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"Lets Roll" <letsroll@meet-me-in-hell.com> wrote in message
news:pT5ve.8896$jX6.5374@newsread2.news.pas.earthlink.net...
> 16 February 2005
>
>
> Text: Greenspan Urges U.S. Action on Long-term Economic Challenges
>
> Calls for improvements in education, reform of benefits for elderly
>
> As the U.S. economic expansion continues, policy-makers must address
> long-term problems such as the composition of the work force and the
federal
> budget deficit to ensure that the economy remains flexible and
competitive,
> Federal Reserve Chairman Alan Greenspan says.
>
> Testifying February 16 before the Senate Banking Committee, the head of
the
> U.S. central bank gave an upbeat assessment of the U.S. economy and its
> near-term potential.
>
> "All told, the economy seems to have entered 2005 expanding at a
reasonably
> good pace, with inflation and inflation expectations well-anchored," he
said
> delivering the bank's semiannual monetary report to Congress.
>
> However, he said that "people experiencing long periods of relative
> stability are prone to excess" and cautioned against complacency given the
> economic challenges that will confront U.S. policymakers in coming years.
>
> Greenspan cited the composition of U.S. work force as one of those
problems.
> He said that technology advances and global competition have diminished
> demand for less skilled workers and increased demand for highly skilled
> workers in the United States and other developed countries. However, the
> supply of the latter in the U.S. economy has failed to keep up with a
> continued rise in demand, he said.
>
> Greenspan called for strengthening elementary and secondary education to
> prevent a wage gap between skilled and less skilled workers from widening
> and fueling "resentment and political polarization." He said that such
> developments could lead to political clashes and misguided economic
policies
> and leave the U.S. economy unprepared to compete effectively in the modern

> global marketplace.
>
> Greenspan said that an adjustment of the U.S. current account deficit is
> another challenge. Because an increase in net national savings is central
to
> an orderly adjustment, he said that restoring fiscal discipline is
> imperative.
>
> The current account balance is the broadest measure of a country's
> transactions with the rest of the world.
>
> Greenspan reaffirmed his view that public pension and related health care
> benefits for the elderly will strain the resources of younger workers when
> large numbers of U.S. workers born after World War II start retiring. He
> said the sheer number of potential retirees suggests that the problem
should
> be addressed sooner rather than later. He cautioned that interest rates on
> government debt could be affected in the long run if the problem is not
> dealt with soon enough.
>
> President Bush has urged a reform of Social Security, the U.S. public
> pension system, that would allow 55-year-old and younger workers to
convert
> part of their mandatory Social Security contributions into private
> investment accounts. Although the details of the plan are not yet known,
the
> impact of such a change on pension incomes, Social Security and the
federal
> budget is being hotly debated.
>
> During the hearing, Greenspan said in response to a question that he
> supports the central concept of the president's plan but urged a cautious
> approach to its implementation to diminish the risk of destabilizing
> financial markets.
>
> "I think it's a good thing to do over the longer run," he said. "[But] if
> you are going to move to private accounts, which I approve of, you have to
> do it in a cautious, gradual way."
>
> Greenspan said he believes that long-term U.S. economic challenges will
> ultimately be met and resolved.
>
> Following is the text of Greenspan's testimony as prepared for delivery:
>
> (begin text)
>
> Federal Reserve Board
>
> Testimony of Chairman Alan Greenspan
> Federal Reserve Board's semiannual Monetary Policy Report to the Congress
> Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
> February 16, 2005
>
> Mr. Chairman and members of the Committee, I am pleased to be here today
to
> present the Federal Reserve's Monetary Policy Report to the Congress. In
the
> seven months since I last testified before this Committee, the U.S.
economic
> expansion has firmed, overall inflation has subsided, and core inflation
has
> remained low.
>
> Over the first half of 2004, the available information increasingly
> suggested that the economic expansion was becoming less fragile and that
the
> risk of an undesirable decline in inflation had greatly diminished. Toward
> midyear, the Federal Reserve came to the judgment that the extraordinary
> degree of policy accommodation that had been in place since the middle of
> 2003 was no longer warranted and, in the announcement released at the
> conclusion of our May meeting, signaled that a firming of policy was
likely.
