– despite the fall in output being twice as big, and despite there being more than twice as many companies in existence now. and even though there are over 850, 000 extra people out of work following the recession, and the unemployment rate has reached 8 %, ( chart 6 ) a 6 % fall in output could have been expected to generate much more unemployment than it has. 2 unemployment peaked at nearly 12 % in the eighties and over 10 % in the early nineties – after smaller falls in output. labour force data were published after the date of this talk : unemployment has dropped to 7. 9 % in the three months to april. throughout the recession we have heard many reports from firms about how they and their workforces have responded to recessionary pressures. those reports are from our agents or mpc members talking directly to business contacts across the regions and in all sectors – a truly invaluable source of information for the committee. it has been clear that there has been an unusual response from companies and their employees. many firms have sought to retain staff wherever possible, rather than shed them as in previous downturns – hours have been shortened and wages frozen or even cut where possible, rather than making people redundant. large firms with smaller suppliers have tried to work with suppliers to keep their supply chains intact, which has helped smaller firms to survive. many employees – at least in the private sector – have been willing to forgo income in order to retain their jobs. tax officials have worked very hard with firms to give them the time for tax bills to be paid. and even the banks, despite the fierce criticism from some firms who did not receive the financial support they expected, do not seem to have been as quick to pull the plug on their borrowers as they were during previous downturns. overall, the fall in output does not appear to have done as much damage to employment and firm survival as one might have expected. at the same time, the implication of business surveys is that the degree of spare capacity in firms is rather less than implied by the fall in output. so estimates of the gap between overall demand and the economy ’ s capacity to produce goods and services – an indicator of inflationary pressure known as the “ output gap ” – are extremely uncertain at the current juncture. the “ output gap ” appears to be much smaller than the fall in demand alone would have suggested, but there is little evidence of widespread destruction of supply capacity. whatever the balance between demand and supply

do anything about the current account deficit or about the lack of savings from government policy or private choices. our manipulation of the overnight interest rate helps to keep the overall economy in balance - promoting price stability and production at the economy ’ s potential. but on the federal open market committee jack and i can do nothing to promote savings other than to provide a stable backdrop for private decisions. promoting savings is a job for fiscal and tax policy. if our trade and current account deficits move toward balance, foreign economies will face the questions of how to replace the demand that will no longer be coming from the united states and to reallocate production to a new mix of spending. the u. s. current account will not correct in isolation. the united states has been, in effect, exporting its demand overseas, supporting economic activity in foreign economies by importing more goods and services than we export. if our imports fall and exports rise, just the opposite will occur in the rest of the world. as our domestic demand is restrained relative to production, demand elsewhere will have to increase to foster global high employment. how that is to be achieved is an open question : structural reforms that improve the flexibility of the labor force and production and that foster growth abroad are a desirable way to contribute to better global balance, but macroeconomic policy adjustments to promote more domestic demand may also be required. it is simply not possible for all countries to enjoy stimulus from net exports ; some countries will need to be net importers, especially if the united states no longer fills that role. and so my two issues become related. the development strategies of countries such as china and other asian nations, to be successful, must be compatible with the pattern of adjustment in global demand that is required by the consumption, saving, and investment decisions made by market participants everywhere. conclusion the global economy seems to be facing major adjustments in several dimensions simultaneously. successful adaptation to changing circumstances will require flexibility on several fronts. no one can anticipate how events will unfold - the evolving geography and technology of the production of goods and services, the shifting balances between spending and producing as current accounts change. my fear is that poorly formed diagnoses and incorrect policy prescriptions will have unintended adverse consequences for our economy. any elements of rigidity - in exchange rates, in labor and product markets, in quotas and tariffs on international trade - limit the channels through which the adjustment process can work. rigidity concentrates stresses, increases the risk of