SPEAKERS CONTENTS INSERTS
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CONDUCT OF MONETARY POLICY
TUESDAY, JULY 22, 1997
House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to notice, at 2:07 p.m., in room 2128, Rayburn House Office Building, Hon. Michael N. Castle, [chairman of the subcommittee], presiding.
Present: Chairman Castle; Representatives Leach, Roukema, Bereuter, Bachus, Lucas, Metcalf, Paul, Weldon, Cook, Foley, LaFalce, Frank, Kanjorski, Kennedy, Flake, C. Maloney of New York, Watt, Bentsen, Jackson, Kilpatrick and Sanders.
Chairman CASTLE. The hearing will come to order.
We welcome the Chairman. We have a guest with us today, Christa Randzio-Plath, the President of the Monetary Affairs Subcommittee of European Parliament, if she would rise and be acknowledged, please.
We are pleased to have you here today.
Chairman CASTLE. We don't know if we are learning from you, or you'll learn from us, but we are delighted to have you here today.
The subcommittee meets today to receive the semiannual Report of the Board of Governors of the Federal Reserve System on the Conduct of Monetary Policy and the State of the Economy as mandated in the Full Employment and Balanced Growth Act of 1978.
Page 2 PREV PAGE TOP OF DOC Chairman Greenspan, welcome back to the House Committee on Banking and Financial Services Subcommittee on Domestic and International Monetary Policy.
I wish that I could promise that no one will utter the words ''irrational'' or ''exuberance'' in any combination, but I am afraid that is not possible.
I guess a better question is, is this permanent exuberance?
Mr. Chairman, I know that you are a student of the classics as well as business cycles, and thus are familiar with the Roman imperial practice of awarding triumphs to conquering leaders. They were driven through cheering crowds in a gilded chariot with a laurel wreath held above their heads. However, the guy holding the laurel wreath was required to repeat in the conqueror's ear, ''Remember, you are only human.'' Today, you may get a well-deserved triumphal tour of the subcommittee, but you will also receive whispers or shouts in your ear about what the Fed should or should not be doing.
Most of the mandates in the Humphrey-Hawkins Act have been ignored over the years. Now with the United States economy nearing its 80th month of sustained growth, and with the inflation rate still declining, this might be an occasion to revisit some of these goals. The Act established interim numerical goals of 4 percent unemployment and 3 percent inflation by 1983, and zero inflation by 1988. While these goals were to apply primarily to the Administration of the day, the Fed was required to report on how the pursuit of its long-term goals of promoting maximum employment, stable prices and moderate long-term interest rates would affect the achievement of the Federal Government's broader goals. Customary wisdom among economists has been that full employment equalled an unemployment rate considerably in excess of the 4 percent dictated in the 1978 legislation. Now that level seems to be an achievable goal. We will look to you today, and to your colleagues and critics tomorrow, to explain to us if fundamental assumptions about the U.S. economy have been altered. Are we in a new economy that can sustain continued growth without reigniting inflation? Should the Federal Reserve worry less about inflation and focus more on allowing more growth to create additional jobs for Americans? Those are some questions I hope you will address in your testimony.
Page 3 PREV PAGE TOP OF DOC I believe that this Congress acted responsibly in seeking a balanced budget; and that responsible fiscal policy must go hand-in-hand with monetary policy to support long-term economic growth. The marketplace first had to believe that the Federal Government was serious about balancing the budget before it could accept the possibility of arriving at this outcome as a factor in future planning. Now, the health of the economy has so increased revenues that a balanced budget is beginning to be taken for granted. I think this is unwise, and would like your comments on it.
As long as the economy continues to be healthy with inflation in check, Federal Reserve Policies will receive support and your stature will continue to grow. We briefly considered simply giving you a standing ovation and adjourning the hearing, but instead we have scheduled a second day of hearings here tomorrow in the full committee. There we will hear from supporters of current monetary policy, as well as critics who believe that the Federal Reserve should concentrate more on other aspects of economic growth and less on worrying about signs of inflation.
The relative value of the dollar seems to reflect the leading position of our economy with regard to both Europe and the Far East. As integration of economies continues in the direction of a unitary world marketplace, the leverage exerted by the Federal Reserve System grows accordingly. I am concerned that the Board of Governors will continue to have access to the tools necessary to exert adequate influence for the successful conduct of monetary policy.
This subcommittee is still planning to hold oversight hearings following the August recess, to review the role of the central bank as a competitor with the private sector for certain banking support services. We also plan to review Fed preparation for the transition to electronic forms of money. We look forward to hearing how the Fed is planning for the way new technology will affect systemic security, safety, soundness, consumer privacy, as well as the future conduct of monetary policy. In this future hearing, or series of hearings, we can examine the various ways that the approaching digital revolution in money will affect the operations of the Federal Reserve System. I am increasingly persuaded that dramatic change in how we define and employ money may soon be upon us. This in turn, must affect the payment system and institutions charged with its stewardship. Thus, we have continued our series of hearings into the future of money with our recent inquiry into electronic authentication.
Page 4 PREV PAGE TOP OF DOC In the meantime, since the economy seems to have been running ahead of what would be indicated by traditional models, we would welcome any comments that you could make about adjustments being incorporated into your model.
As always, we are delighted to have you with us, and look forward to a lively discussion.
Today we will have 5 minute opening statements by the Members present. In addition, some Members of the full committee may sit with us today and participate in the questioning.
As usual, any prepared remarks presented by a Member will be accepted for the record, and with that I will turn to our Ranking Member, Mr. Flake.
Mr. FLAKE. Thank you very much, Mr. Chairman. Good afternoon, Mr. Greenspan, and we are happy to welcome you again to the Humphrey-Hawkins Act subcommittee hearings on the state of the Nation's economy. This hearing is perhaps one of the subcommittee's most important and useful duties, to the extent that it gives Congress and the American people an in-depth glance at the economic health of the United States. I look forward to your testimony today, and will only make a few comments so that we may move directly to it.
My main concern, in both the political and economic sense, is how we as a Nation will move into the 21st century. Will we move in a direction where all sectors of society will reap economic benefits? Will we have an economy that is inclusive to the extent that parents have the ability to provide good homes and educational opportunities for their children? Will the turn of the century stand as a benchmark for a new era of expansion? Will the United States still lead the world in an ever-expanding global economy?
Toward that end, I would like to hear your testimony and thoughts on whether or not we should be changing the way we approach economic analysis and what Congress' reaction should be with respect to the changing characteristics of the job-place. And I note that the changes are both demographic and qualitative, in the sense that the manufacturing models are becoming obsolete. Obsolete in that the technological revolution we function in should present the Fed with different economic data to track, and puts politicians in a quandary as we represent various interests which stand to benefit or lose, both profits and good-paying jobs. We all recognize that technology-driven industries are growing, that small business represents the bulk of our new employment opportunities, and that the once-standard hourly wage job at the ''factory'' is indeed disappearing.
Page 5 PREV PAGE TOP OF DOC Add to that the global economic employment base, and the question thus becomes does the Fed look beyond traditional data? Do you have a means to gauge the real job prospects of unemployed people who are the victims of corporate downsizing based on technology? Do you, as an example, have the means to track increasing electronic commerce and its effects on the economy?
The United States has had a continuing policy of Government putting to use all practicable means to coordinate its plans, functions, and resources in a manner that is calculated to foster free enterprise and employment opportunities for all those willing to work. It has also been our policy to promote maximum employment, production and purchasing power. Mr. Greenspan, recognizing our national policy in this light, I for one, would like to hear your thoughts about our future. Not necessarily on whether you or members of the FMOC will recommend interest rate hikes at the next meeting, but really our long-term future. Long-term in the sense that what kinds of data the Fed should be looking at 10 years from now, where will job creation take place, particularly in the light of welfare-to-work, and more importantly, what can we do now to assure that we will have the brightest possible future?
With that, I yield and I thank you, Mr. Greenspan, and look forward to your testimony.
Chairman CASTLE. Thank you very much, Mr. Flake.
Mr. LUCAS. No opening statement, thank you.
Chairman CASTLE. Mr. Metcalf.
Mr. METCALF. Thank you, Mr. Chairman.
First of all, I want to thank you for your responsiveness and the responsiveness of your staff on many issues I have been working on.
One is the continuing work on the issue of payments on sterile reserves and the work being done to eliminate Regulation D, which prohibits banks paying interest on corporate checking accounts, and I thank you for your cooperation on those.
Page 6 PREV PAGE TOP OF DOC I have some concerns about recent actions, especially the Fed's raising interest rates in the first quarter of this year. Specifically, some other questions that may arise are regarding Federal Reserve policy on courier services for transporting uncleared checks.
I look forward to comments tomorrow on these issues and other monetary policy questions and I appreciate the opportunity on this when Vice Chairman Rivlin comes before the committee tomorrow.
Today I have some very specific questions dealing with mergers and unemployment, specifically to the aerospace merger between Boeing and McDonnell Douglas relating to Fed policy, and I also have a question dealing with capital requirements of holding companies that we were discussing in the financial modernization bill passed out of this committee a few weeks ago.
Thank you again for being here and I look forward to your comments and the question period later. Thank you.
Chairman CASTLE. Thank you, Mr. Metcalf.
Mr. FRANK. Thank you, Mr. Chairman, and I first want to express my deep appreciation to Chairman Leach, who has joined us for the hearing that he has scheduled for tomorrow. There haven't been many like that since I have been here and I think it is extraordinarily important and I appreciate his willingness to present this forum so that we can have a broader discussion.
That is important procedurally as well as substantively. One of the things that has plagued us I think is this self-imposed reticence on the part of the press toward discussing monetary policy. The last real taboo in American politics appears to be monetary policy.
I notice, Mr. Greenspan, that you are never disagreed with. You are occasionally bashed and sometimes sniped at. These aren't your words. This is the press. People who voice differences with Federal Reserve policy 98 percent of the time have either bashed or sniped.
Page 7 PREV PAGE TOP OF DOC In fact, as you have always acknowledged, what we are dealing here with are very important questions of public policy and the notion that there is somehow any impropriety in their being widely debated I think is an odd one.
One example, for instance, we know more about differences among Supreme Court Justices and members of every regulatory commission than we do about differences within the Federal Reserve, and indeed it is to the credit of a former Chairman of this Committee, Henry Gonzalez, that we now know much more than we used to, and I think it ought to be put into the record that there were strong criticisms voiced historically when Mr. Gonzalez pushed for, for instance, simply having the FOMC announce on the day that it did something that it did something.
I cannot imagine another agency with which that would have a comparable argument about whether or not we should know what it did the day it did it, and in fact we now have those announcements and I think they have been very helpful.
We have much more openness and I think we have all benefited and I congratulate you for implementing these in a very, very useful way.
What I want to talk about substantively is of enormous importance to the social health of this country. We have a serious problem in that substantial elements in the financial establishment have come I think to regard unemployment as the dependent variable in all this. My math terms might be off, but it is the expendable variable. To many people in this country, a low inflation rate has become an end in itself, and the tradeoff between inflation and unemployment is one in which unemployment plays a very small role.
We see this today in Mr. Passell's article on the front page of the New York Times. Basically what we are told is there may well be too much employment in this country. In fact I think it is fair to note that the financial establishment in general including the people who have been dominating the Federal Reserve were wrong on what the tolerable level of unemployment was before we began to have inflation. I think if we had surveyed most of those who write about it, most of the people on Wall Street, most of the people at the Federal Reserve, 18 months ago, we would have been told that it would be impossible to have as low an unemployment rate as we have had and still have virtually no signs of inflationand I would strike ''virtually.''
Page 8 PREV PAGE TOP OF DOC The problem is, I begin to fall into this myself, because I talk about a 5-percent unemployment rate as too low, and here is the dilemma we have. If the skeptics are right, those who are skeptical that inflation can continue to stay virtually out of sight at this level of unemployment, if they are right that that cannot last long, and that pretty soon inflation is going to kick back in and we will have to again slow down growth, then this country is in serious trouble, because we cannot sustain the degree of social inequality that is inherent in that formulation. We cannotwell, let us put it this wayif we are to accept that we are now not only doing as well as we can, but better than we can expect to do over any long term, from the employment standpoint, then this country is in serious social trouble, because, and Mr. Krugman today is quoted in Mr. Passell's article, jokingly in ways, and I do not mean to say that this is his value, but he summarizes what is current sort of establishment thinking: ''Being nice to the rich has not made much difference to the American economy, but being beastly to the poor does seem to increase efficiency.''
Mr. Krugman has put it in his colorful way, and I do not blame him for that formulation. In fact, I welcome his summing up what we are being told. Namely, that we need some unemployment, we need people to be insecure, we need wages to stay low, we cannot have an increasing closing of the gap, that very high profits and lagging wages are the precondition for keeping employment down.
If that is the case, we are in for serious trouble. Some of us find that, and I would just conclude in 30 seconds, Mr. Chairman, some of us find that morally troubling. There are people who do not. Let me say to them the following: Those who want to see an America which continues to engage with the world in terms of trade, those who want to see America continue to take an important role in international economics, should understand that is not sustainable if the average American working person sees this unfairness.
John Kennedy, when he launched the Alliance for Progress, referring back to Franklin Roosevelt's Good Neighbor policy, said he could be a good neighbor abroad because he was a good neighbor at home. If in fact the skeptics that the current situation can hold are right and we will not be able to keep unemployment at this low a level and will have to deliberately retard growth, thus increasing unemployment, if we are to keep inflation down, and that is to be our number one goal, then your ability to get the national consensus people are looking for for international economic cooperation is going to dissolve pretty quickly.
Page 9 PREV PAGE TOP OF DOC Chairman CASTLE. Thank you, Mr. Frank.
Dr. PAUL. Thank you, Mr. Chairman. Welcome, Mr. Greenspan.
I would like to start off by saying that I have a slightly different approach to inflation and monetary policy, and I will make a few statements now so that my questions later on might make a little more sense. But it has already been referred to here and commonly so in all the media is that as soon as the CPI goes up and there is price inflation, price rising, then we have inflation. And I look at this slightly differently because there are many of us who believe that inflation is first and foremost a monetary policy. The inflation starts with the increase in the supply of money and credit and then we subsequently have different things happen.