> The Federal Open Market Committee began to raise the federal funds rate at
> its June meeting, and the announcement following that meeting indicated
the
> need for further, albeit gradual, withdrawal of monetary policy stimulus.
>
> Around the same time, incoming data suggested a lull in activity as the
> economy absorbed the impact of higher energy prices. Much as had been
> expected, this soft patch proved to be short-lived. Accordingly, the
Federal
> Reserve has followed the June policy move with similar actions at each
> meeting since then, including our most recent meeting earlier this month.
> The cumulative removal of policy accommodation to date has significantly
> raised measures of the real federal funds rate, but by most measures, it
> remains fairly low.
>
> The evidence broadly supports the view that economic fundamentals have
> steadied. Consumer spending has been well maintained over recent months,
> buoyed by continued growth in disposable personal income, gains in net
> worth, and accommodative conditions in credit markets. Households have
> recorded a modest improvement in their financial position over this
period,
> to the betterment of many indicators of credit quality. Low interest rates
> and rising incomes have contributed to a decline in the aggregate
household
> financial obligation ratio, and delinquency and charge-off rates on
various
> categories of consumer loans have stayed at low levels.
>
> The sizable gains in consumer spending of recent years have been
accompanied
> by a drop in the personal saving rate to an average of only 1 percent over
> 2004 -- a very low figure relative to the nearly 7 percent rate averaged
> over the previous three decades. Among the factors contributing to the
> strength of spending and the decline in saving have been developments in
> housing markets and home finance that have spurred rising household wealth
> and allowed greater access to that wealth. The rapid rise in home prices
> over the past several years has provided households with considerable
> capital gains. Moreover, a significant increase in the rate of
single-family
> home turnover has meant that many consumers have been able to realize
gains
> from the sale of their homes. To be sure, such capital gains, largely
> realized through an increase in mortgage debt on the home, do not increase
> the pool of national savings available to finance new capital investment.
> But from the perspective of an individual household, cash realized from
> capital gains has the same spending power as cash from any other source.
>
> More broadly, rising home prices along with higher equity prices have
> outpaced the rise in household, largely mortgage, debt and have pushed up
> household net worth to about 5-1/2 times disposable income by the end of
> last year. Although the ratio of net worth to income is well below the
peak
> attained in 1999, it remains above the long-term historical average. These
> gains in net worth help to explain why households in the aggregate do not
> appear uncomfortable with their financial position even though their
> reported personal saving rate is negligible.
>
> Of course, household net worth may not continue to rise relative to
income,
> and some reversal in that ratio is not out of the question. If that were
to
> occur, households would probably perceive the need to save more out of
> current income; the personal saving rate would accordingly rise, and
> consumer spending would slow.
>
> But while household spending may well play a smaller role in the expansion
> going forward, business executives apparently have become somewhat more
> optimistic in recent months. Capital spending and corporate borrowing have
> firmed noticeably, but some of the latter may have been directed to
finance
> the recent backup in inventories. Mergers and acquisitions, though, have
> clearly perked up.
>
> Even in the current much-improved environment, however, some caution among
> business executives remains. Although capital investment has been
advancing
> at a reasonably good pace, it has nonetheless lagged the exceptional rise
in
> profits and internal cash flow. This is most unusual; it took a deep
> recession to produce the last such configuration in 1975. The lingering
> caution evident in capital spending decisions has also been manifest in
> less-aggressive hiring by businesses. In contrast to the typical pattern
> early in previous business-cycle recoveries, firms have appeared reluctant
> to take on new workers and have remained focused on cost containment.
>
> As opposed to the lingering hesitancy among business executives,
> participants in financial markets seem very confident about the future
and,
> judging by the exceptionally low level of risk spreads in credit markets,
> quite willing to bear risk. This apparent disparity in sentiment between
> business people and market participants could reflect the heightened
> additional concerns of business executives about potential legal
liabilities
> rather than a fundamentally different assessment of macroeconomic risks.
