- The Washington Times - Thursday, August 18, 2005

The price of West Texas Intermediate, the benchmark crude oil traded on the New York Mercantile Exchange, has jumped another 50 percent in the last year after leaping 50 percent the previous year. That trend calls to mind the oil shocks that literally devastated the U.S. economy during the 1970s and early 1980s. But the U.S. economy has expanded by an extraordinary 8.4 percent over the last two years ending in June.

Admittedly, energy in general and oil in particular play smaller relative roles in the U.S. economy than they did 20 and 30 years ago. And, to their credit, Alan Greenspan and his colleagues at the Federal Reserve have been vigilantly removing monetary stimulus since last summer. That has helped to alleviate the inflationary pressures that accompany soaring oil prices. Those facts alone, however, cannot explain the U.S. economy’s incredible resilience, which has been steadily building for more than two decades.

Indeed, long before oil prices began their recent upward spiral, the U.S. economy had to confront several major challenges simultaneously. These included the aftermath of the bursting of the stock-market bubble in 2000, which reduced household equity wealth by half; the September 11 terrorist attacks; the escalation of geopolitical risks and uncertainty following those attacks and preceding war with Iraq; the fallout from the corporate governance scandals (Enron, WorldCom, et al.); and the capital-investment meltdown in the telecommunications industry.

In numerous speeches and appearances before congressional committees in recent years, Mr. Greenspan has marveled at America’s economic resilience. Noting early last year that “the past two recessions in the United States were the mildest in the postwar period,” the Fed chairman credited “improved flexibility” for playing “a key role in the U.S. economy’s recent relative stability.” How stable? During the past 23 years, Mr. Greenspan observed that the United States suffered only three instances of quarterly declines in real gross domestic product of more than 1 percent annualized. Since the first quarter of 1991, moreover, there has been only one such quarter. (GDP fell 1.4 percent during the July-September period in 2001). Considering that the 1973-1975 recession included five such quarters (-2.1, -3.4, -3.8, -1.6, -4.7) and the 1981-82 recession included four such quarters (-3.1, -4.9, -6.4, -1.5), America’s economic resilience since the early 1980s has been truly remarkable.

Not known for his superlative declarations, Mr. Greenspan nonetheless has said that the resilience to economic shocks that structural flexibility affords is the most important lesson in recent economic history. Increased flexibility yields “a faster response to shocks and a corresponding greater ability to absorb their downside consequences and to recover from their aftermath,” Mr. Greenspan explained.

Since the late 1970s, when Washington began to deregulate major sectors of the economy, the movement toward increased flexibility has enveloped America’s product, labor, service and financial markets. The airline and trucking industries, for example, were deregulated in the late 1970s and early 1980s, exposing both to massive competition, which reduced prices for consumers. Congress later deregulated the communications and energy industries.

Meanwhile, the decades-long, persistent dismantling of trade barriers eliminated major domestic economic rigidities by increasing competition. That same process opened foreign markets to U.S. products. As a result, U.S. foreign trade (the sum of imports and exports) increased from 10 percent of GDP during the second half of the 1960s to more than 25 percent last year.

Before the information-technology revolution, manufacturers did not have the real-time data necessary to address their inventory imbalances in a timely manner. Not so today.

Labor markets in America, where the unemployment rate is 5 percent today, are far more flexible than those in France (10.1 percent unemployment) and Germany (11.6 percent). Interestingly, as the U.S. labor market became more flexible during the 1980s and 1990s, when firms became less hesitant to eliminate jobs to reduce costs, Mr. Greenspan argues that U.S. structural unemployment has actually decreased because “the broadened freedom to discharge workers rendered hiring them less a potentially costly long-term commitment.”

In Mr. Greenspan’s view, both deregulation and innovative technologies have joined to advance financial flexibility, which “in the end may be the most important contributor to the evident significant gains in economic stability over the past two decades.” The “phenomenal” growth of financial derivatives has created heretofore unavailable opportunities for hedging and dispersing risks. The flexibility and size of the secondary mortgage market has, since 2000, “facilitated the large debt-financed extraction of home equity that, in turn, has been so critical a support for consumer outlays in the United States.”

Through this process of “creative destruction,” first described by Joseph Schumpeter, Mr. Greenspan persuasively argues that “[t]he flexibility of our industry and workforce to reinvent themselves when the need arises forms the basis for increasing standards of living.”



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