Over the past several days, you
have been engaged in sharing a good deal of practical information
on developments in the financial services industry and on the
evolving set of laws and regulations that influence the
availability of credit in the communities that you serve. No
doubt, many of you are here this morning because of your
long-standing interest in the Federal Reserve's implementation of
the Community Reinvestment Act (CRA). However, because we are now
in the final stages of drafting regulations on the Sunshine
Provisions of the Gramm-Leach-Bliley Act, I am prohibited from
commenting at this time. Instead, I would like to discuss with
you, in broader terms, some of the challenges facing businesses,
workers, and consumers--including those in your communities--as
the U.S. economy embarks on a new century.
As you know, we have recently
established a record for the longest economic expansion in this
nation's history. In recent years, it has become increasingly
clear that this business cycle differs in a very profound way from
the cycles that have characterized post-World War II America. Not
only has the expansion achieved record length, but it has done so
with far stronger growth than expected. A key factor behind this
impressive performance has been the remarkable acceleration in
labor productivity, with output per hour in the nonfinancial
corporate sector increasing since 1995 at nearly double the
average pace of the preceding quarter-century. And because
technological change has spawned so many opportunities for
businesses to expand the range and value of their goods and
services, the introduction of new efficiencies has not led to
higher unemployment. Rather, the recent period of technological
innovation has created a vibrant economy in which opportunities
for jobs and new businesses have expanded, enhancing the living
standards of a large majority of Americans.
Our challenge, then, is to
ensure that we--both policymakers and community leaders--extend
the favorable macroeconomic performance and strive to bolster the
capabilities of all Americans to share in the prosperity that is
being generated.
When historians look back at the
latter half of the 1990s a decade or two hence, I suspect that
they will conclude that we are now living through a pivotal period
in American economic history. New technologies that evolved from
the cumulative innovations of the past half-century have now begun
to bring about dramatic changes in the way goods and services are
produced and in the way they are distributed to final users.
How did we arrive at such a
fascinating and, to some, unsettling point in history? While the
process of innovation, of course, is never-ending, the development
of the transistor after World War II appears in retrospect to have
initiated a special wave of innovative synergies. It brought us
the microprocessor, the computer, satellites, and the joining of
laser and fiber-optic technologies. By the 1990s, these and a
number of lesser but critical innovations had, in turn, fostered
an enormous new capacity to capture, analyze, and disseminate
information. It is the growing use of information technology
throughout the economy that makes the current period unique.
For the consumer, advances in
technology and in the flow of information have greatly facilitated
the development of a wide range of new financial products that are
better suited to meeting the preferences of diverse populations.
Similarly, in the case of consumer and business credit, computer
and telecommunications technologies--the same forces that are
shaping the broader economy--have lowered the cost and broadened
the scope of financial services. As a consequence of these
developments, borrowers and lenders are increasingly able to
transact directly with each other, and we have seen a
proliferation of specialized lenders and new financial products
that are tailored to meet very specific market needs. At the same
time, the development of credit-scoring models and the
securitization of pools of loans hold the potential for opening
the door to national credit markets for a broad spectrum of
businesses operating in local and regional markets. Indeed, the
CRA data on small business lending show that institutions located
outside the local community are an important source of credit for
many businesses.
Much attention is focused on the
role of corporate giants in fostering innovation, but we would be
foolish to understate the extent to which America's innovative
energy draws, and will continue to draw, from the interaction of
both large and small businesses. Nowhere in the world are the
synergies of small and large businesses operating side by side in
a dynamic and competitive market economy more apparent than in
this country. Of course, the surging growth of young high-tech
firms and the flashy presence of new Internet businesses capture
the most public attention. But judging from our contacts through
our regional Federal Reserve Banks and information collected in
surveys of small businesses, times have been good for expanding
traditional lines of business as well. The most common complaints
include the difficulty of finding qualified workers in the midst
of strong competing demands for labor. In the current expansion,
the vast majority of small businesses have not listed access to
credit as their top concern, although, as you know, many business
owners are quite apprehensive about the future as the familiar
ways of financing business undergo sometimes dramatic changes.
Several recent developments hold
the promise of improving links between financial institutions and
the small businesses in your communities. First, major banks and
finance companies are trying mass-market approaches to small
business finance, similar to the approaches used in the consumer
credit arena for many years, and this effort has greatly expanded
the competition for loans. In addition, new innovative
intermediaries--such as community development corporations and
multibank and investor loan pools--are seeking to develop
expertise in specific segments of the marketplace for small and
minority businesses.