>
> Turning to the outlook for costs and prices, productivity developments
will
> likely play a key role. The growth of output per hour slowed over the past
> half year, giving a boost to unit labor costs after two years of declines.
> Going forward, the implications for inflation will be influenced by the
> extent and persistence of any slowdown in productivity. A lower rate of
> productivity growth in the context of relatively stable increases in
average
> hourly compensation has led to slightly more rapid growth in unit labor
> costs. Whether inflation actually rises in the wake of slowing
productivity
> growth, however, will depend on the rate of growth of labor compensation
and
> the ability and willingness of firms to pass on higher costs to their
> customers. That, in turn, will depend on the degree of utilization of
> resources and how monetary policymakers respond. To date, with profit
> margins already high, competitive pressures have tended to limit the
extent
> to which cost pressures have been reflected in higher prices.
>
> Productivity is notoriously difficult to predict. Neither the large surge
in
> output per hour from the first quarter of 2003 to the second quarter of
> 2004, nor the more recent moderation was easy to anticipate. It seems
likely
> that these swings reflected delayed efficiency gains from the capital
goods
> boom of the 1990s. Throughout the first half of last year, businesses were
> able to meet increasing orders with management efficiencies rather than
new
> hires. But conceivably the backlog of untapped total efficiencies has run
> low, requiring new hires. Indeed, new hires as a percent of employment
rose
> in the fourth quarter of last year to the highest level since the second
> quarter of 2001.
>
> There is little question that the potential remains for large advances in
> productivity from further applications of existing knowledge, and insights
> into applications not even now contemplated doubtless will emerge in the
> years ahead. However, we have scant ability to infer the pace at which
such
> gains will play out and, therefore, their implications for the growth of
> productivity over the longer run. It is, of course, the rate of change of
> productivity over time, and not its level, that influences the persistent
> changes in unit labor costs and hence the rate of inflation.
>
> The inflation outlook will also be shaped by developments affecting the
> exchange value of the dollar and oil prices. Although the dollar has been
> declining since early 2002, exporters to the United States apparently have
> held dollar prices relatively steady to preserve their market share,
> effectively choosing to absorb the decline in the dollar by accepting a
> reduction in their profit margins. However, the recent somewhat quickened
> pace of increases in U.S. import prices suggests that profit margins of
> exporters to the United States have contracted to the point where the
> foreign shippers may exhibit only limited tolerance for additional
> reductions in margins should the dollar decline further.
>
> The sharp rise in oil prices over the past year has no doubt boosted
firms'
> costs and may have weighed on production, particularly given the sizable
> permanent component of oil price increases suggested by distant-horizon
oil
> futures contracts. However, the share of total business expenses
> attributable to energy costs has declined appreciably over the past thirty
> years, which has helped to buffer profits and the economy more generally
> from the adverse effect of high oil and natural gas prices. Still,
although
> the aggregate effect may be modest, we must recognize that some sectors of
> the economy and regions of the country have been hit hard by the increase
in
> energy costs, especially over the past year.
>
> Despite the combination of somewhat slower growth of productivity in
recent
> quarters, higher energy prices, and a decline in the exchange rate for the
> dollar, core measures of consumer prices have registered only modest
> increases. The core PCE and CPI measures, for example, climbed about 1-1/4
> and 2 percent, respectively, at an annual rate over the second half of
last
> year.
>
> All told, the economy seems to have entered 2005 expanding at a reasonably
> good pace, with inflation and inflation expectations well anchored. On the
> whole, financial markets appear to share this view. In particular, a broad
> array of financial indicators convey a pervasive sense of confidence among
> investors and an associated greater willingness to bear risk than is yet
> evident among business managers.
>
> Both realized and option-implied measures of uncertainty in equity and
> fixed-income markets have declined markedly over recent months to quite
low
> levels. Credit spreads, read from corporate bond yields and credit default
> swap premiums, have continued to narrow amid widespread signs of an
> improvement in corporate credit quality, including notable drops in
> corporate bond defaults and debt ratings downgrades. Moreover, recent
> surveys suggest that bank lending officers have further eased standards
and
> terms on business loans, and anecdotal reports suggest that securities
> dealers and other market-makers appear quite willing to commit capital in
> providing market liquidity.
