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Remarks to the TCU Economic Outlook
Conference
Delivered to the Center for Business and Economic Forecasting at the
Neeley School of Business, Texas Christian University

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Fort Worth, Texas
May 16, 2007

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

Remarks at the TCU Economic Outlook Conference
Richard W. Fisher
Thank you, Dean Short. I am honored to be the keynote speaker at this first annual Economic
Outlook Conference at the Center for Business and Economic Forecasting here at TCU’s Neeley
School of Business. You are especially kind to take in a Dallasite to break bread with you today.
We have come a long way since the days when the late, great Amon Carter would reportedly
bring his own food whenever he had to come 30-some miles east to Dallas and some of the great
characters of Dallas would do the same when they came out Fort Worth-way. The world has
changed much in the past many years since these trailblazing figures dominated our respective
communities.
Today, Fort Worth and Dallas are joined together on the continuous Möbius strip that is today’s
global economy. Together, we are on the same plane as we face the challenges of the new
economic era.
I’d like today to talk about some of the changes that have occurred in the world around us. I
would like to talk about globalization and prospering in an intensely competitive world.
Long ago, the case for competition was articulated by such iconic economists as Adam Smith
and David Ricardo. Perhaps the most apt refinement of the dynamics of competition and its
consequences for economic advancement, however, came from a professor at Harvard—the TCU
of the East—named Joseph Schumpeter.
I am midway through a brilliant biography of Schumpeter, Prophet of Innovation, by Thomas
McCraw and published just recently. McCraw puts substantial flesh—a double entendre, by the
way, as he writes that Schumpeter used to tell his classes at Harvard that he “aspired to be the
greatest economist, horseman and lover in the world” and then would add, “Things are not going
well with the horses”—he puts flesh on the bones of an economist who coined the term creative
destruction, one I draw on repeatedly to put our current economic situation in perspective.
Let me read to you three excerpts from two of Schumpeter’s seminal works. First, from
Capitalism, Socialism, and Democracy: “The fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new consumers’ goods, the new methods of
production or transportation, the new markets, the new forms of industrial organization that
capitalist enterprise creates.”
From that same page: “The opening up of new markets, foreign or domestic, and the
organizational development from the craft shop and factory…illustrate the same process of
industrial mutation…that incessantly revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly creating a new one. This process of Creative
Destruction is the essential fact of capitalism. It is…what every capitalist concern has got to live
in.”

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And from volume 1 of Schumpeter’s Business Cycles: “A railroad through new country, i.e.,
country not yet served by railroads, as soon as it gets into working order upsets all conditions of
location, all cost calculations, all production functions within its radius of influence; and hardly
any ‘ways of doing things’ which have been optimal before remain so afterward.”
String the key operative phrases of those three citations together and you get the plot of the story
of globalization: “The opening up of new markets, foreign or domestic . . . revolutionizes the
economic structure, . . . destroying the old one, . . . creating a new one. . . . [It] upsets all
conditions of location, all cost calculations, all production functions, . . . and hardly any ‘ways of
doing things’ which have been optimal before remain so afterward.”
The master of creative destruction of syntax, Yogi Berra, put it more eloquently: Once you open
new markets, “History just ain’t what it used to be.”
Globalization is a gargantuan Schumpeterian railroad coursing across our economic landscape,
upsetting all conditions of location, all cost calculations, all production functions, and no doubt
all the assumptions once harbored by economic forecasters. None of the “ways of doing things”
that were optimal before the revolutionary impulses of cyberspace and the fall of the Soviet
empire, the transformation of China, and the many other manifestations of the hyperintegrated
world we live in, remain so. History—together with the assumptions upon which many
forecasters base their models for growth and inflation forecasting—just ain’t what it used to be.
The economic impact of globalization is captured in stark prose in the recently issued annual
report of the Dallas Federal Reserve Bank. I have brought copies for each of you today. Take it
home. Read the essay titled “The Best of All Worlds.”
