roger w ferguson, jr : productivity - past, present, and future remarks by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, at the new york association for business economics meeting, new york, 7 july 2004. * * * thank you for the invitation to speak here today. in assessing the economic outlook, economists cannot avoid confronting the question of how fast the economy can expand without creating upward pressure on inflation. a fundamental determinant of the economy ’ s potential growth is the sustainable rate of productivity expansion. critical though this issue is, it does not by itself capture the importance of productivity. besides influencing the near - term course of important economic variables, such as gross domestic product growth, inflation, and profits, productivity largely determines our society ’ s long - term economic welfare. productivity growth forms the foundation for improvements in living standards. and our ability to deal with budgetary challenges - such as funding the large future obligations of our social security and medicare systems and, more generally, managing the nation ’ s debt - depends critically on the future direction of productivity. thus, knowing where productivity growth is headed is, in many respects, equivalent to foreseeing our economic destinies. in thinking about productivity in the future, it is useful to first consider how it has behaved in the distant past and more recently. the past offers lessons about the kinds of economic and political environments that have proven most effective in fostering high rates of productivity growth. and a better understanding of the forces shaping recent developments in productivity - in particular, the causes of the pickup in labor productivity growth that began in the mid - 1990s and the sources of the additional post - 2000 surge - can help us put sensible bounds on possible future movements in productivity. in my discussion today, i will not attempt to predict these future movements, but with the knowledge gained from studying the past and the present, i will lay out some of the conditions - both favorable and unfavorable - that are likely to influence them. as usual, my remarks represent my own views, which are not necessarily shared by other members of the board of governors or of the federal open market committee. the past1 over the past century and a half, three episodes stand out as especially relevant for assessing the sustainability of the current productivity boom : the late 1800s from roughly the end of the civil war to around 1890 ; the decade or so between the end of world war i and the onset of the great

- art capital equipment and the technology embodied in the existing stock of equipment remains across a broad set of industries. that gap implies continued incentives for capital investment. 3 although the exhaustion of technological possibilities seems unlikely to slow trend productivity growth, adverse changes in the economic, legal, and financial environment could threaten the longevity of the current productivity boom. for example, economists have long noted that free trade - and the specialization and economies of scale that it affords - fosters productivity increases. that our most recent productivity boom occurred against a backdrop of freer trade and increased globalization is likely no coincidence. however, the momentum for the liberalization of global trade now appears to be facing strong resistance. a halt in the movement toward freer trade or outright backsliding, such as the erection of new barriers to the trade of goods or services, would endanger the sustainability of the current productivity boom. some observers believe that security - enhancing limitations on the international flow of capital, labor, and goods in response to an increased terrorist threat could have similar effects. in addition, a failure to continue to vigorously address the corporate governance issues of the past few years could also threaten the current boom. as i noted earlier, the efficient channeling of capital to innovators has been a critical component of past productivity booms. fraud or dishonesty in corporate accounts increases investors ’ risk, raising the cost of capital and reducing incentives for investment. large government borrowing to fund current consumption could also raise the cost of capital and crowd out the investment on which the current boom depends. the magnitude of future government obligations to fund social security payments for the retiring baby - boom generation and the growing costs of providing medical care to the elderly add to the urgency to put government debt on a sustainable long - term path. doing so sooner rather than later would make the necessary adjustments easier and diminish the likelihood of significant future economic disruptions. some observers have also stressed the importance of large economic shocks, such as the oil price shock of the early 1970s, in bringing periods of rapid productivity growth to an end. it seems possible that the recent run - ups in energy prices, and the fact that markets expect much of them to be permanent, could reduce productivity growth by rendering energy - intensive technologies and capital obsolete. without dismissing such concerns, one needs to keep in mind that the recent shock to date has been significantly smaller than the oil shocks of the 1970s and that the economy today is far less energy intensive than it was then. additionally, one