timothy f geithner : economic policy and the sustainability of us productivity growth remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the puerto rico bankers association luncheon, new york, 12 april 2005. * * * thank you for the opportunity to speak to you today and to support the important work of improving economic and financial education. i am going to focus my remarks on two important dimensions of our economic future - the acceleration in the rate of growth in productivity of the past decade and the more recent decline in our net national savings rate. the former offers considerable promise for future growth in the living standards in the united states. the latter presents some risk and challenges to that brighter prospect. both are areas where education, education in general and financial education in particular, can make an important contribution. the united states has been through an exceptionally good decade of economic performance. while growth in most mature economies slowed, we averaged a respectable 3. 5 percent growth in real gdp a year. inflation moderated to a rate of around 2 percent, and long term inflation expectations stayed stable for some time at quite moderate levels. the volatility of u. s. output, which declined significantly in the mid - 1980s, remained low, meaning growth was smoother, with recessions less frequent, shorter and shallower. perhaps the most important dimension of this experience was the doubling of productivity growth, from about 1. 5 percent a year in the two decades up to 1995 to more than 3 percent a year in the decade since. productivity growth is important because it is the primary driver of long term gains in living standards. and this acceleration in the united states seems more remarkable in part because most other large mature economies experienced a slowdown in productivity growth during the same period. this doubling of productivity growth in the united states can be broken down into several important elements. one was rapid improvement in the productivity of the relatively small part of the economy that produces information technology, including computers and computer software and telecommunications equipment. also important was very substantial growth in investment in information technology by the rest of the economy. and alongside these changes, u. s. firms became significantly more efficient in their use of equipment and labor. the sources of these improvements in productivity are varied and complex. economists do not fully understand what drove them, but they seem to agree on several contributing factors. we experienced a very large and positive technology shock, a dramatic increase in innovation, which improved

of a benign adjustment process, not least because at some point the interests of those on one side of the balance may change. i think this mix of challenges in our fiscal and external positions deserve concern and attention. they may end up being diffused gradually and benignly, but they necessarily bring with them a greater risk of higher risk premia, a more adverse investment environment and poorer growth outcomes. under some circumstances, this could undermine an important foundation of the environment for innovation that has delivered our productivity acceleration. what can we do to mitigate the risks in this constellation of forces? we can work to keep monetary policy credible, to preserve confidence we will act to keep inflation and inflation expectations stable at moderate levels. we can act to raise public sector savings, begin to bring our entitlement commitments and our resources closer into balance and build a greater financial cushion into our financial future against the risk of a less benign world. we can make sure we keep our markets open, and to support rather than resist the integration of china and india into the world economy. we can work to make sure that our financial system remains strong, with a substantial capital and liquidity cushion, a more resilient infrastructure and continued rapid innovation in financial intermediation. and we can work to improve educational opportunities in this country, to improve educational achievement and to improve public awareness of economics and finance. nurturing a sophisticated, technologically advanced workforce that is capable of contributing to the competitiveness of our society has to be one of our highest goals and most rewarding objectives. these are achievable ambitions. they would not guarantee that the future will look as good as the recent past, but they will improve the probability it will. the hardest of these are those where the politics are hard. and this is why it ’ s so important that we work to strengthen the constituency in the united states for good fiscal choices and good trade policy choices. education is an important part of this. and the work of the economic and financial education alliance of puerto rico can play a valuable part in creating a stronger foundation for future economic growth in puerto rico and in the country. thank you.