The U.S. economy has absorbed recent sharp increases in energy prices with little trouble because it has become more dynamic, competitive and open to global trade over the past quarter-century, Federal Reserve Chairman Alan Greenspan said yesterday.
That resilience results from advancing technologies and from government getting out of the way of free markets, Greenspan suggested in a speech delivered via satellite to the annual meeting of the National Association for Business Economics in Chicago.
At a time the aftermath of Hurricane Katrina has included spiking gasoline prices, plunging consumer confidence and widespread forecasts of a brief economic slowdown, Greenspan sounded upbeat in explaining why he thinks the economy has not stumbled seriously in two decades despite natural disasters, a stock market crash, terrorist attacks and other shocks.
The key, Greenspan said, is economic "flexibility" -- a term he has used frequently to refer to the ability of prices, interest rates and exchange rates to adjust rapidly in response to changing conditions.
"The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years," Greenspan said. "The consequence has been a far more stable economy."
Other aspects of economic flexibility, he said, include the gradual deregulation of large parts of the transportation, communications, energy and financial industries since the 1970s. Greenspan also credited the lowering of trade barriers, the freedom to fire workers, the development of information technologies that have improved inventory management and the creation of complex financial tools that have enabled businesses and investors to disperse risk.
That flexibility enabled the economy to weather the 1987 stock market crash with no long-term economic stress and helped the economy survive both the credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 with the mildest recessions since World War II. Even the terrorist attacks of September 2001 caused "severe economic weakness . . . for only a few weeks," he said.
"The more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances," he said.
Flexibility was inhibited in the past, Greenspan said, by wage and price controls and efforts to protect workers' jobs through trade barriers. Recently, members of Congress and some state legislatures have responded to the surge in energy costs by proposing controls on gasoline prices.
Greenspan made his comments as many analysts and business executives are voicing concern that Hurricane Katrina might have pushed energy prices high enough to force a sharp reduction in consumer spending as average wages lag, households' debts are high, and savings are scant.
U.S. consumer confidence fell by the most in 15 years after Hurricane Katrina, the Conference Board reported yesterday. The research group's monthly index of consumer confidence dropped to its lowest level in two years.
Many economists forecast economic growth to slow in the first months after Katrina, and to rebound next year as reconstruction efforts take off.
"The destruction wrought by Katrina and Rita may reduce growth somewhat in the short run, but the longer-term growth trajectory remains in place," Ben S. Bernanke, chairman of the president's Council of Economic Advisers said yesterday in a separate speech to the NABE meeting.
Bernanke, a former Fed board member, echoed Greenspan's optimistic outlook: "The resiliency of the economy -- the product of flexible labor markets, a culture of entrepreneurship, liquid and efficient capital markets, and intense market competition -- is helping it to absorb the shocks to energy and transportation from the hurricanes, and the ability of our economy to grow and create jobs will act as a lifeline to the regions and people that have been most affected."