[IP] Remarks by Chairman Alan Greenspan Before the World Affairs Council of Greater Dallas, Dallas, Texas
Remarks by Chairman Alan Greenspan
Before the World Affairs Council of Greater Dallas, Dallas, Texas
December 11, 2003
Interest in issues of trade, tariffs, and protectionism has ebbed and
flowed in this country since our founding. The widened trade deficit of
recent years, in the context of a prolonged bout of job loss, has again
elevated cries of distress to special prominence.
The sensitivity of our economy to foreign competition does appear to have
intensified recently as technological obsolescence has continued to
foreshorten the expected profitable life of the nation's capital stock. The
more rapid turnover of our equipment and plant, as one might expect, is
mirrored in an increased turnover of jobs. A million workers leave their
jobs every week, two-fifths involuntarily, often in association with
facilities that have been displaced or abandoned. A million, more or less,
are also newly hired or returned from layoffs every week, in part as new
facilities come on stream.
Related to this process, jobs in the United States have been perceived as
migrating over the years, to low-wage Japan in the 1950s and 1960s, to
low-wage Mexico in the 1990s, and most recently to low-wage China. Japan,
of course, is no longer characterized by a low-wage workforce, and many in
Mexico are now complaining of job losses to low-wage China.
In the United States, conceptual jobs, fostered by cutting-edge
technologies, especially information technologies, are occupying an ever
increasing share of the workforce and are gradually replacing work
requiring manual skills. Those industries in which labor costs are a
significant part of overall costs have been under increasing competition
from foreign producers with labor costs, adjusted for productivity, less
than ours.
This process is not new. For generations American ingenuity has been
creating industries and jobs that never existed before, from vehicle
assemblers to computer software engineers. With those jobs come new
opportunities for workers with the necessary skills. In recent years,
competition from abroad has risen to a point at which our lowest skilled
workers are being priced out of the global labor market. This diminishing
of opportunities for such workers is why retraining for new job skills that
meet the evolving opportunities created by our economy has become so urgent
in this country. A major source of such retraining has been our community
colleges, which have proliferated over the past two decades.
We can usually identify somewhat in advance which tasks are most vulnerable
to being displaced by foreign or domestic competition. But in economies on
the forefront of technology, most new jobs are the consequence of
innovation, which by its nature is not easily predictable. What we do know
is that over the years, more than 94 percent of the workforce, on average,
has been employed as markets matched idled workers seeking employment to
new jobs. We can thus be confident that new jobs will displace old ones as
they always have, but not without a high degree of pain for those in the
job-losing segment of our massive job turnover.
The American economy has been in the forefront of what Joseph Schumpeter,
the renowned Harvard professor, 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,
along with new savings, to finance the production of capital assets that
almost always embody cutting-edge technologies. Workers migrate with the
capital. 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, a process that brings both progress and
stress.
Disoriented by the quickened pace of today's competition, some in our
society look back with nostalgia to the seemingly more tranquil years of
the early post-World War II period, when tariff walls were perceived as
providing job security from imports. Were we to yield to such selective
nostalgia and shut out a large part, or all, of imports of manufactured
goods and produce them ourselves, our overall standards of living would
fall. In today's flexible markets, our large, but finite, capital and labor
resources are generally employed most effectively. Any diversion of
resources from the market-guided activities would, of necessity, engender a
less productive mix.
For the most part, we as a nation have not engaged in significant and
widespread protectionism for more than five decades. The consequences of
moving in that direction in today's far more globalized financial world
could be unexpectedly destabilizing. A likely fall in wage incomes and
profits could lead, ironically, to a fall in jobs and job security in the
shorter term. So, yes, we can shut out part or all foreign competition, but
we would pay a price for doing so--perhaps a rather large price.
* * *
I do not doubt that the vast majority of us would prefer to work in a less
stressful, less competitive environment. Yet, in our roles as consumers, we
seem to relentlessly seek the low product prices and high quality that are
prominent features of our current frenetic economic structure. In
particular, America's discount retailers have responded by learning to
profit as intermediaries between consumers and low-cost producers, whether
located in Guangdong province in China or Peoria, Illinois.
Retailers who do not choose their suppliers with price and quality
uppermost in mind risk finding themselves in liquidation. If a producer can
offer quality at a lower price than the competition, retailers are pressed
to respond because the consumer will otherwise shop at the retailer who
does. Retailers are afforded little leeway in product sourcing.
If consumers are stern taskmasters of their marketplace, business
purchasers of capital equipment and production materials inputs have taken
the competitive paradigm a step further and applied it on a global scale.
