Ms Rivlin's view on sustaining economic growth and development in the United States  (Central Bank Articles and Speeches, 13 May 1999)
Central bank: fed | Type: speech | Date: 1999-05-13

## Ms Rivlin's view on sustaining economic growth and development in the United StatesSpeech by Alice M Rivlin, Vice Chair of the Board of the US Federal Reserve Syste Minneapolis, Minnesota, on 13 May 1999.Everyone seems to be talking about the spectacular performance of the U.S. economy days and wondering how long it can stay so good.

Will our economy go on performin splendidly into the next millennium or will the good times come to an end sometime soIndeed, the economic journalists' most frequent question these days is some variant long will it last?' 'Is the good news temporary or permanent?' I get this question a as do all members of the Federal Open Market Committee.

Hope springs eternal that w be privy to some secret economic clues available only to readers of entrails inside Unfortunately, of course, we process the same economic information available to ev else and face the same uncertainties.I don't know the answer to how long the good times will roll, and I don't kn responsible person who claims to know.

Indeed, I think it's a silly question.

So formulate a more important query, one that I think has more operational significa operational question is this: Given what we know-or think we know-about why the econ might be performing so extraordinarily effectively, what can we all do that will lik keep the good news flowing?

Answering this question will require: (1) sorting out t factors that appear to be contributing to the good performance into those we may b control or influence and those we can't; (2) doing everything we can to influ controllable factors so that we maximize the chances that the good performance continBy ' we' I don't just mean the Federal Reserve, although the Fed has a role to pla everyone in this room and people like you in all parts of the country.

We all make policy decisions at the household, business, community or governmental level, dire through our actions, and influence as consumers, investors, producers and voters.

S the high performance of the economy depends much more on what people in Minnesota d along with those in Maine and Louisiana and Oregon-than it does on monetary policy.What do we mean when we say the economy is performing well?

The statistics usually are the growth rate of gross national product, the unemployment rate and the rate o (for which there exist several different measures).

All of these statistics have bee roses for some time-simultaneously.

The GDP (in real terms, after inflation) h growing continuously for eight years and this long expansion, instead of petering accelerated in the last couple of years.

Real GDP grew about 4.5 percent in the firs this year and has grown about 4 percent a year for the last two years, despite t impact of the world financial crisis that began in Asia in early 1997.

Millions o have been created in the last few years; and unemployment, now at 4.3 percent, has b below 5 percent for over two years.

Not long ago, most economists thought growth thi and unemployment this low would inevitably produce inflation.

However, inflatio remained remarkably subdued, and, indeed has continued to decline over the last years.All of this means rising standards of living and greater economic security for most A Moreover, the strength of the economy has been spread broadly across all regionscountry.

A few areas with deep-seated economic problems, such as Northern Minnesota, sti lag, and parts of agriculture are suffering severely from the downward pressure of weak w demand on commodity prices, but growth in other sectors has taken up much of the slack Low inflation has reduced expectations of inflation, lowered long-term interest ra encouraged investment and housing and made planning ahead easier for everyone.Moreover, in the last couple of years, one of the discouraging aspects of this long exp finally seems to be reversing.

Through 1996, the benefits of rising prosperity were flow those with skill and education, people already doing relatively well.

Those at the low the skill and income ladder were falling further behind.

Recently, however, very tight markets have meant that even unskilled and less educated workers have enjoyed higher re earnings, poverty rates have begun to decline, and even the bottom 20 percent of househo have had a significant increase in their standard of living for a change.The high performance of the economy does not just mean more material possessions for most people, although it certainly does mean that.

It also means more enjoyment of and support the creative side of life-art, music, theatre, dance-and more public resources for impr streets, parks and schools, cleaning up pollution and preserving natural beauty.