One of those things possibly can be rising prices in consumer and in producer prices. But more importantly and what I want to concentrate on is that the other things that can occur with monetary inflation is that we get malinvestment, we get the encouragement of excessive debt, and we get speculative markets. And the reassurance that we hear continuously day in and day out in the media or here in the Congress that there is no inflation is not that reassuring to me, and I will pursue that later on, because if we are missing this and there are speculative markets out there and excessive debt and malinvestment, what we really need to be concerned about is the correction that inevitably comes after a period of inflation.
We were reassured in the 1920's do not worry about anything, there was no inflation, because they looked only at prices. Japan did the same thing in the 1980's. Do not worry, we have no inflation. Yet Japan has been suffering a bit since 1989. So the reassurance does not come across too strong as far as I am concerned.
I am not totally reassured that we have no inflation. Quite possibly the rules have changed in measuring money supply. Of course we know that M1 means nothing anymore. It is actually going down, so we do not call that deflation. In the past 10 years a significant point in monetary history we have found out that the Fed has increased total Federal Reserve credit two times, but during this same period of time, something new has crept in, and that is the ''monetization'' of our debt by foreign central banks. They have increased their holdings by more than four times. During these past 10 years we have increased M3 by $1.5 trillion. So the question is, ''How has this been discounted?''
Page 10 PREV PAGE TOP OF DOC We say there is no problem because there are no price increases, but we have also had the advantage of technology. That keeps prices down. We have cheap imports. That keeps prices down. We have world labor markets now. That keeps prices down and takes the pressure off wages. We have the privilege of being the reserve currency of the world. Foreigners are still willing to take our dollars. So we inflate. Not only do they take our dollars in the form of credit and buy our Treasury bills, but they are quite willing to hold two-thirds of our cash overseas, which again leads us to believe that there is no monetary inflation.
We also know that the measurement of price inflation comes from the Government measuring the CPI, and we do know that the calculation of the CPI is ongoing, as reported in the last minutes of FFOMC, and therefore the CPI is reflecting something lower. Now, a lot of people in this country generally do not trust what the Government tells them, and when I talk to the people in my district, they just sort of roll their eyes and laugh if they are told that there is no inflation and that prices are rising at 1 or 2 percent. And yet, if you look at a private organization that measures the cost-of-living index, Al Sindlinger of Sindlinger & Co., from Wallingford, Pennsylvania, he claims that consumer prices are rising by 5.8 percent.
So, I think that I am going to emphasize in my questioning the importance of looking at the right targets, and not being deceived and saying that ''there is no inflation, there is no concern.'' Maybe we should have some concern about some exuberance someplace in the economy. And I thank you.
Chairman CASTLE. Thank you, Dr. Paul.
Mr. KENNEDY. Thank you, Mr. Chairman.
Welcome, Mr. Chairman. You know, I once again want to welcome you here to the Congress and thank you for taking the time to listen to all of our concerns about the way the economy is moving. It seems to me generally speaking people feel that the economy is moving very much in the right direction, and as I said in the last time you were up here, I think people give you a great deal of credit for that. But there are also, as you said in your last time up before this subcommittee, that there are concerns that you have had, and both Mr. Frank and I think Mr. Sanders voice those concerns pertaining to the unemployment rate as being foremost on the minds of many people in the sense that if in fact the unemployment rate dropped to a certain rate, that there might be a number at which you felt compelled to then raise interest rates.
Page 11 PREV PAGE TOP OF DOC My concern today is not just over unemployment but is really over what these hearings are legislated to be about. The Humphrey-Hawkins report calls forand let me just quote to you''to promote maximum employment, production, and purchasing power.'' I think that you would be the first to admit that wages have simply not kept up certainly with the stock market but with other economic indicators over the course of the last 10 years or 20 years. And the concern would be that you read these reports in the paper today, everybody is jiggling about whether or not in the next hour or two, whenever you actually get around to talking, you might mention the fact that the inflation rateexcuse me, the interest rates might go up.
I think I have a fundamental concern that one of the reasons for that will be in fact any notion that somehow the wages of the American worker might actually start to go up. And I wonder whether or not, and I hope in your comments you will talk about what has happened to the ordinary worker's wages in this country, and whether or not in fact there is room to allow wage increases for ordinary families that can take place, people that are earning $20,000 or $30,000 or $40,000 a year, whether or not they can actually hope to see their incomes and purchasing power rise without a call for an increase in interest rates on your part.
Is there in fact any room other than for the stock market to rise, for wages to actually rise, because obviously if wages rise, then you are going to say prices have risen because prices have risen, inflation has gone up, and so the ordinary worker is stuck in almost a hamster-like stance where they cannot ever hope to make any progress because of the very box that the economists have designed to put you and the Fed in this extraordinary condition that says anytime there is a wage increase across the board where ordinary people actually receive some of the benefits that have certainly accrued to people that can invest in the stock market and other kinds of businesses in this country, that they automatically will then suffer as a result of a higher unemployment rate because we are going to bang up the inflation rate.
And I would very much appreciate it, Mr. Chairman, whatever you say about the interest rates, if you could talk to us a little bit about the wage problem that so many families are facing.
Page 12 PREV PAGE TOP OF DOC I yield back the balance of my time.
Chairman CASTLE. Thank you Mr. Kennedy.
Dr. WELDON. I thank the Chairman, and I want to thank you, Mr. Chairman, for calling this hearing, and I want to thank Federal Reserve Chairman for coming. The area of interest for me that I hope you will be commenting on, I haven't had time to review as of yet your testimony, as we all know we are in a somewhat unprecedented circumstance for the last third of the 20th century where we have strong economic growth and low inflation. My own personal opinion that one of the primary drivers behind that is the resolve on the part of the Congress to balance the budget and not be in the marketplace borrowing money in huge amounts, and I'm hoping in your comments or in the question-and-answer period we will be able to get at that issue, because I personally believe that is one of the biggest fundamental reasons why the economy is doing well right now and inflation rates are low.
I yield back the balance of my time, Chairman Castle.
Chairman CASTLE. Thank you very much, Dr. Weldon.
Mr. SANDERS. Thank you, Mr. Chairman, and I want to welcome Mr. Greenspan to the hearings this afternoon, and also as Barney Frank did, thank Mr. Leach for the hearings that we are going to have tomorrow as well. These issues that we are discussing are of enormous consequence to the American people, and it is important that we have some good debate about them.
Before I begin let me say one thing. As an independent, my views are a little bit different than my colleagues', and also I will say some things about Mr. Greenspan that may sound a little bit harsh, but they are not meant to be disrespectful. I think that anyone who is willing to venture into the public arena, no matter what their point of view, deserves our respect. You defend your point of view, and I happen to appreciate that.
Page 13 PREV PAGE TOP OF DOC It is my personal opinion that Mr. Greenspan throughout his political career, and today, has functioned to represent the wealthiest people of this country consistently, and his policies reflect that today.
It is also my view that many of his policies are very adverse and hurt the working families of our country. Mr. Greenspan sometimes poses as kind of an economist, a mainstream economist, but in fact his background is that he is an extremely conservative individual, worked on the committee to elect Ronald Reagan, contributed to Jesse Helms' contribution to the campaign, wrote letters in support, lobbied on behalf of Charles Keating in the Lincoln Savings and Loan Company, which subsequently collapsed at a cost of $2.6 billion. But that is not what is important. What is most important, I think, is the policies that he advocates, and the impact they have on middle-class and working families.
My understanding is that in the midst of the debate last year over raising the minimum wagewhich at $4.25 had reached the lowest point in 40 yearsMr. Greenspan's wisdom indicated that the Congress should not raise the minimum wage. Fortunately Congress did that. We did raise the minimum wage. We have a long way to go.
My understanding is that last January he testified before the Senate Budget Committee and said, quote, ''The appropriate capital gains tax is zero.'' My understanding is that if Congress enacted that policy it would cost the Treasury roughly $50 billion a year in revenues, with 70 percent of those tax cuts going to households over $100,000 a year. And, with the $50 billion not coming in, no doubt, necessitate more cuts in Medicare and Medicaid and programs benefiting ordinary Americans.
In 1983, as Chairman of the Social Security Commission, you led the effort to raise the highly-regressive payroll taxes by about $200 billion, while at exactly the same time, you advocated successfully for significant tax breaks for the richest people in America and for the largest corporations.
Page 14 PREV PAGE TOP OF DOC You now advocate lowering the CPI, which in my State, means senior citizens trying to survive on $8- or $9,000 a year will actually get less in their Social Security benefits.
You have been consistent. And I think the policies that you advocateI give you credit for your consistency. But let me now shift to what is going on in the economy. I notice that on page one of your report you say, ''The recent performance of the economy characterized by strong growth and low inflation has been exceptional''''exceptional.'' Well, I am going to welcome you in my question and answer period to come to the State of Vermont where people are working 50-, 60-, 70-hours a week, trying to pay the bills to keep their families alive; where they are working longer hours for low wages. And I want you to come to my State, and you tell the people of the State of Vermont, all the people, working families of America, how ''exceptional'' the economy is doing.
I think there is a bit of a confusion here. And that is that the economy is, in fact, performing exceptionally for the rich and the powerful. In fact, I will agree with you. For those people, the economy has never been better. But, for the middle class and working families of this country, the economy continues to decline.
Let us talk about what is really going on in the economy. And, if the media wants to know what is going on in the economy, you do not have to listen to Mr. Greenspan, go to Vermont, go to big cities, talk to working people all over America. That is how you learn what is going on in the economy.
Now, last year the CEOs of large corporations, according to Business Weeknot exactly a socialist publicationBusiness Week indicated that the CEOs of large corporations earned a 54 percent increase in their compensation. They now make 200 times what their workers earn. Now, that is pretty good. I guess for them the economy is booming. Corporate profits are soaring. The stock market is going off the wall.
Page 15 PREV PAGE TOP OF DOC In the last 20 years, the wealthiest one percent of American families saw their after-tax incomes more than double. The richest one percent of the American people now own 40 percent of the wealth in this country, more than the bottom 90 percent, and the gap between the rich and poor in this country is now wider than any other industrialized nation on Earth. So, yes, the economy is exceptional for the people who are rich. But, for the middle class and working class of this country, things are not so good, and your policies have not helped them.
Twenty years ago, American workers led the world in terms of the wages and compensation they received. Today, they are in 13th place. Adjusted for inflation, the average pay for 80 percent of American workers plummeted by 16 percent
I would ask for one more minute, please.
Plummeted by 16 percent between 1973 and 1993. While unemployment is relatively low, most of the new jobs that are being created are low-wage, part-time and temporary. Americans at the bottom end of the wage scale have become the lowest paid workers in the industrialized world. Eighteen percent of those with full-time jobs are paid so little that they are not living above poverty.
Now, if that sounds like an exceptional economy, clearly some of us may have been hanging out at the country clubs and not talking to ordinary people. So, I would argue that the policies that we are advocatingand that you are advocating, Mr. Greenspanrepresent the wealthy and the powerful. But, they are not doing justice to the middle income people, or the working families of this country. I look forward to the question and answer period.
Chairman CASTLE. Thank you, Mr. Sanders.
Mrs. ROUKEMA. Thank you, Mr. Chairman. And Chairman Greenspan, I certainly welcome you here. And with reference to my colleague Barney Frank's earlier statement, I am not a basher or a sniper, Mr. Chairman. And I hope that today we can have a rational inquiry here, not irrational, but a rational inquiry here. And I want to say, and perhaps a little different from what has been said previously, I am most respectful of the fine job that you are doing at the Fed.
Page 16 PREV PAGE TOP OF DOC I am going to really condense everything that I had intended to say, because I think it is most important that we hear from you, Mr. Chairman. I am not going to go into the global competition and the driving down of wages and the technologies, or whatever downsizing has been going on. We could all go on about that, but I want to hear it from you.
However, I would respectfully request if you would give some time in your statement to advice that you might give the Congress with respect to our responsibility here in terms of maintaining the fiscal restraint, how we balance that fiscal restraint with what is genuine deficit reduction, not only short term, but longer term. Particularly, I would appreciate any comments you would want to make about an investment-oriented tax policy. I think all three of these issues are extremely relevant to the work that you are doing and to our overall question as to, not only employment rates, but the rate of inflation in the economy.
So respectfully, I would look forward to your testimony and ask that the full text of my opening statement be included in the record. Thank you for being here.
Chairman CASTLE. Thank you, Ms. Roukema, and without objection, of course, the full text of your statement or the statements of any Members who wish to submit them for the record will be accepted.
Mr. KANJORSKI. Thank you very much, Mr. Chairman.
Mr. Chairman, certainly we welcome the Chairman. We look forward to your testimony. Everybody cannot get too settled, because we are going to rush out and call our brokers as soon as the hearing is over.
But, in that tradition, Mr. Chairman, I am particularly disturbed in reading your comments and looking at the economy today, that you do not discuss capacity. I see us near maximum capacity in the economy, particularly with regard to the utilization of capital assets. And as I look at the unemployment rate hovering nationwide around 5 percent, I see the utilization of labor at near capacity. Not a great deal of flexibility in there. And I am particularly interested in your evaluation of what is now the policies of the Administration and Majority in Congress in anticipating a consumptive tax reduction, and whether or not that anticipated reduction can be met with increased capacity, or increased labor to provide that capacity, or whether we are, in fact, laying the groundwork for an inflationary cycle that will be stimulated by the additional consumptive money put in the economy by the tax reduction that is anticipated to pass on, because it is supported both by the Administration and the Majority in Congress.
Page 17 PREV PAGE TOP OF DOC I am really asking you for an in-depth economic lesson, because everything I learned in economics in college is contrary to what we tend to be doing. It seems to me that as we move down this road toward a balanced budget and tax reform, that tax reform should be concentrated and directed toward saving and investment, and not toward consumption. And that the short relief of the consumptive tax credit could be the poison pill of the future a year or two down the road, in terms of its effect on the economy.
So, I look forward to your comments in that area, very similar to my friend, Ms. Roukema on the other side of the aisle. I hope you will address that. It is not contained in your prepared statement, but I hope you will take the time to answer those particular questions.
Thank you very much, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Kanjorski.
Mr. BEREUTER. Mr. Chairman, I want to welcome Chairman Greenspan, look forward to his testimony and his responses to questions. And I yield my time to another colleague on this side of the aisle.
