alan greenspan : globalization remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, at the council on foreign relations, new york, new york, 10 march 2005. * * * the u. s. economy appears to have been pressing a number of historic limits in recent years without experiencing the types of financial disruption that almost surely would have arisen in decades past. this observation raises some key questions about the longer - term stability of the u. s. and global economies that bear significantly on future economic developments. among the limits that we have been pressing against are those in our external and budget balances. in the united states, we have been incurring ever - larger trade deficits, with the broader current account measure moving into the neighborhood of 6 percent of our gross domestic product. yet the dollar's real exchange value, despite its recent decline, remains above its 1995 low. meanwhile, we have moved from a budget surplus in 2000 to a deficit that is projected by the congressional budget office to be around 3 - 1 / 4 percent of gdp this year. in addition, we have enacted commitments to our senior citizens that, given the impending retirement of our huge baby - boom generation, will create significant fiscal challenges in the years ahead. yet the yields on treasury notes maturing a decade from now remain at low levels. nor are households experiencing inordinate financial pressures as a consequence of record - high levels of household debt relative to income. * * * has something fundamental happened to the u. s. economy that enables us to disregard all the timetested criteria for assessing when economic imbalances become worrisome? regrettably, the answer is no ; the free lunch has still to be invented. we do, however, seem to be undergoing what is likely, in the end, to be a one - time shift in the degree of globalization and innovation that has temporarily altered the specific calibrations of those criteria. globalization has altered the economic frameworks of both advanced and developing nations in ways that are difficult to fully comprehend. nonetheless, the largely unregulated global markets, with some notable exceptions, appear to move smoothly from one state of equilibrium to another. adam smith's " invisible hand " remains at work on a global scale. because of deregulation, increased innovation, and lower barriers to trade and investment, crossborder trade in recent decades has been expanding at a far faster pace than gdp. as

ideas to a level far beyond our capabilities a decade or two ago. the advent of real - time information systems has enabled managers to organize a workforce without the redundancy required in earlier decades to ensure against the type of human error that technology has now made far less prevalent. real - time information, by eliminating much human intervention, has markedly reduced scrappage rates on production lines, lead times on purchases, and errors in many forms of recordkeeping. much data transfer is now electronic and far more accurate than possible in earlier times. the long - term path of technology and growth is difficult to discern. indeed, innovation, by definition, is not forecastable. in the united states, we have always employed technologies at, or close to, the cutting edge, and we have created many innovative technologies ourselves. the opportunities of many developing economies to borrow innovation is not readily available to us. thus, even though the longer - term prospects for innovation and respectable u. s. productivity growth are encouraging, our productivity growth has rarely exceeded an average rate of 3 percent annually for any protracted period. although increased flexibility apparently promotes resolution of current account imbalances without significant disruption, it may also allow larger deficits to emerge before markets are required to address them. moreover, the apparent ability of the u. s. economy to withstand the stock market plunge of 2000, the terrorist attacks of september 11, 2001, corporate governance scandals, and wars in afghanistan and iraq indicates a greater degree of economic flexibility than was apparent in the 1970s and earlier. caroline freund ( 2000 ), " current account adjustment in industrialized countries, " board of governors of the federal reserve system, international finance discussion paper 692 ( december ) ; hilary croke, steven b. kamin, and sylvain leduc ( 2005 ), " financial market developments and economic activity during current account adjustments in industrial economies, " board of governors of the federal reserve system, international finance discussion paper 827 ( february ). * * * we have, i believe, a reasonably good understanding of why americans have been able to reach farther into global markets, incur significant increases in debt, and yet not suffer the disruptions so often observed as a consequence. however, a widely held alternative view of the past decade cannot readily be dismissed. that view holds that the postwar paradigm is still largely in place, and key financial ratios, rather than suggesting an evolving economic structure, reflect extreme values that have materialized within an unchanged structure and