Gov. Kohn Says U.S. Place
in World Economy Is Key
Two significant trends in the global economy have become major policy issues in the United States, according to Federal Reserve Gov. Donald L. Kohn. Speaking recently at the Atlanta Fed’s Public Policy Dinner, Kohn noted that the emergence of developing countries as global forces and the consequent reorganization of production processes and jobs is changing Americans’ view of the job market. The second major issue he addressed is the country’s ballooning trade and current account deficits.
Both trends, Kohn believes, are important issues for the Fed to keep in mind as it conducts monetary policy. These two issues can influence the balance of supply and demand as well as the economy's flexibility, resiliency, and capacity to advance standards of living.
The restructuring of jobs is part of a huge increase in global productive capacity, Kohn noted. Many developing countries—but especially China and India, which they have maintained political stability—are shifting toward market-based economic systems. At the same time, technology has helped improve production processes, unleashing huge productive potential and opening up opportunities for more developed countries to transfer production to locations where the work can be done less expensively. In manufacturing, this shift has been under way for a long time and has restructured production processes both in the United States and abroad.
As a consequence, workers in the United States must shift toward industries specializing in goods and services that the country produces more efficiently, according to Kohn. At the same time, U.S. consumers are gaining access to cheaper goods produced abroad. The shifting of some jobs to Japan in the 1980s and to East Asia and Mexico in the 1990s aroused concern, yet the U.S. unemployment rate in the late 1990s reached a 30-year low.
Kohn advised, however, that any rigidity in exchange rates or labor and product markets or quotas and tariffs on international trade will limit the channels through which a natural adjustment process can work. Hasty diagnoses and incorrect policy prescriptions, he cautioned, may have adverse consequences for the U.S. economy.
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