Understandably, as a consequence, trade discussions under the aegis of the
World Trade Organization have become increasingly contentious. After four
decades of more or less successful negotiations, the "low-hanging trade
agreement fruit," so to speak, has already been picked. Current trade
negotiators, accordingly, now must grapple with the remaining, more
difficult issues, such as intellectual property rights and agricultural
subsidies. Debates over trade restrictions have understandably become far
more confrontational than in earlier years.
For example, a strain of so-called conventional wisdom has attributed the
weak labor market in the United States to the widening trade deficit, and a
loss of jobs since the beginning of the recession of 2001 to low-priced
competition from abroad (often deemed "unfair") and increased foreign
outsourcing on the part of corporate America. In fact, as Council of
Economic Advisers Chairman Greg Mankiw recently pointed out, U.S. "job
losses are ... more closely related to declines in domestic investment and
weak exports than to import competition."1 In addition, of course,
increased productivity has enabled ongoing demand to be met with fewer
workers.
Noteworthy is the singling out of a particular exchange rate, the Chinese
renminbi, as a significant cause of American job loss. The renminbi is
widely believed to be markedly undervalued, and it is claimed that a rise
in the renminbi will slow exports from China to the United States, which
according to some, will create increased job opportunities for Americans at
home.
The story on trade and jobs, in my judgment, is a bit more complex,
especially with respect to China, than this strain of conventional wisdom
would lead one to believe. If the renminbi were to rise, presumably U.S.
imports from China would fall as China loses competitive position to other
low-wage economies. But would, for example, reduced imports of textiles
from China induce increased output in American factories? Far more likely
is that our imports from other low-wage countries would replace Chinese
textiles.
Despite the very large surplus of China's trade with the United States,
overall Chinese trade is much closer to balance. Chinese exports, a
majority of which are from foreign-owned firms or affiliates, many
American, depend on purchases from East Asian companies that supply inputs
to the products the Chinese sell to the United States and elsewhere.
Emerging Asia used to manufacture many goods that were then directly
exported to the United States. However, a growing fraction of these goods
are now partially assembled with capital-intensive, high-value-added
manufacturing in the rest of emerging Asia; exported to China, where final
processing is done--typically with labor-intensive, lower-value-added
manufacturing; and then exported to the United States. This situation
implies a deterioration in the Chinese trade balance with the rest of
emerging Asia, along with a growing surplus with the United States. In
large part, the increase in China's share of U.S. imports has come at the
expense of other East Asian exporters.
China's imports overall have risen dramatically over this year, from
approximately $25 billion per month a year ago to $33 billion per month
more recently, as China has become a major consumer of the world's
commodities. Doubtless, part of the recent firmness in non-high-tech
commodity prices is attributable to China's voracious appetite for raw
materials.
* * *
A rise in the value of the renminbi would be unlikely to have much, if any,
effect on aggregate employment in the United States, but a misaligned
Chinese currency, if that is indeed the case, could have adverse effects on
the global financial market and, hence, indirectly on U.S. output and jobs.
In order to maintain the tight relationship with the dollar initiated in
the 1990s, the Chinese central bank has had to purchase large quantities of
U.S. Treasury securities with renminbi. What is not clear is how much of
the unquestioned current upward pressure on the renminbi results from
underlying market forces, how much from capital inflows due to speculation
on potential revaluation, and how much from capital controls that suppress
Chinese residents' demand for dollars.
No one truly knows whether easing or ending of capital controls would ease
pressure on the currency without central bank intervention and, in the
process, also eliminate inflows from speculation on a revaluation. Many in
China, however, fear that an immediate ending of controls could induce
capital outflows large enough to destabilize the nation's fragile banking
system. Others believe that decontrol, but at a gradual pace, could
conceivably temper such concerns.
Central bank purchases of dollars, unless offset, threaten an excess of
so-called high-powered money expansion and consequent overheating of the
Chinese economy. The Chinese central bank this year has indeed offset, that
is, sterilized, much of its heavy dollar purchases by reducing its loans to
commercial banks, by selling bonds, and by increasing reserve requirements.
But currency and commercial bank reserves have been rising enough to
support a growth of the money supply well in excess of a 20 percent annual
rate so far this year. Should this pattern continue, the central bank will
be confronted with the choice of an overheated economy, with its potential
recessionary consequences, or a curtailing of dollar asset purchases. The
latter presumably would allow the renminbi to appreciate against the dollar.
China has become an important addition to the global trading system. A
prosperous China will bring substantial positive benefits to the rest of
the trading world. It is, thus, important to all of us that they succeed in
navigating through their current economic and financial imbalances.
* * *
The challenges represented by China's large surplus with the United States
and the efforts to repair a recent breach in the current round of trade
negotiations have engaged the attention of policymakers worldwide. But
these are subplots in a much larger debate about the benefits and costs of
expanding globalization.
