Non-Manufacturing Productivity -

Dr. Alan Greenspan, Chairman
The Federal Reserve System
20th and C Streets NW
Washington DC, 20551-0001

November 8, 2003

Dear Chairman Greenspan:

Coming out the recession, US labor productivity has been showing impressive gains. But the overall figures tend to mask much lower productivity results in major parts of the economy like medicine and education. Non-manufacturing sectors are a continually increasing share of our economy. Thus the long term outlook for the productivity of the US economy could be a concern. Is this an area that the Federal Reserve is doing some thinking about?

For example, there has been little change in the productivity of education. In most K-12 classes, one teacher has been teaching around 30 students for over a hundred years. If anything, productivity has gone down recently with the addition of classroom aides and with laws to reduce class size, as in California. Similarly, the ratio of nurses to patients in hospitals has not declined noticeably, contributing to the ever increasing portion of the economy made up of medical costs.

Productivity in non-manufacturing areas has been further hurt by the power of unions. As manufacturing jobs have been going overseas, union attention has refocused on the growing service and governmental jobs areas. Teacher unions are largely responsible for the reduced class size laws, as well as opposition to vouchers and similar educational productivity innovations.

These productivity trends not only have a negative impact on our economy, they also interact with the Federal Reserve's goal of a zero inflation environment. Several years ago I wrote you about zero inflation, in part:

"I have often wondered why the free market has difficulties adjusting to a tight money supply, while accommodating most other perturbations....The difference. I believe, is due to the reluctance of people to accept lower wages. Prices of raw materials drop readily in response to lowered demand, but most individuals are slow to accept lower wages for the same work."

Your Director of the Division of Research and Statistics replied:

"Chairman Greenspan asked that I respond to your letter regarding the problems associated with zero inflation....Recent experience (circa 1997) raises questions about the relevance of this analysis, and I would question whether such rigidities would persist in a lengthy period of price stability....You certainly have distinguished company in your concerns, and many economists are continuing to investigate these issues. Sincerely, MH Bell"

Since 1997, the Fed has helped provide reasonable price stability, yet I find that my teacher friends are still reluctant to face a future of no wage increases. Their productivity increases remain zero or less (having the same or lowered class sizes), Thus the only way teachers and similar workers can be paid a wage increase is by a transfer from other parts of society or by the illusion of an increase as part of a small general price inflation.

Again, I would welcome comments from you or your staff on these important productivity/ inflation issues affecting Federal Reserve policies.

Sincerely,

A. V. Sloan
Graduate of Princeton and the Stanford Business School
1 Salt Landing
Tiburon, CA 94920

PS My analysis and non-partisan approach to economics has been recognized. For example, opposites Milton Friedman and John Kenneth Galbraith have both commented favorably on my Economics text. Their comments appear at http://econ.4mg.com/preface.htm

attachment: MH Bell's 6/6/97 letter, in response to my 5/30/07 letter to you