sional testimony in February 2000, for example, predicted that low
unemployment must either push prices up or profits down:
At some point in the continuous reduction in the number of work-
ers willing to take available jobs, short of repeal of the law of supply
and demand, wage increases must rise above even impressive gains
in productivity. This would intensify inflationary pressure or
squeeze profit margins [Greenspan 2000].
This quaint Phillips curve theme suffers even more problems than
usual. First, there has been no “continuous reduction in the number
of workers willing to take available jobs.” If that had happened the
unemployment rate would have fallen, rather than hovering near 4
percent or more since October 1999. Second, the “law of supply and
demand” does not imply that employers will foolishly continue to add
workers at higher wages if doing so squeezes their profit margins. On
the contrary, elementary price theory teaches that employers add
workers only up to the point where the added cost is matched by
added revenue. Third, nonfarm productivity rose by 5.9 percent over
the four quarters ending in the second quarter of 2000, pushing unit
labor costs up only 1.7 percent as business prices rose by only 2
percent. When theory and facts diverge so dramatically, it is not the
facts that are at fault. Fourth, even if unit labor costs were rising
rather than falling, that would not make it any easier for firms to hike
prices without losing sales to domestic or foreign rivals. Short of
repeal of the law of supply and demand, fewer sales must mean fewer
jobs, thus reversing the hypothetical decline in unemployment that
was supposed to produce the hypothetical rise in unit labor costs.
The Fed’s old story about falling unemployment being inflationary
is illogical and out of touch with reality. Trying to make some sense
out of it, Greenspan even resorted to finding fault with rising pro-
ductivity. “The problem,” he claims, “is that the pickup in productivity
tends to create even greater increases in aggregate demand than in
potential aggregate supply.” However, “should productivity fail to
continue to accelerate,” he added, “that would engender inflationary
pressures.” A pickup in productivity can be inflationary, in the chair-
man’s view, because it boosts profits and stock prices and therefore
consumer demand. Yet a slowdown in productivity would also engen-
der inflationary pressures by raising unit labor costs.
The rhetorical agility required to convert booming productivity into
an inflation threat was needed to rationalize the Fed’s odd anxiety
about productivity-driven growth. Since a slowdown in productivity
“would engender inflationary pressures,” any Fed crusade to slow real
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