At the risk of oversimplification, I would separate the parties in that
debate into three groups. First, there are those who believe that
relatively unfettered capitalism is the only economic organization
consistent with individual and political freedom. In a second group are
those who accept capitalism as the only practical means to achieve higher
standards of living but who are disturbed by the seeming incivility of many
market practices and outcomes. In very broad terms, the prevalence with
which one encounters allegations of incivility defines an important
difference in economic views that distinguishes the United States from
continental Europe--two peoples having deeply similar roots in political
freedom and democracy.
A more pronounced distinction separates both of these groups from a third
group, which views societal organization based on the profit motive and
corporate culture as fundamentally immoral.
This group questions, in particular, whether the distribution of wealth
that results from greater economic interactions among countries is, in some
sense, "fair." Here terms such as "exploitation," "subversion of democratic
choice," and other value-charged notions dominate the debate. These terms
too often substitute for a rigorous discussion of the difficult tradeoffs
that we confront in advancing the economic welfare of our nations. Such an
antipathy to "corporate culture" has sent tens of thousands into the
streets to protest what they see as "exploitive capitalism" in its most
visible form--the increased globalization of our economies.
As solutions to these alleged failures of globalization, dissidents
frequently appear to favor politically imposed systems, employing the power
of the state to override the outcomes arrived at through voluntary
exchange. The historical record of such approaches does not offer much
encouragement. One would be hard pressed to cite examples of free and
prosperous societies that suppressed the marketplace.
* * *
Setting aside the arguments of the protesters, even among those committed
to market-oriented economies, important differences remain about capitalism
and the role of globalization. These differences are captured most clearly
for me in a soliloquy attributed to a prominent European leader several
years ago. He asked, "What is the market? It is the law of the jungle, the
law of nature. And what is civilization? It is the struggle against
nature." While acknowledging the ability of competition to promote growth,
many such observers, nonetheless, remain concerned that economic actors, to
achieve that growth, are required to behave in a manner governed by the law
of the jungle.
In contrast to these skeptical views, others argue for the ethical merits
of market-driven outcomes posited on the value preferences of individuals
as reflected in their choices in a free marketplace. The ultimate arbiter
of an economy's ethics is, or should be, the material welfare of the
individuals in a society. The crux of the largely laissez-faire argument is
that, because unencumbered competitive markets reflect the value
preferences of consumers, the resulting price signals direct a nation's
savings into those capital assets that maximize the production of goods and
services most valued by consumers. Wages, profits, and other sources of
income are determined, for the most part, by how successfully the
participants in an economy contribute to the welfare of consumers.
Clearly not all activities undertaken in markets are civil. Many, though
legal, are decidedly unsavory. Violation of law and breaches of trust do
undermine the efficiency of markets. But the legal foundations and the
discipline of the marketplace are sufficiently rooted in a rule of law to
limit these aberrations. It is instructive that despite the egregious
breaches of trust in recent years by a number of the nation's business and
financial leaders, productivity, an important metric of corporate
efficiency, has accelerated.
On net, vigorous economic competition over the years has produced a
significant rise in the quality of life for the vast majority of the
population in market-oriented economies, including those at the bottom of
the income distribution.
The highly competitive free market paradigm, however, is viewed by many at
the other end of the philosophical spectrum as obsessively materialistic
and largely lacking in meaningful cultural values. This view gained
adherents with the recent uncovering of much scandalous business behavior
during the boom years of the 1990s.
But is there a simple tradeoff between civil conduct, as defined by those
who find raw competitive behavior demeaning, and the quality of material
life they, nonetheless, seek? It is not obvious that such a tradeoff exists
in any meaningful sense when viewed from a longer-term perspective.
During the past century, for example, economic growth created resources far
in excess of those required to maintain subsistence. That surplus in
democratic capitalist societies has been, in large measure, employed to
improve the quality of life along many dimensions. To cite a short list:
(1) greater longevity, owing first to the widespread development of clean,
potable water and later to rapid advances in medical technology; (2) a
universal system of education that enabled greatly increased social
mobility; (3) vastly improved conditions of work; and (4) the ability to
enhance our environment by setting aside natural resources rather than
having to employ them to sustain a minimum level of subsistence. At a
fundamental level, Americans have used the substantial increases in wealth
generated by our market-driven economy to purchase what many would view as
greater civility.
* * *
Debates on the pros and cons of market capitalism have waged for
generations. The collapse of the Soviet empire, and with it central
planning, has left market capitalism as the principal, but not universally
revered, model of economic organization.
The vigorous debates on how economies should be organized and by what rules
individuals' trading should be governed surfaced most prominently in the
latter part of the eighteenth century. Those debates appear destined to
continue through the twenty-first century and presumably beyond.
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