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fomc | 2,001 | Yes, I remember the conclusion and several of those conjectures as well. I guess my question really is: Subsequent to the publication of that article, do we know anything more that we can say about it? | 43 |
fomc | 2,001 | The authors of that article continue to update their database and we look to them for additional work on productivity. But they have not in any sense reached firmer conclusions. | 33 |
fomc | 2,001 | I have a working hypothesis that is essentially very easy to come up with, Gary. And that is if multifactor productivity depends very much on the use of information technology in order to make older industries be more efficient, the single most competitive advantage a country can have, which the United States has, is a... | 65 |
fomc | 2,001 | Yes, that's part of my explanation, too. But rather than rely on my own intuition, I was hoping that we had some more hard and fast evidence of what either has or hasn't been going on. | 41 |
fomc | 2,001 | Yes, but I think it's really a combination of economics and sociology, since what we're observing is a society as well as the pure economics of the situation. | 31 |
fomc | 2,001 | Yes, we do know that it is far more difficult to discharge workers in Europe than it is here. That's a legal question, wholly demonstrable, and it shows up in European unemployment rates. If a significant amount of capital investment is labor displacing and a firm is not able to displace labor, then the rate of return ... | 178 |
fomc | 2,001 | Gary, could I jump in on this point? I went through the article to which Karen was referring, and I think ideally what one would like to have is a chart like Dan's Chart 3 for all the other countries--a chart that just sets out the decomposition of productivity growth. But as I remember, we can't get a BLS-type breakdo... | 130 |
fomc | 2,001 | It is certainly true that it is a struggle to get data to work with--even something as basic as hours as opposed to number of employees. In the study our staff used an approach involving a set of OECD countries, and they used OECD data. So the weakest link, if you will, is to find the data. It's certainly possible that... | 112 |
fomc | 2,001 | Governor Meyer. | 3 |
fomc | 2,001 | I would like to try to draw out from these very interesting discussions some implications for the near-term forecast. I want to focus on areas where the two approaches -we'll call them the staff approach and the Boston approach--agree and disagree. I take it that the agreement is that currently structural productivity ... | 142 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | Now where you disagree, I take it, is whether or not we believe this structural productivity growth overshot in some sense and is now reversing. The question is: How does that matter in your two visions? Let me describe how I think the staff is looking at it, particularly if equity values and investment respond sharply... | 156 |
fomc | 2,001 | I would be somewhat hesitant to draw very tight links between anybody's specific estimate of structural productivity and what the stock market did or didn't do at any point in time. I think a qualitative link is there in that, yes, we in Boston believe that structural productivity has increased for the reasons you just... | 139 |
fomc | 2,001 | Mr. Stockton, please proceed. [Secretary's note: The Chairman had left the room briefly and the Vice Chairman was recognizing the next speaker.] | 29 |
fomc | 2,001 | Let me add just one comment to that. With our more variable estimate, we think that some downward adjustment to structural productivity growth probably has occurred over the past year and that that has had an effect of lowering the equilibrium real federal funds rate. For all the reasons that Jeff laid out about our un... | 90 |
fomc | 2,001 | I have a question for Sandy Struckmeyer on the treatment of capital deepening. You make no attempt to separate out cyclical from structural changes in the case you presented. You indicated that you don't do so because it's not useful in some sense, not that you don't do it because it's too difficult or you don't know h... | 152 |
fomc | 2,001 | There are two parts to that. The first is the investment part, and we think we've done that correctly. That's because for a concept of potential output or structural productivity, we do not want the capital stock that might have been in place had we never had a business cycle over the postwar period. That would be such... | 235 |
fomc | 2,001 | President Jordan. | 3 |
fomc | 2,001 | Thank you. Let me make a couple of observations and then pose a different type of question about the international dimensions of this. First, on the observations: I think it is very useful to have these kinds of papers and discussions such as this in light of our relative ignorance on the subject of productivity. When ... | 759 |
