The New Paradigm - Federal Reserve Bank of Dallas

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unsustainable for four years and
counting. Sounds odd, doesn’t it?
Our faster output growth is based
primarily on faster productivity
growth and secondarily on faster
labor force growth.
Productivity growth, or increases
in output per hour worked, is the
main source of rising living standards.
It's nice to have more output
based on more workers and more
hours worked, but more output per
hour worked is what raises per
capita incomes and living standards.
Productivity growth slowed
dramatically in the early 1970s, and
for two decades thereafter it grew
just over 1 percent a year. With the
number of hours worked also growing
just over 1 percent, the potential
noninflationary growth rate—the
speed limit—was thought to top out
around 2.5 percent.
The decline in productivity
growth reversed in the 1990s, especially
in the second half. Productivity
growth now appears to be at
least 2.5 percent and rising. An
increase from 1 percent to 2.5 percent
is an increase of 150 percent,
a huge jump with profound implications
if sustained. Last year was
encouraging. Productivity rose over
3 percent for the year and over 5
percent in the second half.
In addition to faster productivity
growth, faster labor force growth
has also boosted the economy. This
was accomplished by drawing
down the pool of unemployed
labor, as evidenced by the decline
in the unemployment rate. I mentioned
in last year's Annual Report
that it will be difficult to sustain
recent growth rates with this shrinking
labor pool, and I made two
modest suggestions for alleviating
the shortage: remove the penalty
for Social Security recipients who
work, and increase the number of
visas for the skilled workers our
high-tech sector requires. The need
is even greater a year later, making
these reforms more urgent.
Given today's squeaky-tight labor
markets, neither of these proposals
should threaten existing workers.
The immigration proposal shouldn't
be a threat since our colleges are not
graduating enough native science
and technology students to
meet demand. Filling key
slots with foreign
workers would likely
increase the demand
for U.S. workers by
allowing stalled projects
to go forward. In addition,
Americans would
benefit if U.S. firms could
stay put rather than relocate
abroad to employ foreign
workers.
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The Federal Reserve Bank of
Dallas had a good year in 1999.
We—along with our banks—
squashed the Y2K bug. We provided
more services with improved
efficiency. The District's economy
remained strong, and our banks
remained profitable and well capitalized.
A good time—as they say—
was had by all.
On a personal note, I, too, had a
good year. Highlights included my
first visit to "Austin City Limits"
and to the Grand Ole Opry and the
Bluebird Cafe in Nashville. At the
Bluebird, the man who wrote one
of my favorite songs, "Bubba
Hyde," sang it for me. I made pilgrimages
to Adam Smith's grave in
Scotland, Buddy Holly's in Lubbock
and Sam Houston's in Huntsville.
1999 will be a hard year to top.
Robert D. McTeer, Jr.
President
1999 ANNUAL REPORT Federal Reserve Bank of Dallas