>
> In this environment, long-term interest rates have trended lower in recent
> months even as the Federal Reserve has raised the level of the target
> federal funds rate by 150 basis points. This development contrasts with
most
> experience, which suggests that, other things being equal, increasing
> short-term interest rates are normally accompanied by a rise in
longer-term
> yields. The simple mathematics of the yield curve governs the relationship
> between short- and long-term interest rates. Ten-year yields, for example,
> can be thought of as an average of ten consecutive one-year forward rates.
A
> rise in the first-year forward rate, which correlates closely with the
> federal funds rate, would increase the yield on ten-year U.S. Treasury
notes
> even if the more-distant forward rates remain unchanged. Historically,
> though, even these distant forward rates have tended to rise in
association
> with monetary policy tightening.
>
> In the current episode, however, the more-distant forward rates declined
at
> the same time that short-term rates were rising. Indeed, the tenth-year
> tranche, which yielded 6-1/2 percent last June, is now at about 5-1/4
> percent. During the same period, comparable real forward rates derived
from
> quotes on Treasury inflation-indexed debt fell significantly as well,
> suggesting that only a portion of the decline in nominal forward rates in
> distant tranches is attributable to a drop in long-term inflation
> expectations.
>
> Some analysts have worried that the dip in forward real interest rates
since
> last June may indicate that market participants have marked down their
view
> of economic growth going forward, perhaps because of the rise in oil
prices.
> But this interpretation does not mesh seamlessly with the rise in stock
> prices and the narrowing of credit spreads observed over the same
interval.
> Others have emphasized the subdued overall business demand for credit in
the
> United States and the apparent eagerness of lenders, including foreign
> investors, to provide financing. In particular, heavy purchases of
> longer-term Treasury securities by foreign central banks have often been
> cited as a factor boosting bond prices and pulling down longer-term
yields.
> Thirty-year fixed-rate mortgage rates have dropped to a level only a
little
> higher than the record lows touched in 2003 and, as a consequence, the
> estimated average duration of outstanding mortgage-backed securities has
> shortened appreciably over recent months. Attempts by mortgage investors
to
> offset this decline in duration by purchasing longer-term securities may
be
> yet another contributor to the recent downward pressure on longer-term
> yields.
>
> But we should be careful in endeavoring to account for the decline in
> long-term interest rates by adverting to technical factors in the United
> States alone because yields and risk spreads have narrowed globally. The
> German ten-year Bund rate, for example, has declined from 4-1/4 percent
last
> June to current levels of 3-1/2 percent. And spreads of yields on bonds
> issued by emerging-market nations over U.S. Treasury yields have declined
to
> very low levels.
>
> There is little doubt that, with the breakup of the Soviet Union and the
> integration of China and India into the global trading market, more of the
> world's productive capacity is being tapped to satisfy global demands for
> goods and services. Concurrently, greater integration of financial markets
> has meant that a larger share of the world's pool of savings is being
> deployed in cross-border financing of investment. The favorable inflation
> performance across a broad range of countries resulting from enlarged
global
> goods, services and financial capacity has doubtless contributed to
> expectations of lower inflation in the years ahead and lower inflation
risk
> premiums. But none of this is new and hence it is difficult to attribute
the
> long-term interest rate declines of the last nine months to glacially
> increasing globalization. For the moment, the broadly unanticipated
behavior
> of world bond markets remains a conundrum. Bond price movements may be a
> short-term aberration, but it will be some time before we are able to
better
> judge the forces underlying recent experience.
>
> This is but one of many uncertainties that will confront world
policymakers.
