Testimony of Federal Reserve Officials

Federal Reserve Bulletin, June 2001 | Go to article overview

Testimony of Federal Reserve Officials


Testimony of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Finance, U.S. Senate, April 4, 2001

I am pleased to be invited to discuss some of the important issues concerning international trade and the attendant implications for the U.S. economy and the world economy more generally. In doing so, I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

One of the most impressive and persistent trends of the last several decades is the expansion of international trade. Trade across national borders has increased far faster than world gross domestic product. As a consequence, imports of goods and services as a percentage of gross domestic products worldwide, on average, have risen from approximately 12 percent forty years ago to 24 percent today.

To most economists, the evidence is impressively persuasive that the dramatic increase in world competition--a consequence of broadening trade flows--has fostered markedly higher standards of living for almost all countries that have participated in cross-border trade. I include most especially the United States.

Globalization as generally understood involves the increasing interaction of national economic systems. Of necessity, these systems are reasonably compatible and, in at least some important respects, market oriented. Certainly, market-directed capitalism has become the paradigm for most of the world, as central-planning regimes have fallen into disfavor since their undisputed failures around the world in the four decades following World War II.

Globalization, in turn, has been driven importantly by advances in technology. By lowering the costs of gathering information and conducting transactions, new technologies have reduced market frictions and provided significant impetus to the process of broadening world markets. Expanding markets, in turn, have both increased competition and rendered many forms of government intervention either ineffective or perverse.

The recognition of this prosperity-enhancing sea-change in world markets and, in that context, of the counterproductive consequences of pervasive intervention has led many governments to reduce tariffs and trade barriers and, where necessary, to deregulate markets. These actions themselves have further promoted the very globalization that, interacting with advancing technology, spurred the deregulatory initiatives in the first place. The result of this process has been an advance and diffusion of technical change that has raised living standards in much of the world.

The international trading system that evolved has enhanced competition and nurtured what Joseph Schumpeter a number of decades ago called "creative destruction," the continuous scrapping of old technologies to make way for the new. Standards of living rise because the depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled to finance the newly produced capital assets that almost always embody the cutting-edge technologies. This is the process by which wealth is created incremental step by incremental step. It presupposes a continuous churning of an economy in which the new displaces the old.

But there is also no doubt that this transition to the new high-tech economy, of which rising trade is a part, is proving difficult for a large segment of our workforce that interfaces with our rapidly changing capital stock day by day. This is most evident in the rising fear of job skill obsolescence that has induced a marked increase in experienced workers going back to school--often community colleges--to upgrade their skills for a rapidly changing work environment.

While major advances in standards of living are evident among virtually all nations that have opened their borders to increased competition, the adjustment trauma resulting from technological advances as well as globalization has also distressed those who once thrived in industries that were once at the cutting edge of technology but that have become increasingly noncompetitive.

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