoundconceptslike“creativity”and“innovation.” flictingpolicygoalshavebeenresolvedwithout Nevertheless,historyofferssomelessonsabout regardforeconomicefficiency.AlthoughIthink thesethings,whichI’llgettoshortly. westillhavealongwaytogointhisregard,we aretodaymorelikelytoseeinnovativepolicies liketradablepollutionpermits.Thiskindof GROWTH FROM INPUTS market-basedapproachisfarlessdamagingthan SowherehasU.S.growthcomefrom?First thestyleofregulationthatsayssimplythat“thou thebigpicture—thelast50years.Between1948 shaltnotpollutemorethan3partsperbillion.” 4

ASt.LouisFedPerspectiveonLong-TermEconomicGrowth THE PRODUCTIVITY SLOWDOWN isdistorted.ZviGriliches,whoisoneoftheleadingresearchersinthisarea,arguesthatthepart Thatbringsusbacktothemysterycompooftheeconomyhecalls“reasonablymeasurable” nent—thecomponentthatwecalltotalfactor hasdeclinedfromabouthalftolessthan30perproductivity.Thefactthatthiscomponent centsinceWorldWarII.Theproblemisthatmuch accountedforabout40percentofgrowthoverthe oftheeconomyproducesthingsthatareextremely lasthalfcenturyhidesoneofthemostimportant difficulttomeasure,andtheshareofthissector— andlongest-runningstoriesinmacroeconomics, services,broadlyspeaking—keepsgrowing.Moretheproductivityslowdownthatstartedaround over,theproductivityslowdownappearstobe 1970.Economistsstilldebatethecausesofthis persistinginthesedifficult-to-measureindustries. slowdown.Someareconvincedthattheexplana- Griliches’sbottomlineisthatoutsideofsectors tionliesintheenergycrisesofthe1970s;some likeagricultureandmanufacturing,whereit’s believethatapolicyenvironmentunfriendlyto moreorlesspossibletocountthingsinorderto businessbearsmuchoftheblame.Otherspoint measureoutput,weshouldbeextremelysuspitothehigherinflationrateofthe1970s,andstill ciousofproductivitynumbers. otherstoenvironmentalcontrols.Wehavemore theoriesthandatapoints. Inanycase,thegrowthrateoftotalfactor WHAT THE PAST TELLS US ABOUT productivitydidfallbyhalfduringthe1970s,and THE FUTURE OF PRODUCTIVITY thedeclinewasevenmoredramaticformanufacturingthanfortheeconomyasawhole. Whataboutthefuture?Weseenewelectronic Hasthisslowdownended?Atfirstglance,the technologyallaroundus.Iwouldguessthatmost answerappearstobeno.Lookingatdataforthe ofyouarecarryingsomeofitwithyourightnow. entirebusinesssector,itappearsthattheslow- NewsstoriesabouttheInternetareincessant. downinthegrowthrateoftotalfactorproduc- Onewouldsurelybejustifiedinsuspectingthat tivityhascontinued.Thatmeansthatthehigher allofthisrepresentsaproductivityrevolutionof growthofoutputperhouroflaborinput—labor sorts.AndIampartlysympathetictothisview. productivity—inrecentyearsreflectstheinvest- Inthemacroeconomicsphere,though,revolumentboom—morecapital—ratherthanahigher tionstakedecades.Mostpeoplecallthatevolution. growthrateoftotalfactorproductivity. Ibelievethatinformationtechnologywillbea Theclaimthatproductivitygrowthhasnot genuineengineofgrowthfordecades,butthere increaseddoesn’tseemright,though,doesit?We hasn’tbeenandwon’tbeasuddenswervetoward seeproductivityimprovementsallaroundus. somesortof“neweconomy.”Thehistoryof Indeed,inmanufacturingitisapparentthatmost “general-purposetechnologies,”aseconomists oftheproductivityslowdownhasevaporated. callthem,tellsuswhyevolutionisabetterword. Therearetwowaystointerpretthisrecent Onesuchgeneral-purposetechnology,elecdiscrepancybetweenmanufacturingandoverall tricity,hasbeenstudiedextensivelybyeconomic businessproductivitygrowth.Youmightconclude historianPaulDavid.AccordingtoDavid,less thatmanufacturingreallyhasbeenmoreinnova- than5percentofmechanicalpowerinthenation’s tive—streamliningproductionprocessesandso factorieswasprovidedbyelectricmotorsin1899. forth.Thereisprobablysometruthtothat,butif Ittookabout20yearsforthatnumbertoriseto it’sthewholestory,therestoftheprivatesector 50percent.Davidaddressedtwointerrelated isdoingverybadly.Myobservationssuggestthat questionsaboutthespreadofelectricityusein innovationandimprovedproductivityareall generalandtheuseofelectricmotorsinparticular. aroundus—inmanufacturingandelsewhere. First,whywastheadoptionratesolow?Second, Asecondangleonthesenumbersistothink whatisspecialaboutthespreadofageneralaboutwhetherthemeasurementofproductivity purposetechnologylikeelectricity? 5

