mr. greenspan gives some personal perspectives on the current economic situation in the united states testimony of the chairman of the board of governors of the us federal reserve system, mr. alan greenspan, before the committee on the budget of the us senate on 21 / 1 / 97. mr. chairman and members of the committee, i am pleased to appear here today. in just a few weeks the federal reserve board will submit its semiannual report on monetary policy to the congress. that report and my accompanying testimony will cover in detail our assessment of the outlook for the u. s. economy and the challenges facing monetary policy. this morning, i would like to offer some personal perspectives on the current economic situation. i think it is fair to say that the overall performance of the u. s. economy has continued to surpass most forecasters ’ expectations. the current cyclical upswing is now approaching six years in duration, and the economy has retained considerable vigor, with few signs of the imbalances and inflationary tensions that have disrupted past expansions. although the data for the fourth quarter are still incomplete, it is apparent that real gross domestic product posted an increase in the neighborhood of 3 percent over the four quarters of 1996. this increase may seem quite moderate compared with the gains registered in some earlier years of the postwar period ; however, at a time when the working - age population is expanding relatively slowly and unemployment is already low, this economic growth is appreciable indeed. it was enough to generate more than 2½ million new payroll jobs last year and to cause the unemployment rate to edge down to 5¼ percent - - a figure roughly matching the low of the last cyclical upswing, in the late 1980s. but, in contrast to that earlier period, we have not experienced a broad increase in inflation ; in fact, by some important measures of price trends, inflation actually slowed a bit in 1996. the balance and solidity of the expansion last year can be seen in the composition of the growth. notably, consumers appear to have been rather conservative in their spending. in some instances, they may have been constrained by the debt - service burdens accumulated over the previous few years ; but in the aggregate, households experienced an enormous further accretion of net worth as the stock market continued to climb at a breathtaking rate. judging from historical patterns, such an increase in wealth might have inspired households to spend an enlarged share of their current income ; but, if we take the

is the heightened pressure on firms and their workers in industries that compete internationally. domestic deregulation has had similar effects on the intensity of competitive forces in some industries. in addition, the continued decline in the share of the private workforce in labor unions has likely made wages more responsive to market forces - - indeed, the converse is also true in that the new competitive realities have in many instances undermined union strength. in any event, although i do not doubt that all these explanations are relevant, i would be surprised if any were dominant. another potential explanation is that persistently low price inflation is constraining wage increases. historical evidence clearly indicates that price inflation is a factor in wage change. but, if the causation is running mainly from product markets, where prices are set, to labor markets, where wages are set, then we would expect to see some squeeze on profit margins. clearly, this is not the case at present. rather, owing in part to the subdued behavior of wages, profits and rates of return on capital have risen to high levels. the high rates of return, in turn, seem to be inducing competitive pressures that limit the ability of firms to raise prices relative to their underlying cost structures because they fear that competitors anxious to capture a greater share of the market will not follow suit. thus, the evidence seems more consistent with the view that wage restraint is damping price increases than the other way around. if the job insecurity paradigm that i have outlined is the key, then we must recognize that, as i indicated in last february ’ s humphrey - hawkins testimony, “ suppressed wage cost growth as a consequence of job insecurity can be carried only so far. at some point in the future, the trade - off of subdued wage growth for job security has to come to an end. ” in short, this implies that even if the level of real wages remains permanently lower as a result of the experience of the past few years, the relatively modest wage gains we ’ ve seen are a transitional rather than a lasting phenomenon. the unknown is how long the transition will last. indeed, the recent pickup in some measures of wages suggests that the transition may already be running its course. if so, the important question from a monetary policy point of view is whether prospective labor market conditions will be consistent with the maintenance of satisfactory price performance. i would like to conclude with a brief discussion of some issues of measurement and economic data that may be useful as you begin your delibe