What does Mr. Greenspan know? Despite the intensive coverage given to his recent actions as chairman of the Federal Reserve Board, a key component of his analysis has hardly received mention. Specifically, the fact that the high-tech economy will likely continue to foster wealth creation and economic growth because of historically high productivity gains.
Some call him Maestro. Others compare him to as an omniscient economic advisor to policymakers of both parties. His influence was a point of debate during the last election. I have even heard a spirited debate about Alan Greenspan as a Yoda-like figure who can summon the “Force” to fix the economy or as a wizard who pulls economic levers like the man from Oz.
Is this warranted? Doubtful. The economy is a complex and difficult beast that regularly confounds the brightest among us. Its vastness and complexity approaches that of society – it is the sum of public and private exchanges constantly taking place all over the country. The wise economist knows the limitations of his trade. The sobering fact is that economists still have little understanding of how or why recessions occur.
Although recessions may be difficult to explain, it is safe to say that productivity is important to a healthy economy and increased productivity can increase economic growth. On this subject, Greenspan is on solid ground. There is widespread agreement about the role of productivity in economic growth.
Last month, Greenspan made news with support for a broad-based tax reduction and an emphasis on capital gains relief. He was able to do so based on assumptions about productivity, which were confirmed by new year-end data on productivity from the Department of Labor. Productivity rose by 4.3 percent last year, the highest level since a 4.5 percent gain in 1983.
It would have been more helpful to conservatives in Congress had Greenspan shown how tax reductions led to productivity gains. But, he did plenty by showing that productivity has made, and will continue to make, room for extensive tax reduction.
Between the early 1970s and 1995, most of the economy became about 1 ½ percent more productive every year. However, since 1995 productivity gains have approximately doubled. The most recent estimates from the Congressional Budget Office and the Office of Management and Budget suggest that productivity gains over the next decade should average about 2 ¼ to 2 ½ percent per year. Greenspan testified that these figures are conservative, and productivity gains could actually be much higher. There is no evidence to suggest that productivity will fall from a record-breaking run of more than three percent per year since 1995.
In fact, anecdotal evidence may suggest otherwise. Bloomberg News reported that a recent survey of 50 chief information officers from major firms and government agencies found that budgets for electronic commerce are expected to increase 30 percent – 5 times more than the 6 percent increase for overall information technology spending. Why?
Electronic commerce increases productivity in areas like supply chain management and the tracking of customer orders. Investments in new technologies reduce costs and subsequently free resources for the creation of new wealth. As a result, the cost per unit of output falls. Put another way, investment in electronic commerce provides a boost to productivity.
A recent study by Dataquest, a leading market research company, offers similar conclusions. Last week, Dataquest reported that sales of computer servers – the “back office” computers that keep networks running smoothly – increased 14 percent over 1999. The fourth quarter numbers were even better. While there was a slump in the equity markets, server sales were up a stunning 21 percent over their fourth quarter from 1999.
Historically high productivity gains can produce tremendous wealth for the economy and for individual tax-paying consumers. An important byproduct of productivity gains is an increase in government revenue. It is no mystery that when the economy grows so, too, do government coffers.
Rather than staring over a precipice of economic uncertainty, continued high productivity married with tax relief should translate to long-term strength for the economy. Consider that throughout the 25-year economic boom that followed World War II, productivity averaged 3 percent. While productivity averaged only 2 percent a year over the course of the last century, living standards doubled about every 35 years.
What does Mr. Greenspan know? The answer to the question is clear. He knows that an infusion of high technology into the economy will continue to produce historically high levels of productivity. Along with economic growth, this generates excess revenues for the government. For legislators, it should be more than enough cover to reduce taxes.
Kent Lassman is the director of technology and communications policy at Citizens for a Sound Economy Foundation.
This Commentary also appeared on National Review Online February 12, 2001.