Tuesday, January 13, 2004

Federal Reserve Chairman Alan Greenspan yesterday dismissed worries that the U.S. recovery could peter out because so few jobs are being created, asserting the economy is not capable of growing rapidly for long without producing jobs.

“It’s just a matter of time before we begin to see employment start to pick up quite significantly, as it always has in the past,” Mr. Greenspan said. He argued that the stunning 9.2 percent growth rate in productivity, or output per worker, seen in the summer is so extraordinary that it in effect “stole” jobs that otherwise would have been created as a result of booming growth.

In a rare comment on an economic report that shook the markets and raised doubts about the recovery Friday, Mr. Greenspan told bankers in Berlin that the meager December job gain of 1,000 reported by the Labor Department “is not surprising,” given such high productivity. But that rate of productivity growth is many times the average experienced by the U.S. economy in the past, and will not continue, he said.

In a question-and-answer session after his speech, Mr. Greenspan also appeared to endorse President Bush’s efforts to reform the immigration laws and allow foreign workers to seek temporary jobs in the United States. He portrayed the reforms as a necessary adjustment to the widespread and sometimes illegal migration of workers in the era of globalization.

The Fed chairman in his speech repeated his warning against “creeping protectionism,” although he expressed satisfaction that the trend in the United States and elsewhere toward defensive trade measures lately “has not been accelerating.”

Mr. Greenspan’s speech appeared aimed at allaying concerns in Europe and elsewhere about the rapid fall of the dollar and bloated U.S. trade deficit, which was in the $500 billion range last year. The Fed chairman may be trying to forestall an attempt by European leaders to propose concerted action to curb the dollar’s fall at a meeting of the Group of Seven finance ministers in Florida next month.

Mr. Greenspan said the Fed is not worried about a currency crisis developing like those that gripped Mexico, Russia and other nations with large current account deficits in the 1990s. He noted that the United States has had no trouble thus far attracting the large inflows of foreign capital it needs to finance its deficits.

“There is, for the moment, little evidence of stress,” Mr. Greenspan said. “To date, the widening to record levels of the U.S. ratio of current-account deficit to [gross domestic product] has been, with the exception of the dollar’s exchange rate, seemingly uneventful.”

While the U.S. deficit currently is above the 5 percent of GDP level that has triggered crises in other countries, a recent study by the Fed found that some developed nations since 1980 have weathered deficits as high as the “double digits” without a crisis, although they may have experienced “some significant slowing of economic growth,” he said.

The role the dollar plays as the world’s reserve currency, constituting 65 percent of reserves held by central banks worldwide, seems to be assisting the United States in financing its unprecedented deficits, he said. Foreigners remain willing to hold dollars despite their shrinking value.

The Fed chairman added that he sees no signs the dollar’s 25 percent drop against other major currencies since early 2002 has spurred higher import prices — another potential problem that could force the central bank to raise interest rates.

“Inflation, the typical symptom of a weak currency, appears quiescent,” he said. Import prices in recent months have been flat after declining because of the dollar’s strength in previous years.

Mr. Greenspan acknowledged that the drop of the dollar — which has been sharpest against the European currency — has created difficulties in export-driven European economies such as Germany.

European Central Bank council member Ernst Welteke told the gathering of bankers, “We fear that the appreciation of the euro could put a brake on the recovery.”

German Chancellor Gerhard Schroeder told reporters he expressed concern about the dollar’s weakness in a meeting with Mr. Greenspan yesterday. But they agreed that the burden is on the European bank to take action — possibly by lowering interest rates.

French leaders recently have said they might ask the United States to help curb the dollar’s fall at the G-7 meeting, which is being hosted by Treasury Secretary John W. Snow. But Mr. Greenspan’s comments and recent remarks by Mr. Snow suggest neither would be open to such a proposal.

Mr. Greenspan warned against interfering with the market adjustment now under way, and indicated that the best course of action is to do nothing.

“The market will do it,” he said. “If it appears to be moving toward equilibrium, then obviously nothing is required and indeed, I would say further, nothing should be done. … We should be very careful in trying to alter the markets driving toward balance, because with the very major changes going on internationally — not all of which we fully understand — there are risks that unexpected events can occur.”

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