so hard under the pressure of competition and recession to become less rigid and more flexible have in fact done so. but those are all guesses - - or wishful thinking. we don ’ t know for sure. the price puzzle is why prices have been so well behaved in the face of labor costs that have been rising, albeit not especially fast. has the economy, as so many business anecdotes allege, really become more fiercely competitive both nationally and internationally? is the ability of firms to absorb labor cost increases without raising prices and without apparent reduction in profit margins confirming the hypothesis that productivity is rising faster than we thought, or faster than the admittedly inadequate data have been telling us? indeed, it is the productivity puzzle that may hold the key to the gratifyingly mysterious behavior of the economy. economists have thought for some time that the increasing importance of services in the economy is confounding the ability to understand what is happening to both product and productivity. we observed an increase in manufacturing productivity, but not in service productivity. indeed, measured productivity was generally negative in service industries even where anecdotal evidence indicated that processes had been streamlined, products had been substantially improved, as well as greatly proliferated, and the people in the industry believed they were doing a much more effective job serving their customers. economists freely admitted they didn ’ t quite know how to identify and measure the quality of the products that were being produced in service industries, sometimes even in manufacturing. economists also wondered aloud why all the investment in computers and information technology that was so obviously changing the world was not having an impact on productivity. we opined that maybe people weren ’ t using computers very well or that many things people were using computers for - - like editing everything to death or spelling things correctly - - were not actually contributing to productivity at least as we were measuring it. now, we should turn all this speculation - 4into a full court press to figure out what kind of data we need and what kind of analytical methods we need to invent in order to understand better what is going on in this economy. the need to improve the accuracy of the cpi has captured the attention of the press and the politicians because the indexing of benefits and tax brackets plays such a large part in the federal budget. but the problems of identifying what consumers are buying and how the quality of the items purchased has changed is very closely related to the problem of identifying what is being produced and what inputs are going

recent rapid job growth in the u. s. are especially evident by contrast with europe. french and german unemployment rates have been incredibly high for a long time. french and german officials speak of their unemployment as “ structural ” and discuss the need to increase job training, improve the functioning of labor markets, and reduce the incentives not to work which are built into their generous benefit systems. these are all doubtless constructive things to do, but are unlikely to be very successful unless the economies are growing and jobs are being created. it is a lot easier to reduce structural unemployment when the demand for labor is brisk than when it is lagging. so this central banker believes that the goal of monetary policy, like the goal of fiscal policy, ought to be the highest sustainable growth rate and the lowest sustainable unemployment. low inflation should not be thought of as an end in itself, but as a means to an end. accelerating inflation has proved a threat to the sustainability of growth, and the self - perpetuating nature of inflation makes it more costly to correct than to avoid. the drafters of the humphrey hawkins act gave the fed multiple goals. they said : “ the federal open market committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy ’ s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long - term interest rates. ” that ’ s a bit ambiguous, but it ’ s about as good a set of instructions as any. it would be a mistake to reword the act, as some have suggested, to give the fed a single objective - - reducing inflation - - on which to focus monetary policy. it would be especially unfortunate to specify a zero inflation target. first, because we don ’ t measure inflation well enough to know when we have hit an exact target. second, because the benefits of getting all the way to zero may not be great and the costs could be substantial, especially if there is significant reluctance to reduce nominal wages. but it is the second part of the central banker stereotype that economists see as most obviously absurd ; namely, that the fed actually controls interest rates and that it knows for sure where the monetary dials ought to be set to achieve a specific growth or unemployment target. the reality is that the fed controls - - and rather imperfectly at that - - one extremely short - term interest rate, the fed funds rate. the fed funds rate certainly has