Statements to Congress - Statements by Alan Greenspan to the Senate Committee on the Budget and the Senate Committee on Finance

Federal Reserve Bulletin, March, 1997

The evidence that inflation has been slower and that real growth has been faster than the official measures indicate is welcome, in part because it suggests that the nation's current level of economic well-being is higher than we had thought. But I want to make clear that revising our historical estimates of real growth to incorporate better price data would have no material effect on measures of the degree of resource utilization because such a revision implies faster growth in potential output as well as actual output; accordingly, it does not alter the relationship between resource utilization and inflation. Nor does it change the outlook for the federal budget deficit, apart from any modifications to the indexing formulas for entitlements and income taxes.

Certainly, the judgment that aggregate productivity has been growing faster than indicated by the official statistics seems reasonable in light of the significant business restructurings and extraordinary improvements in technology in recent years. I do not mean to imply, however, that we should assume that the full productivity gain from information technology has already been reaped. Clearly, it takes some time for firms to adopt production techniques that translate a major new technology into increased output. In an intriguing parallel, electric motors in the late nineteenth century were well known as a technology but were initially integrated into production systems that were designed for steam-driven power plants. Not until the gradual conversion of previously vertical factories into horizontal facilities, mainly in the 1920s, were firms able to take full advantage of the synergies implicit in the electric dynamo and thus achieve dramatic increases in productivity. Analogously, not all of today's production systems can be easily integrated with new information and communication technologies. Some existing equipment cannot be controlled by computer, for example. Thus, the full exploitation of even the current generation of information and communication equipment may occur over quite a few years and only after a considerably updated stock of physical capital has been put in place.

Although such a scenario is quite plausible, we cannot be certain when, or if, it will occur. Thus, we must be vigilant to ensure that our economy remains sufficiently flexible for entrepreneurial initiatives. And we must continue our efforts to further enhance productivity growth by raising national saving and spurring capital formation. Attaining a higher national saving rate quite soon is crucial, particularly in view of the anticipated shift in the nation's demographics and associated pressures on federal retirement and health programs in the first few decades of the next century. Reducing the size of the federal budget deficit, and over time moving the unified budget into surplus, would go a substantial way in that direction.

Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Finance, U.S. Senate, January 30, 1997