WASHINGTON – The remarkable improvement in American workers' productivity in recent years is likely to continue despite the slowdown in the economy, Federal Reserve Chairman Alan Greenspan said Friday.
There probably will be some moderation in productivity growth because of the weaker economy, Greenspan said, but the lull should be only temporary.
Productivity, the amount of output per hour of work, is the key ingredient determining Americans' living standards. The significant pickup in productivity growth that has occurred since 1995 has been a major factor supporting the record-long economic expansion.
In a speech delivered by satellite to a bond traders convention in West Virginia, Greenspan indicated he has not lost faith in the belief that massive investments in computers and other high-tech equipment in recent years have permanently improved the outlook for productivity.
Such a development is especially important to the record government budget surpluses, Greenspan said.
"The dramatic improvement in projections of the budget balance in recent years reflects, in large part, the pickup in underlying productivity growth in the U.S. economy, which has boosted corporate profits and household incomes and thereby tax receipts," Greenspan said.
Greenspan noted projections by the Congressional Budget Office and the White House Office of Management and Budget that the surplus will total $5.6 trillion over the next decade are based on a belief that the upturn in productivity seen since 1995 will continue.
He said he agrees with this assessment even though the measured rate of productivity will slow somewhat as the economy cools.
From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. However, since 1995 increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.
Greenspan didn't address interest-rate policy in his speech, copies of which were released in Washington. The Fed has slashed interest rates four times since January and many economists predict another rate reduction next month.
However, he did discuss how the Federal Reserve and other holders of Treasury securities will adapt to a period of shrinking national debt.
While the Fed and foreign governments -- two of the biggest holders of Treasury bonds and notes -- will have to find alternative forms of debt, Greenspan said, he is certain that this adjustment will not cause major disruptions in the huge securities market.
"I am confident that U.S. financial markets, which are the most innovative and efficient in the world, can readily adapt to a paydown of Treasury debt by creating private alternatives with many of the attributes that market participants value in Treasury securities," Greenspan said.
The Fed influences the level of short-term interest rates by buying and selling Treasury securities to American banks. Greenspan, in his speech, said that the central bank had already begun on a limited basis using some securities backed by home mortgages to carry out monetary policy.
Greenspan said the central bank is exploring ways to broaden the use of non-Treasury securities for these operations.
As he has done in the past, Greenspan cautioned against using the government's large surpluses to invest directly in private assets such as stocks of American companies. He said a better alternative would be creation of individual retirement accounts to allow people to make their own investment decisions. The Bush administration is pushing such accounts as one of the ways to shore up the Social Security system.