TEXT-Greenspan speech on U.S., global economy
WASHINGTON, Sept 4 (Reuters) - The following is the full text of Fed
Chairman Alan Greenspan's speech on Friday at University of
California, Berkeley:
Question: Is There a New Economy?
The question posed for this lecture of whether there is a new economy
reaches beyond the obvious: Our economy, of course, is changing
everyday, and in that sense it is always ''new.'' The deeper question
is whether there has been a profound and fundamental alteration in the
way our economy works that creates discontinuity from the past and
promises a significantly higher path of growth than we have
experienced in recent decades.
The question has arisen because the economic performance of the United
States in the past five years has in certain respects been
unprecedented. Contrary to conventional wisdom and the detailed
historic economic modeling on which it is based, it is most unusual
for inflation to be falling this far into a business expansion.
Many of the imbalances observed during the few times in the past that
a business expansion has lasted more than seven years are largely
absent today. To be sure, labor markets are unusually tight, and we
should remain concerned that pressures in these markets could spill
over to costs and prices. But, to date, they have not.
Moreover, it is just not credible that the United States can remain an
oasis of prosperity unaffected by a world that is experiencing greatly
increased stress. Developments overseas have contributed to holding
down prices and aggregate demand in the United States in the face of
strong domestic spending. As dislocations abroad mount, feeding back
on our financial markets, restraint is likely to intensify. In the
spring and early summer, the Federal Open Market Committee was
concerned that a rise in inflation was the primary threat to the
continued expansion of the economy. By the time of the Committee's
August meeting, the risks had become balanced, and the Committee will
need to consider carefully the potential ramifications of ongoing
developments since that meeting.
Some of those who advocate a ''new economy'' attribute it generally to
technological innovations and breakthroughs in globalization that
raise productivity and proffer new capacity on demand and that have,
accordingly, removed pricing power from the world's producers on a
more lasting basis.
There is, clearly, an element of truth in this proposition. In the
United States, for example, a technologically driven decline is
evident in the average lead times on the purchase of new capital
equipment that has kept capacity utilization at moderate levels and
virtually eliminated most of the goods shortages and bottlenecks that
were prevalent in earlier periods of sustained strong economic growth.
But, although there doubtless have been profound changes in the way we
organize our capital facilities, engage in just-in-time inventory
regimes, and intertwine our newly sophisticated risk-sensitive
financial system into this process, there is one important caveat to
the notion that we live in a new economy, and that is human
psychology.
The same enthusiasms and fears that gripped our forebears, are, in
every way, visible in the generations now actively participating in
the American economy. Human actions are always rooted in a forecast
of the consequences of those actions. When the future becomes
sufficiently clouded, people eschew actions and disengage from
previous commitments. To be sure, the degree of risk aversion differs
from person to person, but judging the way prices behave in today's
markets compared with those of a century or more ago, one is hard
pressed to find significant differences. The way we evaluate assets,
and the way changes in those values affect our economy, do not appear
to be coming out of a set of rules that is different from the one that
governed the actions of our forebears.
Hence, as the first cut at the question ''Is there a new economy?''
the answer in a more profound sense is no. As in the past, our
advanced economy is primarily driven by how human psychology molds the
value system that drives a competitive market economy. And that
process is inextricably linked to human nature, which appears
essentially immutable and, thus, anchors the future to the past.
But having said that, important technological changes have been
emerging in recent years that are altering, in ways with few
precedents, the manner in which we organize production, trade across
countries, and deliver value to consumers. To explore the significance
of those changes and their relevance to the possibility of a ''new
economy,'' we need to first detail some key features of our system.
An implication of high equity market values, relative to income and
production, is an increased potential for instability. As I argued
earlier, part of capital gains increases consumption and incomes.
Since equity values are demonstrably more variable than incomes, when
equity market values become large relative to incomes and GDP, their
fluctuations can be expected to effect GDP more than when equity
market values are low.
