productivity improvements are almost magical<\/a>. When companies roll out new machines or technology, their workers can become more efficient and produce more stuff per hour. That allows firms to earn more and to raise employees\u2019 pay without raising prices. In short: Surging productivity can drive economic growth without spurring inflation. <\/p>\nGreenspan and the internet<\/p>\n
In the mid-1990s, Greenspan was contending with a strange set of economic circumstances: Wages were rising, but inflation wasn\u2019t heating up. <\/p>\n
Big productivity gains might have explained things, but government data showed no sign of them. Other Fed policymakers worried that surging wages and tame inflation couldn\u2019t co-exist and that higher prices were coming. They wanted to raise interest rates.<\/p>\n
But Greenspan suspected the official productivity numbers were missing something. For one thing, they didn\u2019t jibe with the amazing tales of efficiency improvements the Fed was hearing from companies investing in computers and turning to the internet.<\/p>\n
So he ordered his lieutenants to dig through decades of productivity numbers. The official statistics they assembled told an implausible story: Services firms \u2014 from retailers to legal practices \u2014 had supposedly seen productivity fall over the years, despite intense competitive pressure and massive investments in technology.<\/p>\n
Greenspan didn\u2019t believe it. He persuaded his Fed colleagues that the government\u2019s numbers were wrong and were understating productivity. They agreed in September 1996 to hold off on raising rates.<\/p>\n
The economy took flight.<\/p>\n
Tardily, productivity advances began to show up in the official data. Overall, American economic growth surpassed 4% every year from 1997 through 2000, something it would do again only once in the next quarter century. The unemployment rate plunged to 3.8% in April 2000, lowest in three decades. Inflation stayed in its cage, coming in below 2% — later the Fed\u2019s official target \u2013 for 17 straight months in 1997-1999.<\/p>\n
History repeats itself … maybe?<\/p>\n
American productivity certainly looked strong in the second and third quarters of 2025, and some economists attribute the improvements to early adoption of AI; they see bigger gains and stronger economic growth ahead.<\/p>\n
Others aren\u2019t so sure.<\/p>\n
Joe Brusuelas, chief economist at the consulting firm RSM, wrote that the 2025 productivity improvements \u201care not because of artificial intelligence\u2019\u2019 but reflect investments in automation that companies made when they couldn\u2019t find enough workers during and after the COVID-19 pandemic. \u201cThose investments are starting to pay off,\u2019\u2019 Brusuelas wrote.<\/p>\n
Economist Martin Baily, senior fellow emeritus at the Brookings Institution, believes it will take time for AI to have a big impact on the way companies do business and on the nation\u2019s productivity.<\/p>\n
\u201cCompanies don\u2019t change that fast,\u201d said Baily, chair of President Bill Clinton\u2019s Council of Economic Advisers. \u201cIt\u2019s expensive to change. It\u2019s risky to change. The managers don\u2019t necessarily understand the new technology that well. So they have to learn how to use it. They have to train their staff. All that stuff takes a long time.\u2019\u2019<\/p>\n
A productivity boom can raise the economy\u2019s speed limit \u2014 how fast it can grow without pushing prices higher. But it might not justify lower interest rates, Federal Reserve Gov. Michael Barr said in a speech earlier this month. <\/p>\n
Businesses will borrow to invest in AI, putting upward pressure on interest rates. Likewise, American workers and their families likely would save less and borrow more in anticipation of higher wages, the payoff for being more productive; that would put still more pressure on rates to rise.<\/p>\n
Bottom line, Barr said: \u201cThe AI boom is unlikely to be a reason for lowering policy rates.\u2019\u2019<\/p>\n
Even Greenspan\u2019s Fed eventually came to the same conclusion, reversing course and starting to raise its benchmark rate in mid-1999, taking it from 4.75% to 6.5% in less than a year. (The rate Trump complains about now is around 3.6%.)<\/p>\n
\u201cWarsh and Bessent talk only about the dovish 1995\/96 version of Greenspan; they overlook the hawkish 1999\/2000 variant,\u2019\u2019 Perkins wrote.<\/p>\n
Then and now<\/p>\n
Many of Warsh\u2019s potential future colleagues on the Fed\u2019s interest-rate setting committee see the late 1990s experience differently than he does, setting up what could be a clash at the central bank if the Senate confirms Warsh as chair.<\/p>\n
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said earlier this week that \u201cthe analogy to the late 90s is a little harder for me to understand.\u201d Greenspan\u2019s insight was that productivity gains meant the Fed could hold off on raising rates, not that it should slash them, Goolsbee noted. <\/p>\n
\u201cIt wasn\u2019t, \u2018Should we cut rates because productivity growth is higher?\u2019\u201d he said. <\/p>\n
The economic backdrop that awaits Warsh is also far less friendly than the one Greenspan enjoyed.<\/p>\n
Greenspan was avoiding rate hikes at a time when the usually profligate U.S. government was running rare budget surpluses and didn\u2019t need to borrow so desperately. Now, after a series of spending hikes and tax cuts, deficits are piling up year after year, and the Congressional Budget Office expects federal debt to hit a historic high of 120% of America\u2019s GDP by 2035.<\/a><\/p>\nNor was productivity the only thing controlling inflation in the 1990s. Countries were lowering tariffs and dismantling trade barriers. Immigration was surging.<\/p>\n
Now, thanks largely to Trump\u2019s own policies, notably his sweeping taxes on imports and his crackdown on immigration, the world is much different. \u201cTrade barriers are going up,\u2019\u2019 Perkins wrote. \u201cGlobalization has given way to de-globalization.\u2019\u2019<\/p>\n
\u201cThat benign era is clearly behind us,\u2019\u2019 said Michael Pearce, chief U.S. economist at Oxford Economics.<\/p>\n
____<\/p>\n
AP Economics Writer Christopher Rugaber contributed to this story.<\/p>\n","protected":false},"excerpt":{"rendered":"WASHINGTON (AP) \u2014 President Donald Trump, his Treasury secretary and his choice to lead the Federal Reserve believe…\n","protected":false},"author":2,"featured_media":498432,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[156163,181,791,28,157,227634,3505,12,8876,109,101,8877,2402,11382,2938,92380,45588,227635,220837,147881,111,4666,74,792],"class_list":{"0":"post-498431","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-alan-greenspan","9":"tag-artificial-intelligence","10":"tag-bill-clinton","11":"tag-business","12":"tag-chicago","13":"tag-dario-perkins","14":"tag-district-of-columbia","15":"tag-donald-trump","16":"tag-economic-indicators","17":"tag-economic-policy","18":"tag-economy","19":"tag-federal-reserve-system","20":"tag-inflation","21":"tag-information-technology","22":"tag-jerome-powell","23":"tag-joe-brusuelas","24":"tag-kevin-warsh","25":"tag-martin-baily","26":"tag-michael-barr","27":"tag-michael-pearce","28":"tag-politics","29":"tag-scott-bessent","30":"tag-technology","31":"tag-united-states-government"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/498431","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=498431"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/498431\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/498432"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=498431"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=498431"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=498431"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}