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Wednesday, October 12, 2005

Greenspan on the Virtues of Free Markets and Information Technology

There are several speeches today by monetary officials.  Let's start at the top with remarks by Alan Greenspan.

Here's Greenspan discussing how the economy's ability to self-correct after large shocks has been driven by a movement towards less government regulation and intervention beginning in the 1970's. He also cites stabilization of the financial system through the use of better information technology and the ability of firms to use information technology to manage inventories and other components of production as contributing to the increased flexibility of the economy in recent years.  Finally, he does not tip his hat at all on the future course of monetary policy:

Economic flexibility, by Chairman Alan Greenspan, October 12, 2005: ...In my more than eighteen years at the Federal Reserve, much has surprised me, but nothing more than the remarkable ability of our economy to absorb and recover from the shocks of stock market crashes, credit crunches, terrorism, and hurricanes--blows that would have almost certainly precipitated deep recessions in decades past. This resilience, not evident except in retrospect, owes to a remarkable increase in economic flexibility, partly the consequence of deliberate economic policy and partly the consequence of innovations in information technology.

...For this country's first century and a half, government was only peripherally engaged in what we currently term the management of aggregate demand. Any endeavor to alter the path of private economic activity through active intervention would have been deemed inappropriate and, more important, unnecessary. ... The free-market paradigm came under ... vigorous attack after the collapse of the world's major economies in the 1930s. As the global depression deepened, the seeming failure of competitive markets to restore full employment perplexed economists until John Maynard Keynes offered an explanation ... He argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. ... In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes. A tidal wave of regulation soon swept over much of the American business community. Labor relations, securities markets, banking, agricultural pricing, and many other segments of the U.S. economy became subject to the oversight of government. ... At the macro level, the system of wage and price controls imposed in the 1970s to deal with the problem of inflation proved unworkable and ineffective. And at the micro level, heavy regulation of many industries was increasingly seen as impeding efficiency and competitiveness...

Starting in the 1970s, U.S. Presidents ... responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. ... As the 1980s progressed, the success of that strategy confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy...

Beyond deregulation, innovative technologies, especially information technologies, have contributed critically to enhanced flexibility. ... Deregulation and the newer information technologies have joined, in the United States and elsewhere, to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades... recent regulatory reform, coupled with innovative technologies, has ... contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. ...

Governments today, although still far more activist than in the nineteenth and early twentieth centuries, are rediscovering the benefits of competition and the resilience to economic shocks that it fosters. We are also beginning to recognize an international version of Smith's invisible hand in the globalization of economic forces. ... We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided. It is important to remember that most adjustment of a market imbalance is well under way before the imbalance becomes widely identified as a problem. ... administrative or policy actions that await clear evidence of imbalance are of necessity late...

Flexibility is most readily achieved by fostering an environment of maximum competition. A key element in creating this environment is flexible labor markets. Many working people, regrettably, equate labor market flexibility with job insecurity. Despite that perception, flexible labor policies appear to promote job creation, not destroy it. ... Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers. At best, it is a short-term fix .... We need increased education and training for those displaced by creative destruction, not a stifling of competition. ... Accordingly, education is no longer the sole province of the young. Significant numbers of workers continue their education well beyond their twenties. ... to upgrade their skills or get new ones. It is a measure of the dynamism of the U.S. economy that community colleges are one of the fastest growing segments of our educational system...

Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. To be sure, that stability, by fostering speculative excesses, has created some new challenges for policymakers. But more fundamentally, an environment of greater economic stability has been key to the impressive growth in the standards of living and economic welfare so evident in the United States.

I was pleased to see this remark, "We need increased education and training for those displaced by creative destruction, not a stifling of competition," as I do not believe we do enough to help those displaced by globalization.

    Posted by on Wednesday, October 12, 2005 at 08:59 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (5)

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