made possible the creation, valuation, and exchange of these complex financial products on a global basis. at the end of the day, the benefits of new technologies can be realized only if they are embodied in capital investment, defined to include any outlay that increases the value of the firm. for these investments to be made, the prospective rate of return must exceed the cost of capital. technological synergies have enlarged the set of productive capital investments, while lofty equity values and declining prices of high - tech equipment have reduced the cost of capital. the result has been a veritable explosion of spending on high - tech equipment and software, which has raised the growth of the capital stock dramatically over the past five years. the fact that the capital spending boom is still going strong indicates that businesses continue to find a wide array of potential high - rate - of - return, productivity - enhancing investments. and i see nothing to suggest that these opportunities will peter out any time soon. indeed, many argue that the pace of innovation will continue to quicken in the next few years, as companies exploit the still largely untapped potential for e - commerce, especially in the businessto - business arena, where most observers expect the fastest growth. an electronic market that would automatically solicit bids from suppliers has the potential for substantially reducing search and transaction costs for individual firms and for the economy as a whole. this reduction would mean less unproductive search and fewer workhours more generally embodied in each unit of output, enhancing output per hour. already, major efforts have been announced in the auto industry to move purchasing operations to the internet. similar developments are planned or in operation in many other industries as well. it appears to be only a matter of time before the internet becomes the prime venue for the trillions of dollars of business - to - business commerce conducted every year. there can be little doubt that, on balance, the evolving surge in innovation is an unmitigated good for the large majority of the american people. yet, implicit in the very forces of change that are bringing us a panoply of goods and services considered unimaginable only a generation ago are potential financial imbalances and worker insecurities that need to be addressed if the full potential of our technological largesse is to be achieved. as i testified before the congress last month, accelerating productivity entails a matching acceleration in the potential output of goods and services and a corresponding rise in real incomes available to purchase the

new output. the pickup in productivity however tends to create even greater increases in aggregate demand than in potential aggregate supply. this occurs principally because a rise in structural productivity growth, not surprisingly, fosters higher expectations for long - term corporate earnings. these higher expectations, in turn, not only spur business investment but also increase stock prices and the market value of assets held by households, creating additional purchasing power for which no additional goods or services have yet been produced. historical evidence suggests that perhaps three to four cents out of every additional dollar of stock market wealth eventually is reflected in increased consumer purchases. the sharp rise in the amount of consumer outlays relative to disposable incomes in recent years, and the corresponding fall in the saving rate, is a reflection of this so - called wealth effect on household purchases. moreover, higher stock prices, by lowering the cost of equity capital, have helped to support the boom in capital spending. outlays prompted by capital gains in equities and homes in excess of increases in income, as best we can judge, have added about 1 percentage point to annual growth of gross domestic purchases, on average, over the past half - decade. the additional growth in spending of recent years that has accompanied these wealth gains, as well as other supporting influences on the economy, appears to have been met in equal measure by increased net imports and by goods and services produced by the net increase in newly hired workers over and above the normal growth of the workforce, including a substantial net inflow of workers from abroad. but these safety valves that have been supplying goods and services to meet the recent increments to purchasing power largely generated by capital gains cannot be expected to absorb indefinitely an excess of demand over supply. growing net imports and a widening current account deficit require ever - larger portfolio and direct foreign investments in the united states, an outcome that cannot continue without limit. imbalances in the labor markets perhaps may have even more serious implications for potential inflation pressures. while the pool of officially unemployed and those otherwise willing to work may continue to shrink, as it has persistently over the past seven years, there is an effective limit to new hiring, unless immigration is uncapped. at some point in the continuous reduction in the number of available workers willing to take jobs, short of the repeal of the law of supply and demand, wage increases must rise above even impressive gains in productivity. this would intensify inflationary pressures or squeeze profit margins, with either outcome capable of