The C Chicago, for example, is putting $2 billion into renovating its crumbling schools.Perhaps most important, strong growth and tight labor markets have opened opportunities workers at all levels-opportunities to move up, to get better jobs, to get off welfare, t to school with less fear of being unable to find jobs on completion.And it isn't just the United States that benefits from our prosperity-indeed, the v American economy is contributing mightily to the revival of growth in what would otherwi be a weak global economy.

Asia is only beginning the process of recovery from the dee recession that followed the financial crisis of 1997, and the hoped-for engine of recover-the huge Japanese economy-remains stalled.

Much of Latin America is in recession as a result of the Brazilian financial crisis and low commodity prices; Russia is struggl exporting its troubles to its trading partners; even Western Europe, affected by all above, is growing far more slowly than we are.

When Americans are prosperous, we spend an increasing portion of our rising incomes on imports.

Without the income generated exporting to us, many other countries would be in much worse shape than they actually are.In the long run, the rapid accumulation of obligations to foreigners, which pays for our of imports over exports, cannot be sustained.

In the meantime, however, we are financ some of our boom-times by borrowing the savings of foreigners, and they are benefiting exporting to us.

A slowdown in the U.S. economy would reduce our trade and current accoun deficits, but make it harder for the rest of the world to recover.

The bottom line is, b people, not just us, benefit from the high performance of the U.S. economy, so what can do to keep it functioning so well?The key conundrum is how we have managed to have such strong growth and associated tight labor markets, with subdued, even declining, inflation.

Some of the credit clearly go global forces that Americans don't control and which can't be counted on to continue push in the same direction forever.

The world financial crisis has weakened demand f internationally traded goods, especially commodities, including agricultural products, m and oil (although the oil price has come back up recently as producing countries cut supIn the face of weak demand, world prices of just about everything tradable are competition is fierce.

At the same time, the U.S. dollar has been strong, especiall to currencies of emerging market countries.

In part, the strength of the dollar ref that our economy has been performing so well and has offered international in profitable opportunities along with a safe haven from political and financial tu strong dollar has made imports cheap and has helped keep inflation low-to the benefi consumers and the distress of some U.S. producers.We can't count on low world commodity prices or a strong dollar continuing far i future, and both have their downsides for us and for others.

Some features of t economy, however, seem likely to endure.

The events of the last two years come on t huge expansion of global trade, competition and productive capacity-all of which hav American businesses less control over prices in the face of rising costs and American consumers through low prices.

Moreover, although we often think of 'gl competition' as being associated with internationally traded goods, many of the sam that have made the global marketplace increasingly competitive-especially faster, transportation and the revolutionary changes in communications and informa management-also operate to make domestic markets broader and more competitive. buying, selling, and comparing prices at a distance has become easier, producers of of goods and services have found themselves in a more competitive environment with independent pricing power than they used to have.The increasing competitiveness of the U.S. economy-and that of the rest of the worl likely to continue to reduce inflationary tendencies in the future.

Further deregul foster this competitiveness, as would further lowering of trade barriers.

Co reregulation or a relapse into protectionism would tend to negate the procompetitive inflationary trend.Fierce national and international competition has its cost in uncertainty, disrupt and settled patterns.

It demands flexibility and adaptability of businesses, w communities.

It requires a willingness of workers to learn new skills, to take chanc to new jobs and new places.

It requires nimbleness, flexibility and risk taking on business.

It requires communities to be adaptable, to make efforts (not all of whi successful) to diversify their economic bases and to attract new jobs and reside existing ones move on.

It requires government to be imaginative and creative (words always associate with government) in designing transition assistance for worke communities that will provide incentives to change and adapt, rather than incentives stuck in the status quo.Strong growth and tight labor markets reduce the likely cost of taking chances for businesses and communities.

But change is hard and not everyone is willing or able t price.

One of the determinants of how long the U.S. economy can continue to perfor high level with low inflation is how well we all learn to adapt to the changes that increased competitiveness of the national and international marketplace that is help our economy growing and inflation low.An important part of the answer to why the U.S. economy has been able to grow so st without inflation accelerating has been the recent resurgence in productivity Productivity grew strongly from the end of World War II into the early 1970s, accounthe rapid increase in American's real incomes over that period.

