The New York Times

Monday, March 6, 2000

Mr. Greenspan's New Economics

Chairman Alan Greenspan has gained worldwide acclaim for his cautious stewardship of the Federal Reserve. But in recent testimony before Congress, Mr. Greenspan unveiled some unorthodox ideas. He suggested that a high rate of productivity growth -- something economists usually regard as an unmitigated blessing -- has a nasty downside, actually encouraging inflation. He also suggested that the Fed might need to raise interest rates again to keep stock prices from rising too fast.

Some of the chairman's normally ardent admirers, especially on Capitol Hill, were taken aback. His fears about productivity seemed overdrawn. So did his fixation on stock prices. The critics have a point.

Economists have generally thought that the impact of the stock market on the economy was small. But Mr. Greenspan argues otherwise. He starts with the fact that productivity -- output per worker -- has been rising quickly in recent years. That means there are more goods and services for people to buy, a situation that ordinarily is thought to put downward pressure on prices. But he says high productivity can also drive prices up by creating an expectation among investors that corporate earnings will rise. High corporate earnings drive up stock prices, enriching consumers who own stock and inducing them to spend more. This then adds to inflation.

This is certainly a novel argument. But there are not many economists who will buy it. The simple reason is that there is no evidence to support the claim that productivity does more to raise prices than reduce them.

Meanwhile, Mr. Greenspan's remarks suggested to some observers that the Fed might need to raise interest rates in order to prevent stock prices from rising faster than household income, possibly sparking an inflationary burst in consumption. In this case, Mr. Greenspan appears to be giving too much weight to one cause of inflationary pressure, and not an especially important one at that.

Mr. Greenspan does not need these novel arguments. The economy grew at a 7 percent annual rate toward the end of last year, a rate most economists deem unsustainable. For that reason alone, Mr. Greenspan can justify raising rates to slow the economy.