Fed Chief Warns of Barriers to Growth

A strengthening U.S. economy should begin creating more jobs soon but future growth could be slowed by ballooning deficits and creeping protectionism, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan, in his semiannual economic assessment to Congress, urged lawmakers to take steps to narrow the federal budget shortfall and resist pressure to restrict international trade.

The Fed chairman acknowledged that imports of low-cost foreign goods and the outsourcing of U.S. jobs have created hardships for many Americans. But he said the answer was better education and job training, not higher trade barriers.

“The greatest single threat ... is protectionism, a danger that has become increasingly visible on today’s landscape,” he told members of the House Financial Services Committee. “Creeping protectionism must be thwarted and reversed.”

In an important signal to financial markets, Greenspan also said the central bank would continue to be “patient” before raising its benchmark short-term interest rate from a 45-year low.

His comments buoyed securities markets. The Dow Jones industrial average jumped 123.85 to 10,737.70, a 2 1/2-year high. The Standard & Poor’s 500 gained 12.22 to 1,157.76, while the Nasdaq composite index rose 14.33 to finish at 2,089.66. And bond prices moved up, with bond yields falling, on expectations that interest rates would remain low.

Greenspan’s admonition on protectionism came amid a growing election-year clamor over the wisdom of President Bush’s tax cuts and trade policies. Although Greenspan did not offer an explicit endorsement of the policies, he indicated he would rather see the deficit reduced through spending restraint than tax increases. He also said efforts to protect jobs by restricting trade would lower future living standards.

“The problem is you cannot readily stop progress,” he said. “You can try, but invariably you will fail.”

His words did little to placate some lawmakers, who said the president’s policies have contributed to a federal deficit expected to top $500 billion this year and the loss of 2.9 million manufacturing jobs since Bush took office.

“American companies have shipped millions of jobs overseas,” said Rep. Bernie Sanders (I-Vt.). “According to you, it doesn’t matter whether we get our goods from people in China making 20 cents an hour or from people in this country making $20.”

Greenspan said the nation’s economic outlook improved considerably over the last six months. Gross domestic product has expanded, productivity has surged, and inflation has remained low. “The picture has brightened,” he said.

The missing ingredient, he conceded, was job creation. The “extraordinary” increase in productivity has enabled U.S. firms to generate more goods and services with fewer workers, keeping job growth low and unemployment relatively high.

That should change soon, the Fed chief predicted, as businesses find it increasingly difficult to respond to rising demand by squeezing more work out of existing employees. “In all likelihood, employment will begin to grow more quickly before long,” he said.

The Fed is forecasting that the economy will grow at a rate of between 4.5% and 5% this year, and unemployment will decline gradually from January’s 5.6% rate to between 5.25% and 5.5% in the fourth quarter.

Although he didn’t provide a specific job growth prediction, Greenspan said the administration’s latest estimate of 2.6 million new jobs this year appeared credible. “I don’t think it’s fantasyland,” he said. “It’s probably the most likely projection.”

He said the economy’s ability to generate jobs had been hamstrung by the remarkable surge in productivity, which he attributed to businesses wringing out inefficiencies accumulated during the heady days of the dot-com investment boom.

“My view is this pattern is about to change,” he said. When it does, he said, employment opportunities will be created for Americans displaced by the loss of U.S. factory jobs and the outsourcing of white-collar work to other countries. Until then, he said, Congress should avoid the temptation to protect jobs with trade restrictions.

“It’s the transition that is so difficult and so stressful for people,” Greenspan said. “A lot of people are losing their jobs every week. Yet if you look over a protracted period of time, you find that an ever-increasing number of Americans are employed in ever-higher-paying jobs.... Human ingenuity always finds new ways of doing things, and there are always new jobs being created.”

Some lawmakers appeared unconvinced. “Where are the jobs of the future?” Rep. Barbara Lee (D-Oakland) asked. “We’re telling our young people, ‘Get trained, go to school.’ They’re playing by the rules, only to find that when they get out of school, there are no jobs.”

Greenspan declined to specifically endorse or rebut recent remarks by the chairman of Bush’s Council of Economic Advisors, N. Gregory Mankiw, who called the offshoring of U.S. jobs “a good thing” that would help the economy grow over time.

Mankiw’s comments outraged opponents of the administration’s trade policies. The furor intensified Wednesday, with some Democrats calling for his resignation and prominent Republicans joining in the criticism of the president’s chief economist.

“I understand that Mr. Mankiw is a brilliant economic theorist, but his theory fails a basic test of real economics,” said House Speaker J. Dennis Hastert (R-Ill.). “An economy suffers when jobs disappear.”

White House spokesman Scott McClellan rejected suggestions that Mankiw should step down. “Any job loss is regrettable,” McClellan said. “Our economic team is doing a great job helping the president work to strengthen our economy even more.”

Greenspan, who described Mankiw as “a first-rate economist,” said he hadn’t yet read the council’s economic report. But he said he agreed with Mankiw that it would do little good to restrict imports from China in an effort to protect vulnerable U.S. jobs.

“If China stopped exporting to the United States, others would take up the slack,” he said. “It’s a basic issue of competition internationally.”

Greenspan said the widening U.S. budget deficit would jeopardize the government’s ability to keep Social Security and Medicare solvent once when the baby boomers begin retiring in a few years.

“This development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level, without debilitating increases in tax rates,” he said.

Burgeoning budget and trade deficits could cause problems even sooner by undermining investor confidence in America’s fiscal stability, he said, causing long-term interest rates to rise and economic growth to slow.