ECONOMICGROWTH Thinkaboutwhatafactorywaslikebefore Amorerecentexampleillustratesaslightly theelectricmotor.Therewastypicallyasingle differenttheme.Whenthelaserwasinventedin sourceofmechanicalenergy:awaterwheelor, 1957,noonerecognizeditasageneral-purpose later,asteamengine.Thisenergyhadtobedis- technology.Indeed,BellLabsdidn’tevenpatent tributedaroundtheplantbymechanicalmeans— itsinvention.Forsomeyears,thelaserwas gears,driveshafts,beltsandpulleys.Becauseof regardedasanextremelyspecializedtool.Infact, thenumberofinterconnectedmovingparts,this itwasbidingitstime,waitingforcomplementary systemwasexpensivetobuild,inflexibleand developmentsinthesemiconductorindustry. dangerous.Buttheinitialexpensewasasunk Wheninexpensivesemiconductorlasersbecame cost,andonceinplacethesystemdidn’tcost available,thelaserbecameubiquitous.Though muchtorun.Soinmostcasesitdidn’tmake wetendtoconnectthelaserwithgee-whizinvensensetoscrapanoldplantuntilitphysically tionsandweapons,probablyitsmostprofound woreout,eventhoughthenewtechnologywas effectontheU.S.economyisthehumblebar-code markedlysuperior.Electricmotorsspreadrapidly reader,whichwasnotpracticalbeforecheap inindustriesthatwereexpanding,butelsewhere lasers.Idon’thavetoexplaintothisaudience theoldtechnologycontinuedtoprevail.Thereis howthisinnovationhasalteredtheeconomic atremendousamountofinertiainthissortof landscapeinretailstores,libraries,thepostoffice, thing.Thatisthefirstlessonaboutthespreadof evenRedCrossbloodcollection.Virtuallyanytechnology:It’ssimplytooexpensiveforaninduswhereweneedtokeeptrackofthemovementof trialeconomytorearrangeitsproductionand physicalobjects,you’llseebarcodesofonesort scrapalargepartofitscapitalstockovernight, oranother. nomatterhowexcitingthenewtechnologyis. Ofcourse,cheaperandcheapercomputing Buttheramificationsoftheelectricmotorfor powerenableswiderspreadofbar-codescanners, manufacturing,whenitwasfinallyadopted,were justasbar-codescannersallowbusinessesto immense.Mechanicalenergydidn’thavetobe bringcomputingpowertobearoninventory distributedfromacentralsource;youjustputa control,marketingandsales.Who’dhaveimagmotorwhereyouneededit,soyoucouldeasily inedthattheircombinedpowerwouldbemost reconfiguretheproductionprocess.Theproducvisibleinthegrocerycheckoutlane?That’sthe tionprocesscouldbephysicallystretchedout, secondbiglessonabouttechnologicalchange allowingthedevelopmentofatrueassemblyline. thatItakefromeconomichistory:It’shardto Newfactorystructuresneededonlytokeepthe predictthebiggesteffectsuntilyou’rerightin rainoff;theynolongerneededbracingforheavy, themiddleofthem. rapidlymovingpower-distributionmachinery. Today,weareinthemiddleoftheadoption Maintenancecouldbeperformedonasingle machine,withoutshuttingdowntheentirefactory. cycleforaremarkablesetoftechnologicalinno- Thoseofyouwithamechanicalengineering vationsinmicroprocessorsandcommunications. backgroundcanprobablyfindahundredmore Itisdifficulttobelievethatthesethingswillnot reasonswhytheelectricmotorwassuchanimpor- spureconomicgrowth.Butlet’snotkidourselves: tantinvention. Wehaveyettofigureoutwhattodowithallof Alloftheseadvantageswereclearinprinciple thiscomputerpowerandtheInternet,andit’s attheturnofthecentury,buteachbusinesshad notgoingtohappenovernight.Ineffect,wemust tofigureouthowtoadaptthetechnologytoits writetheeconomicsoftwareforthistechnology. needs(aswellasneedingtoamortizeolder Thatwilltakealongtime,andwewon’tunderinvestments).Thus,thoughtheimpactofelectric- standhowithasshapedoureconomyuntilit ityonmanufacturinganddailylifewasprofound, hasalreadyhappened.Thatseemstobetheway itwasspreadovermanyyears. thesethingshavealwaysbeen. 6