fomc | 2,001 | Were there such an innovation, my supposition is that we would get a major increase in the rate of return on capital. We would see that reflected in greater profitability, a larger flow of capital income, and that would be reflected in the capital deepening numbers that would then boost structural productivity. And ove... | 86 |
fomc | 2,001 | So if we are importing the final product, partial analysis would say that that's going to enter negatively in our GDP numbers. | 24 |
fomc | 2,001 | But we are also getting capital income. If you are Intel and your production facility is located in Taiwan, there is a reflow of income from that capital. | 32 |
fomc | 2,001 | Unless in the time period I'm looking at the exchange translation effects of that are swamping that reflow of income. Because we have the innovation going on here, our wealth increases, capital flows in, our currency rises, and we get a lower rate of return at least for that time period on our foreign capital investmen... | 64 |
fomc | 2,001 | There would also be a positive price shock that would be exactly the reverse of the oil shock of the '70s because we'd be getting imports more cheaply. | 31 |
fomc | 2,001 | If our measurement is right and we get the J-curve effects. | 14 |
fomc | 2,001 | President Minehan. | 4 |
fomc | 2,001 | Thank you, Mr. Chairman. I, too, found this discussion very interesting. Obviously, I talked with Jeff Fuhrer about these issues beforehand, but the combination of all three papers and the Chicago paper was quite interesting. I want to reiterate what Bob Parry said about the adjustment costs because I think that is a f... | 353 |
fomc | 2,001 | Y2K is a very complex phenomenon to analyze. It is particularly complicated for the capital services measure because there are two parts to that measure. On the one hand, there's the capital stock itself and there are also weights--rental prices or efficiency weights--that get attached to those various items. Indeed, o... | 275 |
fomc | 2,001 | That was the thrust of my question. | 8 |
fomc | 2,001 | We came up with a number of $50 billion for what it cost corporations to remedy their Y2K concerns in terms of labor and consultants. That number didn't include the capital. So that would have been taken out of their flow of capital income and would have been reducing profits and holding down that rental price measure.... | 94 |
fomc | 2,001 | That was the reason for my question. I was wondering if we might actually see a leveling off from the productivity growth number here, as a result of the negative impacts of Y2K. | 38 |
fomc | 2,001 | May I follow up on that? That answer suggests to me that the way you think about that event is similar to the way some view the '70s, when we had enormous capital expenditures--mandated expenditures--on clean air and clean water, but they were not output-enhancing capital expenditures. Some people at least asserted tha... | 114 |
fomc | 2,001 | The way BLS constructs these numbers, they are part of the capital stock from the product side obviously, but there is also a flow of capital income from the income side. To the extent that those pollution abatement expenditures produced no profits but actually reduced profits, then that would have been a compensating ... | 88 |
fomc | 2,001 | Further questions? President Moskow. | 7 |
fomc | 2,001 | Thank you, Mr. Chairman. I, too, want to congratulate the authors of the papers. I thought they were all very good and I believe it was an excellent idea to have this as a topic for our session today. I just wanted to make a couple of comments about the so-called "organizational improvement" portion of multifactor prod... | 339 |
fomc | 2,001 | May I make just a brief comment? There's a very interesting paper by Eric Brynjolfsson and Loren Hitt in last fall's Journal of Economic Perspectives that provides some very nice evidence on the importance of organizational improvements. Also, on the adjustment costs point that Presidents Parry and Minehan mentioned, I... | 164 |
fomc | 2,001 | Thank you. | 3 |
fomc | 2,001 | I have a question that's relevant to the measurement of output and capital. I've seen a lot of stories about companies that invested in equipment--last year, let's say-that didn't work out and they are writing that equipment off at ten cents on the dollar or something like that this year. The equipment is included in l... | 112 |
fomc | 2,001 | That's a complex question. I'll tackle a piece of it. The equipment got into output when it was produced; it gets into the capital stock, as measured by the BLS, when a company purchases it. To the extent that it ever yields a profit, that gets into the income flows from the corporate sector that we will see this year ... | 147 |
fomc | 2,001 | But it isn't written off. It's basically just not producing profit. The point that President Poole is making is that it's a problem of abusing the concept of gross product originating data--using that rather than net data and then having that item of capital destruction in the depreciation accounts. Maybe we ought to a... | 69 |
fomc | 2,001 | Yes, economic obsolescence. | 7 |
fomc | 2,001 | Economic obsolescence. | 5 |
