much larger as a share of gdp than in the other major economies. these features of the u. s. financial system seem to have made us better at allocating u. s. savings, a more attractive place for the savings of other countries, and probably less vulnerable to shocks. they have also made macroeconomic policy more effective in responding to shocks. and a final factor, by most accounts, involved good policy choices. this has been an exceptionally good period for u. s. monetary policy, with the formidable combination of volcker and greenspan achieving a dramatic and sustained moderation in inflation. better monetary policy and inflation outcomes played a central role in laying the foundation for the increased investment that made the productivity surge possible and in bringing about the reduction in the depth and length of recessions that are a feature of the more even u. s. economic performance. better fiscal policy in the 1990s helped too, by reducing long - term interest rates and improving confidence in future u. s. economic performance. more of the savings the united states borrowed from the world went to finance private investment rather than government consumption. this list of factors - technology, openness and flexibility, the more innovative u. s. financial system, and good monetary and fiscal policy - is not a comprehensive list. it ’ s hard to know how important each element was to the overall record and whether we would have seen as much improvement without all four of these elements. we were fortunate in the sense that the size of the shocks we experienced were smaller than in the past. the strategic environment of the 1990s seemed at the time more peaceful and secure, and so our security needs claimed a smaller share of resources than is true now and may be true for some time. but it wasn ’ t just luck. much of what was exceptional in the u. s. was the result of conscious choices by policy makers. this is encouraging in the sense that it suggests that with good policy choices we have the capacity to sustain quite strong rates of income growth in the future. we face a number of major challenges to sustaining this record. i want to focus on just a few of these those where the risks are highest and the return to sensible policies is likely to be highest. the first of these challenges is the combination of our fiscal and external imbalances. both are unsustainable. each magnifies the risk in the other. fiscal deficits of the magnitude projected are large enough to damage future growth prospects of the u. s

in productivity was not completely unique to the united states, but it has not yet been matched by the other major economies, though that may be in prospect. what accounted for these achievements? this is important to try to understand, because it is important to assessing whether these trends are enduring or temporary, and what types of policies are likely to sustain them. there is no definitive consensus on this question, and economists have an interesting debate underway about how much of this was luck and how much was skill. most observers seem to attribute the record to the following mix of factors. the first, of course, is technology. we experienced during this period the benefits of a powerful technology shock that made possible a revolution in the productivity of investment, in transportation and communication costs, in business methods, in computing power, etc. given the speed with which technological advances are diffused, one might expect the benefits to have been more broadly spread among other economies, but that has not yet happened on a scale that is sufficient to narrow the growth gap. the extent of technological progress and its impact on economic growth were magnified by the openness and flexibility of the u. s. economy. the united states became significantly more open over the past decade, with imports and exports as a share of gdp rising by about 50 percent. this happened in part because of the impact of trade agreements like nafta and the uruguay round that lowered u. s. trade barriers, and in part because we stayed out of the way of the impact of technology and globalization and did not, on the whole, try to insulate the u. s. economy from the pressures of competition. we are by choice significantly more flexible than the other major economies. the major deregulations ( telecom, transportation, finance, etc. ) of the last two decades made us more so. we have relatively limited regulation of business activity, low barriers to entry by new firms, lower hiring and firing costs, and more worker mobility and turnover. a third key factor involves the u. s. financial system. our system has proven to be exceptionally good at matching capital to ideas, at rewarding innovation and penalizing failure, and relatively more resilient to shocks. in comparison to the other major economies, banks are a smaller share of our financial system and the capital markets play a greater role. securitization and other avenues for risk transfer advanced much more rapidly here. the venture capital, private equity and hedge fund parts of our financial system are