JIM LEHRER: Alice Rivlin is with our economic correspondent, Paul Solman of WGBH-Boston.
PAUL SOLMAN: Well, today another record for the stock market, another indicator of low or no inflation. Meanwhile, unemployment remains low, and the growth continues strong. By most historical measures it's an unusually rosy economic picture. Here to talk about the short and the long of it, Federal Reserve Vice Chair, Alice Rivlin. Vice Chair Rivlin, welcome. First, from your perch now at the Federal Reserve, how rosy is it?
ALICE RIVLIN, Federal Reserve Board: The current situation is very good. It's--it's terrific. It's hard to imagine how the economy at the aggregate level could be going any better. We have good growth. We have low unemployment, and we have very little inflation.
PAUL SOLMAN: As an economist, how surprised are you? I mean, you seem a little like--wowed by it.
ALICE RIVLIN: Oh, I'm surprised because most economists thought this couldn't happen. They thought that we could not grow this fast, have this low unemployment, and at the same time not be seeing more signs of inflation. It's the combination that's really the surprise.
PAUL SOLMAN: The Producer Price Index, down for the fifth month in a row, so where's that inflation that the Fed before your time and during your time has always worried about?
ALICE RIVLIN: Well, it may be still to come. Producer prices have been going down over several months, but what you have to look at is what's happening to wages and with very low unemployment, naturally wages are going up. They haven't been going terribly fast, but that could give us pressure on costs and prices in the future.
PAUL SOLMAN: You know, on this show year after year it's unemployment can't go down below 6 percent without trigger inflation, 5.8 percent, 5.5 percent, 5.3 percent. Now, we're at 4.8 percent and there's still no sign of it. So, I mean, why were economists so wrong?
ALICE RIVLIN: Well, we're not quite sure. But, clearly we've had good productivity increases. We may be benefitting from some of the hard things that we all did in the 1980's and early 90's. Companies took a hard look at what they were doing, downsized, fired a lot of people, which was very tough, but became more productive. They invested in computers in a big way, and maybe that computer investment is finally paying off in productivity. We got the budget deficit down and the Federal Reserve actually did some tough things too. In '94, they raised interest rates and slowed down the economy a little bit, so we didn't get a runaway situation with inflation.
PAUL SOLMAN: Do you think that the world has fundamentally changed economically? I mean, these are more approximate causes, but, I mean, the idea that there are so many people driving down wages around the world because there are more people than there are jobs, you know, the non-skilled level, for example.
ALICE RIVLIN: Well, certainly, the world is more competitive globally than it's ever been. And that will probably only get more so, and we are competing. We are competing very well, the United States economy. But that does have the tendency to hold down prices and, indirectly, wages.
PAUL SOLMAN: So do you think there's sort of a sea change that's gone on, or--
ALICE RIVLIN: Well, hard to know whether it's a sea change, but, yes, I'm an optimist. I think we may be in for--if we're careful--a good, long period of good growth.
PAUL SOLMAN: So unemployment now is the lowest it's been in 24 years. Why is that?
ALICE RIVLIN: Well, because consumers are buying, and businesses are investing, and everybody has to hire more people. In fact, many businesses would hire more people than they now have if they could find the people with the requisite skills.
PAUL SOLMAN: Again, surprising, I take it?
ALICE RIVLIN: Yes.
PAUL SOLMAN: And today another stock market record, so what's happening on Wall Street?
ALICE RIVLIN: Well, Wall Street is feeling optimistic about the economy. And you have to be really optimistic about earnings to justify these levels of prices, prices of equities, but apparently people feel things are going great.
PAUL SOLMAN: But even when unemployment was down, Wall Street--the stock market went up, which is usually not what we think is going to happen the other day, right?
ALICE RIVLIN: No. That's right. I think that Wall Street has been reading, as we all have, the signals which are in those directions: strong growth, but some softening of growth. Retail sales have not been very strong recently, and that may mean that the runaway exuberance of the economy in the first quarter is slowing down.
PAUL SOLMAN: So was Alan Greenspan wrong to warn about irrational exuberance on Wall Street back I think in December it was?
ALICE RIVLIN: Oh, no, not at all. One of the things that one should worry about is that people get too exuberant, particularly in the stock market, and--
PAUL SOLMAN: You sound pretty exuberant.
ALICE RIVLIN: Well, one also has to be cautious. The stock market going up could make people feel wealthier and have them spend more, even when they haven't realized those gains. That could add to the pressure on the economy. So it's something that one ought to watch, especially the Federal Reserve.
PAUL SOLMAN: So does all this good news mean that the Fed won't raise interest rates next time we meet--you meet? I'm not there, but the next time you meet.
ALICE RIVLIN: We will consider very seriously the pros and cons of that, and we do have to look at this low unemployment and whether it could be giving us inflationary pressure down the road, because the Fed has to anticipate. We're paid to be worriers, and we have to be sure that the economy isn't overdoing it.
PAUL SOLMAN: But you don't seem terribly worried just at the moment, I mean, here.
ALICE RIVLIN: I'm an optimist, and I think over the next few years we're likely to have quite a good economy.
PAUL SOLMAN: Do you feel that the Fed really has its hand on the tiller now, I mean, that you really can navigate the economy? Economists used to be very skeptical about that, that notion of fine tuning, of navigating perfectly, and yet, it seems like the Fed has done a great job if you look at it sort of--I mean, just on first glance.
ALICE RIVLIN: Things are going very well right now. But eternal vigilance is very important, and I don't think that we've repealed the business cycle, or made it impossible in any way for inflation to take off. So it's a question of balancing the good news of the present against some risks of the future.
PAUL SOLMAN: You know, a year ago here on the NewsHour, we were talking about economic insecurity, and everybody was talking about that. Now we're talking about sort of a magic economy. I'm wondering what's happened? I mean, why has there been this sort of change in the public's--everyone's perception of the economy?
ALICE RIVLIN: Well, things have gone well but that doesn't mean there isn't economic insecurity. One of the mysteries is why wages haven't gone up faster when unemployment is so low. And it may be that part of that is people are concerned about the future of their jobs. They don't want to leave their job and go look for another one because technology is changing very rapidly, and there is some reason to be concerned.
PAUL SOLMAN: And so finally, what do you worry about the sizes--black youth unemployment say, I mean, foster kids can't find places in New York--I mean, what are your main concerns at this point?
ALICE RIVLIN: Oh, I think the biggest things that we need to worry about are the inequality of income. We need to seize this opportunity when unemployment is very low to make sure that we're improving education and skills and that we're really working to make the welfare reform work. In this kind of economy it will not be that difficult to move people from welfare into jobs, but it won't work if we have a recession.
PAUL SOLMAN: Well, Vice Chair Rivlin, thanks very much.
ALICE RIVLIN: Thank you.