fomc | 2,001 | But the way it is treated in the capital stock data that you use is that it would be accumulated--sort of a perpetual inventory but depreciated at whatever is the normal depreciation rate. | 37 |
fomc | 2,001 | Right. | 2 |
fomc | 2,001 | It actually ends up as lower multifactor productivity or, excuse me, innovation. | 16 |
fomc | 2,001 | But I gather that the reason for the sharp drop in productivity this year might have to do in part with the fact that companies are writing off capital--at least some of this capital is equipment--faster than the depreciation assumptions you have built in. So there's capital in your capital stock figures that companies... | 69 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | So that will show up as reduced productivity from capital. | 11 |
fomc | 2,001 | Yes. | 2 |
fomc | 2,001 | But that capital has been sold and purchased at a lower price and is yielding a very good yield for those companies that bought it. | 26 |
fomc | 2,001 | Well, it depends on the nature of the capital. Those companies might be getting a yield on it that's worth 10 cents on the dollar, but it's being carried as if it's worth a lot more than 10 cents on the dollar in the capital stock data that the staff is using. | 58 |
fomc | 2,001 | Well, I think that's absolutely right. What you're thinking of is what actually appears on the books of the company. The property accounts added up from the IRS returns will produce a different set of numbers from the capital stock we use because the former does include write-offs. National income accounts don't pick t... | 61 |
fomc | 2,001 | But the point of the question is that some of what we called output last year-- and it entered our data as 100 cents on the dollar--in fact hasn't turned out to be useful because it is being written off this year to 10 cents on the dollar. So in truth we produced less last year than we thought because part of what we p... | 77 |
fomc | 2,001 | We should have called it consumption last year. | 9 |
fomc | 2,001 | Or waste or something. That's my point. Some of this huge spike in measured productivity is perhaps a consequence of overstating output last year, but some of that is showing up this year. That's the way the data system works. Is that right? | 50 |
fomc | 2,001 | Just on this point, you already write computer software off in a four-year period, don't you? It has a very rapid depreciation. | 27 |
fomc | 2,001 | Three to five years, depending on the type of software. | 12 |
fomc | 2,001 | So the point is true, but it's not going to be with us very long. | 17 |
fomc | 2,001 | No, that's right. But what I'm focusing on is trying to understand the most recent data and how that bears on our outlook right now. That's what I was getting at with my question. | 38 |
fomc | 2,001 | But, Bill, isn't part of your point that no capital service is being gained from this investment and that's why it ends up looking as though there's really no productivity improvement? That's because there's no service that gets paid off from this investment. | 47 |
fomc | 2,001 | Or it's 10 cents on the dollar, right. | 11 |
fomc | 2,001 | It's creating an expense. | 5 |
fomc | 2,001 | Right. | 2 |
fomc | 2,001 | So it's really a problem of service being generated as opposed to the accounting concept, which is the definition of service here. | 24 |
fomc | 2,001 | And it also underestimates the multifactor productivity number because that's picked up in the residual. So it can distort the projections. Any other comments or questions? | 32 |
fomc | 2,001 | I'd like to go back to Gary Stern's question about other countries and focus on Europe. I realize most of this is about structural productivity rather than total productivity. What about the idea of "give growth a chance"? During our period of rapidly increasing productivity monetary policy was fairly easy. We were pro... | 167 |
fomc | 2,001 | I think that would be saying that they are misjudging, as it were, how much growth they could in fact experience and still not get inflationary pressures. | 33 |
fomc | 2,001 | I was thinking that in some sense we accidentally found out what our economy was capable of doing. | 19 |
fomc | 2,001 | That is true. I certainly--and many others--have challenged our European counterparts not to be held hostage to the numbers from the past and to be open to the concept that their economies could grow more rapidly and not encounter inflationary outcomes that would be unacceptable at some point. Then along came the oil p... | 192 |
fomc | 2,001 | Okay, why don't we take a coffee break? Let's try to keep it to ten minutes if we can. | 22 |
fomc | 2,001 | Given the availability of these colorful charts and staff advisors, it appears that we have a Chart Show coming up. Mr. Stockton. | 26 |
fomc | 2,001 | Thank you, Mr. Chairman. If the Vice Chairman found the last presentation a refreshing admission of ignorance, wait until he hears this Chart Show!3 [Laughter] As you know from reading the Greenbook, we continue to believe that the economy is barely growing at present. Real GDP--the black line in the upper left panel o... | 2,677 |