I would like to emphasize,
however, that credit alone is not the answer for small businesses.
They must have equity capital before they are considered viable
candidates for debt financing. Equity acts as a buffer against the
vagaries of the marketplace, and it is, accordingly, a sign of the
creditworthiness of a business enterprise and the commitment of
its owner. This is especially true in lower-income communities,
where the weight of expansive debt obligations on small firms can
severely impede growth prospects or more readily lead to business
failures.
Overall, our evolving economic
and financial systems have been highly successful in promoting
growth and higher standards of living for the majority of our
citizens. But we need to reach further to engage those who have
not been able to participate. One way is through the education and
training of our workforce--that is, enhancing our stock of
"human capital," which is a necessary complement to our
ever-changing physical capital. A major consequence of the
fast-paced technological change of recent years and the growth of
the conceptual emphasis of our nation's output has been to
increase the demand for skilled workers. In today's economy, skill
has taken on a much broader meaning than it had only a decade or
two ago. Today's workers must be prepared along many
dimensions--not only with technical know-how but also with the
ability to create, analyze, and transform information and with the
capacity to interact effectively with others. Moreover, they must
recognize that, with new technologies coming rapidly on line, the
skills that they develop today will likely not last a lifetime.
Traditionally, broader human
capital skills have been associated with higher education, and
accordingly the demand for college-trained workers has been
increasing rapidly. The result has been that, over the past
several decades, the economic returns to workers with college
training have on average outstripped those to workers who stopped
their formal schooling with a high-school diploma or less. In the
past few years, real wage gains for college-educated workers have
continued to be rapid, but owing to dynamic economic growth and
tightening labor markets, increases for other workers, on average,
have kept pace. Nonetheless, a wide gap between the wages of
college-educated workers and those of high-school-trained workers
remains.
Another consequence of rapid
economic and technological change that needs to be addressed is a
higher level of worker insecurity, which is the result, I suspect,
of fears of potential job skill obsolescence. Despite these
tightest labor markets in a generation, more workers currently
report that they are fearful of losing their jobs than similar
surveys found in 1991 at the bottom of the last recession. The
marked move of capital from failing technologies to those at the
cutting edge has quickened the pace at which job skills become
obsolete. The completion of high school once equipped the average
worker with sufficient skills to last a lifetime. That is no
longer true, as evidenced by the trends in workers returning to
school and in businesses expanding and upgrading their on-the-job
training.
Certainly, higher education will
continue to play an important role in preparing workers to meet
the evolving demands for skilled labor. But the pressure to
enlarge the pool of skilled workers requires that we recognize the
significant contributions of other educational programs in your
communities. Community colleges, for example, have become an
important provider of job skills training not just for students
who may eventually move on to a four-year college or university
but for individuals with jobs--particularly older workers seeking
to retool or retrain. In some cases, community colleges are
providing contract training for employers, part of a broader trend
in which employers and their workers are recognizing that to
maintain human capital, investment in formal training programs
must complement experience on the job.
As one might expect, greater
worker insecurities are also creating political pressures to
reduce the fierce global competition that has emerged in the wake
of our 1990s technology boom. Protectionist measures, I have no
doubt, could temporarily reduce some worker anxieties by
inhibiting these competitive forces. However, over the longer run
such actions would slow innovation and impede the rise in living
standards. They could not alter the eventual shifts in production
that owe to enormous changes in relative prices across the
economy. Protectionism might enable a worker in a declining
industry to hold onto his job longer. But would it not be better
for that worker to seek a new career in a more viable industry at
age 35 than to hang on until age 50, when alternative job
opportunities would be far scarcer and when the lifetime benefits
of additional education and training would be necessarily smaller?
To be sure, assisting those who are already close to retirement in
failing industries is an imperative. But that can be readily
accomplished without distorting necessary capital flows to newer
technologies through protectionist measures. More generally, we
must ensure that our whole population receives an education that
will allow full participation in this dynamic period of American
economic history.
No doubt, in your communities
many workers may view the changing needs of their employers as a
threat to the security of their job; and perhaps students
preparing to enter the workforce see the demand for rising skills
as a hurdle too high to overcome with the limited resources
available to them. You, as community leaders, can continue to
explore ways of developing creative linkages between businesses
and educational institutions to better prepare students for the
rising demands of the workplace and to help workers, who must keep
up with those changing demands and who must cope with the
consequences of global competition, renew and upgrade their
skills.
