JACKSON, Wyo., 31 August 2003 — The US economy and the global economy are now better able to withstand shocks because of government deregulation and more flexibility in such areas as labor markets, Federal Reserve Chairman Alan Greenspan believes.
Greenspan made that observation at a two-day conference that attracted some of the world’s top central bankers to examine the issues of economic uncertainty and change. The conference, which was scheduled to wrap up with a concluding session yesterday, also saw a defense by Greenspan of the Fed’s handling of the threat of deflation and the bursting of the stock market bubble in 2000.
Greenspan, who this month began his 17th year in what many see as the second-most-powerful job in the country, took issue with a paper delivered Friday by James Stock and Mark Watson, two economists from the National Bureau of Economic Research.
The two argued that economic shocks that trigger recessions have become less frequent in the last two decades, helped in part by successful implementation of monetary policy by the Fed and other central banks.
“I have been watching the economy for over 50 years and I don’t think there has been a reduction in the number of shocks,” Greenspan said. Rather, he said, greater flexibility in the form of government deregulation of major industries and more flexible labor markets and financial markets have helped the US economy withstand shocks that in the past would have triggered major recessions.
“There is no question that the shock of Sept. 11 was of monumental importance,” Greenspan said of the 2001 terrorist attacks. But he said that the US economy was able to bounce back quickly with little impact on economic performance just three months later. “There has been a very significant increase in the flexibility of the US economy and the world economy to absorb shocks,” Greenspan said. “Deregulation has enabled this country to absorb shocks in a way that it could not in previous periods.”
Greenspan on Friday used his appearance at the Jackson Hole Monetary Conference sponsored by the Kansas City Federal Reserve Bank to promote his brand of flexible monetary policy based on risk assessments over rival proposals that set strict rules, such as establishing inflation targets, to govern the conduct of monetary policy.
Under inflation rate targeting, a central bank would announce an annual target for inflation and then conduct monetary policy to achieve that desired level of price increases.
But Greenspan argued that setting a numerical target is too inflexible and simplistic when the Fed is trying to manage monetary policy in the face of an enormous array of uncertainties. He said the better approach was to base decisions on policy-makers’ assessments of a wide range of risks, including those that while remote, would be very detrimental to the economy if they occurred, such as deflation.
“Some critics have argued that such an approach to policy is too undisciplined, judgmental, seemingly discretionary and difficult to explain,” Greenspan said. But Greenspan said that uncertainty “is the defining characteristic” of monetary policy and central bankers need maximum flexibility, not arbitrary rules, so that they can make adjustments quickly.
Greenspan said it was sometimes necessary for the Fed to take out an insurance policy “against the emergence of especially adverse outcomes.” As a comparison to the recent worries about the remote possibility of deflation, Greenspan pointed to the Fed’s actions at the height of the Asian and Russian financial crisis in 1998 when the Fed moved aggressively to cut interest rates to keep global turmoil from derailing the US economy.
