WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan is rummaging around in his public relations toolbox to come up with a new rationale for raising interest rates.
Mr. Greenspan and his colleagues know they can't keep using the old spin about moving to a neutral policy on rates since their May 17 move boosting the federal funds rate to 4.25% from 3.75%.
The new buzzword coming out of the Fed is "productivity." Typically, businesses seek to boost productivity by investing in plant and equipment, restructuring their work force, and doing whatever else they can to become more efficient.
Since 1990, U.S. productivity - a measure of the relationship between output of goods and the amount of labor rime this output requires - has increased about 2% a year.
Some Gains from Upturn
Economists say some of that is the result of gains that typically occur in an upturn as businesses increase output While they hold back hiring. Many estimate long-term productivity is about 1.5% a year.
To calculate how fast the economy can grow without overhearing and stirring inflation, economists add up productivity and labor force growth. The Bureau of Labor Statistics projects that the labor force will grow 1.3% a year between now and the year 2005.
Assuming a productivity rate. of 1.5% and labor force growth of 1.3% produces a potential gross domestic product rate in the range of 2.5% to 3%. Analysts work with slightly different numbers, but anything above that range signals an overhearing economy generating wage and price pressures.
In March, Mr. Greenspan said that the underlying level of U.S. productivity iS about 1.5% - a conventional estimate.
But in testimony last week to the House Budget Committee, Mr. Greenspan suggested that productivity may be running higher as businesses reap the gains of the computer age.
Gains in productivity are a wonderful thing, Mr. Greenspan explained. He called productivity "the key to increase our standard of living over time" because it allows businesses to raise wages without kindling inflation. He said there is increasing evidence that lower rates of inflation can bring not only higher levels of productivity, but faster growth in productivity.
By this thinking, rate increases are justified because in suppressing inflation they boost productivity of U.S. businesses, which are supposed to pass the gains on to workers in higher wages.
Whether Fed officials raise rates further remains to be seen. Many analysts on Wall Street think they will, especially if the economy keeps growing faster than 3%. But if that happens, Mr. Greenspan will be telling the public about how he is doing good things for the economy as the Fed chips away at jobs in interest-rate sensitive sectors.