Greenspan Bullish on Net Economy

SAN FRANCISCO (03/06/2000) - U.S. Federal Reserve Chairman Alan Greenspan today said an Internet-based economy will continue to foster productivity, technology innovation and wealth creation. Yet Greenspan also warned that rising stock prices threaten to overheat the economy.

In speech delivered today at Boston College during a conference on the "New Economy," Greenspan said technology-based product development and capital spending continues at a healthy pace.

"I see nothing to suggest that these opportunities will peter out anytime son," Greenspan said. "Indeed, many argue that the pace of innovation will continue to quicken in the next few years as companies exploit the still largely untapped potential for e-commerce, especially in the business-to-business arena, where most observers expect the fastest growth."

However, Greenspan cautioned that large productivity increases are also creating inflation-related problems.

"Implicit in the very forces of change that are bringing us a panoply of goods and services considered unimaginable only a generation ago are potential financial imbalances and worker insecurities that need to be addressed if the full potential of our technological largesse is to be achieved," Greenspan said.

Productivity increases have fueled demand that has outpaced supply, which, in turn, has increased corporate borrowing costs significantly, he said.

"Presumably as a result, many analysts are now projecting that the rate of increase in stock market wealth may soon begin to slow," Greenspan said. "If so, the wealth effect adding to spending flow would eventually be damped, and both the rate of increase in net imports as a share of GDP (Gross Domestic Product), and the rate of decline in the pool of unemployed workers willing to work should also slow."

Greenspan echoed comments he made last month, when he said interest rates will have to rise to slow the economy.

"Our immediate goal at the Federal Reserve should be to encourage the economic and financial conditions that will best foster technological innovation and investment that spur structured productivity growth, " he said. "Achievement of this goal requires a stable macroeconomic environment of sustained growth and continued low inflation."

The rapid pace of productivity has also raised concerns about worker security that could spur calls for protectionist measures aimed at curbing foreign competition, he said. "We must ensure that our whole population receives an education that will allow full participation in this dynamic period of American economic history."

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