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Despite high prices for energy and a significant decline in the housing sector, the U.S. economy not only continued to grow last year, it grew “at an impressive rate,” according to Edward Lazear, chairman of the Council of Economic Advisors to president George W. Bush. Lazear spoke at an event cohosted by the Chicago Council on Global Affairs and the Initiative on Global Financial Markets February 1 at the Chicago Club. Lazear was a member of the GSB’s faculty from 1978 to 1992.
According to Lazear, a strong labor market and increased exports are the key trends responsible for the growth in the economy. Not only did the unemployment rate fall, wages grew at a higher rate than in the second half of the 1990s, he said. These factors and an increased demand for exports have “pushed the American economy forward during a period when many were predicting a slowdown,” Lazear said. “With consistent and open economic policies, these trends should continue through 2007 and into the next year.”
Lazear said the United States is in the midst of a changing economic structure. Just as an economy based on agriculture was replaced by one based on manufacturing at the turn of the 20th century, so the manufacturing economy is being replaced by one based on services. “The United States is heavily a service economy,” Lazear said, “Seventy-seven percent of private output and 84 percent of payroll jobs are found in the service sector.” And, he said, “the strength of the service sector is indicative of strength in manufacturing rather than the reverse.”
Lazear explained that the movement of jobs from manufacturing to services reflects changes in demand for services and technical change that allowed for enhanced manufacturing productivity. “Workers have been able to move to the service sector without harming the amount of manufacturing output because our manufacturing productivity has been so impressive.”
One challenge the United States faces with a service economy is advancing international trade in services. Although furthering trade has been an important goal, restrictions on exports of services has hampered that effort, he said. “Our inability to export our services freely to other countries, as well as import some from our trading partners, has limited significantly the gains that we enjoy from trade,” Lazear said.
Lazear said he was grateful for the opportunity to return to his roots. “I think of that as a period not so much of teaching, but rather of learning from the great masters who were my senior colleagues at that unsurpassed institution.”
Second-year student Cynthia Abdulelah, a native of Kuwait who is focusing on finance and economics, said afterward, “I feel so privileged to see the economic advisor to the president. This talk gives me another way to look at Kuwait. I can use what I heard to understand the U.S. economy, which is important because of its global impact.”
—Carmen Marti