As I indicated earlier, one
notable aspect of the remarkable performance of our economy in
recent years has been the substantial, and relatively broadly
based, rise in real income. During the past several years,
workers, including those at low end of the wage distribution, have
seen noticeable increases in the inflation-adjusted value of their
wages; more comprehensive Census Bureau figures on the real money
income of families also show gains in each quintile between 1996
and 1998, and presumably when the 1999 data become available
further improvement will be evident. These recent increases for
low-income workers, however, have not reversed the rise in wage
inequality that occurred during the 1980s and early 1990s when the
gap in wages between those at the top and the bottom of the
distribution was widening considerably. Nonetheless, the leveling
off in that disturbing trend is an encouraging sign of what can be
achieved if we can maintain strong and dynamic labor markets
accompanied by low inflation.
Of course, we need also to
consider trends in wealth, which, more fundamentally than earnings
or income, represent a measure of the ability of households to
consume. The Federal Reserve's Survey of Consumer Finances
indicates that the median real net worth of families increased
17-1/2 percent between 1995 and 1998. As one might expect, the
rising stock market coupled with the spreading ownership of
equities was an important factor. However, even in the face of the
strong aggregate trend, median net worth declined over this period
for families with incomes below $25,000, and medians for
non-whites and Hispanics were little changed.
That families with
low-to-moderate incomes and minorities did not appear to fully
benefit from the highly favorable economic developments of the
mid-1990s is, of course, troubling, and the survey results warrant
a closer look. In the details, we find that families with incomes
below $25,000 did increase their direct or indirect holdings of
stock, and more reported that they had a transactions account.
However, they were less likely to hold nonfinancial
assets--particularly homes, which constitute the bulk of the value
of assets for those below the top quintile according to income. At
the same time, one encouraging finding from the survey is that the
homeownership rate among minorities rose from 44 percent to 47
percent between 1995 and 1998, which may be a sign of improved
access to credit for minorities.
Although market specialization,
competition, and innovation have vastly expanded credit to
virtually all income classes, under certain circumstances this
expanded access may not be entirely beneficial, either for
customers in general or for lower-income communities. Of concern
are abusive lending practices that target specific neighborhoods
or vulnerable segments of the population and can result in
unaffordable payments, equity stripping, and foreclosure. The
Federal Reserve is working on several fronts to address these
issues and recently convened an interagency group to identify
aberrant behaviors and develop methods to address them.
I have no illusions that the
task of breaking down barriers that have produced disparities in
income and wealth will be simple. It remains an important goal
because societies cannot thrive if significant segments perceive
their functioning as unjust. Although we have achieved much in
this regard, more remains to be done. Despite the considerable
progress evident in recent decades in reducing racial and other
forms of discrimination, this job is far from complete.
Discrimination is against the
interests of business--yet business people too often practice it.
To the extent that market participants discriminate, they erect
barriers to the free flow of capital and labor to their most
profitable employment, and the distribution of output is
distorted. In the end, costs are higher, less real output is
produced, and national wealth accumulation is slowed. By removing
the non-economic distortions that arise as a result of
discrimination, we can generate higher returns to both human and
physical capital.
We are experiencing an
extraordinary period of economic innovation. At the policy level,
we must work to configure monetary policies that will foster a
continuation of solid growth and low inflation. Beyond this
primary mandate, we at the Federal Reserve are also responding to
the challenge of ensuring that all communities can fully
participate in our growing prosperity. With our Community Affairs
program we provide information, instruction, and technical
assistance to a diverse range of constituents regarding community
reinvestment, community economic development, fair lending, and
related issues. Our reach is broad: During 1999 more than 15,000
participants attended our conferences and seminars, and we
responded to more than 800 requests for in-depth technical
assistance. We are also increasing the research focus on topics
related to community and economic development and in 2001 will
host a second national conference, this one focusing on the theme
of changing financial markets and community development. Your
participation in, and support of, these activities is important
because you play such a crucial role in helping communities
respond to the evolving financial, educational, and technological
demands of this new century.
As I indicated in my opening
remarks, future historians are likely to conclude that the past
five years have been a pivotal period in American economic
history. I trust they will also conclude that it was a period that
set in place policies to foster the eventual emergence of full
participation of that segment of the workforce that has not fully
shared in our economic progress.