The essay points out that the simultaneous opening up of the world economy—especially the
integration of markets due to the telecommunications revolution and the development of
cyberspace—has changed the way every entrepreneur, every manager, and every business
woman and man in America contemplates their cost of goods sold and the markets they sell to as
they navigate into the future.
The essay explores 10 ways globalization raises productivity and reduces costs. I am going to
summarize them for you. But first, let me set the stage with a story about a good friend of mine
named Dr. Jonathan Weissler, who holds the chair in pulmonary research at the University of
Texas Southwestern University Hospitals in Dallas, where Dr. Weissler is chief of medicine. We
have coffee together in the mornings at our local Starbucks and here is what he tells me:
When Dr. Weissler sees a patient, he, like most doctors, dictates examination notes into a
recorder so that the information can be transcribed into the patient’s file. There is nothing
startling there; this has been standard medical practice for decades. What is new—and a hallmark
of the Knowledge Economy—is that instead of paying an on-site employee at UT Southwestern
to transcribe his dictation, he sends the recording electronically to a company that farms the work
out to English speakers around the world to transcribe overnight. They type up the notes for a
fraction of the cost while Dr. Weissler sleeps. And, voilà, they are on the good doctor’s desktop
the next morning.

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Incidentally, Dr. Weissler says he can tell when the transcripts are produced in India because the
English is perfect and even the most complex medical terms are spelled correctly—a testimony
to India’s teaching P.G. Wodehouse and the blocking and tackling of proper English in their
schools.
By reducing costs and streamlining his recordkeeping in this way, Weissler’s practice runs more
efficiently and his staff can devote more time to serving patients. The real payoff is that the
money saved can be reinvested into researching new ways to save and improve lives.
Dr. Weissler is harnessing and harvesting globalization. He is availing himself of resources
created by the spread of knowledge around the world in order to save money and run an efficient
operation. He now optimizes his operations in a way that couldn’t be done before.
To some this is alarming—especially those who focus on jobs lost to globalization, like the ones
held by Texans and other Americans who once transcribed those notes for Dr. Weissler.
Dwelling on these lost jobs or outsourced tasks ignores lessons of history. To be sure, we cannot
and should not ignore the painful adjustments that economic advancement inflicts upon displaced
workers; we should never underestimate the human costs of the process of creative destruction.
And we should implore our political leaders to come up with ways to assist those displaced
workers and provide mechanisms for them to move up the economic ladder. Without, I might
add, mucking up the creative side of the process.
American entrepreneurs and workers have developed a mastery of the creative side of the
process—albeit with fits and starts—over the past 200 years. Our $13.2 trillion economy—the
world’s biggest, by far—is proof that we can adapt to new circumstances and profit from the
benefits those circumstances provide. To be prepared for globalization—to harness and harvest it
and ride it to continued prosperity—we must remain at the forefront of the Information Age. We
must master the Knowledge Economy.
The lesson of the essay in our annual report is that globalization is spreading the Knowledge
Economy around the globe—and the Knowledge Economy is accelerating the pace of
globalization. While globalization itself is not new, it has gathered intensity over the past decade
or so because of technologies that make it cheaper and easier to move information to nearly all
corners of the world.
We have had decades to contemplate globalization in goods that were produced by cheap labor
and abundant resources in faraway lands like China or Vietnam or Poland. But globalization has
spread beyond manufactured goods to other segments of the economy, rapidly moving up the
value-added ladder. Computers, the Internet, high-capacity fiber-optic cables and other marvels
of modern communications fuel the extension of international competition into a broad realm of
the economy that had been largely isolated from it. I am referring, of course, to the globalization
of the service sector.
Bear in mind that 82 percent of the American workforce is employed in the service sector.
Generally speaking, our highest-paying jobs are in services—engineers, scientists, computer
systems analysts, stockbrokers, professors, doctors, lawyers, dentists, CPAs, entertainers and
other service providers—to say nothing of the mega-compensation paid to hedge fund managers
and financial engineers.
