17 October 2001
Text: Greenspan Testimony on U.S. Economy Since Terrorist Attack
(He says recovery uneven, hampered by uncertainty for now) (1770)
U.S. economic recovery after terrorist attacks on the World Trade
Center and Pentagon remains uneven and restrained by uncertainty, but
the outlook for long-term economic performance remains sound, Federal
Reserve Chairman Alan Greenspan says.
In October 17 testimony before the Joint Economic Committee of
Congress, Greenspan said policy makers should improve their
understanding about the economy in weeks ahead "as the initial shock
continues to wear off."
Before the September 11 attacks, he said, some tentative signs of U.S.
economic recovery from the ongoing slowdown were showing up in
consumer spending, investment and business profits.
After September 11, he said, business activity dropped significantly
even as the Federal Reserve employed extraordinary temporary measures
to protect financial markets and the payment system.
Greenspan also cited the Federal Reserve decision to cut interest
rates again after the attacks but gave no indication about the future
direction of monetary policy.
Increased uncertainty raises problems for business decision makers and
consumers, he said, as they face higher insurance and security costs.
Investing in security is certainly worthwhile but does not contribute
to productivity or economic well-being, he added. Nonetheless, he said
he expects productivity will rebound as the economy adjusts to a
higher level of perceived risk.
"Judging from history, human beings have demonstrated a remarkable
capacity to adapt to extraordinarily adverse circumstances," Greenspan
said. "And I expect the same adaptability to become evident in the
present situation."
Following is the text of Greenspan's testimony as submitted for the
committee's record:
(begin text)
Testimony of Chairman Alan Greenspan
Monetary policy and economic outlook
Before the Joint Economic Committee, U.S. House of Representatives
October 17, 2001
I appreciate this opportunity to appear before the Committee to
discuss recent developments in the United States economy. Despite the
tragic events of September 11, the foundations of our free society
remain sound, and I am confident that we will recover and prosper as
we have in the past.
But before the recovery process gets under way, stability will need to
be restored to the American economy and to others around the world.
Arguably, that stability was only barely becoming evident in the
United States in the period immediately preceding the act of
terrorism.
Aggregate measures of production, employment, and business spending
continued to be weak in August. Consumer spending, however, moved
higher that month and appeared to be reasonably well maintained in the
first part of September. Industry analysts suggest that motor vehicle
sales were running close to August levels, and chain store sales were
only modestly lower. New orders for nondefense capital goods
stabilized in August. Moreover, the dramatic rate of decline in
profits was slowing. To be sure, these signs were tentative but, on
the whole, encouraging.
In the days following the attack, the level of activity declined
significantly. The shock was most evident in consumer markets as many
potential purchasers stayed riveted to their televisions and away from
shopping malls. Both motor vehicle sales and sales at major chain
stores fell off noticeably. The airline and travel industries also
suffered severe cutbacks.
The unprecedented shutdown of American air travel and tightened border
restrictions induced dramatic curtailments of production at some
establishments with tight just-in-time supply chain practices, most
notably in the motor vehicle industry.
As the initial shock began to wear off, economic activity recovered
somewhat from the depressed levels that immediately followed the
attacks, though the recovery has been uneven. Markedly increased
incentives induced a sharp rebound in motor vehicle sales by the end
of the month that has carried apparently undiminished into the first
half of October. However, many retailers of other consumer goods
report that sales have only partially retraced the steep drops that
occurred in mid-September. Fortunately, air freight is largely back to
normal. Overall airline passenger traffic, while above its
mid-September lows, was still off considerably in early October from
pre-attack levels. Similarly, the hospitality and entertainment
industries have overcome some of their earlier difficulties but
continue to struggle.
The effect on financial markets of the devastating attack on the World
Trade Center was pronounced as telecommunications and trading
capacities were severely impaired. But the markets are mostly
functioning normally now, and, as in the past, the infrastructure will
be rapidly restored.
For a brief time, the terrorist attacks markedly disrupted payment
transfers, leaving those counting on receiving payments caught short.
Those needs ultimately were met by the Federal Reserve, both through
record lending at the discount window and through an extraordinary
infusion of funds through open-market operations. To facilitate the
channeling of dollar liquidity to foreign financial institutions
operating in the United States, thirty-day currency swap lines were
arranged with major central banks, again in record volumes. It was
essential in such an environment to meet all appropriate demands for
dollar liquidity. As repair of the financial markets and payment
infrastructure proceeded apace, loans were repaid, open-market
operations could be scaled back, the unusual swap lines were allowed
to expire, and the temporarily bloated balance sheet of the Federal
Reserve largely returned to normal.