Then, around the time o first oil shock in the early 1970s, productivity growth slowed drastically both here and industrial countries, remaining weak in the U.S. through the 1980s and first half of the Average growth in output per hour in non-farm business was only a little over 1 perc between 1973 and 1995.

In the last three years, however, productivity growth has accelera reaching an astonishing 4 percent growth in the last two quarters.

The growth in product has enabled business to pay higher wages without raising prices significantly or ero profits severely.Is the increase in productivity a temporary cyclical response to strong growth or do presage an upward shift in the productivity growth trend that will make it easier going f to continue strong growth, rising real incomes and low inflation?

That's another one of silly questions to which no one can honestly claim to know the answer.Hypotheses abound about why productivity growth might have accelerated in the mid 1990s.

Technology clearly has something to do with it.

Although the telecommunications and information management revolution did not start in the 1990s, it may have been just at right point by then to offer firms that are facing strong demand and tight labor markets to increase their efficiency.In the past, when unemployment remained low for an extended period, economists expected productivity to suffer because firms were forced to hire less skilled workers with experience-workers whose productivity was likely to be low.

However, recent experience suggests-but certainly does not yet prove-that two factors may have combined to change t expected impact of tight labor markets on productivity.

One factor is the availability technology, especially computers and telecommunications technology.

The other factor is revolution in management attitudes and practices that has occurred since the 1980s.

A wh generation of managers has been trained to think continuously about productivity and qua management.

Buzzwords like reengineering and restructuring have not only gotten into t vocabulary of managers, but they have also infiltrated their thought processes and aff their behavior.

The response of many firms to shortages of skilled workers and to for competition has apparently been to reorganize what they were doing and how they were doin it, substituting efficient new equipment for employees, training workers to use new equip and techniques, and outsourcing to reduce costs.

All of these have combined to incre productivity.If this hypothesis is right-or even partly right-then there are actions that many differe of economic actors can take to help keep a good thing going.- Workers and potential workers can acquire more skills and more education at all leve They can take the risk of moving to new and better jobs or starting new businesses.- Companies can keep their focus on cutting costs and increasing productivity; they foster research and innovation; they can offer training and employee incentives to ac more education and skills.- Colleges and universities, community colleges and technical institutes can offer cours times and in places convenient for workers, for 'non-traditional' students as wel traditional ones.

They can put less emphasis on standard degrees and more on cours designed to help students acquire not just job skills, but the broader education tha- them to become more adaptable and to acquire the intellectual self-confidence th them deal with change.- Communities, large and small, can make efforts to diversity their economic bases, and modernize their school systems, and welcome new kinds of workers and companies- Governments can support the basic research from which applications and innova flow, and offer incentives to education and training and financial aid for student- Financial institutions can offer attractive convenient ways for individuals to invest.

They can take chances on new ideas, new clienteles, and innovative comp subject to sound risk management, of course.- All levels of government can manage their finances prudently, provide public s efficiently, build up surpluses and rainy day funds and pay down debt.

This behavior will result in government adding to the national saving rate and enhan chances of future growth, rather than subtracting from national saving by runnin deficits.

It is especially important to use the current and projected federal budg reduce the federal debt.

The President's budget and social security proposal wo this effect.- Finally, the Federal Reserve can continue trying, as we have been doing, to bal risk of allowing the economy to grow too fast for its own long-run good and b growth-threatening acceleration of inflation against the other risk that the ec slowdown too much in the near term and lose the benefits of healthy labor marke sustainable growth.

## In short- No one knows how long the good news will last.- But

there is a whole long list of actions that can be taken by workers, bu communities, governments, educational institutions and others that can, if taken increase the chances that this remarkable combination growth and low inflatio continue for a while.

If we all do them together, we and our children will hav chance of living in a world where change is normal but most of the changes are better.