White House warned of dangers to current good times

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White House warned of dangers to current good times

Source: Associated Press Publication date: 2000-04-05

WASHINGTON (AP) -- President Clinton heard an earful of worries Wednesday when he challenged a group of the country's greatest economic minds to forecast what could derail the current supercharged economy.

Federal Reserve Chairman Alan Greenspan warned about "imbalances" represented by a dwindling supply of available workers and a soaring trade deficit. Others fretted that more stomach-churning days on Wall Street might finally signal an end to the economic expansion after a record nine years.

The president used a daylong conference in the White House East Room to examine how the keep the current times going. As president-elect, the former Arkansas governor relied on the same format in December 1992 when he summoned top economists to Little Rock for two days of discussions about how to battle huge budget deficits and weak job growth.

On Wednesday, Nobel Prize-winning economist Amartya Sen joined Microsoft's Bill Gates, Greenspan and other top economic thinkers to explore how the U.S. and global economies were being changed by the so-called New Economy -- the explosion in the use of computers and other high-tech inventions. Clinton expressed optimism about the promise that technological advances offered, not only for the United States but also impoverished nations bypassed by the current prosperity.

"I believe the computer and the Internet give us a chance to move more people out of poverty more quickly than at any time in all of human history," Clinton said.

Clinton warmly praised billionaire Bill Gates -- just two days after his Microsoft Corp. was found guilty of violating federal antitrust laws -- for the "phenomenal commitments" he and his wife have made in contributing $750 million to combatting global poverty and health problems.

Greenspan defended the Federal Reserve's five interest rate increases over the past 10 months, saying that imbalances represented by tight labor markets and the rising trade deficit had to be addressed.

The central bank has been raising interest rates in an effort to dampen consumer spending, thus slowing the economy and alleviating the threat that tight labor markets will trigger inflationary wage demands.

Also of concern is that the huge trade deficits, a further reflection of strong consumer demand, could become a liability if foreigners suddenly decide they no longer want to invest in U.S. assets such as the stock market.

"The significant uncertainties surrounding these new economic forces counsel prudence," Greenspan said. "We need to be careful to keep inflationary pressures contained."

Greenspan used his appearance to address critics who have charged that the Fed's rate increases were an effort to tame the "irrational exuberance" of investors he has worried about from time to time. He said the central bank had no desire to target stock prices.

Still, the recent volatility in stock prices was a leading concern at the conference, held the day after both the Dow Jones industrial average and the technology-heavy Nasdaq index suffered their biggest one-day swings in history.

Roger Altman, a former Clinton administration Treasury official who is now an investment banker in New York, said that he believed that Wall Street was already in a market correction. It was likely to be a "sharp one, he said, at least in terms of technology" stocks, many of which have soared in price despite an absence of company profits.

Abby Joseph Cohen, the famously bullish chief investment strategist at Goldman Sachs Group Inc., said she believed "over the next period of time, the aggregate rate of return in the market will decelerate sharply."

She triggered a market selloff last week when she recommended to her firm's clients that they reduce their allocations of stock in favor of holding more cash.

Yale University economics professor William Nordhaus raised concerns about inflation. "The speed limit (for economic growth) has been raised, but there is still a speed limit," he said. "The betting odds are long against another four years as strong as the last four years."

International economist C. Fred Bergsten said he was troubled by "the huge and growing trade deficit," which hit a record high of $267.6 billion last year.

Bergsten said the deficit could trigger a panic response in which foreign investors start fleeing U.S. markets, triggering a sharp decline in the value of the dollar. "A sharp decline in the dollar would push up interest rates and push down the stock market," he said.

Not all the participants focused on economic threats. Some argued that the current good times could continue as long as the Fed did not overreact and raise interest rates too much in a pre-emptive strike against inflation.

University of Texas economist James K. Galbraith said that the big surge in productivity caused by strong business investment was allowing the economy to expand at a faster rate with lower unemployment without triggering inflation.

"Why not take the positive view?" he asked. "Full employment and strong growth are great achievements. Let us celebrate and defend them."

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=9826979&ID=cnniw&scategory=Business+and+Finance

-- Carl Jenkins (Somewherepress@aol.com), April 06, 2000


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