June 5, 2001

More Evidence Mr. Greenspan is Wrong

We told you yesterday about Fed Chairman Greenspan's declaration that inflation isn't a problem. But, today, we see more evidence that inflation is lurking in the shadows. The US government slashed its previous estimate of worker productivity for the first quarter of 2000. Productivity fell by a whopping 1.2%, the largest drop in eight years. As a result, unit labor costs increased 6.3%, their biggest jump since the fourth quarter of 1990.

As the Associated Press explains, "Gains in productivity are the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation."

Just yesterday, Mr. Greenspan stated that businesses were finding it difficult to raise prices. Although that may be true now, as labor costs increase, companies will be forced to raise prices. Plus, the prospects for increased productivity don't look promising because the slowdown has caused businesses to make fewer investments in productivity-enhancing technology. That will make pulling out of this economic slump even more difficult.

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