Good morning. It's a pleasure to have this opportunity to address you
on issues of mutual concern. We at the Federal Reserve Bank of Minneapolis
have had a longstanding interest in agriculture and its central role
in the economy of the Ninth District. Considerable space in our regional
publication, the fedgazette,
is devoted to the sector. In addition, we have long been involved in
issues related to economic growth and questions such as: why do some
nations' economies grow more rapidly than others? Why do some regional
economies far outpace the performance of others? What contribution can
government policy make toward economic growth?
These questions are important because to a considerable extent growth
determines a country's standard of living. That is, given its population,
or a path of population over time, the more rapidly the economy expands,
the higher living standards will climb. Growth, therefore, is largely
the key to economic well being.
Despite its significance, we do not know as much about growth as we
might like. Nevertheless, in my remarks this morning I would like to review
with you some of what we do know about this critical subject, with emphasis,
in particular, on the role of government policy. Actually, I should say
"roles" of government policy, for government can contribute constructively
to growth both on the aggregate level and through appropriate micro policies
and programs. Let me now move on to some specifics about these issues.
Although the U.S. is well into its seventh consecutive year of economic
expansion, some observers remain uneasy about the health of the economy.
They claim, among other things, that recent performance does not measure
up when compared with that of the first twenty-five years of the postwar
In assessing this claim, I think it important and appropriate to look
both at objective measures of business activity and at more general indicators
of economic well being. The thrust of this analysis is that the assertion
that our recent economic performance does not measure up to the past is
at least questionable. Indeed, our economy has performed well in recent
years, and many have benefited in the process.
By many, although not all, objective measures of economic performance,
the US economy has done and is continuing to do well. Nationwide, unemployment
is a relatively low 5 percent of the labor force, and it is a good deal
lower in many of the states of the Ninth Federal Reserve District. Perhaps
more importantly, since its low in 1991, employment has increased by about
13.5 million workers, or at a rate of more than 2 million net new jobs
per year. Moreover, sizable gains in employment are not a new phenomenon
in our economy; for example, from the end of the recession in 1982 to
the end of the succeeding expansion in 1990, about 20 million jobs were
I do not intend to inundate you with statistics, so let me just add
that, in addition to employment gains, the past six plus years have been
characterized by modest inflation, thriving corporate profits, strong
financial markets, and sustained economic growth. To a considerable extent,
similar language can be used to describe the period from 1982 to mid 1990
as well. In short, objective measures say we have done well over an extended
If we put aside the statistics and consider products and services that
have proliferated over the past decade or two, the increase in our prosperity
becomes ever clearer. Specifically, I am thinking about how commonplace
VCRs, CD players, computers, boats, snowmobiles, jet skis, air travel,
mutual funds, and long distance communication have become. And it is not
just high income families that avail themselves of these products and
services for, if that were the case, the markets for and volumes of these
products would be far smaller than they in fact are.
Anecdotal evidence also testifies to the strength of the expansion.
In meetings with business and other community leaders, we are told constantly
of severe labor shortages, of renewed strength in commercial construction
activity, and, in some locations, of very tight housing markets. Clearly,
a lot has been going on in the economy, and much of it is positive. There
is a school of thought which says that many of the newly created jobs
are in the service sector and are relatively low paying. This statement
is half right. The service sector of the economy has grown rapidly but,
according to the Council of Economic Advisers, many new jobs in services
are in relatively well-paid managerial and professional positions.
It is important to ask how this favorable performance has come to pass?
This is not an easy question to answer for, if we knew the formula, we
could bottle and sell it. But at least three factors can be cited as significant,
if not all inclusive, contributors to this period of sustained growth:
they are technology, trade, and government policy. Let me discuss each
of these factors in turn.
For some time, it has been recognized that improvement in the state
of technologythat is, technological progressis a key factor
determining economic growth. This is because the available state of technology,
which refers to the efficiency with which a given set of productive inputs
is employed, influences the productivity of labor. In short, technological
progress raises labor productivity, which in turn raises growth.
Research has shown that the state of technology in a country depends,
in part, on the pool of world knowledge available at a given time and,
perhaps more importantly, on internal institutional arrangements that
promote or retard the use of this knowledge. Technological progress, therefore,
depends on the rate at which world knowledge grows and on the extent to
which a country's institutions provide incentives for employing that expanding
world knowledge. Recent evidence shows, further, that the state of technology
of a country is related positively to factors such as openness to foreign
trade and to deregulation. That is, it appears that the more an economy
participates in trade and the less regulated it is, the better its state
of technology: competitive pressures undoubtedly hasten adoption of new
Conversely, countries which erect barriers to the use of world knowledgebarriers
which limit international trade, constrain business practices excessively,
or reduce competitiontend to have relatively poor states of technology.