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Beginning in 1993, the average wage for private services employees surpassed base industry
wages. By 1999, all nonretail services employees, even public service employees like
government workers and teachers, were averaging more pay per hour than industrial workers.
The destructive side of the process of capitalism’s creative destruction is evident in the numbers
as old professions give way to new, higher-paying ones. The number of U.S. farm laborers
decreased 20 percent between 1992 and 2002. In the same 10-year time frame, employment of
telephone operators decreased 45 percent; that of sewing machine operators decreased 50
percent. This is not ancient history; this all occurred within a time frame that is fresh in the
memory of everyone in this room.
Yet within that same time frame—between 1992 and 2002—the number of architects grew 44
percent, legal assistants 66 percent and financial services employees 78 percent. The growth of
job categories related to the Internet, many of which didn’t even exist in 1992—webmasters, for
example—has been as dramatic as Moore’s curve. The creative side of creative destruction has
replaced lost jobs in declining sectors with new ones in emerging sectors.
Since 1992, the goods-producing sector has seen its share of nonfarm payrolls fall by 3.9
percentage points. However, the losses have been more than offset by job gains in just three
service sectors—professional and business services, health care, and leisure and hospitality.
Today, manufacturing employs one of 10 U.S. workers, about the same number as the leisure
and hospitality sector. One in 20 works in construction—fewer than in financial services. Nearly
the same number of people work in government as in the goods-producing sector as a whole. In
the past year, the number of manufacturing jobs shrank by 1 percent. In contrast, employment
grew by around 3 percent in education, health care, and leisure and hospitality and by over 5
percent in professional services.
Here is a statistic that about beats all: At the end of 2005, the U.S. auto and auto parts
manufacturing industry employed about 1.1 million workers and added 0.8 percent of the value
to our GDP. The legal services sector employed nearly the same number but contributed 1.5
percent of the value added to GDP. I will resist the temptation to make a lawyer joke because
this is no laughing matter to economists: The legal services industry provides as many jobs as
auto manufacturers but contributes nearly twice the value added to our economic output.
I think you get the point: The service sector, not autos and other forms of traditional
manufacturing, drives our economy. And will continue doing so.
Many services are still untouched by globalization. It remains impractical, for example, for a
TCU professor to enjoy the pristine sushi freshly made by the dockside chefs who work around
Tokyo’s Tsukiji fish market, or to import the services of a barber who lives in…Seville—sorry
Rossini, I couldn’t resist that one. But many more services from all parts of the world can be
delivered here in the blink of an eye (or in 40 winks of Dr. Weissler's eye overnight), thanks to
the revolution in communication technologies that allow knowledge to overcome traditional
impediments of distance.

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Dr. Weissler shows us how some of the medical profession’s common support services have
been globalized. Yet, his example is but the tip of the iceberg of the ways we can stretch the
boundaries of high-skilled services. In 2001, a surgeon in New York, using robotic tools,
removed the gallbladder of a patient 3,870 miles away in the French city of Strasbourg. In 2005,
a laptop computer in Boston guided instruments as they performed heart surgery—unaided by
human hands—on a patient in Milan, Italy. Geographic boundaries and technological
impediments are evaporating even at the far reaches of the value-added realm.
It is trends like these that inspired us at the Dallas Fed to consider the ways globalization is
changing our economy.
Here are the 10 ways in which globalization now impacts the Knowledge Economy. We have
found that globalization lowers communication and transportation costs, point No. 1; fuels
competition, point No. 2; and encourages specialization, point No. 3. A firm can now access
labor, raw materials and other resources at any time and from anywhere on the globe, resulting in
point No. 4: improved production functions.
Producers can sell their goods and services to a larger market, No. 5, and extend their economies
of scale, No. 6, by producing to satisfy global, not just domestic, demand.
Point No. 7, capital markets expand, freeing money to seek the highest return available globally
and to fund development of new production capacity anywhere on the planet.
Point 8, knowledge spreads across towns, industries and countries, fueled by migration, the
Internet, cell phones and trade.
