In a speech in Chicago this morning, after a lot of the usual stuff about info tech and its contribution to the rise in productivity, Greenspan said:
<quote> Although productivity has accelerated in recent years, the impressive strength of domestic demand, in part driven by sharply rising equity prices, has meant that the substitution of capital for labor has been inadequate to prevent us from steadily depleting the pool of available workers.
This worker depletion constitutes a critical upside risk to the inflation outlook because it presumably cannot continue without eventually putting increasing pressure on labor markets and on costs.
The number of people willing to work can be usefully defined as the unemployed component of the labor force plus those not actively seeking work, and thus not counted in the labor force, but who nonetheless say they would like a job if they could get one. This pool of potential workers aged sixteen to sixty-four currently numbers about 10 million, or just 5-3/4 percent of the corresponding population. This is the lowest such percentage on record--which begins in 1970--and is 2-1/2 percentage points below its average over that period.
The rapid increase in aggregate demand has generated growth of employment in excess of the growth in population, causing the number of potential workers to fall since the mid-1990s at a rate of a bit under one million annually. We cannot judge with precision how far this level can decline without sparking upward pressures on wages and prices. Accelerating productivity may have appeared to break the link between labor market conditions and wage gains in recent years, but it cannot have changed the law of supply and demand. At some point, labor market conditions can become so tight that the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate.
Under those circumstances, inflation premiums embodied in long-term interest rates would doubtless rise. The attendant increased risk premiums would boost real interest rates as well, as investors become less certain about future price prospects. Thus, while rates of return on new capital equipment might remain elevated, the real cost of capital could rise enough to suppress capital expenditures and, perhaps of greater relevance to the outlook, the stock market.
Our negative personal saving rate indicates that the wealth effect is alive and well. The latter has unquestionably been a key factor in the rise in domestic demand, which despite productivity improvements has exerted increasing pressure on labor markets. Thus, should equity markets retrench, consumer and business investment demands would, doubtless, weaken considerably.
A more distant concern, but one that cannot be readily dismissed, is the very condition that has enabled the surge in American household and business demands to help sustain global stability: our rising trade and current account deficits. There is a limit to how long and how far deficits can be sustained, since current account deficits add to net foreign claims on the United States.
It is very difficult to judge at what point debt service costs become unduly burdensome and can no longer be sustained. There is no evidence at this point that markets are disinclined to readily finance our foreign net imbalance. But the arithmetic of foreign debt accumulation and compounding interest costs does indicate somewhere in the future that, unless reversed, our growing international imbalances are apt to create significant problems for our economy.
Finally, while it is reasonable to conclude that some of the gains in output per hour have been driven by fundamental forces, and are not only a cyclical phenomenon or a statistical aberration, it remains a wholly separate question of whether they can be extended. The rate of growth of productivity cannot increase indefinitely. While there appears to be considerable expectation in the business community, and possibly Wall Street, that the productivity acceleration has not yet peaked, history advises caution.
As I have noted previously, history is strewn with projections of technology that have fallen wide of the mark. With the innumerable potential permutations and combinations of various synergies, forecasting technology has been a daunting exercise.
There is little reason to believe that we are going to be any better at this in the future than in the past. Hence, despite the remarkable progress witnessed to date, we have to be quite modest about our ability to project the future of technology and its implications for productivity growth and for the broader economy.
For, if productivity growth should level out or actually falter because additional technology synergies fail to materialize, or because output per hour has been less tied to technology in the first place, inflationary pressures could reemerge, possibly faster than some currently perceive feasible. </quote>
This knocked about 3/4 point off the price of The Long Bond.
Doug