In taking such actions, countries usually are not trying to resist technology
so much as protect a particular industry or sector from competition or
According to this reasoning, openness to foreign trade is positive for
economic growth because of its implications for technological progress
and labor productivity. But this reasoning aside, empirical studies that
have looked at trade alone have concluded that it has a distinctly positive
effect on a nation's growth and living standards. In this connection,
it is interesting to note that both US exports and imports have increased
annually at double digit rates, in inflation adjusted terms, since their
lows of the early 1980s. Our exports have grown over this period from
about 8 percent of GDP to nearly 12 percent at present, while the import-GDP
ratio has climbed comparably from roughly 9 percent to 13 percent. To
be sure, these observations do not demonstrate causality, but the economy
has certainly done well as trade has expanded, and we should bear this
in mind when issues like NAFTA arise. The record seems sufficiently impressive
to suggest that we should encourage growth in trade to the extent possible.
The third factor earlier identified as contributing to economic growthnamely,
government policyis relevant in several ways, one of which has already
been touched upon. Government policy can have an appreciable impact on
technological progress by ensuring that a country's organizations and
institutions have incentives to use and to adapt world knowledge. In this
regard, the commitment in the US to measure more carefully the costs and
benefits of regulations, to deregulation of several industries, and to
open trade have undoubtedly been positive for technological progress and
productivity. A second aspect of government policynamely, progressive
steps taken in recent years toward balancing the federal budgethas
been positive as well, largely, I suspect, through their favorable implications
for business capital investment.
I would be remiss if I did not add that the Federal Reserve, through
our conduct of monetary policy, has also contributed to the favorable
performance of the economy. Notably, in this decade as well as through
much of the expansion of the 1980s, inflation has been contained to moderate
rates, a characteristic shared by the way by the long expansion of the
economy during the 1960s. Causality is difficult to demonstrate in economics,
but we nevertheless seem to be building a considerable body of evidence
which suggests that, at least in the United States, modest inflation and
prolonged periods of growth go hand in hand. I suspect that one key in
this relation is the stability provided by a low inflation environment.
In such an environment, there is less uncertainty about the future, and
business and consumers can make decisions and take actions with confidence.
Such an environment is likely to favor savings and investment, to the
long-run benefit of economic performance.
The evidence about the relation between low inflation and economic growth
is directly relevant to the Federal Reserve and our responsibility for
monetary policy because there is widespread agreement that inflation is
ultimately a monetary phenomenon; it results from a long-term pattern
of money creation which is excessive relative to the economy's ability
to produce goods and services. Further, there is agreement that the supply
of money is determined by the central bank in the long run. Thus, with
policy which limits money creation appropriately, the Federal Reserve
can in fact achieve and maintain low inflation.
The role of government policy, however, goes beyond encouragement of
trade and technological progress, and beyond sound monetary and fiscal
policies, important as they may be. As I suspect you recognize full well,
government provision of certain public goods, including transportation
infrastructure, can be critical in fostering development and growth.
Transportation infrastructure is particularly important to the economy
of the Ninth Federal Reserve District since we are far from export ports,
such as New Orleans and Portland. Moreover, transportation costs are the
principal wedge between world prices of wheat, corn, and soybeans and
farm gate prices. The more expensive transportation is, the less Ninth
District farmers receive.
Fortunately, the US has the lowest cost transportation system in the
world for agricultural products. By way of example, it costs Brazilian
farmers more than twice as much to move soybeans 300 miles from western
Parana state to the coast as it does to move Ninth District soybeans 1,500
miles to the Gulf Coast. And US port charges are about half of Brazilian
The Mississippi and Missouri rivers have played a central role in the
economic development of the region for more than a century. Steamboats
linked St. Paul with the rest of the nation, went as far up the Minnesota
River as Mankato, and 4-foot draft steamwheelers clawed their way up the
Missouri as far as Montana in the 1880s. But the development and maintenance
of the 9-foot channel in the Mississippi between the wars has been the
most important factor for low-cost movement of Ninth District agricultural
products. Locks and dams at St. Paul, Hastings, Red Wing, between Wabasha
and Winona, as well as near Trempealeau and La Crosse, Wisconsin have
helped to facilitate the large shipment of district products downriver
and inputs such as fertilizer upriver.
The Mississippi, to be sure, provides a fundamental physical underpinning
to the prosperity of Ninth District agriculture. But successful utilization
of this resource has depended as well on government infrastructure investmentsthe
channel, locks, and damscited earlier.
So the government can and has, in fact, played several significant roles
in fostering economic growth. Macroeconomic policies, which have promoted
stability, have provided a sound underpinning on which the private sector
has thrived. Further, we have had an environment generally favorable to
technological progress, a key element in productivity improvement. And,
finally, government infrastructure investment has played a positive role
as well, to the benefit of many sectors of the economy.