Clearly, the history of large swings in investor confidence and equity
premiums for rational and other reasons counsels caution in the
current context. We have relearned in recent weeks that just as a bull
stock market feels unending and secure as an economy and stock market
move forward, so it can feel when markets contract that recovery is
inconceivable. Both, of course, are wrong. But because of the
difficulty imagining a turnabout when such emotions take hold, periods
of euphoria or distress tend to feed on themselves. Indeed, if this
were not the case, the types of psychologically driven ebbs and flows
of economic activity we have observed would be unlikely to exist.
Perhaps, as some argue, history will be less of a guide than it has
been in the past. Some of the future is always without historical
precedent. New records are always being made. Having said all that,
however, my experience of observing the American economy day by day
over the past half century suggests that most, perhaps substantially
most, of the future can be expected to rest on a continuum from the
past. Human nature, as I indicated earlier, appears immutable over the
generations and inextricably ties our future to our past.
Nonetheless, as I indicated earlier, I would not deny that there
doubtless has been in recent years an underlying improvement in the
functioning of America's markets and in the pace of development of
cutting edge technologies beyond previous expectations.
Most impressive is the marked increase in the effectiveness in the
1990s of our capital stock, that is, our productive facilities, the
issue to which I alluded earlier. While gross investment has been
high, it has been, in recent years, composed to a significant extent
of short-lived assets that depreciate rapidly. Thus, the growth of the
net capital stock, despite its recent acceleration, remains well below
the peakrates posted during the past half century.
Despite the broadening in recent decades of international capital
flows, empirical evidence suggests that domestic investment still
depends to a critical extent on domestic saving, especially at the
margin. Many have argued persuasively, myself included, that we save
too little. The relatively low propensity to save on the part of the
American public has put a large premium on the effective use of scarce
capital, and on the winnowing out of the potentially least productive
and, hence, the least profitable of investment opportunities.
That is one of the reasons that our financial system, whose job it is
to ensure the productive use of physical capital, has been such a
crucial part of our overall economy, especially over the past two
decades. It is the signals reflected in financial asset prices,
interest rates, and risk spreads that have altered the structure of
our output in recent decades towards a different view of what
consumers judge as value. This has imparted a significant derived
value to a financial system that can do that effectively and, despite
recent retrenchments, to the stock market value of those individual
institutions that make up that system.
Clearly, our high financial returns on investment are a symptom that
our physical capital is being allocated to produce products and
services that consumers particularly value. A machining facility that
turns out an inferior product or a toll road that leads to nowhere
will not find favor with the public, will earn subnormal or negative
profits, and in most instances will exhibit an inability over the life
of the asset to recover the cash plus cost of capital invested in it.
Thus, while adequate national saving is a necessary condition for
capital investment and rising productivity and standards of living, it
is by no means a sufficient condition.
The former Soviet Union, for example, had too much investment, and
without the discipline of market prices, they grossly misplaced it.
The preferences of central planners wasted valuable resources by
mandating investment in sectors of the economy where the output wasn't
wanted by consumers--particularly in heavy manufacturing industries.
It is thus no surprise that the Soviet Union's capital/output ratios
were higher than those of contemporaneous free market economies of the
West.
This phenomenon of overinvestment is observable even among more
sophisticated free market economies. In Japan, the saving rate and
gross investment have been far higher than ours, but their per capita
growth potential appears to be falling relative to ours. It is
arguable that their hobbled financial system is, at least in part, a
contributor to their economy's subnormal performance.
We should not become complacent, however. To be sure, the sharp
increases in the stock market have boosted household net worth. But
while capital gains increase the value of existing assets, they do not
directly create the resources needed for investment in new physical
facilities. Only saving out of income can do that.
In summary, whether over the past five to seven years, what has been,
without question, one of the best economic performances in our history
is a harbinger of a new economy or just a hyped-up version of the old,
will be answered only with the inexorable passage of time. And I
suspect our grandchildren, and theirs, will be periodically debating
whether they are in a new economy. |
