|Remarks by Vice Chairman Roger W. Ferguson, Jr.
Before the Florida Council of 100, Washington, D.C.
May 12, 2000
Economic Policy for Our Era: The Florida Experience
Today, I would like to offer some observations, from the perspective of a policymaker, on the events that have already transformed much of the national and regional economies and that are continuing to reshape business around the globe. Specifically, I want to reflect on the changing role of economic policy in our current environment of rapidly improving communications and expanding markets. In order to sustain the gains that Florida and other regions have made in the past decade, and to best ensure our continued global competitiveness, we need to fashion economic policy that, above all else, helps to facilitate communication through efficient and effective markets.
Recent Growth Trends
Growth in Florida has been even more impressive. Florida has always had a large service sector because of the tourism and medical industries. The recession associated with the Gulf War had a disproportionate impact on Florida's growth, and your state started the decade with a slightly deeper recession than the rest of the Southeast and the nation as a whole. In early 1992, the state began to systematically outperform the nation overall, and that has continued to the present. Year-over-year employment growth in Florida has outstripped that of the rest of both the Southeast and the United States since 1992.
The recent job growth and prosperity of the state has been powered by two components of services, tourism and back-office type business services. There was a dramatic surge in service-sector growth beginning in 1997 that was associated with expansions of capacity in Orlando and, to a lesser extent, Miami. The more recent surge has been mainly the movement of back-office corporate functions, such as call centers, into the state, which have relocated mostly to the northern metropolitan areas of Tampa, Jacksonville, and Tallahassee. These service industries depend importantly on modern communications, a theme to which I will return shortly.
Florida also has significant international exposure, with approximately one-half of Florida's exports going to Latin America. Brazil and Mexico are two major trading partners. The export mix from Florida includes computer and communications equipment as well as industrial chemicals and fertilizers. In the service sector, south Florida, as the gateway to Latin America, continues to attract the interest of banking organizations from around the world. In the state, foreign banks from twenty-three countries compete with domestic banks in the areas of international private banking, trade finance, and correspondent banking.
What accounts for this remarkable reversal in economic fortune? As I have said recently, on the national level, and possibly in Florida as well, the dominant force of late appears to have been a significant upshift in the rate of productivity growth. Having increased 1.6 percent per year from 1990 to 1995, output per hour in the nonfarm business sector--a conventional measure of productivity--has risen at an annual pace of about 2.6 percent since 1995. Cyclical forces--such as the inability of businesses to add to their payrolls as rapidly as they would have liked in response to the rise in demand--have probably played some role in these efficiency gains. But I suspect that longer-term, structural changes, reflecting the boom in capital spending and the revolution in information technology, probably have been more important. Through this increase in productivity, our national economy has successfully prepared itself to take advantage of the rapid globalization that has characterized the current economic expansion.
Although private decisions rightly deserve primacy in any discussion of the current economic climate, they were taken against the backdrop of important policy decisions. I believe that this productivity increase might not have occurred were it not for the policy adjustments that were started in the late 1970s and are continuing even today. Furthermore, the opening of many nations' economies to our goods and services reflects, in my judgment, the fact that the world's policymakers have, in general, abandoned the economic policies that were found to be counterproductive. In the end, free trade, deregulation, sound fiscal policy, and sound monetary policy have all played a role in the strength of the U.S. economy. These same factors are emerging as equally important in other economies.
Economic Prosperity, Trade, and Global Integration
Today, we are experiencing a great technological revolution--a communications revolution. The proliferation of microprocessors and other innovations of the past several decades has dramatically lowered the costs of getting and transmitting information. Predictably, the new communications technology has brought with it a growth of new markets. This great expansion of markets has allowed the U.S. economy to improve its allocation of resources by shifting them to their most internationally competitive uses. It also seems probable that these new communications technologies have brought greater openness in global markets by helping us to break down the complex and unproductive network of artificial trade barriers that characterized much of the previous century.
The role of international trade and finance in bringing renewed prosperity to our economy in the past decade is hard to overemphasize. Total trade with foreigners now accounts for about one-quarter of the total U.S. national output--more than twice the share of the period between 1920 and 1970 and the largest trade share of the U.S. economy in more than a century.
The Cost of Growth
Simply put, economies are constantly under competitive pressure to re-invent themselves. As they move toward higher levels of productivity, they necessarily make other production technologies obsolete. Schumpeter cautioned that economic policymakers who fail to appreciate the relationship between the relentless churning of the competitive environment and wealth creation will end up focusing their efforts on the methods and skills that are in decline. In so doing, they establish policies that are aimed at protecting weak, outdated technologies, and in the end, they slow the economy's march forward.
