WASHINGTON – Federal Reserve Chairman Alan Greenspan has not let the current economic hard times diminish his belief that a high-technology revolution is making American companies much more productive.
Greenspan demonstrated in an appearance Tuesday night at Rice University why he remains the foremost proponent of the view that the country has entered a new economic era. He said he believes that so far U.S. companies have realized only 50 percent of the possible gains in productivity.
Productivity, the output per hour of work, is a key ingredient in rising American living standards. After being mired at annual growth rates of little more than 1 percent for more than two decades, productivity growth has skyrocketed to average annual rates close to 3 percent since 1996.
That has ignited a strong debate in the economics profession over whether the change is a temporary phenomenon or the result of long-lasting structural changes in the economy.
Greenspan left no doubt during a question-and-answer session following the speech at Rice that he thinks the resurgence in productivity is here to stay. He said numerous surveys find that business executives believe they have so far been able to install only half of the new technologies available to boost output at their factories.
``That means there is a major unexpected amount of technology which is still out there,'' Greenspan said. He said implementation has been put on hold by businesses which had to cut back on investment plans following the collapse of stock prices in March 2000.
``New capital investment, especially the high tech type, will continue where it left off'' when the economy begins to rebound, he said. ``The long-term outlook for productivity growth as far as I am concerned remains substantially undiminished.''
He said his belief that productivity will not sink back to the weak rates of the 1973-95 period was bolstered with the release last week of a report showing that productivity grew at a much better than expected 2.7 percent annual rate in the third quarter, ``far better than what any of the models, especially the older ones, would have indicated.''
His optimism about future productivity gains, Greenspan said, was a major reason he believed the long-term outlook for the U.S. economy ``looks to be extraordinarily good'' despite the weakness demonstrated over the past year.
Many economists believe the Sept. 11 terrorist attacks pushed an already weak economy over into a full-blown recession that could last through the first half of next year.
Greenspan did not specifically address when an economic rebound might occur. But he did take issue with arguments that the lack of response so far to the Fed's 10 interest rate cuts this year proved that monetary policy is not as powerful as it once was.
``All evidence that we can produce is that monetary policy is as effective as it has always been,'' he said. He said the Fed's rate cuts had allowed American companies to restructure their debt burdens, putting them in a ``far better position to move forward'' in coming months.
Greenspan said an important area that policy-makers must focus on now was ensuring dependable supplies of energy, something he said could be done by focusing on free markets.
``We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion,'' Greenspan said.
Greenspan outlined an energy program that largely tracked the plan President Bush submitted to Congress this year, emphasizing development of all sources of energy from increased exploration for oil and gas to expanded use of nuclear power.
``Developments in energy markets will remain central in determining the long-run health of our nation's economy,'' Greenspan said.