Chairman CASTLE. Mr. Cook, would you like to make an opening statement?
Mr. COOK. Thank you, Mr. Chairman. And to Chairman Greenspan, again very delighted that you are meeting with us today as a businessman for two decades in the manufacturing sector. I just want to express my appreciation of the business climate, the stable prices, the stable financial environment that we have enjoyed in the last few years, and I compare that to the early years that I had in the explosives business, where the misery indexthe index of inflation plus unemploymentwas hovering around 20 and sometimes I think even over 20 percent. We certainly had double-digit inflation in those days in the 1970's when we could not rely on raw material, supply contracts at all. They went out the window and there was just really a lot of unease and unrest in the mining industry generally because if those things.
Page 18 PREV PAGE TOP OF DOC So, I just want to say as someone who has admired your tenure over these three terms at the Federal Reserve, that probably more than anyone else, I think you have represented the essence of the stability of the financial markets and the whole environment and the protection of our currency and our money. And I, for one, am very grateful.
I wish I could totally share in the enthusiasm of Dr. Weldon that Congress has created all of this. And I think Congress is definitely in the right direction in the last few years in moving toward a balanced budget. But, I think it's very lucky for American businessmen generally that we have the stability that we have in prices today, even without balanced budgets. I think it is a testament to some of the work you have done in the Federal Reserve in your decision.
I have been at times, if not a very vocal critic of interest rate hikes, still wondering at times. But, I have to say that I think this country may be well-served by looking at the track record of your decisions in terms of changes in the discount rates, changes in the interest rates that we can understand that the long-term stability of prices is what we are really after. And that is what this subcommittee, I think, should be most focused on.
So, again, I want to thank you for the service and have to say this in a final statement. I felt that the best decision the President of the United States has made in his entire service has been your reappointment to the third term.
Chairman CASTLE. Thank you, Mr. Cook.
Mr. MALONEY. Thank you, Mr. Chairman.
Welcome, Mr. Greenspan. I always look forward to your testimony. You have played a major role in developing a monetary policy that has been consistent with lower overall unemployment, virtually no inflation in 1997, and a stock market at a near all-time high. This is a superb record and I congratulate you.
Page 19 PREV PAGE TOP OF DOC We have had 6 years of economic growth, and with the right interest rate policy I think that we can keep this growth going.
Most people would be surprised to learn that only 1,600 of the 25,000 Federal Reserve employees are working in monetary policy. The rest are involved in unrelated services, such as the transportation of paper checks. As you know from the signed statements sent to your office and to the committee in 1995, 1996, and 1997 from employees who manage the Fed's fleet of 47 airplanes, the Federal Reserve is heavily subsidizing the transportation of paper checks.
I am going to ask you today to join with me in supporting a bipartisan bill, along with Congressmen Metcalf and Ney, the Efficient Check Clearing Act of 1997, which would end that practice.
The Government should not be in the business of driving private competitors from the market. Competition will produce innovation and efficiency. No Government bureaucracy should be trying to block these changes by subsidizing a service such as the transportation of paper checks.
I hope you will support this bipartisan effort to end this subsidy. Let us promote competition on a level playing field and bring banking services into the 21st century with a modern payment system in which private enterprise provides competition and innovation to promote a full range of choices for the Nation's consumers.
I look forward to your testimony.
Chairman CASTLE. Thank you, Ms. Maloney.
Mr. BENSTEN. Thank you, Mr. Chairman.
Chairman Greenspan, during the opening statements I have had the opportunity to read through your testimony and it would appear like Congress you havethe Fed has more questions than answers. And that it also would appear that the Fed has now found that it is less precise in being able to predict the economy than it has been in recent years, and I would agree with that.
Page 20 PREV PAGE TOP OF DOC I also want to state just for the record, while I opposed or disagreed with the Open Market Committee's decision to raise the Fed funds rate back in March, I think in retrospect now we look at it as potentially some form of a regulator that the marketsor a chokethat the markets perceive, and as a result we are probably better off.
I do not know if that is how you planned it. At this point you might go ahead and say that was your intent at the time. But I think that it ended up being a good guess on your part, and otherwise I have a number of questions and look forward to your testimony.
Chairman CASTLE. Thank you very much, Mr. Bentsen.
Mr. JACKSON. Thank you, Mr. Chairman. I appreciate the opportunity to welcome the Chairman of the Federal Reserve, the Honorable Alan Greenspan, in his second address to the 105th Congress.
Chairman Greenspan, it is with great pleasure and admiration that I welcome you today to apprise us of the status of the American economy and your judgments as to the activities of the Federal Reserve system in fulfilling its duties, among others, of conducting national monetary policy in pursuit of the objectives of price stability and full employment. Welcome Chairman Greenspan.
Chairman Greenspan, I also want to commend you for your leadership in resisting the forces which encouraged unnecessarily raising interest rates during the Federal Reserve's Open Market Committee meetings in May.
I also would like to thank you for your insights related to the, quote, ''New economic age'' that we have clearly entered. Global market expansion and increased spending on new technology have produced big productivity gains. I concurred with your assessment that there is no need for an interest rate hike under the current economic conditions.
However, I must register my dissent with those who would claim that we may be entering a period where the economy may overheat. And for this reason, slowing the economy and reducing job creation is a necessary course of action for the Fed. While conventional wisdom speaks to expansion and growththe stock market has reached record levels, indicators reflect rapid growth, falling unemployment, rising incomes for some sectors of the population, with a concurrent decline in inflationthe least well-off and the least-educated amongst us, however, continue to experience stagnant wages.
Page 21 PREV PAGE TOP OF DOC Assessing the economy depends upon one's vantage point. You see one thing if you are on the top looking down, and you see quite another if you are a worker or you are poor, or economically insecure, and you are looking up.
If you are one of the 15-to-20 million Americans who are unemployed, underemployed, never had a job, or gave up looking for one, or you have been the victim of corporate downsizing, then the exuberant economic indicators do not reflect your individual circumstances.
Chairman Greenspan, I believe this is a more accurate picture of the economic conditions of communities like those in my district on the South Side of Chicago, or the south suburbs, and explains the widespread levels of economic anxiety currently plaguing the American people.
In light of the foregoing, Chairman Greenspan, I will be listening intently to your testimony, and particularly with respect to your view on how the Fed can encourage and guide the economy toward attaining true levels of full employment.
Once again, Chairman, thank you for joining us today and I look forward to hearing your testimony.
Thank you, Chairman Castle.
Chairman CASTLE. Thank you, Mr. Jackson.
Mr. FOLEY. Thank you, Mr. Chairman.
I would like you, if you could, at the end of your comments, maybe talk just briefly about the banking situation with commerce, lending, baskets. It was probably one of the tougher decisions that I have had to reach on this subcommittee. I am new to the subcommittee and I have served on a bank board beforeand a savings and loan board beforeand I am quite concerned as they attempt to find this new level of equal playing field, what the impacts will be. And I would also like you to maybe comment on the front cover of Money Magazine this month that puts the pronouncement, ''sell everything.'' And what plans we may have in the event that there are some panics to the market, what impact that would have on our monetary policy, what impacts that would have to the savings of America, and what we may initiate in order to forestall those types of hysterical headlines that Money Magazine published this month that I think threaten the stability of the marketplace, certainly threaten the economy, and the progress that has been made.
Page 22 PREV PAGE TOP OF DOC Chairman CASTLE. Thank you, Mr. Foley.
There are a number of individuals from the Banking Committee, Mr. Chairman, who have joined us, as they are want to do when you are here to testify. And I would like unanimous consent to allow them to make, hopefully very brief, if they will, opening statements if they want to, and perhaps to ask questions as follow up. If there is no objection, let me ask the Chairman of the Banking Committee, Mr. Leach, if he would like to make a statement.
Mr. LEACH. I do not have an opening statement, Mr. Chairman. I do want to welcome the Chairman. And sitting here, I feel obligated to make the comment how proud I am that I think this is one of the best-led subcommittees of the United States Congress. You and Mr. Flake do a wonderful job.
Chairman CASTLE. Well, that is high praise indeed. We appreciate it. I would have called on you a long time ago if I had known you were going to say that.
Chairman CASTLE. I hope the television cameras pick that up.
Chairman CASTLE. Thank you, Mr. Chairman.
Ms. KILPATRICK. I pass, Mr. Chairman.
Chairman CASTLE. Mr. Watt.
Mr. WATT. Pass.
Chairman CASTLE. Mr. LaFalce.
Mr. LAFALCE. I pass, Mr. Chairman.
Chairman CASTLE. Mr. Bachus.
Page 23 PREV PAGE TOP OF DOC Mr. BACHUS. Thank you.
Mr. Greenspan, you have been asked to comment about working Americans and the working families of America, and I was just noting from the other side, and the working class, I heard that word. If you are going to comment about working Americans, I would like to be interested in what your definition of ''working Americans'' is, so I will know who you are talking about.
I know if you adopt Richard Gephardt's definition of ''working Americans'' you have to accept the premise that you have to makethe householdhas to make $35,000 or less. He defines ''working Americans'' as those people in households making $35,000 or less a year. I guess I would be interested in knowing whether you think people that make over $35,000 a year, if they should be defined as working Americans, too?
You have also talked about ''working class.'' You have talked about people trapped in America today without opportunities. You, in your opening statement mention that there are remarkable increases in work opportunities for Americans. I would like to know whether you think it is fair for us to compare working Americans today, or the working class, with 19th century England, where there was a class system and people were trapped in a working class. Whether you think thatyou know, you were asked what you would do about people that were trapped.
I would like your comments on what you think is trapping people, if there are a large segment of Americans that are trapped in some working class. Before World War II, we did talk about during the Depression, people trapped, high unemployment. But, with such high employment today, I would like your thoughts on what is trapping these people? You know, is it maybe, on occasion, their own behavior, or their dropping out of school? Or maybe they do not have the right education. Or whether alcohol, drug addictionwhat is the reason for that unemployment?
Page 24 PREV PAGE TOP OF DOC But, I would like yourI want to know whether you think it is fair to keep using these words ''working class'' and withoutif you said the wordBernie has described the working class
Mr. SANDERS. Would the gentleman yield?
Mr. BACHUS.As anyone that
Mr. SANDERS. Would the gentleman yield?
Mr. BACHUS.Makes under $30,000 a year, and that would mean that most of my district does not work.
Mr. SANDERS. Would the gentleman yield?
Mr. BACHUS. Sure, I will.
Mr. SANDERS. Would the gentleman yield?
Mr. BACHUS. I will yield.
Mr. SANDERS. Thank you.
When the CEOs of large corporations make 207 times what their workers make and most of the gains
Mr. BACHUS. I am not talking about that.
Mr. SANDERS. Answer my question and then you answer me.
Mr. BACHUS. You are talking about
Mr. SANDERS. You have one percent of the population
Chairman CASTLE. Is this a parliamentary inquiry?
Mr. FRANK. Mr. Chairman, a parliamentary inquiry.
Mr. SANDERS. Well, one minute.
Mr. FRANK. Parliamentary inquiry.
Chairman CASTLE. Well, one minute. Parliamentary inquiry is in order.
Page 25 PREV PAGE TOP OF DOC Mr. FRANK. Can you rescind unanimous consent retroactively?
Chairman CASTLE. I was wondering about yielding on opening statements. Gentlemen, let us try to wrap this up.
Mr. BACHUS. I will reclaim my time.
Mr. SANDERS. Thank you for yielding.
Mr. BACHUS. I would be interested in whether you think there isif a working class ofsay, people that make $50,000 a year. Are they working families?
Chairman CASTLE. Thank you, Mr. Bachus. We appreciate your statement. And, I think with that, everybody here has had an opportunity to speak.
Mr. WATT. Mr. Chairman.
Chairman CASTLE. Sorry, Mr. Watt.
Mr. WATT. I do not seem to be able to find a copy of Mr. Greenspan's statement.
Chairman CASTLE. We will get you one.
Mr. WATT. Other Members of the subcommittee might want one, too.
Chairman CASTLE. I think the other Members have it. It is perhaps because you came a little bit later, but we will get you one immediately.
Well, I am certain that our visitor from the European Parliament will go back and report that this is a very diverse group of Members who make up the subcommittee
Chairman CASTLE.As we have heard from the various positions which have been taken here. And we would depend upon you, Mr. Chairman, to unite us all in some way or another, in some central point amongst the views we have here. This, after all, is the real reason that we are all gathered. I do not think anyone had a great deal of overwhelming interest in what we had to say, but we know that the world follows carefully what you are about to say, or what you have printed earlier and already has been distributed.
Page 26 PREV PAGE TOP OF DOC And we are sorry this takes so long, but I think it is very important frankly, that we as the elected Members of Congress give our opinions and statements concerning where we think things are, and subsequently we will have the opportunity to ask questions, in at least one round of 5-minute questions, and perhaps longer. But this is your moment and we turn to you. Thank you for being here.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. GREENSPAN. Well, thank you very much, Mr. Chairman. Speaking as a private citizen, I must say that this is called ''democracy,'' and it is something that we ought to be proud of. We should not to be concerned about the level of decibels, but recognize that this is the way laws are made in this country. I think we all ought to be proud of that.
I am, as always, pleased to appear before this subcommittee to present the Federal Reserve's Report on the economic situation and monetary policy.
Mr. Chairman, my prepared remarks are rather extended, and I request that, even though I will excerpt them this afternoon, I would appreciate the full text being included for the record.
Chairman CASTLE. Certainly. Without objection the full text will be included in the record.
Mr. GREENSPAN. The recent performance of the American economy, characterized by strong growth and low inflation, has been exceptionaland better than most anticipated. During the first quarter of 1997, real gross domestic product expanded at nearly a 6 percent annual rate, after posting a 3 percent increase over 1996. Activity apparently continued to expand in the second quarter, albeit at a more modest pace. The economy is now in the seventh consecutive year of expansion, making it the third longest post-World War II cyclical upswing to date.
Page 27 PREV PAGE TOP OF DOC Moreover, our Federal Reserve Banks indicate that economic activity is on the rise, and at a relatively high level, in virtually every geographical region and community of the Nation.