In retrospect, we can tell that some economic policies of the past century have inadvertently, or in some cases intentionally, done just that. They have had the effect of directing or misdirecting economic growth by either substituting policymakers' judgment regarding the distribution of an economy's assets for the combined wisdom of individuals or allowing markets to send false signals. In the long run, such policies were destined to fail.
The Economic Policies of the Last Century
In a similar spirit, some economies used taxes or other incentives to promote one industrial activity or discourage another. Obviously, the most egregious form of this policy was in planned economies. But many democratic economies, as they recovered from various wars and other national traumas, nationalized entire industries. In our society, we never found that degree of government intervention appropriate, but we did regulate some business decisions for certain industries, such as electric power distribution and airlines, attempting to overcome the "natural monopoly" or "excessive competition" characteristics perceived in these industries.
Finally, some central banks in the past engaged in policies that artificially altered the path of domestic prices in their effort to regulate their business cycles. If the monetary authority wanted more growth above trend, it lowered money-market interest rates by expanding the stock of money. Such policies were expected to bolster demand and encourage an acceleration of growth. There was the misunderstanding that somehow a long-run tradeoff existed between inflation and unemployment. But it gradually became understood that inflation eroded investor and consumer confidence and distorted behavior, both because the average of prices gave a constantly depreciating reading of the values it was supposed to represent and because relative prices provided an inaccurate reflection of comparative worth. Monetary policies that intended to create growth through the inflation of prices ended up impeding markets and reducing economic prosperity. We now know that there is no long-run tradeoff between inflation and unemployment. The U.S. experience of the last several years has also taught us that low and stable inflation is the underpinning for sustainable growth and that sustainable growth fosters the maximum creation of jobs over time.
Emergence of the Communications Era
Trade is flourishing, gaining great momentum in the ten years since the fall of the Berlin Wall. Total trade with foreigners now accounts for about one-quarter of total U.S. national output--more than twice the share of the period between 1920 and 1970 and the largest trade share for the U.S. economy in more than a century. Not coincidentally, the economy has been expanding at a strong and steady rate.
In addition, our economy has benefited from past actions by the government to deregulate industries. The removal of unnecessary government regulation started more than twenty years ago, during the administration of President Ford, and gathered momentum during the Carter years. It has altered the business landscape. Deregulation allowed, indeed forced, businesses to focus more clearly on a marketplace that has become more competitive, with fewer constraints and increased flexibility.
If economic policy is to play a constructive role in building a new world economy, policymakers must increasingly focus on policies that eliminate barriers to communication and allow the market to work most efficiently and effectively. They must develop approaches that do not hinder "creative destruction" but appropriately cushion its impact on workers and communities. They can encourage the information revolution by fostering policies and approaches conducive to giving investors and consumers the information they require to make informed decisions. For example, the Federal Reserve and the Basel Committee on Banking Supervision have strongly supported initiatives to improve the quality of national and international disclosure practices. Credible financial statements and other disclosures are key means for communicating a company's operating results and its overall health, as well as for making more transparent various operating activities.
Regarding monetary policy, central banks around the world are now endeavoring to provide stability to their domestic price levels. In some cases, this focus on price stability was undertaken in order to return credibility to the central bank after a period of unacceptable inflationary pressures.
The Federal Reserve, with our mandate, must also seek to facilitate the transmission of the information that the price level is meant to convey. By maintaining a stable purchasing power for money, workers and firms will more clearly see the values being attached to their opportunities and more effectively make judgments about the allocation of their resources. This is a monetary policy that does not attempt to alter the information being transmitted by the marketplace but to increase its clarity and consistency.
The increased openness of Federal Reserve decisions--reflected in announcement policies aimed at more rapid and transparent dissemination of Federal Open Market Committee decisions--also needs to be appreciated as a way to facilitate the communication to and within the marketplace in order to promote the most effective policy possible.
Policies for a Communications Era--A Local Perspective
In closing, let me give a few examples of some of the local programs that are conceived in this spirit. The Atlanta Reserve Bank and the Board of Governors, along with nine other federal agencies and regulators, earlier this year hosted a conference to discuss rural housing and economic development activities. The conference, entitled "Bridging the Gap: Financing Affordable Housing in Rural Florida, Georgia and Alabama," was held in Maitland, Florida, and was attended by seventy-five community development practitioners. The conference focused on rural economic development opportunities, particularly those housing programs designed to serve low- and moderate-income families, and on the ways to identify program and administrative funding sources necessary to take advantage of these opportunities.
In addition, the Atlanta Reserve Bank last year hosted a conference for financial institutions, local community development corporations, local municipalities, and others to roll out the community profiles that the Reserve Bank had prepared and to discuss programs and opportunities to address local needs. The profiles included demographic and statistical information about these communities. Currently, the staff of the Atlanta Reserve Bank are conducting extensive outreach to the same communities to assess the program and to identify current needs and emerging issues.