mr. greenspan comments on the current direction of the us economy and the fiscal situation in the united states testimony by the chairman of the board of the us federal reserve system, mr. alan greenspan, before the committee on the budget of the us senate on 29 / 1 / 98. mr. chairman and members of the committee, in just a few weeks, the federal reserve board will submit its semiannual report on monetary policy to the congress. that report, and my accompanying testimony, will give a detailed assessment of the outlook for the us. economy and the implications for monetary policy. this morning, i would like to direct most of my comments to the fiscal situation. but let me begin by offering a few observations about the current direction of the economy. first, it is clear that the u. s. economy has been exceptionally healthy, with robust gains in output, employment, and income. at the same time, inflation has remained low - indeed, declining by most measures - - over the past year. second, to date, we have as yet experienced only the peripheral winds of the asian crisis. but before spring is over, the abrupt current - account adjustments that financial difficulties are forcing upon several of our asian trading partners will be showing through here in reductions in demand for our exports and intensified competition from imports. all of this suggests that the growth of economic activity in this country will moderate from the recent brisk pace. third, as i ’ ve noted previously, such a moderation would appear helpful at this juncture. the growth of output has caused employment to rise much faster than the working - age population and there are limits to how far this can go. pressures in the labor market likely contributed to the acceleration of wages in recent months. since price inflation has been minimal and domestic profit margins firm, productivity appears to have accelerated sufficiently last year to damp increases in unit labor costs. how long that pattern can continue is still an unresolved issue. the likelihood that we shall be seeing some lower prices on imported goods as a result of the difficulties in asia may afford some breathing room from inflation pressures. but they will not permanently suppress the risks inherent in tightened labor markets. conversely, a continuation of the asian crisis should give us pause in assuming that our economy will remain robust indefinitely. as a consequence, we must be vigilant to the re - emergence of destabilizing influences - - both higher inflation, and shortfalls in demand and decreases in some prices that would press the

during this period policymakers became more and more inclined to blame inflation on so - called cost - push shocks rather than on monetary forces. cost - push shocks, in the paradigm of the time, included diverse factors such as union wage pressures, price increases by oligopolistic firms, and increases in the prices of commodities such as oil and beef brought about by adverse changes in supply conditions. for the purpose of understanding the upward trend in inflation, however, the most salient attribute of cost - push shocks was that they were putatively out of the control of the monetary policymakers. the combination of output optimism and inflation pessimism during the latter part of the 1960s and the 1970s was a recipe for high volatility in output and inflation - that is, a set of outcomes well away from the efficient frontier represented by the economy ’ s taylor curve. notably, the belief in a long - run tradeoff between output and inflation, together with an unrealistically low assessment of the sustainable rate of unemployment, resulted in high inflation but did not deliver the expected payoff in terms of higher output and employment. moreover, the fed ’ s periodic attempts to rein in surging inflation led to a pattern of “ go - stop ” policies, in which swings in policy from ease to tightness contributed to a highly volatile real economy as well as a highly variable inflation rate. wage - price controls, invoked in the belief that monetary policy was ineffective against cost - push forces, also ultimately proved destabilizing. monetary policymakers bemoaned the high rate of inflation in the 1970s but did not fully appreciate their own role in its creation. ironically, their errors in estimating the natural rate and in ascribing inflation to nonmonetary forces were mutually reinforcing. on the one hand, because unemployment remained well above their over - optimistic estimates of the sustainable rate, they were inclined to attribute inflation to outside forces ( such as the actions of firms and unions ) rather than to an overheated economy ( romer and romer, 2002 ; nelson, 2004 ). on the other hand, the view of policymakers that exogenous forces largely drove inflation made it more difficult for them to recognize that their estimate of the sustainable rate of unemployment was too low. several years passed before policymakers were finally persuaded by the evidence that sustained anti - inflationary monetary policies would actually work ( primiceri, 2003 ). as you know, these policies were implemented