This strong expansion has produced a remarkable increase in work opportunities for Americans. A net of more than 13 million jobs has been created since the current period of growth began in the spring of 1991. As a consequence, the unemployment rate has fallen to 5 percentits lowest level in almost a quarter century. The expansion has enabled many in the working-age population, a large number of whom would have otherwise remained out of the labor force or among the longer-term unemployed, to acquire work experience and improved skills. Our whole economy will benefit from their greater productivity. To be sure, not all segments of our population are fully sharing in the economic improvement. Some Americans still have trouble finding jobs, and for part of our work force real wage stagnation persists.
In contrast to the typical postwar business cycle, measured price inflation is lower now than when the expansion began and has shown little tendency to rebound of late, despite high rates of resource utilization. The consumer price index rose at less than a 2 percent annual rate over the first half of the year, down from a little over 3 percent in 1996.
With the economy performing so well for so long, financial markets have been buoyant, as memories of past business and financial cycles fade with time. Soaring prices in the stock market have been fueled by moderate long-term interest rates and expectations of investors that profit margins and earnings growth will hold steady, or even increase further, in a relatively stable, low-inflation environment.
The key question facing financial markets and policymakers is what is behind the good performance of the economy, and will it persist? Without question, the exceptional economic situation reflects some temporary factors that have been restraining inflation rates. In addition, however, important pieces of information, while just suggestive at this point, could be read as indicating basic improvements in the longer-term efficiency of our economy. The Federal Reserve has been aware of this possibility in our monetary policy deliberations and, as always, has operated with a view to supplying adequate liquidity to allow the economy to reach its highest potential on a sustainable basis.
Page 28 PREV PAGE TOP OF DOC Nonetheless, we also recognize that the capacity of our economy to produce goods and services is not without limit. If demand were to outrun supply, inflationary imbalances would eventually develop that would tend to undermine the current expansion and inhibit the long-run growth potential of the economy. Because monetary policy works with a significant lag, policy actions are directed at a future that may not be clearly evident in current experience.
In making monetary policy judgments, we need to analyze carefully the various forces that may be affecting the balance of supply and demand in the economy, including those that may be responsible for its exceptional recent behavior. The remainder of my testimony will address the various possibilities.
Many observers, including us, have been puzzled about how an economy, operating at high levels and drawing into employment increasingly less-experienced workers, can still produce subdued and, by some measures even falling, inflation rates. It will, doubtless, be several years before we know with any conviction the full story of the surprisingly benign combination of output and prices that has marked the business expansion of the last 6 years.
Certainly, public policy has played an important role. Administration and congressional actions to curtail budget deficits have enabled long-term interest rates to move lower. Deregulation in a number of industries has fostered competition and held down prices. Finally, the preemptive actions of the Federal Reserve in 1994 contained a potentially destabilizing surge in demand. But the fuller explanation of the recent extraordinary performance may well lie deeper.
In February 1996, I raised before this subcommittee the hypothesis tying together technological change and cost pressures that could explain what was, even then, a puzzling quiescence of inflation. The new information received in the last 18 months remains consistent with those earlier notions; indeed, some additional pieces of the puzzle appear to be falling into place.
Page 29 PREV PAGE TOP OF DOC A surge in capital investment in high tech equipment that began in early 1993 has since strengthened. Presumably companies have come to perceive a significant increase in profit opportunities from exploiting the improved productivity of new technologies.
It is premature to judge definitively whether these business perceptions are the harbinger of a more general and persistent improvement in productivity. Although the anecdotal evidence is ample and manufacturing productivity has clearly picked up, a change in the underlying trend is not yet reflected in our conventional data for the whole economy.
But, even if the perceived quicker pace of application of our newer technologies turns out to be mere wheel-spinning, rather than true productivity advance, it has brought with it a heightened sense of job insecurity, and as a consequence, subdued wage gains. As I pointed out here last February, polls indicated that despite the significant fall in the unemployment rate, the proportion of workers in larger establishments fearful of being laid off rose from 25 percent in 1991 to 46 percent in 1996.
To be sure, since last year, surveys have indicated that the proportion of workers fearful of layoff has stabilized, and the number of voluntary job leavers has edged up. But, the increases in the Employment Cost Index still trail behind what previous relationships to tight labor markets would have suggested, and a lingering sense of fear or uncertainty seems still to pervade the job market.
The combination in recent years of subdued compensation per hour and solid productivity advances has meant that unit labor costs of non-financial corporations have barely moved. A significant part of the measured price increase over that period was attributable to a rise in profit margins, unusual well into a business expansion. Rising margins are further evidence suggesting that productivity gains have been unexpectedly strong.
While accelerated technological change may well be an important element in unraveling the current economic puzzle, there have been other influences at play as well in restraining price increases at high levels of resource utilization, including the strong dollar, increasing globalization, deregulation, and changes in the health care industry.
Page 30 PREV PAGE TOP OF DOC Many of these forces are limited or temporary, and their effects can be expected to diminish, at which time cost and price pressures would tend to re-emerge. The effects of an increased rate of technological change, however, might be more persistent.
When I discuss greater technological change, I am not referring primarily to a particular new invention. Instead, I have in mind the increasingly successful and pervasive application of recent technological advances. Many of these technologies have been around for some time. Why might they be having a more pronounced effect now?
What we may be observing in the current environment is a number of key technologies, some even mature, finally interacting to create significant new opportunities for value creation. For example, the applications for the laser were modest until the later development of fiber optics engendered a revolution in telecommunications. Broad advances in software have enabled us to capitalize on the prodigious gains in hardware capacity. The interaction of both of these has created the Internet.
The accelerated synergies of the various technologies may be what have been creating the apparent significant new profit opportunities that presumably lie at the root of the recent boom in high-tech investment.
We do not know, nor do I suspect can anyone know, whether current developments are part of a once-or-twice-in-a-century phenomenon that will carry productivity trends nationally and globally to a new higher track, or whether we are merely observing some unusual variations within the context of an otherwise generally conventional business cycle expansion.
But, whatever the trend in productivity and, by extension, overall sustainable growth, from the Federal Reserve's point of view, the faster the better. We see our job as fostering the degree of liquidity that will best support the most effective platform for growth to flourish. We believe a noninflationary environment is such a platform.
Page 31 PREV PAGE TOP OF DOC The Federal Reserve's policy problem is not with growth, but with maintaining an effective platform. To do so, we endeavor to prevent strains from developing in our economic system which, long experience tells us, produce bottlenecks, shortages, and inefficiencies.
In gauging the potential for oncoming strains, it is the effective capacity of the economy to produce that is important to us.
Capacity is a complex concept, which requires a separate evaluation of its two components, capital and labor. It appears that capital can adapt and expand more expeditiously than in the past to meet demands. Hence, capital capacity is now a considerably less rigid constraint than it once was.
In recent years, technology has engendered a significant compression of lead times between order and delivery for production facilities. This has enabled output to respond increasingly faster to an upsurge in demand, thereby decreasing the incidence of strains on capital capacity and shortages so evident in earlier business expansions.
Increased flexibility is particularly evident in the high-tech industries, but the shortening of lags has been pervasive even in more mature industries.
At the extreme, if all capital goods could be produced at constant cost and on demand, the size of our Nation's capital stock would never pose a restraint on production. We are obviously very far from that nirvana, but it is important to note that we are also far from the situation a half-century ago when our production processes were dominated by equipment such as open hearth steel furnaces, which had very exacting limits on how much they could produce in a fixed time frame, and which required huge lead times to expand their capacity.
Even so, today's economy as a whole still can face capacity constraints from its facilities. Indeed, just 3 years ago, bottlenecks in industrial production were putting significant upward pressure on prices at earlier stages of production. More recently, vendor performance has deteriorated somewhat, indicating that flexibility to meet demands still has limits. Although further strides toward greater facilities flexibility have occurred since 1994, this is clearly an evolutionary, not a revolutionary, process.
Page 32 PREV PAGE TOP OF DOC Moreover, technology and management changes have had only a limited effect on the ability of labor supply to respond to changes in demand. To be sure, individual firms have acquired additional flexibility, for example, by increased use of outsourcing and temporary workers. While these techniques put the right workers at the right spots to reduce bottlenecks, they do not increase the aggregate supply of labor. Labor capacity for an individual country is constrained by the size of the working-age population, which, except for immigration, is basically determined several decades in the past.
Of course, capital facilities and labor are not fully separate markets. Within limits, labor and capital are substitutes.
Yet, despite significant increases in capital equipment in recent years, new additions to labor supply have been inadequate to meet the demand for labor. As a consequence, the recent period has been one of significant reduction in labor market slack.
The key point is that continuously digging ever deeper into the available work-age population is not a sustainable trajectory for job creation. The rise in the average workweek since early 1996 suggests employers are having increasingly greater difficulty fitting the millions who want a job into available job slots. If the pace of job creation continues, the pressures on wages and other costs of hiring increasing numbers of such individuals could escalate more rapidly.
Thus, there would seem to be emerging constraints on potential labor input. Even before we reach the ultimate limit of sustainable labor supply growth, the economy's ability to expand employment at the recent rate should rapidly diminish. Simply adding new facilities will not increase production unless output per worker improves. At the cutting edge of technology, where America finds itself, major improvements cannot be produced on demand. New ideas that matter are hard won.
As I noted, Mr. Chairman, the recent performance of the labor markets suggests that the economy is on an unsustainable track. Unless aggregate demand increases more slowly than it has in recent yearsmore in line with trends in the supply of labor and productivityimbalances will emerge.
Page 33 PREV PAGE TOP OF DOC Fortunately, the very rapid growth of demand over the winter has eased recently. In view of the various factors affecting the outlook, monetary policymakers forecast a continuation of less rapid growth in coming quarters.
For 1997 as a whole, the central tendency of their forecasts has real Gross Domestic Product growing 3 to 3 1/4 percent, and 2 to 2 1/2 percent in 1998. This pace of expansion is expected to keep the unemployment rate close to its current low level.
We anticipate that consumer prices will rise only 2 1/4 to 2 1/2 percent this year. The central tendency of the projections is that the CPI will be 2 1/2 to 3 percent in 1998a little above the expectation for this year. However, much of this increase is presumed to result from the absence of temporary factors that are holding down inflation this year.
I have no doubt that the current stance of policycharacterized by a nominal Federal funds rate around 5 1/2 percentwill need to be changed at some point to foster sustainable growth and low inflation. Adjustments in the policy instrument in response to new information are a necessary, and I should like to emphasize, routine aspect of responsible policymaking. For the present, as I indicated, demand growth does appear to have moderated, but whether that moderation will be sufficient to avoid putting additional pressures on resources is an open question. With considerable momentum behind the expansion and labor market utilization rates unusually high, the Federal Reserve must be alert to the possibility that additional action might be called for to forestall excessive credit creation.
The Federal Reserve is intent on gearing its policy to facilitate the maximum sustainable growth of the economy, but it is not, as some commentators have suggested, involved in an experiment that deliberately prods the economy to see how far and fast it can grow. The costs of a failed experiment would be much too burdensome for too many of our citizens.
Clearly, in considering issues of monetary policy we need to distinguish carefully between sustainable economic growth and unsustainable accelerations of activity.
Page 34 PREV PAGE TOP OF DOC The key question is how monetary policy can best foster the highest rate of sustainable growth and avoid amplifying swings in output, employment, and prices. The historical evidence is unambiguous that excessive creation of credit and liquidity contributes nothing to the long-run growth of our productive potential and much to costly shorter-term fluctuations.
Our objective has never been to contain inflation as an end in itself, but rather as a precondition for the highest possible long-run growth of output and incomethe ultimate goal of macroeconomic policy.
The Federal Reserve recognizes, of course, that monetary policy does not determine the economy's potential. All that it can do is help establish sound money and a stable financial environment in which the inherent vitality of a market economy can flourish, and promote the capital investment that, in the long run, is the basis for vigorous economic growth.
Similarly, other Government policies also have a major role to play in contributing to economic growth. A continued emphasis on market mechanisms through deregulation will help sharpen incentives to work, save, invest, and innovate.
Similarly, a fiscal policy oriented toward limited growth in Government expenditures, producing smaller budget deficits and even budget surpluses, would tend to lower real interest rates even further, also promoting capital investment. The recent experience provides striking evidence of the potential for the continuation and the extension of monetary, fiscal, and structural policies to enhance our economy's performance in the period ahead.
Thank you, Mr. Chairman, I look forward to your questions.
Chairman CASTLE. Well, thank you, Mr. Chairman, and we will have, I'm sure, a series of questions here.
Mr. Chairman, the performance of the economy has obviously, by anybody's standards, moved the stock market and increased Government revenue. And in my judgment, most AmericansI do not know how that is measuredbut, most Americans seem to be benefiting from the good economy.
Page 35 PREV PAGE TOP OF DOC I would like to know your views on what else could be done to ensure that all boats are lifted. Actually, sort of encapsulating some of the positions which were taken up here, and all Americans being able to benefit from this period of high economic growth. And I realize you may disagree with the premise of this question, you may feel that there is individual behavior on the part of some Americans that may cause this. And there were some figures on pages 12 and 13 of your testimony that you didn't read here, that sort of interested me, too. But, I would be interested in your views on that particular area.
Mr. GREENSPAN. As I have testified before this subcommittee in the past, we have a problem in this country of increasing dispersions of incomeincreasing inequalitythat has created a fairly pronounced degree of concern amongst policymakers generally. To be sure, the evidence does suggest, as the Council of Economic Advisors pointed out earlier this year, that the degree of inequality has apparently stabilized in the last two or three years, and that there is no evidence of moving backward.
In my judgment, the main cause of the increase that has occurred since the late 1970's, is the fairly dramatic increase in technology, which in turn has enhanced the degree of education to the point where the income of those who are college graduates has widened significantly over those who are high school graduates. Also, the income of those who are high school graduates has increased significantly over those who are not high school graduates.
It's also the case that this evident value of education has induced increased enrollments in our schools, that is, the economic forces are obviously working here. The only thing that I can see which will significantly impact on returning to the type of income distribution which we had say 15 or 20 years ago is increased education, increased on-the-job training, and the bringing up of the skill levels of all Americans. And the reason, as I indicated in the prepared remarks that I have just delivered, is that this current period really is exceptional for this countryit is creating a platform for many individuals who would not otherwise have been able to increase their skills, to get the best type of training that there isa job.
Page 36 PREV PAGE TOP OF DOC Chairman CASTLE. Thank you, Mr. Chairman.
