Recent growth in the economy, which has seen increased saving, investment and productivity, may last beyond the typical boom-and-bust cycle of stock markets in the last century.
Edward Gramlich, a member of the Board of Governors of the Federal Reserve System, explained Thursday why this could be the case during a visit to the University.
Gramlich, who spoke to about 80 business people associated with the University during a lunch sponsored by the College of Arts and Sciences, said the economy’s current strength was due to the spread of information technologies and globalization but also to more traditional factors, such as savings and investments.
Savings and investments in the United States economy from foreign sources have been a major factor in recent growth, he said. Gramlich also noted the importance of government savings in bolstering the economy.
“The government’s contribution to saving has increased remarkably since 1992,” he said.
A large surplus in the form of social security benefits waiting to be collected by aging baby boomers is earning interest and making up for some declines in private investment.
“It never occurred to me that I’d be alive when the government was in surplus,” Gramlich said.
The boom in the high-tech revolution has produced very sharp increases in productivity and “this revolution has a long way to run,” he said.
This predicted longevity is due in part to high rates of obsolescence inherent to the high-tech industry. To stay competitive, firms have to continually buy newer and faster computers as technology advances. Furthermore, many experts have called this the beginning of the high-tech boom, with years of similar growth possible, Gramlich said.
“Compared with the investment booms of the ’60s, this has much more potential to be sustainable,” he said. “I think for the next five to 10 years, the productivity outlook is rosy.”
He added that it is difficult to predict how long the technology boom will last because guessing about new technological innovations is difficult.
Gramlich, who took office in November of 1997, explained the Federal Reserve Board’s role in creating and preserving a strong economy.
“What I think we at the Fed oughta do is keep inflation down,” he said. “If we see inflation coming, we’ve got to tighten up; if we see unemployment coming, we’ve got to ease up.
“The challenge is to be appropriately preemptive.”
He said he hopes the general strategies of tight fiscal policy, high government saving and paying back the national debt will continue to work toward this end.
Gramlich spent Thursday morning talking with students in a poverty, inequality and public policy economics class that deals with some of the issues he is an expert in.
The class is taught by associate professor of economics James Ziliak, who invited Gramlich to the University.
Gramlich “has been associated with research on poverty and inequality for 30 years,” Ziliak said. “He is one of the country’s experts.”
Gramlich’s term on the seven-member Federal Reserve Board of Governors will end in January of 2008. All seven members are nominated by the President and confirmed by the Senate, according to the Federal Reserve System Web site.