Globalization erodes national or natural monopoly power, making markets more accessible to
competition and more fair to consumers—or in other words, more “contestable,” point 9. And
finally, increased production leads to increased consumption without reducing the amount
available for others to consume, point 10. Just because I’m downloading the most recent episode
of 24 from iTunes does not mean someone in Norway cannot download it, too.
The common thread among these 10 factors is that they all raise productivity’s level or its growth
rate—or both. Higher productivity lowers costs. Lower costs restrain inflation, the bête noire of
any progressive economy and the bane of Federal Reserve officials and central bankers
everywhere. In this fundamental way, globalization raises the economy’s speed limit, allowing
policymakers to relax a little and let the economy expand at rates that might once have been
considered unsustainable. In a globalized world, faster growth need not carry the same
inflationary implications it does in a closed world.
The Fed’s mandate calls for keeping inflation low while maintaining maximum sustainable
economic growth—a duty we cannot fulfill without weighing productivity. Getting more output
from existing labor and capital allows the economy to grow faster without igniting price
pressures. We saw this vividly, for example, in the 1990s, when the IT revolution led to surging
productivity, lower costs and faster growth. The Fed understood that increased supplies of goods
and services, not inflationary excess demand, fueled the expansion, and it wisely let the economy
seek a higher growth rate.
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Considering all the dynamics of our globalized world, one problem economic forecasters have is
that they lack proper measuring sticks to capture these intangible dynamics. When a Boston
doctor operates remotely on a patient in Milan, should we credit it to the U.S. economy or the
Italian economy? A Barbie doll is designed in America and assembled in Malaysia from
Taiwanese plastic pellets, Chinese cloth and Japanese nylon. Is the doll American or Malaysian
or something else? When people in the U.S. and other countries can work together so seamlessly,
how can we pull them apart with the data? Our annual report underscores how the world is fast
becoming one big integrated economy, which suggests we should care as much about foreign
output gaps, capacity utilization rates and unemployment rates as we do about our own.
Traditional economic doctrine does not recognize the importance of, for example, foreign output
to a country’s inflation rate. Only domestic output matters. But a new economic model, produced
by the Dallas Fed, allows us to show that foreign output also matters. For central bankers, getting
policy right will involve analyzing a great deal of additional data and overcoming blind spots
about what’s going on in key parts of the world. We don’t, for example, know as much as we’d
like about China’s capital stock, work hours and rural unemployment. We have no reliable
estimates of the productive capacity in Brazil, India and Russia. All the data shortcomings are
maddening, but they aren’t reason enough to deny the fundamental fact that globalization is
changing the way our economies work.
Data that do not reflect the world in which we live increase the chances for errors in judgment.
We need to develop much better measures for the global economy, particularly as services are
increasingly traded. Today, our most detailed measures pertain to goods, a proportionally
shrinking segment of our economy. We can tell you about agriculture and manufacturing in
excruciating detail—for example, manufacturing data are so refined that I can tell you whether
the plastic we make is used for a bag, bottle, pipe, pillow or floor. But we have relatively little
data about our fast-growing service sector. We have even less data on the global services
economy.
Globalization doesn’t just drive down costs and ramp up efficiency for businesses that harvest it.
It advances living standards in ways not captured by the standard economic measures of
progress. We need new and better tools to help us determine just how globalization is affecting
economies around the world, and how policymakers can reap benefits from these insights.
Getting it right may well alter our notions of economic progress, with ramifications for how we
approach the goal of price stability.
The Dallas Fed is hard at work researching this issue. We are in the process of establishing the
Globalization and Monetary Policy Institute, and our economic research team—the same people
who inform our Bank’s participation in the Federal Open Market Committee—is focused with
laserlike intensity on advancing our knowledge of these underresearched and poorly understood
phenomena.
I hope that our annual report will give you insight into how the operators of our economy address
the Globalization Challenge. And I wish you luck as you attempt to forecast the future of our
economy in this rapidly changing, intensely challenging and ever-entertaining world.
Thank you.
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