Let me change subjects for a moment. With some pundit saying that the Federal budget is on its way to being balanced on its own, without us doing anything, can we forget about fiscal responsibility in spending restraint, or do we have to continue to work to limit Government spending?
Mr. GREENSPAN. Mr. Chairman, any of us who look at projections of our budgetary accounts recognize that there are errors inevitably in all of these forecasts. With trillion-dollar-plus receipts and expenditures, we cannot come in close to estimates when we remember that our deficit is the difference between these two very large amounts.
Nonetheless, if you project out the implications of some of the particular programs which exist in our budget accounts, it is hard to imagine how we are going to maintain what is either very low budget deficitswhich we, in fact, have todayor balance, which I hope we will have very shortly. We are unlikely to keep that into the 21st century as the inexorable demographics emerge and create very large increases in the costs of programs for our elderly who will be retiring in the year 2009 and the years immediately thereafter.
If you look at the program charts, what you find, as I am sure you have seen, Mr. Chairman, is a fairly dramatic rise in budgetary commitments. The presumption that we have somehow come to a point where we have resolved the budget deficit problem by the year 2002, and that that is the end of the job, and the budget will thereafter automatically balance itself, is a clearly mistaken view. The really tough budget work, I regret, is in front of the Congress, not behind.
Chairman CASTLE. Thank you.
Mr. FLAKE. Thank you very much, Mr. Chairman.
Mr. Greenspan, I would like to just call your attention again to the labor segment of your speech, and realizing, as you have just correctly stated, if you are going to impact in any significant way the labor force that is under-utilized in many communities, there is a necessary educational process to bring skill levels up and to develop the necessary training.
Page 37 PREV PAGE TOP OF DOC To that end, as a former educator in higher education, and realizing that many of the young people that you get at that level have already been put at a major disadvantage by virtue of the fact that they have not gotten the educational training necessary at the earliest stages of their educational venue, I would raise a question of you in terms of how you feel that, as a Nation, we might involve ourselvesengage ourselvesin a process where we are actually producing so many dysfunctional persons who do not have the skills to take to the marketplace? By the time we talk about skills and training, they are already at such a disadvantage that it is almost impossible to train them, because technology is running so far ahead of them that the possibility of getting them trained becomes an almost impossible task. So, we wind up with a potential labor force that either is so under-trained and unskilled and uneducated that it winds up being a part of the fabric of those who represent social misbehavior, wind up in jail or whatever.
Would you offer any suggestions as it relates to what we might do, given that our primary educator is a public system that, quite frankly, in my opinion, does not produce the kind of product that is competitive in the marketplace in which we function, to develop the kind of labor pool that I think industry is looking for today?
Mr. GREENSPAN. Mr. Flake, as we have discussed before, this is one of the most difficult issues confronting this country. I wish I knew more about it. I am not an expert in this particular field, but like any citizen, I recognize the size of the problem which, as far as I can judge, has gotten worse, not better, in the last decade or so.
At a minimum, the question of jobs is crucial, because, from what I have observed, having been an employer in the private sector over the years, is that a lot of people come in to work for their first jobs feeling terribly insecure about whether they can actually do the job, and it requires a considerable amount of increased self-esteem for them to actually be willing to learn the techniques that they need to know. So, even if you get somebody with really basic intelligence and who is really, down deep, pretty smart, if their motivation is somehow uninspired, it is very difficult to teach them, because they don't want to learn.
Page 38 PREV PAGE TOP OF DOC What we have got to do is find ways of getting people on the first rung of the employment ladder, so to speak, and when they have gotten to a point where they say, ''I can do this,'' then you have opened up the door to somebody. But, unless and until you open up that door, I think all of the professional, sophisticated schooling techniques that educators talk about do not work.
There is a new problem that is confronting this Nation, but I don't think we have looked at it in this way before. We have got to find a wedge that will make it work. I am chagrined that we have every sort of program out there on which the Congress spends money and, to a very substantial extent, most of them do not work.
We have a lot of congressionally-authorized training programs on the books, and I would be hard-pressed to find really concrete evidence to suggest that we are doing the right thing there. Something is wrong with what we are doing. All I can say to you is that we just have got to keep pushing until we find the right answers. I wish I knew more of the answers. I don't.
Mr. FLAKE. I would hope that somehow from the platform on which you stand, you can be effective at least as a voice in pushing for necessary changes in the educational process, so that perhaps from the pre-K level through high school, at least, we begin to make an investment that ultimately gives us a return of better young people, more capable of functioning, and with the tools necessary. So that once they get their minds finely tuned enough, we know that their skills can be transferable. And as we move from welfare to work, particularly looking at a population of people who have not worked, in many instances, in the past, there is a whole new arena where we are going to have to try to educate people. As you say, their self-esteem and so forth may be so low.
I don't think that when we talk about economic policy we can exclude the ultimate possibilities of depression that will be caused if we don't attack that segment of the marketplace.
Page 39 PREV PAGE TOP OF DOC And, with that, I will yield back, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Flake.
Mr. LUCAS. Thank you, Mr. Chairman, and thank you for coming, Chairman Greenspan, today.
Being by nature a farmerI guess, actually, I should say by trademy focus on commodity prices generally is more in the direction of wheat or beef cattle or corn, whatever. But in the context of this subcommittee and the hearings that we hold, naturally, it has a broader definition. I guess my question is, what price pressures, if any, are you seeing in the commodity markets, Mr. Chairman?
Mr. GREENSPAN. We are certainly not seeing any pressures in the wheat market at this particular moment. Soybeans have come off a good deal. They were showing some increase, as was coffee. That is on its way down. Corn is lower.
There is, therefore, very little in the agricultural area which shows any really significant price pressures. There is also very little, as I can see, in the industrial area as well. The steel scrap price went up for a few weeks, and then it has come back down in the last week or so.
We have as close to stable prices that I have seen, certainly since the early 1960's.
Mr. LUCAS. I think you may well have answered the next part of my question. Thinking in particular about how the price of gold in recent weeks has trended as low as under the $320 mark, and how I read that some foreign central banks have sold portions ofor substantial portions oftheir gold stock and bought U.S. Treasury instruments again in their place. I guess my next question would be, how do these commodity prices generally signal inflationary pressures? I think you have answered that.
Page 40 PREV PAGE TOP OF DOC Mr. GREENSPAN. They become early signals of the inflation process when you begin to see shortages emerge, and you begin to see people starting to trade on those shortages, and it becomes a self-fulfilling process which, if fueled by excess credit, engenders inflation. And the extraordinary decline in the price of gold, which incidentally, probably is only in small part the result of sales by central banks, is the obverse, namely, the increasing sense of the purchasing power of money, of currency, which, for want of a better term, is ''fiat'' money, and the implication of that is that inflation expectations generally are falling.
In the various surveys which have shown very exceptional increases in consumer confidence in the last year or two, we are now beginning also to see a fairly marked decline in long-term inflation expectations. And you see some evidence in, for example, the new indexed Treasury security which has some aspects of measuring inflation expectations. It is very crude, but nonetheless, it is showing some evidence which is not inconsistent with: one, the decline in the price of gold as a measure of inflation expectations; and, two, a number of these surveys which are suggesting that the people in general are becoming increasingly less fearful of inflation reigniting.
Mr. LUCAS. Thank you, Mr. Chairman and thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Lucas.
Mr. FRANK. Mr. Chairman, as I read your statement I'm troubled. And it seems clear to me a number of people were wrong on the pessimistic side. The economy has clearly behaved better than a lot of people expected. But that includes, obviously, people at the Federal Reserve. I believe, for instance, reading your testimony, that it is clear that the March increase was unnecessary. You acknowledge that monetary policy operates with a lag and you acknowledge that, in fact, inflationary pressures you feared in February turned out not to materialize in the second and subsequent quarters, obviously not because of the March increase. Even more profound, I know, from having been on this subcommittee, that if it had been suggested to the people at the Federal Reserve, or other people in the financial community, that unemployment could get this low with no sign of inflation, with producer prices, in fact, dropping, that we would have been told that was hopelessly optimistic.
Page 41 PREV PAGE TOP OF DOC My problem is that after having been wrong in the past, a lot of peopleand I don't mean to include you, but I think it includes many of your colleaguesare determined to be wrong again and they want to repeat that error. And I sometimes get the sense, as I read your statement, it is a kind ofyou are resisting the good news. What you are saying is, ''There is no evidence of inflation, we have done better than we thought, there is this good trend and that good trend. But let's still act as if it can't really be happening.''
I think sometimes that the Open Market Committee, it's kind of like Pirandello. Instead of ''Six Characters in Search of an Author,'' you are ''12 Pessimists in Search of Some Gloom.'' I mean, the absence of good news seems to be the biggest problem confronting you.
What bothers me is this, we have the negative social consequences that I think get understated. I am in agreement with many of the criticisms implicitly you made about some of the job training programs in response to Mr. Flake. I think the big problem there is an absence of aggregate demand, that you can't train people for jobs that don't exist.
In fact, we have just begun to reach a level of job expansion. We have just begun to get the good news out. And I want to say again, I am terribly concerned that respectable financial opinion seems to be taking the position now that, ''Yeah, while we were wrong and it turns out unemployment could go lower than we were sure it could go, and not have inflationary effects, we are going to resist drawing that conclusion and we are still going to act as if this is sort of an aberration,'' and the whole tone of your statement, and of other similar statements is ''Don't get your hopes up.''
Well, I would hope you could at least approach this neutrally. I mean, the whole tone of this, the whole tone of your approach is one of rebuttal. We have had good news, solid good news, and it is not just results, not just less inflation at a given level of unemployment but, as you point out, real reasons for thinking that. Some reasons I regret, like the erosion of labor unions beginning with conscious Federal policy in the 1980's, internationalization, technological change, a whole range of things. We have just begun to reach out to people in the welfare population to expand jobs.
Page 42 PREV PAGE TOP OF DOC The social peace of this country, I believe, is at risk if we are not able to project the current trends forward. That is really what is at issue here. You are talking, and you acknowledge, and you deserve credit for helping describe the trends we are talking about, the difference between people who are educated and uneducated, the problems with job training programs.
If what we have had over the last couple of years is only temporary and aberrant good news, then we are in terrible trouble. Now, we can't wish ourselves into a better social atmosphere. But, what bothers me is the mind-set you appear to have is, ''Let's find reasons to explain away what happened.''
You talk here about, ''Well, we might have to put on the brakes.'' Isn't it possible that we might have to try to be stimulative? Why is the policy goal of more growth not one that is before us?
And so, I guess I really need you to address how do you reassure us. Because, I assume you disagree with me, that you and your colleagues are notby temperament, by the situation in which you work, by the concerns you have with the financial markets, and by our own past experiencecultural lag is probably the greatest enemy of all of us. How do we get reassured that you are not going to repeat the errors, and that there is not almost a vested intellectual interest in the notions that were wrong, and thus a resistance to good news that may deprive us of some benefit?
Mr. GREENSPAN. Let me say first of all, that if we sound cautious about believing in all of the elements that are coming in ''over the transom,'' so to speak, the reason is that we see the extraordinary improvement in the benefits to this society generally from keeping this expansion going.
Mr. FRANK. Let me just break in one last time, because, and here is the point. When you say ''over the transom,'' if they were just coming in ''over the transom,'' I would understand that, but you give explanations for them. They are not over the transom. They have walked in the front door.
Page 43 PREV PAGE TOP OF DOC Mr. GREENSPAN. I am talking about the facts, which we interpret. If it were not for a very important fact that we know with a high degree of probability that when we take an action, it takes a year or more to impact the real economy. It means that the type of economy in which policy is directed is essentially the economy which is in place the summer of 1998 and beyond. We are putting very substantial resources into evaluating what is going on in this country and indeed, what is going on in the world. To be sure, when we see significant dramatic changes apparently occurring, we are skeptical, as indeed we should be skeptical, until the evidence emerges that it is clear that what we are looking at is something that is fundamentally changed.
Mr. FRANK. Why are you not neutral, rather than skeptical? Because the impression we get is that you are skeptical, because you have got to be on the side of focusing on inflation.
Mr. GREENSPAN. No.
Mr. FRANK. Why should you not be neutral?
Mr. GREENSPAN. Congressman, let me put it to you this way. I have lots of views on lots of different subjects. The one thing I can say to you with respect to what the Federal Reserve does, is it tries in an objective manner, to bring together all of the facts we can marshal and the most sophisticated insights to explain those facts. We are not starting off with the proposition that inflation is a big bogey and that we will construct all sorts of arguments to endeavor to thwart growth in some manner or another. That is not our purpose.
Our purpose, as I have stated many times in the past, is to maintain maximum sustainable economic growth. That is a goal which I think everyone should support. That leaves open the question: What is the best way of doing that? And I submit to you that we are looking at that in as objective and nonbiased way as I know, and you are just mistaken with respect to your view as to what a bunch of old fogeys you think we are.
Page 44 PREV PAGE TOP OF DOC Mr. FRANK. Open is not skeptical. I am glad you are open, but not skeptical. I did not say you were an ''old fogey.''
Mr. GREENSPAN. Skepticism has very significant roots in philosophy, and these are good roots. You look for real evidence to determine whether something is true or false.
Mr. FRANK. I just want to say with regard to ''old fogey,'' far from calling you an ''old fogey,'' when you talked about people retiring in 2009 and 2010, indeed I thought you were talking about yourself.
Chairman CASTLE. Thank you, Mr. Frank.
Dr. PAUL. Thank you, Mr. Chairman.
I think the Banking Committee must be making progress, because even others now bring up the subject of gold, so I guess conditions are changing. But I might just suggest that the price of gold between 1945 and 1971 being held at $35 an ounce was not much reassurance to many that the future did not bode poorly for inflation. So the price of gold being $325 or $350, ten times what it was a few years back, should not necessarily be reassurance about what the future holds. Unlike my colleague from the other side accusing you of searching for gloom, I might wonder whether or not we might be hiding from some of it? So I thought that the last thing I would suggest is that we lack monetary stimulus and all we need is a little more monetary stimulus, and all of a sudden we are going to take care of the problems. And by the way, the problems that are described are the problems that I am very much concerned about, but I come up with a different conclusion on why we are having those problems.
