Greenspan warns on productivity

Alan Greenspan: guardian of the US economic miracle

US central bank chief Alan Greenspan has warned that protectionism and state intervention might reassert themselves as economic growth and productivity wanes.

Speaking at the Fed's annual retreat in the resort of Jackson Hole, Wyoming, Mr Greenspan argued that the US has enjoyed higher growth and greater investment as a result of its free market policies, especially in relation to worker protection.

Should positive trends in economic growth falter, it is quite imaginable that support for market-orientated resource allocation will wane and the latent forces of protectionism and state intervention will begin to reassert themselves

Alan Greenspan, US Fed chairman

"Even among those who deride the more unbridled forms of capitalism, there is a growing awareness that many attempts to tame such regimes are not without cost in terms of economic growth and the average living standards of a nation," Mr Greenspan said.

Productivity gap

Mr Greenspan warned that the high cost of sacking workers in Europe had made companies more reluctant to install new technology.

"A recent manifestation of these costs can be seen in the lower level of high-tech capital investment in continental Europe relative to the United States ..discharging workers has been made a difficult and costly process in comparison with that in the United States .. as a result, even though those technologies are available to all, the intensity of their application and the accompanying elevation in the growth of productivity are more clearly evident in the United States," he explained.

The bottom of the income distribution has not benefited from much of anything.

Alice Rivlin, former Fed vice-chair

Mr Greenspan has argued that it is the rapid growth in US productivity - the output produced by each worker - that is behind the US economic miracle.

Productivity has been growing at an annual rate of around 5% as US companies embrace computers and the internet. But the Fed chairman warned that the productivity surge would inevitably end.

"A tapering-off of productivity acceleration is inevitable at some point in the future..(which) would damp the historically high rates of return on capital investment and (reduce) projections of long-term profits growth," he warned.

And he warned, "should positive trends in economic growth falter, it is quite imaginable that support for market-orientated resource allocation will wane and the latent forces of protectionism and state intervention will begin to reassert themselves."

Banking on the US

Mr Greenspan's remarks reflect the remarkable eight-year economic boom in the United States, and his hope that it will both lead and reflect a global shift towards free market policies.

He argues that both governments and investors have embraced the US model of privatisation and deregulation, but he is concerned that any slowdown will strengthen the hand of the protestors against globalisation.

But others attending the conference warned that not everyone had benefited from economic changes.

Mr Greenspan's former deputy Alice Rivlin, now at the Brookings Institution, said that globalisation had in fact hurt some parts of society.

"Many...have not benefited over the past few years," she said. "The bottom of the income distribution has not benefited from much of anything."

Mr Greenspan's job has been to ensure that the US economy maintains its economic strength, and his judicious juggling of interest rates has so far helped him achieve that end.

But he knows that the biggest challenges are yet to come, as the Fed struggles to manage a "soft landing" for the US economy.

Yet his remarks to the world's bankers reflect the renewed confidence with which the Fed is facing the world, two years after it feared that the world might collapse in a financial meltdown of truly historic proportions.