> Over the past two decades, the industrial world has fended off two severe
> stock market corrections, a major financial crisis in developing nations,
> corporate scandals, and, of course, the tragedy of September 11, 2001. Yet
> overall economic activity experienced only modest difficulties. In the
> United States, only five quarters in the past twenty years exhibited
> declines in GDP, and those declines were small. Thus, it is not altogether
> unexpected or irrational that participants in the world marketplace would
> project more of the same going forward.
>
> Yet history cautions that people experiencing long periods of relative
> stability are prone to excess. We must thus remain vigilant against
> complacency, especially since several important economic challenges
confront
> policymakers in the years ahead.
>
> Prominent among these challenges in the United States is the pressing need
> to maintain the flexibility of our economic and financial system. This
will
> be essential if we are to address our current account deficit without
> significant disruption. Besides market pressures, which appear poised to
> stabilize and over the longer run possibly to decrease the U.S. current
> account deficit and its attendant financing requirements, some forces in
the
> domestic U.S. economy seem about to head in the same direction. Central to
> that adjustment must be an increase in net national saving. This serves to
> underscore the imperative to restore fiscal discipline.
>
> Beyond the near term, benefits promised to a burgeoning retirement-age
> population under mandatory entitlement programs, most notably Social
> Security and Medicare, threaten to strain the resources of the working-age
> population in the years ahead. Real progress on these issues will
> unavoidably entail many difficult choices. But the demographics are
> inexorable, and call for action before the leading edge of baby boomer
> retirement becomes evident in 2008. This is especially the case because
> longer-term problems, if not addressed, could begin to affect longer-dated
> debt issues, the value of which is based partly on expectations of
> developments many years in the future.
>
> Another critical long-run economic challenge facing the United States is
the
> need to ensure that our workforce is equipped with the requisite skills to
> compete effectively in an environment of rapid technological progress and
> global competition. Technological advance is continually altering the
shape,
> nature, and complexity of our economic processes. But technology and, more
> recently, competition from abroad have grown to a point at which demand
for
> the least-skilled workers in the United States and other developed
countries
> is diminishing, placing downward pressure on their wages. These workers
will
> need to acquire the skills required to compete effectively for the new
jobs
> that our economy will create.
>
> At the risk of some oversimplification, if the skill composition of our
> workforce meshed fully with the needs of our increasingly complex capital
> stock, wage-skill differentials would be stable, and percentage changes in
> wage rates would be the same for all job grades. But for the past twenty
> years, the supply of skilled, particularly highly skilled, workers has
> failed to keep up with a persistent rise in the demand for such skills.
> Conversely, the demand for lesser-skilled workers has declined, especially
> in response to growing international competition. The failure of our
society
> to enhance the skills of a significant segment of our workforce has left a
> disproportionate share with lesser skills. The effect, of course, is to
> widen the wage gap between the skilled and the lesser skilled.
>
> In a democratic society, such a stark bifurcation of wealth and income
> trends among large segments of the population can fuel resentment and
> political polarization. These social developments can lead to political
> clashes and misguided economic policies that work to the detriment of the
> economy and society as a whole. As I have noted on previous occasions,
> strengthening elementary and secondary schooling in the United States -- 
> especially in the core disciplines of math, science, and written and
verbal
> communications -- is one crucial element in avoiding such outcomes. We
need
> to reduce the relative excess of lesser-skilled workers and enhance the
> number of skilled workers by expediting the acquisition of skills by all
> students, both through formal education and on-the-job training.
>
> Although the long-run challenges confronting the U.S. economy are
> significant, I fully anticipate that they will ultimately be met and
> resolved. In recent decades our nation has demonstrated remarkable
> resilience and flexibility when tested by events, and we have every reason
> to be confident that it will weather future challenges as well. For our
> part, the Federal Reserve will pursue its statutory objectives of price
> stability and maximum sustainable employment -- the latter of which we
have
> learned can best be achieved in the long run by maintaining price
stability.
> This is the surest contribution that the Federal Reserve can make in
> fostering the economic prosperity and well-being of our nation and its
> people.
>
> (end text)
>
> http://chennai.usconsulate.gov/wwwhpr050217a.html
>
> And Bush wants to import more illiterate, unskilled third world rejects.
>
>