Earlier, I made the case in my opening statement that quite possibly we are using the wrong definitions and we are looking at the wrong things, and we continue to concentrate and to reassure ourselves that the Consumer Price Index is held in check, and therefore things are OK and there is no inflation. Real interest rates and the long bond remain rather high, so there is a little bit of inflationary expectation still built into the long-term bond. But the consumer prices might be inaccurate, as Sindlinger points out, and they may become less important right now because of the various technical things going on.
Page 45 PREV PAGE TOP OF DOC And also I made the suggestion that the money-supply calculations that we use today might not be as appropriate as they were in the past, because I do not think there is any doubt that we have all the reserves and all the credit and all the liquidity we need. I mean, it is out there. It might not be doing what we want it to do, but there is evidence that it is there. The marginal debt today was reported at $113 billion, just on our stocks. So there is no problem with getting the liquidity. My argument is that what if we looked at the prices of stocks as your indicator as you would look at the CRB? I mean, we would have a rapidly rising CRBor any commodity index. It would be going up quite rapidly. For instance, in the past 3 months, we had a stock price rise of 25 percent. If it continued at that rate, we would increase the stock prices 100 percent in one year. If that was occurring in the commodities or Consumer Price Index, I know you would be doing something.
My question and suggestion is maybe we ought to be doing something now, because there is a lot of credit out there doing something else, causing malinvestment, causing deficits and debt to build up, and that there will be a correction. We have not repealed the business cycle. So we have to expect something from this.
I think there are some interesting figures about what has happened to the stock market. In 1989, Japan's stock market had a greater value than our stock market does. Our market now is three times more valuable in terms of dollars than Japan. We have 48 percent of the value of all the stocks in the world, and we put out 27 percent of the output. So, there is a tremendous amount of marking up of prices, a tremendous amount of credit. So, instead of being lacking any credit, I think we have maybe an excess amount. I would like to know if you can reassure us that we have no concerns about this malinvestment, that we do not have excess credit and that these stock prices are not an indicator that might be similar to a Consumer Price Index?
Mr. KENNEDY. What?
Mr. GREENSPAN. Let me first say, Dr. Paul, it is certainly the case that if you look at the structure of long-term nominal Government interest rates, there is still a significant inflation premium left. In the 1950's and the 1960's, we had much lower nominal rates, and the reason was that the inflation premium was clearly quite significantly less. I think we will eventually get back there if we can maintain a stable noninflationary environment. I do not think we can remove the inflation premium immediately, because it takes a number of years for people to have confidence that they are dealing with a monetary policy which is not periodically inflationary.
Page 46 PREV PAGE TOP OF DOC To follow on the conversation I was having with Congressman Frank, the type of conversation we have at the Federal Open Market Committee is indeed the type of conversation that is coming from both of you. In other words, we are trying to look at all of these various forces and recognize where the stable relationships are and those which tell us about what is very likely to occur in the months, the quarters, and hopefully, in the years ahead.
It is a very intensive evaluation process, especially during a period when there seem to be changes in the longer-term structure which we do not yet know are significant or overwhelming. But we are experiencing changes which lead us to spend a considerable amount of time trying to evaluate what is going on. But we would be foolish to assume that all of history has somehow been wiped from the slate and that all of the old relationships, all of the problems that we have had in the past, have somehow in a period of a relatively few years, disappeared. The truth of the matter is that we suspect that there are things that are going on. We do not know yet how important they are. But we are keeping a very close evaluation of the types of events that are occurring, so that we can create what we believe to be the most appropriate monetary policy to keep this economic expansion going in a noninflationary way, because that is what is required to keep growth going.
Dr. PAUL. So, you are saying the stock price index is of a lot less value than the commodity price index or the Consumer Price Index?
Mr. GREENSPAN. I would say our fundamental purpose is to keep inflation, meaning basically the underlying general price index, stable, because that is the most likely factor which will create financial stability overall. As I have said in previous commentary and discussions before this subcommittee, we of necessity look at the whole financial system, but it has always been our conclusion that the central focus is on the stability of product prices as the crucial determinant in the system, which if you solve that one, you are likely to solve the others as well.
Page 47 PREV PAGE TOP OF DOC Chairman CASTLE. Thank you, Dr. Paul.
Mr. KENNEDY. Thank you, Mr. Chairman.
I want to pick up on what you have just said, Chairman Greenspan. I think in answer to some of Mr. Frank's questions, you indicated that rather than an inflation-based policy, you were really pursuing a maximum-sustainable-growth policy. Yet in answer to the doctor's questions just a minute or so ago, you were suggesting that, in fact, in order to achieve the maximum-sustainable-growth policy, you, in fact, have to enforce the low-inflation policy. Now, I mean, the truth is that when people compliment you, I think what they are really complimenting is the fact that, you know, in the last eight years the stock market has tripled in value from just over 2,660 to over 7,900. I understand since you have started your testimony today it has gone up over 65 points.
Yet, over the same 8-year period, not only have workers not realized any of these rewards in terms ofthey have obviously gotten higher productivitybut their wages have, in fact, gone down. And we can get into who we are talking about. I am talking about the average wage-earner in America. The average male workers have seen their hourly wage decrease by 7 percent in real terms over the same 8-year period.
Now the reason I bring this up, Mr. Chairman, as I look at your testimony today, you say, on page 13: ''Even before we reach the ultimate limit of sustainable labor supply growth, the economy's ability to expand employment at the recent rate should rapidly diminish.'' And on page 14, you say, ''As I noted, the recent performance of the labor market suggests that the economy was on an unsustainable track.'' You go on about ''an aggregate demand increases more slowly than in recent years, more in line with trends in the supply of labor, and productivity imbalances will emerge.''
The point is that if you go back to your testimony just a few months ago, you said, let me just quote to you, you said, ''The rate of pay increases is still markedly less than historical relationships. The typical restraint on compensation increases has been evidenced for a few years now, and appears to be mainly the consequence of greater worker insecurity. Thus the willingness of workers in recent years to trade off smaller increases in wages for greater job security seems to be reasonably well documented.''
Page 48 PREV PAGE TOP OF DOC Again you say, ''The FOMC has recognized the need to remain vigilant for the signs of potentially inflationary imbalances that might, if not corrected promptly, undermine our economic expansion. We cannot rule out a situation in which a preemptive policy tightening may become appropriate before any sign of higher inflation becomes evident.''
It just sounds like you have made a box. You have made a box that suggests that the only way to really determine whether or not the economy is moving strongly, is whether or not we have low inflation, which as long as we can have a stock market that is skyrocketing, as Mr. Sanders will point out, effectively the incomes of the wealthiest Americans has skyrocketed, as I am sure you would yourself admit. It creates a situation where working families', ordinary wage-earners', incomes have stagnated, if not gone down. And, if in fact, their wages go up, they immediately are put into the inflationary spin, which means that you have to then walk in and jack up interest rates, which means that they lose their jobs, or certainly they do not get increased wages.
So, I wonder if you could just explain to us why you have not, in fact, inadvertently, I am sure, pursued really a stagnant wage policy? I am considering today introducing a sense of the Congress resolution in which we would suggest that the Fed should not pursue a stagnant wage policy of raising interest rates as a means to prevent wages from keeping pace with inflation and productivity gains. And I wondered if you might have a comment?
Mr. GREENSPAN. I would, indeed. Our long-term purpose is maximum sustainable economic growth. With maximum sustainable economic growth, you automatically get the most rapid increase in real wages that is possible.
Mr. KENNEDY. How long have you been Chairman?
Mr. GREENSPAN. Ten years.
Mr. KENNEDY. Have you seen any wage increases for ordinary working families in those 10 years?
Page 49 PREV PAGE TOP OF DOC Mr. GREENSPAN. The average real wage, if you use the correct price index and the correct set of data
Mr. KENNEDY. Bureau of Labor Statistics? Is that appropriate?
Mr. GREENSPAN. I know the statistics you are referring to. One, it is certainly the case that there has been a dispersion of income, that is, an increase in the degree of inequality in the income distribution, and that arithmetically necessitates that the lower end of the income scale will be growing more slowly, or declining relative to the median or the upper. That is what dispersion means. It is the arithmetic
Mr. KENNEDY. It means the rich got richer and the poor got poorer.
Mr. GREENSPAN. It is the arithmetic equivalent. The true real wage increase has been going up recently on average.
Mr. KENNEDY. Oh, Mr. Chairman, you are talking at cross-purposes.
Mr. GREENSPAN. No, I am
Mr. KENNEDY. You are trying to suggest that because the wealthy have gotten a lot wealthier
Mr. GREENSPAN. No, I am
Mr. KENNEDY.That ordinary people have gotten wealthy when, in fact, these statistics will point to you that ordinary families'ordinary as defined by medianincomes have declined.
Mr. GREENSPAN. Let me suggest to you that there is a statistical problem here, which if you want me to discuss with you in some great detail, I will be glad to do it. But let me complete my answer.
First of all, the question really is, what is the reason for wanting financial and price stability? The reason is they do not serve ends in themselves, but history tells us that they are necessary conditions for maximum sustainable economic growth.
Page 50 PREV PAGE TOP OF DOC Now you tell me, are you denying that?
Mr. KENNEDY. No, I am just saying that you have to have wages to be able to purchase those goods.
Mr. GREENSPAN. But wait a second. Let's leave aside the income distribution and I will get to that in a minute.
Mr. KENNEDY. OK.
Mr. GREENSPAN. The fact of the matter is that aggregate real wages move up with overall economic activity, that the share in the national income of compensation of employees has not gone down. It has been maintainedyou shake your head. These are the data. I mean, we publish them
Mr. KENNEDY. Mr. Chairman, I am just reading our own Government's data. I mean, you want to argue with your Government?
Mr. GREENSPAN. I am arguing with the way you are interpreting those data to mean something that they don't.
All I am suggesting to you is that, consistent with those data on the national accounts, is that there is a real income increase in general.
Mr. KENNEDY. Sure.
Mr. GREENSPAN. If you are going to tell me
Mr. KENNEDY. Absolutely.
Mr. GREENSPAN. If you are going to tell me that there are segments of our society whose incomes are falling, I will say read page one or two of my testimony. I acknowledge that.
Mr. KENNEDY. I am reading your testimony. I was quoting you
Chairman CASTLE. Mr. Kennedy. Mr. Kennedy
Page 51 PREV PAGE TOP OF DOC Mr. KENNEDY. May I have consent for an additional minute?
Chairman CASTLE. No. Let's let him finish his answer and we will come back to you on a second round so you can continue the discussion, if you will, because it is only fair to the other Members to give them their opportunity.
Mr. GREENSPAN. Congressman, monetary policy has one tool. All we have got is the Federal funds rate. With that we can affect the financial system and we can affect long-term economic growth. What we cannot do is affect the distribution of income.
That requires other public policies, which I grant you, are things that we ought to do. But, if you are focusing on monetary policy and stipulating that somehow, or in some manner, that there are things that can be done with credit creation or the like from the central bank that are going to resolve the issue that you relate to, I say to you, ''I don't know how to do that,'' and I am sure that you don't either.
Mr. KENNEDY. That might well be true, but if you go to credit creation on
Chairman CASTLE. Thank you, Mr. Kennedy.
Mr. KENNEDY.On page 16 of your own testimony, you say you want to forestall excessive credit creation. The fact of the matter is
Chairman CASTLE. Thank you, Mr. Kennedy.
Mr. KENNEDY.That if you, in fact, had policies in place that were looking out after the interests of working families
Chairman CASTLE. Mr. Kennedy, please
Mr. KENNEDY.Instead of just the inflation rate
Chairman CASTLE. We really do have other Members to go to.
Mr. KENNEDY.Then I think you could have
Page 52 PREV PAGE TOP OF DOC Chairman CASTLE. Dr. Weldon.
Dr. WELDON. I really thank the Chairman.
Dr. WELDON. Mr. Greenspan, I enjoyed your testimony and I would take issue, though it was very interesting, your rather lengthy comments about some confluence of technical and technological changes as playing a role.
I am personally of the opinion that one of theI shouldn't say one ofthe biggest reason the situation exists today where we have strong economic growth and low inflation is because of the policies pursued by this Majority in this House. Because interest rates have gone down, and when I get to my question, if you want to try to comment on this, I would be happy to hear your comments. But, a 1 percent reduction in interest rates has a dramatic impact on the ability of companies to attain capital and make the investment they need. But, probably more importantly, just the simple fact that the Federal Governmentwhich is, as I understand our economy, is the 500-pound gorilla out there borrowing money every yearif they are no longer out there borrowing money. Money, like any other issue, is a commodity, and without the Federal Government borrowing as much, interest rates are going to stay down.
We are going to argue about this a lot over the next year-and-a-half, I know. Whether it was our policies, or the Administration's policies, and some people are arguing that it is neither of our policies.
I think one of the things, perhaps, that we maybe wouldn't argue about though, is that there is an element within our society who are being left out and Mr. Flake was alluding to this earlier. I think it is a group of people that we all share a lot of concern about.
I was very interested in your comments about education and the impact that that has in terms of being able to allow people to move up into higher economic strata and perhaps experience those real wage increases that Mr. Kennedy is concerned about.
Page 53 PREV PAGE TOP OF DOC As a student yourself of markets, one of the things that I know I have been very concerned about in coming here, is that we have in the United States, the second most productive economy in the world, after Hong Kong, I believe, and the most efficient. We rely on markets, and we have free markets everywhere except in our educational system, and in particular in the kindergarten through 12 educational system.
Now, I realize that there are millions of Americans who are not yoked to that system and they are, by and large, the affluent. But, the people that you and I are concerned aboutand that many of us here are concerned aboutcannot get out of the public education system, which is not a market system at all. It is not a system that can be accessed, or refused, based on merit for many people in the middle and lower income strata. Do we as a Nation need to seriously consider reassessing how we do education, particularly kindergarten through 12? If we are going to be able, as we head into the next century, to really address these issues.
Mr. GREENSPAN. Congressman, it's pretty obvious that the United States has the preeminent graduate schools in the world. Everyone comes here. We have an extraordinarily effective college education system for many parts of the country and for many segments of our population.
But no matter how you measure it, when you look at grades kindergarten to 12, we don't look terribly good. The way we find out is that we get people going into jobs, or going into higher levels of education, whose basic capabilities are clearly far deficient from what they were 30 or more years ago.
