More of Greenspan...........Federal Reserve's Greenspan Sees 'Remarkable'
U.S. Expansion Continuing
By Noam Neusner
Fed's Greenspan Sees 'Remarkable' U.S. Expansion Continuing
New York, Jan. 13 (Bloomberg) -- The ''remarkable'' U.S.
economic expansion, while showing few signs of overheating, can't
expect to benefit from gains in productivity forever, Federal
Reserve Chairman Alan Greenspan said.
Surging economic growth and subdued inflation make it
''increasingly difficult to deny that something profoundly
different from the typical post-war business cycle has emerged,''
he said in the text of remarks to the Economic Club of New York.
Still, ''if our objective of maximum sustainable economic
growth is to be achieved, the pool of available workers cannot
shrink indefinitely,'' especially at a time when stock market
gains also are contributing to a consumer spending boom,
Greenspan said.
That suggests the Fed -- ''intent on defusing the imbalances
that would undermine the expansion,'' he said -- is likely to
raise the overnight bank lending rate a fourth time since last
June when policy-makers meet early in February.
At the same time, Greenspan he said the cooling effect of
higher interest rates ''is already well advanced.'' Corporate
bond yields and other market interest rates have risen, and that
can be expected to cool demand over time, Greenspan said.
The economy has managed to grow for more than eight years,
with few signs of accelerating inflation, because of what may be
''a once-in-a-century acceleration of innovation,'' particularly
in information technology, Greenspan said.
'Indisputable' Benefits
History may show that ''what we are currently experiencing
was just one of many euphoric speculative bubbles,'' but
Greenspan suggested he doubts that's the case.
''What should be indisputable is that a number of new
technologies'' are benefiting the economy, he said, citing the
Internet among those innovations.
Gains in worker productivity have more than doubled in the
last three years, Labor Department statistics show. Greenspan has
frequently referred to this phenomenon in the last year, and
today said the results are ''awesome changes in the way goods and
services are produced.''
Greenspan didn't define how far the economy can grow without
fueling inflation, yet he said ''there are limits'' to an economy
that is using its available labor pool to the fullest.
''We are groping to infer where those limits may be,'' he
said. ''But that there are limits cannot be open to question.''
Stocks Boost Spending
Greenspan said that an observer in 2010 looking back at this
current economy might describe it as an example of overconfidence
or as a ''once-in-a-century acceleration of innovation ... and
stock prices at a pace not seen in generations, if ever.''
In either case, he said rising stock prices have created a
''potential challenge'' as gains from stock investments have led
to stepped-up spending by businesses and consumers ''beyond the
increases in supply.''
Gains in stocks, he said, may have added about 1 percentage
point, or one-quarter of added economic output, in annual gross
domestic product in the U.S. since late 1996.
That added demand, which can't entire be satisfied by U.S.
producers, has created an appetite for imports.
''Thus the impetus to spending from the wealth effect by its
very nature clearly cannot persist indefinitely,'' he said. ''It
is, in effect, increased purchasing from future income.''
Technology Gains
Greenspan, who has spoken before of the economic gains that
come with greater use of technology, pressed forward on that
theme. Information technology allows companies to react faster to
consumer demands, he said, reducing the need for ''substantial
programmed redundancies,'' such as heavy use of warehouses to
store unwanted goods.
''Before this revolution in information availability, most
20th century business decision-making had been hampered by wide
uncertainty,'' he said.
Now, businesses take fewer risks, allowing them to devote
their resources to other tasks. New technology also allows
businesses to substitute capital investment for labor when
workers are scarce and capital is cheap, as has been the case.
Those labor-saving gains, in turn, have made companies more
competitive and less likely to raise prices, because companies
are afraid that their competitors could use technology to keep
prices steady, Greenspan said.
''The increasing availability of labor-displacing equipment
and software, at declining prices and improving delivery lead
times, is arguably at the root of the loss of business pricing
power in recent years,'' he said.
That has helped keep consumer prices low. In the 12-month
period that ended in November, consumer prices rose 2.6 percent.
'Virtuous Cycle'
''There is a virtuous capital investment cycle at play
here,'' he said. As technology boosts productivity, profits rise,
pushing further investment and spending while at the same time
costs and prices are held at bay, further increasing
profitability, Greenspan said.
Greenspan said government surpluses built in the 1990s
remain a ''critical factor'' in keeping the U.S. economy on its
current course.
''A continuing expansion of the surplus would surely aid in
sustaining the productive investment that has been key to
leveraging the opportunities provided by new technology,'' he
said.
''I trust the recent flurry of increased federal government
outlays, seemingly made easier by the emerging surpluses, is an
aberration,'' he said.
Greenspan also said policy-makers need to ''address the
associated dislocations that emerge'' as the economy continues to
gain from productivity-enhancing tools that force workers from
jobs. ''Societies cannot thrive when significant segments
perceive its functioning as unjust,'' he said. |