ASt.LouisFedPerspectiveonLong-TermEconomicGrowth SUMMARY downofthe1970sand1980sisover.However, wehavetoberealisticaboutthemagnitudeof I’llfinishbysummarizingtheargument. theimprovement.Withalloftheoptimismthat Long-termeconomicgrowthisaterriblyimporsomarksU.S.culture,andwithoursatisfaction tantsubjectfortheUnitedStates,indeedforevery aboutthefineperformanceoftheeconomyin country.Thecentralbankisreallyabitplayerin recentyears,wemustnotallowourselvestobe thegrowthprocess,providedinflationiskept lulledintowishfulthinking. relativelylow.Thegainsfromlowinflationare I’llfinishwithanobservationofspecialreleworthseeking,butweshouldnotoverestimate vancetomanufacturing.Ithasalwaysbeentrue, theirimportancecomparedtogovernmenttax, andistruetoday,thatswingsinaggregatedemand spendingandregulatorypolicies. haveagreatereffectonmanufacturingthanon Thegoalofmonetarypolicy,inmyview, theeconomyasawhole.Iknowthatcertainmanshouldbetokeeptherateofinflationlowandas ufacturingindustrieshavesufferedfromsoft steadyaspossible.TheFederalReserveshould demandsincetheAsiancrisistookholdinthe nothavearigidviewabouttheequilibriumrate summerof1997.Manufacturingwillrecoverin ofunemploymentortheeconomy’sgrowthpotenduetimeasAsiarecovers,andIsincerelyhope tial.Iwanttheunemploymentratetobeaslow, thattimecomessoon.Buttheaggregateeconomy andtheeconomy’sgrowthashigh,asgovernment isdoingwell,andinmyassessmentofmonetary policies,theingenuityofthebusinesscommupolicytheFedmustalwaysfocusonwhatis nity,andthepreferencesofworkersandtheir appropriatefortheeconomyasawhole,even familieswillpermit. thoughparticularsectorsdepartfromtheaverage. Nevertheless,theFederalReserve,insetting Thesemaybeindustrialorgeographicsectors; theintendedfederalfundsrate,cannotavoid California,forexample,recoveredslowlyfrom makingsomejudgmentsabouttheeconomy’s the1990-91recession. growthpotential.I’vesharedwithyoumythinking Clearly,ifmonetarypolicyistooexpansionary abouttheeconomy’scurrentgrowthpotential.I fortoolong,wewillhaveaninflationproblem. amsurethattheeconomywillendupdoingbet- Policywillthenhavetoturnrestrictive,perhaps terorworsethanmybestestimatetoday,butI sharplyso.Somebelievethatcouldbethesituahavegivenyoumybestreadingonit. tiontoday.Ifpolicyerrsintheotherdirection,by IholdwhatIthinkisabalanced,butessenbeingtoorestrictive,theeconomywillsagand tiallyoptimistic,view.Whenweexaminethe manufacturingwillsufferdisproportionately.The datacarefully,itishardformetobelievethatthe Fedwalksafineline.Someofmanufacturing economy’slong-rungrowthpotentialisashigh andmuchofagriculturearenotsharingfullyin asthegrowthrateofrealGDPoverthelastfew today’sgeneralprosperity.Iunderstandthat,and years.Somerecentgrowthhascomefromadding wishitwereotherwise.Iamneverthelessconworkersatapacethatisunlikelytocontinue,and vincedthatifanythingthatIdocontributesto someofthemeasuredincreasesinoutputper destabilizingthegeneraleconomy,Iwillnotbe houroflaborinputseemlikelytobetransitory. doingmanufacturingandagricultureafavor.A Ontheotherhand,theviewthatnothinghas stableaggregateenvironmentisinthelong-run happenedseemscontradictedbydataandbya interestofallofus. hostofanecdotalreportsoverthelastfewyears. Mybestjudgmentisthattheproductivityslow- 7