../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
How Do You Translate Soft?
Subject Economic Policy
Topic Productivity and Growth
Key Words Economic Growth, Inflation, Unemployment
News Story

Since the early part of last year when the Federal Reserve decided that supply and demand were not balanced, there has been much discussion of a "soft landing." While there is little controversy over the meaning of the term "landing," there are differing beliefs as to what is meant by "soft." The Federal Reserve has in the past few years underestimated the economy's ability to grow without inflationary pressures because of the growth in productivity. If productivity continues to grow at a rate like last quarter's 5.3 percent increase, many economists would argue there is no need to "land it."

The economy has grown at an average annual rate of 4.08 percent since 1995 -- almost a full percent higher than the average growth over the past 30 years. In the fourth quarter of 1999, the economy grew at an annual rate of 8.3 percent and there is general agreement that the economy could not sustain that level of growth. However, there is also agreement that the economy could grow faster than the 2.5 percent rate of expansion that until recently was regarded as the sustainable, noninflationary growth rate. Somewhere in between 8.3 and 2.5 percent is the optimum growth rate.

Another measure of inflationary pressure is the nonaccelerating inflation rate of unemployment or Nairu. Economists had thought that Nairu was as high as 6 percent. As the unemployment rate fell through 5 percent and then 4 percent without any sign of accelerating inflation, economists adjusted their concept of Nairu.

It is generally agreed that the Federal Reserve is the organization responsible for achieving a soft landing. The term "landing" means achieving a sustainable, noninflationary growth rate without a recession. The difficult part is to discover the appropriate growth rate. If the Fed reduces growth too much it risks bringing about a recession and the loss of jobs and income. Not enough of a reduction keeps supply and demand out of balance and results in inflation.

(Updated September 1, 2000)

Questions

1. As mentioned above, productivity grew at a 5.3 percent rate in the last quarter, significantly higher than the 1.6 percent annual rate between 1990 and 1994. What is the role of productivity in alleviating inflationary pressures?
2. The Federal Reserve is attempting to slow the economy with a series of interest rate hikes. How do increases in the interest rate slow the economy?
3. Explain the concept of Nairu. If the Nairu were known, how could it be used as a guide for Federal Reserve policies?

Source Steve Liesman, "'Soft Landing' Has Economists Scratching Their Heads," The Wall Street Journal, August 11, 2000.

Return to the Productivity and Growth Index

©1998-2001  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER