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For immediate release


Remarks by
G. William Miller
Board of Governors of the Federal Reserve System
before the
American Productivity Center
Productivity Conference

New York City
October 3, 1978


-1Inflation is a clear and present danger which affects all
our lives and all our opportunities•

As far as monetary policy is

concerned, the emergence early this year of inflation as a more
virulent threat to our system has placed enormous responsibilities
on the Federal Reserve• Monetary policy must and will be used to
restrain inflation, but it needs support from other economic policies
in order to avoid undesirable side effects• The task the central
bank has set out for itself is to use prudent monetary policy to
restrain the forces of inflation, by bringing down the rate of
growth of the money supply, but to do so without triggering a
recession that would work against the over-all objective•

It is

reassuring to note that, earlier this year, when it became apparent
that the effort would not be left to monetary policy alone, positive
initiatives were taken by the Administration and by the Congress•
There have been substantial changes toward a more restrictive fiscal
policy to help bring down the rate of inflation*
With this as background, I am particularly pleased to be
here to participate in this Conference on productivity*

An initiative

to achieve productivity gains is one that we can all endorse and
agressively support. A successful effort to improve economic efficiency will directly offset the upward cost pressures on prices*
It will tend to make our output more competitive in international
markets, and thus improve our balance of trade and help stem the
deterioration of the dollar in the currency exchange markets*


will contribute to long-range increases in our economic capacity and


in our standard of living.

Unless the economyfs productivity expands

at a faster rate, we will be unable to reduce unemployment without
igniting inflation.

Increased productivity is the best prospect

for breaking the vicious cycle of wages chasing prices and prices
chasing wages.
Because it is imperative that we act now to achieve such
benefits as we can from increased productivity, it is well worth
our time today to look at some of the historical trends and to discuss
some of the public policies that could accelerate such gains.
History shows that productivity gains have been a key factor
in our economic growth and in our rising standard of living.


per work hour in the private sector rose more than 125 percent over
the past thirty years.

The bulk of the improvement, however, occurred

between 1947 and 1967.

During that period output per hour doubled.

Since 1967, output per hour has risen less than one-fifth, only about
half the average pace prior to 1967.
Chart 1, attached, shows that output per hour is now well
below its post-war trend.

Even before the oil embargo and the re-

cession of f 74 - f 75, the rate of productivity growth had slowed down.
Prior to 1967, the annual rate of growth was about 3-1/3 percent;
in the years 1967-72, it was only about 2 percent.

Other things being

equal, this added more than a full percentage point to the rise in
unit labor costs.

Such increases in costs are eventually reflected

in final prices, and that was certainly the experience in the f 67 - ! 72

While we thought in those years that 2 percent was a weak



performance, in the following five years things have gotten much

Coincident with the quintupling of oil prices and the deep

recession of '74 - f 75, productivity fell into an unusually long
and deep decline.
Chart 2 shows how output per hour has lagged during this
recovery cycle.

Its eventual upturn was so belated and so mild that

by 1977 output per hour was up only 6-1/2 percent from the 1972 level.

That amounts to an average annual gain of only 1-1/3 percent*


about that for a moment: an average efficiency gain of only 1-1/3 percent
a year, little more than one-third the pace in the two decades ending
in 1967. Even if wages and salaries had remained stable —
course, they did not —

and, of

the productivity slowdown would have added

2 percentage points to the rise of unit labor costs.

The result is a

commensurate impetus to inflation.
During the years of strong productivity gains, workers and
their families became accustomed to generous increases in their real

America's standard of living rose dramatically, average

work schedules were shortened, leisure time was increased.

Over time

we came to expect an annual improvement in our real incomes.

In fact,

an allowance of 3 percent or more in productivity gains was included
in the wage-price guidelines set in the Kennedy Administration in the
early 196Gfs*

These expectations of regular and sizable increases in

the average standard of living were subsequently frustrated*
As productivity growth slox^/ed, real income gains began to
fall below individual and collective expectations.

This had serious

-4consequences for inflationary pressures.

In an effort to sustain

past patterns of real income growth, wages were pushed up, setting
in motion a cycle of intense upward pressure on costs and prices.
This occurred despite high levels of unemployment and excess industrial

Thus the slowing of productivity growth helped trigger

a spiral of inflationary wage-price adjustments throughout the economy.
The lower rate of productivity growth and the higher rates
of inflation at home have contributed to the imbalance of our trade
with other nations.