But even as market functioning and liquidity flows were restored, the
potential for heightened uncertainty to damp household and business
spending for a time persisted. To cushion these effects, we have eased
the stance of monetary policy appreciably since September 11.
We in the United States have assumed ourselves to be fairly well
insulated from terrorism or, at most, subject to limited and sporadic
episodes similar to those previously observed on a number of occasions
in Europe.
We have been aware of the possibility for losses on a much greater
scale. But I suspect that those possibilities were deemed so remote
that they were never seriously incorporated into most conventional
assessments of economic risk.
The shock of the tragedies at the World Trade Center and the Pentagon
has reshaped those assessments of risk and required an abrupt
realignment of prices in many markets to reflect the expected costs of
operating in what we now recognize as a more hostile world. These
circumstances pose a difficult challenge for business decision making,
not so much because the costs are inordinately large, but because the
events, which have potentially substantial consequences, are so
uncertain. Insurance deals with this problem by spreading the risk and
converting potential large unknown costs into a steady stream of known
insurance premiums that facilitates the forward planning so essential
to an effective business operation.
Obviously, sharp increases in insurance premiums for all forms of
businesses are to be expected. Some higher insurance costs, in effect,
will be borne implicitly rather than explicitly as firms choose to
self-insure, at least in part, rather than lay off all of this risk in
the marketplace.
These higher insurance costs, both explicit and implicit, endeavor to
anticipate future losses. But in addition, they cover the physical
capital and labor resources businesses will be required to devote to
enhanced security, and to increased redundancies as protection against
interruption of supplies or production. For example, the degree of
comfort businesses have in allowing inventories to shrink to minimal
levels in a just-in-time supply chain is lessened. In this regard,
increased security threats, not pooled through insurance, have exactly
the opposite effect on productivity than that which is gained by an
improvement in information technology. In addition to the loss of
human life and capital assets, these are important collateral costs
associated with the new threats that we now face.
The pronounced rise in uncertainty also has damped consumer spending
and capital investment; households and businesses, confronted with
heightened uncertainty, have pulled back from the marketplace, though
that withdrawal has been partial and presumably temporary. The very
great economic uncertainties that have arisen in the current
environment have also, at least temporarily, resulted in a widening of
bond spreads on high-yield instruments.
Markets across our economy will adjust to the altered perceptions of
risk that we now confront. Critical to that adjustment process is the
behavior of consumers and business people. Behavior is difficult to
predict in circumstances such as those we have experienced in the past
five weeks. But judging from history, human beings have demonstrated a
remarkable capacity to adapt to extraordinarily adverse circumstances.
And, I expect the same adaptability to become evident in the present
situation.
Although it is difficult to determine with any precision, it seems
quite likely that a significant repricing of risk has already found
its way into our markets as many economic decisions are responding to
shifting market signals. But these adjustments in prices and in the
associated allocation of resources, when complete, represent one-time
level adjustments, without necessary implications for our longer-term
growth prospects.
Indeed, the exploitation of available networking and other information
technologies was only partially completed when the cyclical
retrenchment of the past year began. High-tech equipment investment at
elevated rates of return will, most likely, resume once very high
uncertainty premiums recede to more normal levels.
The level of productivity will presumably undergo a one-time downward
adjustment as our economy responds to higher levels of perceived risk.
But once the adjustment is completed, productivity growth should
resume at rates in excess of those that prevailed in the
quarter-century preceding 1995.
It is worth noting that increased production to enhance security will
be counted in measured output without contributing to our standards of
living as was the case during our military buildup of the Cold War.
Our productivity measures have always endeavored to capture increased
productive efficiency, not increased well being. We are, in effect,
currently using part of our increase in efficiency to supply increased
security. Of course, given the heightened risks we face, these
investments in security are, doubtless, quite sound. In any event,
such costs are likely to fall short of the costs we incurred for
security during the height of the Cold War.
Nobody has the capacity to fathom fully how the effects of the tragedy
of September 11 will play out in our economy. But in the weeks ahead,
as the initial shock continues to wear off, we should be able to
better gauge how the ongoing dynamics of these events are shaping the
immediate economic outlook.
For the longer term, prospects for ongoing rapid technological advance
and associated faster productivity growth are scarcely diminished.
Those prospects, born of the ingenuity of our people and the strength
of our system, fortify a promising future for our free nation.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)
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