There is a great debate within the society. As I said previously, I am not an expert on this, and I don't pretend to be. I am only aware of the consequences, which have a very important impact on economic growth and on the economy generally.
It's hard for me to envisage the level of technology, which is invariably going to be at the base of our economic system in the 21st century, being effectively worked with by some of the people who are produced by some of our schools.
Page 54 PREV PAGE TOP OF DOC We have got to improve, and I think if we are going to eliminate some of the problems which Congressman Frank and Congressman Flake raised, with which I agree, we really have to focus on finding a way to significantly enhance our educational abilities below the college level, because fortunately, above that we're OK.
Dr. WELDON. But, can we do that in the absence of a market system within the educational system itself, where there is not consumer choice?
Mr. GREENSPAN. That is the reason why I say I am not sufficiently knowledgeable about how that system works. My obvious inclinations are to seek market solutions, because I think free people working together in a free market produce the maximum potential wealth in a society. But, there are structural issues which I think are important to understand in any policy issue, and I regret that I don't know enough about what the structure is that is causing the problem to know that the specific market solutions that would be involved, and there are many different types which would work.
I would certainly like to see them tried, because what we have today is not producing a level of education which is going to be required for most of our younger people as they move into the work force in the beginning of the 21st century.
Dr. WELDON. Thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Dr. Weldon.
Mr. SANDERS. Thank you, Mr. Chairman.
Mr. Greenspan, what I would like to do is ask you four questions. I will try to be as brief as I can in asking them. I would appreciate your being brief in trying to answer them.
According to the Government statistics that I have seen, the real wages that American workers are earning today are significantly less than they were 25 years ago. People are working longer hours for lower wages.
Page 55 PREV PAGE TOP OF DOC In 1995, worker pay fell by 1 percent, according to the April 1, 1997 Business Week, while the average compensation for corporate CEOs increased last year by 54 percent. Factory workers saw a 3 percent increase in their income. White collar workers saw a 3.2 percent increase, which means that on average there were tens of millions of American workers who are continuing to see a decline in their standard of living.
Many women are being forced to work who would rather stay home with the kids.
Given that reality, can you briefly tell the American people how, as you indicate in your report today, the recent performance of the economy has been, quote, ''exceptional''? Can you tell tens of millions of workers, who are seeing a decline in their standard of living, how the economy has been ''exceptional''?
Mr. GREENSPAN. It's been exceptional in the sense that, when one compares it to what it has been in the past, we are now looking at relationships which are far more benign and beneficial to the American economy and people generally than, say, 7 or 8 years ago. There is no doubt that the economy is doing much better.
What is exceptional is that we have not experienced a situation that exists today in a very long period of time. Meaning one characterized by what is a quite tight labor market and a period in which the inflation rate is low. Those are facts.
Mr. SANDERS. OK, thank you. Thank you. Let me ask you my second question.
As it happens, I am the Chairmanthe Ranking Member unfortunatelyof the committee which has oversight over the Federal Reserve Board for Government Reform.
Some people have criticized you, and I would agree with their criticism, that you live in a world very separate from ordinary working people who are trying to survive on $7 or $8 an hour. You haven't a clue what is going on in their lives.
Page 56 PREV PAGE TOP OF DOC Now, I would like to hold hearings around the country with the Chairman of the committee so that ordinary people can come to you and tell you what is going on in their lives.
Would you be willing to join us in those field hearings?
Mr. GREENSPAN. I would certainly be willing to do it where I have time.
Let me say to you, Mr. Sanders, I was brought up in a low middle income family. I have been through a long period of my life when I was part of the group to which you are referring. I know what people go through and you are assuming that somehow we are a group of elite central bankers who don't know what is going on in the world.
I very strongly disagree with you on that. We are citizens of this country
Mr. SANDERS. But we will give you the opportunity, Mr. Greenspan, and I have to ask you to be brief, but I apologize. I don't have a whole lot of time, sir, but we will give you the opportunity.
Some people think you hang out at country clubs and hang out with the rich, so we will give you the opportunity to come out to talk to working people and you can explain to them how ''exceptionally'' the economy is doing.
Third, we managed last year to raise the minimum wage. But, given the fact the minimum wage is 25 percent lower today than it was in 1970, and American workers remain at the bottom end of the wage scale in terms of low wage workers throughout the world. Would you join me in supporting legislation that I have introduced to raise the minimum wage to $6.50 an hour?
Mr. GREENSPAN. I would not, and the reason I would not is precisely the reason I discussed with Congressman Flake before.
It is terribly important that we allow people, at whatever levels they are, to earn to get into the workforce and move themselves up.
Page 57 PREV PAGE TOP OF DOC In my judgment, the prohibition on allowing people to have a lower wage when that is the only one that they will get, eliminates them from the capability of moving up the ladder. I personally, as a citizen, oppose it.
As a central banker
Mr. SANDERS. You and Mr. Gingrich and Mr. Armey are in agreement on that issue. That is your position. Thankfully, the Members of the Congress did not agree with you.
My last question is that, in the last 20 yearsand I think even you acknowledge thisthere has been an enormous shift of wealth that has gone from the working class, the middle class, to upper income people.
Yet, as I understand it, while you on one hand tell us you want to move this country toward a balanced budget, and have been a major advocate of such programs of lowering the CPI for senior citizens on Social Security, you have also advocated, as I understand it, repealing the entire capital gains tax, which would largely, overwhelmingly benefit upper income people.
So, you are telling us today you oppose raising the minimum wage for low-income workers, you support eliminating the capital gains tax which largely benefits the rich. Then you want us to move toward a balanced budget, and if we do those things, it will require major cuts in Medicare, Medicaideducation, I suspectSocial Security, which benefit working people.
How can you tell us you want to move toward a balanced budget and then continue to give huge tax breaks to the rich?
Mr. GREENSPAN. First of all, let's remember what you are talking about are issues which have got nothing to do with the Federal Reserve. It's got nothing to do with monetary policy. You are asking my personal views
Page 58 PREV PAGE TOP OF DOC Mr. SANDERS. I am asking your personal views.
Mr. GREENSPAN.On these various things.
The reason why I have been opposed to the capital gains tax is, as I have said on numerous occasions, I think it is a means of raising revenue which, more than any tax I know, curbs economic growth and rising standards of living.
I view that as an issue of how does one maximize economic growth in this country. If any tax inhibits growth, the question is which means of raising revenue inhibits it the most, and I would suggest to you that is the capital gains tax.
Mr. SANDERS. Under your leadership over the last 20 years we have significantly lowered taxes for the rich and large corporations. The rich have gotten richer and real wages have declined.
It doesn't seem to me that you are making a lot of sense.
Mr. GREENSPAN. Under my leadership?
Mr. SANDERS. Well, you are one of the major economic leaders of this country. You have advocated tax breaks for the rich. You have opposed raising the minimum wage. The reality is, the rich have gotten richer.
Chairman CASTLE. Mr. Sanders, you have asked a question. Let's let the Chairman answer that and then we'll have plenty of time for additional questions when the other Members have had a chance to ask questions.
Mr. GREENSPAN. I don't advocate tax rates for the rich. I advocate a tax structure which expands growth at the maximum means possible to help all Americans.
Mr. SANDERS. Thank you.
Chairman CASTLE. Thank you, Mr. Sanders.
Mr. COOK. Yes. Mr. Chairman, I would like to go right to maximum sustainable growth, the objective and the appreciation I believe many Americans feel toward the vigilance on the inflation front in achieving that. But, I did want to ask you about areas outside the purview of the Federal Reserve and how you think those would affect maximum sustainable growth?
Page 59 PREV PAGE TOP OF DOC I take it from the answer to Mr. Sanders' question that, certainly, capital gains tax cuts would be a part of that formula that could help us achieve maximum sustainable growth and provide better jobs, higher wages and salaries.
What about the reduction of marginal tax rates, continuing deregulation of the private sector and generally, keeping on the path of lowering the relative size of Government, as against the entire economy?
How would those things affect growth and faster growth?
Mr. GREENSPAN. Congressman, as I indicated in my prepared remarks, the degree of deregulation that has taken place over the last 15-, 20-years, has been quite instrumental in getting us where we are. Indeed, I was mentioning to Congressman Lucas before, that wheat prices are not moving anywhere. The reason, of course, is that we have effectively eliminated all sorts of means to prop up the market price of wheat. Wheat farmers can now plant pretty much as they choose, as the economyat least, as they see itwill enable them to do it. So, we are getting very large crops and that's good, not bad. That is part of economic growth. The gross agriculture product is part of the gross domestic product.
We have seen significant changes. For example, in the transportation area, there has been quite extraordinary improvements in the efficiency of the system by enabling people to compete. Truck deregulation was quite important, and has contributed quite importantly to transportations efficiencies as, indeed, the significant decline in regulation of our railroads has done.
All of these things are helpful as they expand the economy. A lot of people criticize the notion that President Kennedy had, of ''A rising tide raises all boats.'' But, it's true, and it's important, and it is something that we ought to endeavor to achieve to whatever extent we can.
Mr. COOK. And I take it that lowering marginal tax rates plays into that?
Page 60 PREV PAGE TOP OF DOC Mr. GREENSPAN. Yes. I have always advocated a tax structure which would maximize economic growth, and capital gains tax and marginal tax rates are clearly elements in such a package.
Mr. COOK. Then I would like to clarify, at least in my mind, what you are saying about the trend over the last decadeor two decadesof wages for the average American. I know you have been a real critic of the current measuring devices of the CPI. In fact, I think you believe that the CPI has been overstated even more than the Commission has just reported.
Mr. GREENSPAN. I don't. I think if we adjusted the CPI correctly, the average median real wage would show a much more positive path than the one we publish today, which is deflated by an index which overestimates the cost of living.
There is a complex problem here, which I don't want to get into, because I will just fall into deep ''Fedspeak.'' But, it has got to do with the fact that our productivity data are deflated by the product prices of what people produce. The wage figures are deflated by the prices that people pay at retail. Those two prices have diverged really quite significantly, and it has created a distortion in what is happening to standards of living in this country, which I wish were easy to explain without getting into the detail.
But, the reason why I was having this extended conversation on statistics, is there is a statistical problem here which, in part, is creating an illusion, which I fear, is making the problem, which I think is a bad problem. Namely, increased inequality in the distribution of income appears to be, in fact, a little bit worse than it actually is.
Mr. COOK. OK, and if I could just very quickly, just to make sure I am hearing what I think I am hearing. You reject, I take itpartly because inflation has been overstatedthe statements made here today that the working wage is lower today than it was 20 or 25 years ago? I can't remember exactly the citation.
Page 61 PREV PAGE TOP OF DOC Mr. GREENSPAN. The figures, if you take the average hourly earnings which are published by the Bureau of Labor Statistics, and you deflate that by the Consumer Price Index, you will get an estimated real wage that has been declining for a very significant period of time. The problem is; one, in the price deflator and; two, in the average hourly wage data that the Bureau of Labor Statistics publishes.
It is a partly statistical problem. But, I don't wish to obscure in any way what I said previously. Namely, that we do have a significant problem in a growing inequality of income distribution in the country. That is a fact, that has problems. That creates a level of real wages in the lower segments of our income distribution which are, indeed, going down. But, they are not going down as much as those data imply. That is the issue which, I think, is important to underline.
Mr. COOK. Thank you.
Chairman CASTLE. Thank you very much, Mr. Cook.
Mr. KANJORSKI. Thank you very much, Mr. Chairman.
Mr. Greenspan, I appreciate the fact that you exercise control over monetary policy, and that is very restrictive as to what you can actually do in the economy. But, your voice is well-regarded by policymakers in the fiscal policy side of Government, and we are about to enter into a major public policy decision that will affect fiscal policy. Specifically, the targeted child credit for income tax.
And, I haven't heard your voicemaybe I've missed itbut, I am going to give you an opportunity to tell me. First of all, do you favor the proposal submitted by the House of Representatives that would limit that credit to an income level that is called the ''middle class,'' from approximately $100,000-a-year, down to about $35,000-a-year, and that any children that are raised by income earners above the $100,000 level, or below the $35,000 level per family, would not partake in that tax credit?
Page 62 PREV PAGE TOP OF DOC Mr. GREENSPAN. Congressman, I am aware that there is a fairly substantial dispute going on between the Senate, the House and the Administration which continuously changes. I have not been able to follow it and I'm not sure even if I came to a conclusion that I would feel comfortable voicing it.
Mr. KANJORSKI. I appreciate that.
Well, let me ask you this. Forgetting what the policy is or where it may come out, certainly, as an economist, you recognize that we are talking about savings and investment and consumption. The tax reductions included in all the proposed plansthe Administration plan, the Senate plan, the House planput about two-thirds of the tax reduction into pure consumption.
In light of your testimony that we are pushing the outer edges of capacity, both on capital and labor, is that a wise thing as a matter of public policy?
Mr. GREENSPAN. I have argued in previous testimony that if the purpose of reducing taxes is economic growth, then it is marginal tax rates that the focus should be directed at. I would therefore, as most economists would, find it hard to envisage the type of tax credits that are being recommended as being in that area.
Now, there are other reasons why one wants to lower taxes. And, I would say, I would never argue that ''if it doesn't affect economic growth, that therefore you shouldn't do it.''
Mr. KANJORSKI. I agree. But, isn't that exactly what some of my colleagues here have been arguing? That that portion of the employed element of our society, the lower two-fifths of our economy, have had the least appreciation of economic distribution of income?
Mr. GREENSPAN. That's true. That's a fact.
Mr. KANJORSKI. Is it not logical then to give them the benefit of a tax credit to raise their children? Because, if we are going to be humane about it, and we are going to subsidize children to get a better start in life, a better education, a better opportunity, isn't there something foolish about limiting that contribution of the general tax public and deny that benefit to people under $35,000 a year income?
Page 63 PREV PAGE TOP OF DOC Mr. GREENSPAN. There are certain things I will not get involved in and you have, I think, focused on one. We started off this discussion, at least I did, by saying what we are observing here with all of this debate about policy, is that we are seeing how democracy functions. It is important for the Congress to debate and conclude on this. As a private citizen in this regard, I've got the luxury to sit back and watch.
Mr. KANJORSKI. Well, you have a right to take a pass on that, Mr. Greenspan. But we have a great deal of respect for your opinion, so I thought you could help me decide an issue.