Growth of productivity in the United States

has been slower than that of most of our major international
trading partners, making us less competitive in the international arena.
Slow growth of our exports has contributed to the decline in the exchange value of the dollar, which in turn has fueled domestic inflation
both directly and indirectly.

Higher dollar prices for imports raises

consumer prices directly, while domestic producers of competitive goods
can raise their prices with less fear of losing market shares.
resulting inflation further saps confidence in the dollar.


It also

contributes to a lower value of the dollar in a self-reinforcing

It is critical that we break this spiral.

Perhaps it would be worthwhile to review the trends that
sustained the productivity gains in the private sector from 1947 to
1967 and to compare them with the developments of the last decade.
The first two decades of the post-war era were marked by
significant development and expansion of new technology and improved
methods of operation accompanied by high rates of capital formation.


Significant advances in the quality of the work force also occurred*
There was a shift of resources from low to higher productivity sectors,
Underlying some of these factors were substantial investments in
research and development and in workers1 educations • After 1967,
however9 the economic and demographic trends that supported substantial efficiency gains became much less favorable and new trends
emerged that tended to retard the growth of productivity,
A crucial factor in the slow rate of efficiency improvement has been a slackening in the introduction of new technology
or 9 to put it more broadly, in the application of new ideas and
improved ways of doing things.

The effect of technology on pro-

ductivity is usually associated with equipment and materials, such
as an electronic device that vastly expands data processing capabilities or a new chemical that can help multiply crop harvests.
But just as important are new management techniques that greatly
improve the application and organization of resources, whether of
labor, physical capital or financial resources•

But no matter what

the form of advance in human knowledge, it frequently requires significant investment in new plant and equipment in order to exploit
fully the opportunities presented.
Yet we have failed to maintain an adequate rate of capital
accumulation and investment.

Indeed the nation's stock of capital

expanded at an annual rate of only 2,8 percent over the past five
years, barely half the rate over the proceeding decade.
shows this progressive and disturbing decline.

Chart 3


Capital accumulation per member of the labor force has
slowed even more dramatically.

Compared to 1974-75, the amount of

capital per person in the labor force has actually declined. This
can be seen in Chart 4.

At the same time the share of capital

investment devoted to environmental compliance has increased and
the imposition of environmental standards may have caused practical
obsolescence of some existing plant and equipment.
In a similar vein, the massive increase in the price of
energy clearly has shortened the economic life of some of our capital

So, in many ways, the data on the accompanying charts under-

state the problem that we face.
Another reason for the slower pace of productivity growth
was the huge flood of inexperienced workers into the labor force•
The figures are staggering.

Nearly 15 million more young people and

women were in the labor force in 1977 than in 1967.
for nearly four-fifths —

almost 80 percent —

expansion of the work force over the decade.

They accounted

of the over-all
Even though these new

workers enjoyed the best health, the highest educational attainment,
and the best working conditions in our history, they still had to
learn skills and accumulate experience before they could achieve the
same productivity as employees with long tenure in a particular trade.
Improving the efficiency of the economy under these circumstances demands a comprehensive, forward looking program —

a program

that will restore a climate favorable to productivity growth*
principal elements tnust include, first, a commitment to conquer



inflation so that Investment plans can be made in an environment of
more certainty and, second, greater economic incentives for private
The nation's tax policies have not offered adequate incentives
for new capital investment.

In particular, depreciation allowances are

not adequate to provide cash flows sufficient to encourage increased
fixed investments in today's conditions, nor to offset the substantial
risk of obsolescence,

Higher inflation has made it extremely difficult

for firms to predict forward costs and prices and thus has shaken confidence in business forecasts of financial conditions and general
economic activity.

Facing a less reliable calculation of the real

cost of capital and of expected revenues^ prudent businessmen set high
requirements for prospective returns on investment*

Capital spending

inevitably is retarded.
Because we have been neglecting capital accumulation a
larger share of GMP must now be devoted to capital investments„
Raising the amount of capital per worker will have a favorable impact
on productivity In its own right.

Also, since new capital also generally

embodies new technologies, there should be an extra increment to
efficiency gains.

Newer equipment and structures utilize energy more

efficiently and the resulting conservation and cost savings will contribute to achieving our over-all goals*
However, it is not enough simply to reach the past peak
levels of 10-1/2 or 11 percent of GWP, reflected in Chart 5.


nation should set an ambitious objective for capital investment of, say5


12 percent of GNP for an extended period of time in order to enable
us to make up for past deficiencies and to narrow the gap between
our performance and that of our strong industrial competitors.


Japanese economy spends over 20 percent of GNP on capital investment;
West Germany 15 percent.

It certainly would be appropriate for us

to seek a 12 percent level.

Another element in a long-term strategy aimed at a high
growth, low inflation economy is extensive reform of Federal regulatory activities.

We need to take a critical look at price-regu-

lating Government programs.

Price regulation in the marketplace tends

to discourage or prevent full competition, which is, after all, a
powerful incentive for the development and adoption of the mostefficient techniques.

In recent years there has been a major increase

in well-intentioned laws and regulations aimed at protecting the environment and promoting health and safety.

These regulations greatly

influence when and where new productive capacity may be built and how
firms may operate.

Just hiring the personnel necessary to keep track

of the rules, prepare the reports, and attend the hearings, has swollen
over-all costs without any compensating increase in measured output*
In addition to requiring major expenditures these regulations
create uncertainties about the appropriate scale, location and acceptability of major new additions to or modernization of our productive

Protection of the environment and of public health and

safety must be a major social goal.

But the actual benefits of new


forms of protection must be carefully weighed against the cost to
our economy of achieving them.
Another aspect of a forward looking growth policy is to
assure that our work force continues to be ready to meet the challenge
of developing new ideas and implementing new technologies.


employment and training programs should be redesigned to provide
effective skill training and work experience to disadvantaged workers.
The emphasis on these programs should be on training individuals for
careers in the private sector.

Younger people are affected more

severely than most other groups by high unemployment since early
employment is essential for that on-the-job training which lays the
foundation for a successful life career.

With today's very high levels

of unemployment among younger workers, it Is possible that, unless we
act vigorously, a larger part of that generation will be denied the
opportunities to develop the skills, attitudes and motivation they
need to become productive participants in the adult work force and to
experience the self satisfaction of personal accomplishment.
In addition to investing in human capital in the forms of
direct skill upgrading, we should improve the links between the
classroom and the world of work and expand apprenticeships and similar
opportunities to assure that younger workers are prepared to meet the
needs of their private sector employers.

Methods of raising workers1

incentives to become more productive should also get more attention.
Stock ownership incentives, profit-sharing, labor management productivity councils, are possibilities that certainly warrant closer
examination and further experimentation.


We need all these government actions and incentives.


even more we need a change in attitude among managers and workers;
among all citizens,

America has always been a "can do" nation

characterized by an innovative and competitive spirit.

I am convinced

that a substantial cooperative effort in the private sector, coupled
with a reorientation in tax and regulatory policy, will stimulate
productivity growth and will help ease inflationary pressures without
curtailing growth.

Such trends would be self-reinforcing, for reduced

inflationary expectations would enhance confidence in our economic

All this in turn would lessen the burden on monetary policy

in the fight against inflation and improve the prospects for lower
interest rates.
In the past few months we have learned a great deal about
the limits of government, the importance of coordinating government
economic policies, and the importance of a stronger partnership
between government and the private sector.

Much has been accomplished.

Our fiscal program has been changed so that the prospective deficit
for the year that began this week has been reduced by over $22 billion,
a significant contribution to the fight against inflation.

There has

been cooperation with President Carter's deceleration program, although
much more needs to be done and the President intends to announce other
anti-inflation actions.

Progress has been made in establishing elements

of a national energy policy that will reduce our dependence on imported

We have taken steps, both through short-term bridging actions



and in addressing the longer-term fundamentals to assure a sound
and stable dollar which is essential to our economic well-being*
But much more needs to be done.

In the fight against

inflation, and in the campaign to raise productivity gains once
again to the level that will assure increases in real incomes and
increases in our standard of living, we need to have the purpose,
the determination, the constancy to implement effective long-range

We will need to maintain our efforts for five to seven

years in order to achieve the economic goals of full employment,
price stability and a sound dollar.

The reward will be enhanced

prospects for peace and prosperity in the world.

Chart 1

Output Per Hour, Private Business Sector

Ratio scale, index, 1967=100














Chart 2

Cyclical Comparisons of Output Per Hour,
Private Business Sector41
Index, peak quarter =100






Changes following the cyclical peaks as specified by NBER.



Chart 3

Average Annual Growth of the Capital Stock*

Per cent




Private n on residential net capital stock measured in constant dollars.

Chart 4

Ratio of Capital Stock to Labor Force

Ratio scale, thousands of 1972 dollars per person


1947-1967 TREND








Chart 5

Ratio of Business Fixed investment to GNP





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Based on constant dollar data.



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