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U.S. on cutting edge in creating work, he says
January 27, 2004
WASHINGTON – Fed Chairman Alan Greenspan said yesterday that jobs lost in the last recession can be replaced but that unemployed workers might need retraining to qualify for new work.
In a speech prepared for an economic conference in London, Greenspan sought to address fears that many of the 2.8 million manufacturing jobs lost in the past 3½ years could be gone forever to lower wage countries.
He said competition from low-wage countries is not a new development. He said that in the 1950s and 1960s the concern was that U.S. jobs were migrating to Japan, and in the 1990s fears rose about competition from Mexico. He said more recently the concern has been that the United States are losing jobs to China.
Greenspan said that what people needed to keep in mind is that the U.S. economy has always been able to generate enough jobs in cutting-edge industries to replace jobs lost in industries facing the highest competition from low-wage labor.
This has given the country an average of 94 percent employment of its work force, he said, predicting that this process will continue.
"We can thus be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America's massive job-turnover process," Greenspan said.
He warned U.S. policy-makers worried about the loss of jobs not to heed calls for an increase in protectionist trade barriers, saying such a move could be "unexpectedly destabilizing" to the global economy.
"I remain optimistic that we and our global trading partners will shun that path," he said. "The evidence is simply too compelling that our mutual interests are best served by promoting the free flow of goods and services among our increasingly flexible and dynamic market economies."
In his speech, delivered by satellite to London, Greenspan said the U.S. economy has become more flexible because of government moves over the past three decades to deregulate a number of industries from banking to trucking.
He said this new flexibility has helped to make the past two recessions in the United States, the 1991 downturn and the 2001 slump, the mildest of the post World War II period.
"The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated disturbances," Greenspan said. "Enhanced flexibility has the advantage of being able to adjust automatically and not having to rest on policy-makers' initiatives, which often come too late or are misguided."
As he has in the past, Greenspan praised the increased use of complex financial instruments known as derivatives for boosting flexibility by allowing banks and other financial institutions to spread their risks.
He said derivatives had enabled financial institutions to weather the deep slump in the telecommunications industry after the bursting of the stock market bubble in 2000 – even though globally telecommunications companies had taken out $1 trillion in loans from 1998 to 2001.
"Prices of telecommunications stocks collapsed and many firms went bankrupt," Greenspan said. "But unlike in previous periods of large financial distress, no major financial institution defaulted and the world economy was not threatened."
Greenspan, in his remarks, did not discuss the outlook for the U.S. economy. Federal Reserve policy-makers will begin a two-day meeting today in which they are widely expected to keep pledging to keep interest rates low for a "considerable period" to generate stronger job growth.
Before an extremely weak unemployment report showed that the economy managed to create just 1,000 jobs in December, many analysts and investors thought the central bank would start raising interest rates as early as this spring to ensure that a booming economy did not set off inflation pressures.
However, that view is being reassessed in light of the December unemployment report, which raised concerns that the economy could still be in the grips of a jobless recovery two years after the 2001 recession ended.
"The Fed is not going to move until (it sees) several months in a row of strong employment numbers, and that has not happened yet," David Wyss, chief economist at Standard & Poor's, said Monday.
Wyss and other analysts said it is possible that the Fed will keep its target for the federal funds rate, the interest that banks charge each other, at a 45-year low of 1 percent for all of 2004.
That would be good news for borrowers and such consumer-sensitive industries as housing and autos, which have seen sales skyrocket because of the lowest financing charges in more than four decades.
The advisory committee of the American Bankers Association, 10 top bank economists who give Fed officials their assessment of the economy twice a year, expects Fed rate increases will not occur until the last half of the year. And even when the Fed starts moving rates, the panel said, the increases will be moderate.
The group's median forecast is for the federal funds rate to be at 1.6 percent at the end of this year.
Sung Won Sohn, chief economist at Wells Fargo in Minneapolis and a member of the ABA panel, is even more optimistic, believing the Fed will leave rates alone for the entire year.
"In an election year, why raise interest rates unless you have a strong economic justification?" Sohn asked.
Sohn said the Fed's signals to the markets this year will probably come in three stages: the removal of the "considerable period" promise; a change in the balance of risks from neutral to risks weighted toward higher inflation; and a rate increase.
Sohn said the Fed probably won't make its first rate hike until next January.