That Was the Week That Was
Subject Growth
Topic Fiscal Policy
Key Words Monetary Policy, Fiscal Policy, Interest Rates, Productivity, Economic Growth
News Story

There were three significant economic events during the week of November 4th that will likely have significant short- and long-term implications for the nation's economy. Republicans gained control of Congress in the national elections, the Federal Reserve cut interest rates one-half percent and new economic data on productivity showed growth accelerating to an annual rate of 4 percent in the third quarter. While discussion in the media centered on the election and the Fed decision, productivity changes may have the most significant impact on the economy.

Republicans now have a majority in both houses of Congress due, in part, to the campaigning of President Bush. In return, the Administration will likely push a number of economic policy issues which it was reluctant to press with a Democratic-controlled Senate. Making last year's tax cuts permanent, adding an individually-controlled investment option to Social Security and creating added incentives for investment through tax cuts, are examples of economic policy measures that are part of the White House agenda.

The Federal Reserve lowered interest rates a full one-half percent, to 1.25 percent. Given public pronouncements by Fed chairman Greenspan about the health of the economy and fears of hand-cuffing monetary policy in the event of a Japanese-style deflation, the half-percent cut was unexpected.

Of the three economic events, the third-quarter productivity data may have the farthest-reaching significance. Over the last 12 months, productivity growth was 5.3 percent, the highest growth rate in two decades. Even if sales remain sluggish, higher productivity may mean higher profits and a rise stock prices, with higher stock prices, in turn, generating increased wealth and additional spending. There is a down side, however; productivity growth means that firms can delay hiring even when sales start to increase.

In the long run, productivity growth plays an important role in determining the economy's capacity to expand without inflationary pressure. With productivity growth in the last five years around 2.5 percent, economists believe that the economy could expand at 3.5 percent without a significant rise in the average price level.

(Updated January 2, 2003)


The President would like to create additional incentives for investment primarily through tax cuts. If such a measure was passed by Congress, what would be the likely consequences in terms of investment, the stock of capital, gross domestic product and productivity?

2. What happens to the rate of investment as interest rates decrease? What are the implications of this measure for real GDP and the price level?
3. Economists believe that productivity increases can mean increased wages for workers without pressure on employers to raise prices. Explain.
Source Richard W. Stevenson, "A Sleeper Of a Statistic Could Lead An Awakening," The New York Times, November 10, 2002..

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