fomc | 2,001 | As Dave noted, the tax cut has been a key influence on our thinking about the near-term projection. Almost all of the rebate checks should be mailed out over a ten-week period beginning the week of July 23rd. As shown in the upper left panel of Chart 6, we are assuming that spending out of the rebates--the gray portion... | 2,468 |
fomc | 2,001 | Your first international chart reviews developments in the foreign exchange value of the dollar and compares interest rate and stock price movements in the euro area and Japan with those in the United States. Despite the slowing of U.S. output growth that has become apparent since January and the downward revisions to ... | 2,674 |
fomc | 2,001 | Thank you very much. What I found most interesting in the presentation was the very informative evaluation of the capital overhang, a subject on which a detailed report was sent around to the Committee. Specifically, I thought the elaboration of the situation in the telecommunications industry was really most useful. I... | 96 |
fomc | 2,001 | If I'm recalling correctly, I think that was from a conversation we had with one of our business contacts. I believe it was in the context of one of the CEOs remarking that previously he or she had thought that demand would double every three months and now catastrophe had befallen them and it only doubles once a year. | 64 |
fomc | 2,001 | No, as I remember, the quote was that it had been doubling every year but was going to start to double every three or four months. Then whoever wrote that part of the paper said that indeed it had not changed; it was just doubling every year. Now, the implication is that that means something. If only I knew what it was... | 105 |
fomc | 2,001 | Maybe somebody can help me by finding the reference. | 10 |
fomc | 2,001 | It may be the data packets that are being transmitted across the fiber optic network. We get those estimates from a major consulting firm that we have an arrangement with. | 32 |
fomc | 2,001 | What is the frequency? | 5 |
fomc | 2,001 | I suspect it's semi-occasional, but I'm not sure. [Laughter] | 18 |
fomc | 2,001 | Whenever they have a contract that pays them to do it! | 12 |
fomc | 2,001 | Yes, okay. [Laughter] Incidentally, on Chart 14, one is obviously struck by the middle panel in that Asian semiconductor production appears to track world shipments data--I mean allowing for playing around with scale. | 45 |
fomc | 2,001 | Yes, the scale is making that relationship look good. | 11 |
fomc | 2,001 | Yes, but I'm just curious about that big breakaway at the end of the most recent period. Is that a price or market share issue or just plain statistical noise? | 34 |
fomc | 2,001 | To be honest, I don't know. Let me just make sure that what we've plotted there is understood; it's the whole industrial production index of the Asian semiconductor producer countries that is being averaged. | 38 |
fomc | 2,001 | It's a physical volume index. | 6 |
fomc | 2,001 | Right, but it's of their total industrial production not just their semiconductor production. | 15 |
fomc | 2,001 | Total production. | 3 |
fomc | 2,001 | The chart says Asian semiconductor producers. | 7 |
fomc | 2,001 | The IP of Asian countries that produce semiconductors is how you should read that. | 17 |
fomc | 2,001 | That identifies the countries and it is the average IP for those countries. | 14 |
fomc | 2,001 | Okay, sorry about that. The chart could benefit from some improvement in the labeling, if I may say so. President Moskow. | 27 |
fomc | 2,001 | Mr. Chairman, I too thought the capital overhang paper was a very good paper. I was particularly impressed with the fact that the staff did the econometric analysis and then went out and spoke to people in the industry, and essentially those conversations verified the findings in the econometric analysis. | 58 |
fomc | 2,001 | I won't make any comments on our standard errors! | 10 |
fomc | 2,001 | Well, I was wondering if you had any thoughts as to whether the financial markets actually are reflecting this overhang now, and whether you can relate that in any way to one of the alternative simulations in the Greenbook--the "earnings disappointment" one. Is this already built into market prices or is this an indica... | 78 |
fomc | 2,001 | I think it's hard to know. It certainly is the case that the telecom sector has been punished incredibly. Stock prices of the telecom service firms and the equipment makers have been beaten down by just astonishing proportions. Whether they've taken on board the full extent of the outlook as we see it, I can't say, tho... | 116 |
fomc | 2,001 | It's hard to know exactly how closely connected it is to the capital overhang per se. Obviously, what we are trying to communicate in that particular simulation is that we do see some possibility of considerable tension in our outlook for profits, which is weaker than market analysts are currently reporting. Now, that ... | 249 |
fomc | 2,001 | Thank you. | 3 |
fomc | 2,001 | President Jordan. | 3 |
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