Federal Reserve Chair Janet Yellen faces an economy that is starting to look more like Arthur Burns’s in the 1970s than Alan Greenspan’s in the 1990s.
Productivity growth is slowing, just as it was when Burns headed the central bank, not accelerating as it did under Greenspan’s watch. Business output per hour excluding agriculture has risen at a 1.4 percent average annual rate since the recession ended in June 2009 as hiring has picked up while economic growth has lagged behind.
That result is in line with the 1.5 percent rate from 1973 to 1977 and less half of the 3 percent pace from 1996 to 2000, Labor Department data show. The post World War II average is 2.3 percent.
To understand why this is important, look at what happened to the U.S. in each of those periods.
In the late 1990s, increased worker efficiency allowed Greenspan to countenance a fall in the unemployment rate to a 30-year low of 3.8 percent in April 2000 as companies could pay employees more without having to raise prices. In the 1970s, a sudden downshift in productivity growth caught Burns by surprise and led to a rise in consumer prices of more than 10 percent after oil costs surged.
“There is a risk,” said former Fed Vice Chairman Alan Blinder, who served under Greenspan and co-wrote a book with Yellen about “the fabulous decade” of the 1990s. “You do have the possibility of replaying in the same direction what happened after 1973.”