Mr. GREENSPAN. Frankly, in all seriousness, I don't really know enough about it to give you an opinion.
Mr. KANJORSKI. Have you modeled it at all?
Mr. GREENSPAN. I'm sorry?
Mr. KANJORSKI. Have you modeled the potential tax ramifications?
Mr. GREENSPAN. I think we generally model what we expect the Congress to come out with regarding the tax structure in our forecast models. But, I don't think we have endeavored to do the type of evaluation, for example, which CBO does in trying to
Mr. KANJORSKI. Mr. Chairman, I appreciate your indulgence.
I just happen to be a person that is very leery. I am opposed to any taxes, the Administration, the Senate or the House. I think we have a fairly strong economy and I am very much worried that the consumptive tax that we are putting out there can only exacerbate inflation. And, maybe you could help me by telling me I'm wrong and I shouldn't lose sleep about it.
Mr. GREENSPAN. There are a number of economistsreputable economistswho agree with you. There are others who would like to see taxes cut, but don't like the combination that is currently being discussed. So, I think on this particular issue there are views all over the place.
Page 64 PREV PAGE TOP OF DOC Mr. KANJORSKI. Thank you very much, Mr. Chairman.
Chairman CASTLE. Thank you very much.
Some of those economists are right and some are wrong, clearly, in that category.
Mr. METCALF. Thank you, Mr. Chairman.
Chairman Greenspan, last February when you were before this body, I spoke about mergers and job displacement due to corporate mergers. Today, I want to get your perspective on a specific merger. Boeing and McDonnell Douglas have already been granted approval by the FTC for a merger. In fact, without the merger, McDonnell Douglas says that 14,000 American workers would be displaced. Now the European Community has weighed in, saying that they may disapprove the merger at a meeting tomorrow in Brussels.
My question is, do you think the EC should have any authority to determine the outcome of a U.S. domestic market decision that significantly affects employment? And, do you have concerns about the ability of the EC to intercept electronic wire transfers between U.S. and European companies if the merger goes through and if they disprove it? Is the Federal Reserve concerned about any of these potential actions?
Mr. GREENSPAN. Congressman, I happen to be quite familiar with the whole set of circumstances which you relate. This is an issue which is a profoundly important one, and a profoundly difficult one, because the European Community and the United States are a set of merger powers, in the sense that our 50 States are almost as large as the whole European Community, and these are the two big bastions of the world economy, excluding, obviously, Japan and the Asian countries. And to be involved at this level of dispute I find very disturbing.
I certainly trust that the presumption that a lot of commentators have put forward, that we are on our way toward some sort of trade war as a consequence of this dispute, I must say, I trust that they are mistaken and that some resolution can be found rather quickly.
Page 65 PREV PAGE TOP OF DOC Mr. METCALF. Thank you.
And Boeing does intend to make a final offer today before their meeting tomorrow.
On a different subject, when you testified before the Commerce Committee, you brought up the issue of capital requirements. In your testimony to the Commerce Committee you stated, ''The bill continues to allow the Federal Reserve Board to establish capital adequacy guidelines at the holding company level, however, the bill sets important limits on these holding company guidelines. Some argue that the restrictions placed on holding companies are an unnecessary burden and this action does not contribute to an increase of safety and soundness. Others, of course, state the opposite.''
Do you see any changes that need to occur in this provision as the bill makes its way through the Commerce Committee?
Mr. GREENSPAN. No. In fact, the particular provision to which you refer is a reasonably sensible one. The technology which I have been discussing at length here, relative to the economy, has had a particularly profound effect on finance and it is altering the structure of our financial institutions and, of necessity, altering the way in which they should or should not be regulated. And, my concern is that we make certain that we recognize two principles.
One, that as the technology increases and we get increasingly complex markets, that we allow the private sector to regulate itself as, indeed, it does most of the time. The primary base of regulation is the investment bank which is very conscious of what its counterparty's risks are and is very cautious in making investments or loans until it knows what is going on. That is the most important root, the base of all regulation. It is private regulation.
But, second, what we do need over the structure of these multinational and multistate holding companies, is a form of supervision which we call ''Fed light.'' This means that we are aware what those organizations do, to essentially manage the risk of the total holding company, and that to the extent that that is what occurs, you need a regulatory oversight at a very modest level which completes the structure of regulation that, in my judgment, is required, because we have a Federal safety net which creates and distributes subsidies to the system.
Page 66 PREV PAGE TOP OF DOC So, the specific provision that now exists in this committee's writeup, we think, comes reasonably close to that requirement.
Mr. METCALF. Thank you.
And thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Metcalf.
Mrs. MALONEY. Thank you, Mr. Chairman.
Chairman Greenspan, I know that you will agree that our country needs an efficient system that fully utilizes modern technology in clearing bank checks and paper checks. I believe you will also agree today that the Federal Reserve should not be freezing out private competition and inhibiting the modernization of bank services by subsidizing the transportation of paper checks. The money that the Federal Reserve uses could be returned to the U.S. Treasury to reduce the deficit.
In 1980, the Monetary Control Act passed through this committee with the clear intention that the Federal Reserve would open its check clearing services to all depository institutions, that it would sell each of these services at prices that fully recovered costs and that those costs would include an adjustment for taxes that would have been paid and the return on capital that would have been provided had the services been furnished by a private business firm. I am quoting, really, from the language of the 1980 Monetary Control Act.
We now know that the Fed's interdistrict transportation system is heavily subsidized by the Federal Reserve. The Fed is recovering only a percentage of their costs of paper check transportation, even without an adjustment, and many of usor some of usbelieve that this violates the intent of the Monetary Control Act. Even though the Fed, and I have talked to members of your staff, says that they recoup the subsidy from ITS elsewhere in the Fed's operations.
Page 67 PREV PAGE TOP OF DOC I am hopeful, Chairman Greenspan, that you will support some of the Members of this subcommittee that are supporting a bipartisan bill, the Efficient Check Clearing Act of 1997. I have spoken with some members of your staff about it. It is H.R. 2119. And this bill would basically end the subsidy of check transportation.
Mr. GREENSPAN. As I understand it, the Monetary Control Act requires us to recover, in total, all the costs that we expend, plus a profit margin and all taxes that would make it comparable to a private institution. We have gone further than that. We have set up several groupings of price services, one of which is check services, which we set our price structure for in a manner which recovers all costs according to the Monetary Control Act.
My understanding is that for check services, as a group, we have fully recovered all costs. Indeed, we have had a significant profit which, in effect, has been returned to the Treasury. My recollection is it is something like a billion dollars over the past 10 years for all of our priced services.
What you are raising is a question of what would be called, in a company, the ''internal transfer'' prices between various different types of cost structures. I have served on numerous corporate boards when I was in the private sector, and the general procedure to maximize the efficiency of the system, is often to find means by which you structure your ability to compete and the costs that you incur, so as to maximize the efficiency of the total system.
If you require that each and every subset of check services itself meets certain profit criteria, we will end up with a total clearing system for the Federal Reserve which, in my judgment, would probably be inefficient in general. We probably would not be able to recover our costs and, as a consequence, probably be forced to raise prices. The volumes would be reduced, and eventually we would probably exit from the check services function.
In the public discussions, which are being organized by Federal Reserve Vice Chair Rivlin, who is in charge of a whole review of our priced services and other aspects of our system, as far as I can judge, the general public comments have been strongly in favor of the Federal Reserve continuing as a significant player in the check services area.
Page 68 PREV PAGE TOP OF DOC I think the question that the Congress has to judge is the one you originally put forward, whether or not we should be in the business at all? I have had serious questions about that when I first came on board as Fed Chairman. I have since become a supporter of our being in the business, because I think we add very materially to the payments system of the United States by doing that. I would very strongly suggest that you take a closer look at the implications of what that bill that you are offering would require us to do, and whether it is consistent with our ability to function as an effective check clearer.
Mrs. MALONEY. Well, I am not questioning whether you should be allowed to provide the service. What I am questioning is whether or not it should be subsidized and I believe
Mr. GREENSPAN. No, I don't believe
Mrs. MALONEY.I believe that it should not be subsidized.
Mr. GREENSPAN. I agree with that, it shouldn't be. But we are not doing that.
Mrs. MALONEY. We know that the ITS paper check transportation costs can be recovered separately in our Minority staff investigation of the ITS program, which began in 1995 and is still in progress. The extensive report of that investigation is quite explicit and contains a summary of statements from Federal Reserve employees who, in signed statements, say that the ITS is operating with a substantial subsidy. These are two of your current employees in signed statements.
Mr. GREENSPAN. It is a question of fact as to what is being done. I understand that the Chairman is going to have hearings on this. This is a very complex subject and I think it is an important issue to raise.
The best thing for us to do is to make available in that testimony a judgment of, not of what people feel or believe, but, what are the facts. An issue of whether something is subsidized or not is not an issue of opinion; it is a question of analysis and a question of fact.
Page 69 PREV PAGE TOP OF DOC What I would suggest that we do in that hearing is to endeavor to find out what the facts are.
Chairman CASTLE. Mrs. Maloney, a couple of things. One, we need to move on. And second, you may not have been here, we do intend to have this as either part of a hearing, hopefully in September, or as a full hearing in September as well.
Mrs. MALONEY. Well, Mr. Chairman, since my time is up and I know Chairman Greenspan has been here for a long time, I just respectfully request that I could put in the record the signed statement of two current Federal Reserve employees who say that the ITS service is subsidized, a letter from Chairman Greenspan to Chairman Gonzalez isolating out the cost of the ITS and a statement and study done by the Trade Commission, again, on this particular subject that it is subsidized.
As you know, we are trying to balance the budget. Just this week, there are numerous bills before Congress to cut out subsidies to various agricultural subsidies in the country. Since that is before Congress this week, I think that we should likewise have the opportunity to question whether we should be subsidizing a giant Government bureaucracy to provide a service which the private sector could likewise provide, at a cheaper price to the taxpayer, allowing more money to go to deficit reduction.
Chairman CASTLE. Thank you.
Mr. GREENSPAN. I would say you shouldn't subsidize it. It is a question of fact whether, indeed, that is what is being done and I would hope that at the September hearings we can make a determination.
I don't think there is any question that if, indeed, it is being subsidized, it is wrong. The question really is, is this a subsidy in the form of which you stipulated? Let's let the facts fall where they may.
Chairman CASTLE. Thank you.
Page 70 PREV PAGE TOP OF DOC All those documents, Mrs. Maloney, you asked for will be accepted as part of the record.
Mr. BACHUS. Thank you, Mr. Chairman.
Mr. Greenspan, there has been a lot of discussion about the inequalities of income, and you have expressed concern about it and Mr. Sanders did, and I think all of us in Congress are concerned about that, and I think what we have to focus on is what, if anything, we can do about that.
Now, Mr. Sandersas you know, we have Democrats, Republicans and Independentsand, as you know, Mr. Sanders is a socialist, and I don't say that in a derogatory manner. He is proud of that designation.
He has asked you about what can we do about this? What are you going to do about it? Do you see anythingand we talked about different models for addressing thisdo you see anything in the socialist model, or socialist approach, that would be of any benefit?
Mr. GREENSPAN. I do not, Congressman. I think the last 50 years or so have seen extraordinary almost controlled experiments between socialist societies and free market societies, and invariably the socialist model has failed. Indeed, as I think you know better than anyone, the emerging economiesif I may put it in that waywhich are learning how to function, have switched, virtually universally, toward the free market in order to build up wealth and to create a higher standard of living for their people,
There are unquestionably problems with our model but, to paraphrase Winston Churchill, ''Capitalism is the worst of all economic systems, save all others.'' And the problem is not whether or not we want a socialist system or a capitalist system. We have a capitalist system, it has given us an extraordinary standard of living, but, it has all sorts of problems associated with it. The purpose of public policy is to find ways to minimize them, but not switch to a system which has proven to be a failed means of achieving higher standards of living.
Page 71 PREV PAGE TOP OF DOC Mr. BACHUS. Yes. I thought it was quite ironic that a major advocate for a change was a gentleman who is an avid socialist, and he has complained about trapping large classes of people in low-income jobs, and I think the socialist model has done more to do that than the capitalist model.
Mr. GREENSPAN. We raised our voices a little bit in talking. But, these are precisely the issues that we should discuss. I think that Congressman Frank has raised the question more broadly, but I do think that to have divergent voices argue basic principles is very important in this society. Because, if we all agreed, we would stagnate. To have vigorous debate on various different ways that economies can function is the only way we are going to find the best way to solve the problems which we confront.
Mr. BACHUS. Yes, and we are all concerned about these things. It is just, how do you address them? And socialism is just one way to address them, but it hasn't worked very well.
Mr. GREENSPAN. I happen to think that Congressman Sanders is wrong, but I think he raises the right issues, which is important.
Mr. BACHUS. You mentioned educational reform. Do you see that as probably our best greatest hope of addressing this inequity?
Mr. GREENSPAN. I don't know whether I would call it reform, but we have to find a way to improve the quality of our elementary education, in my judgment, without question.
Mr. BACHUS. The last thing. The European Union, that was mentioned earlier, the very disturbing prospect that two of the large spheres of economic activity would get sideways over this Boeing issue. Would youother than that one, and I suppose that is one of your concerns today, that in this good economy, things couldn't get betterthat that is a disconcerting thing. How about the trade deficit?
Page 72 PREV PAGE TOP OF DOC Mr. GREENSPAN. First of all, let me just say generally, that the reason why I am concerned about the dispute that is going on, is the evidence is really quite overwhelming that the huge increase in trade throughout the world has been a major contributor to everybody's standard of living. The growth rate in international trade far exceeds the growth rate of our domestic economy, meaning that, on average, we are all importing more than we used to and exporting more, and it is pretty clear that that specialization and that globalization, have enhanced living standards all over.
But, in the process, our trade deficit has increased as, indeed, our current account deficit has opened up. It would be a problem for us, were it not for the fact that the American dollar is such a preeminent reserve currency, and increasingly so as our rate of inflation falls and our currency, in that sense, becomes ''harder,'' as we like to say. As that occurs, it means that portfolio investments around the world, despite the fact that the current account deficit is pumping additional dollars into the world system as an accounting necessity, despite that, the demand for dollars is greater than what is being supplied on a net basis.
So, at the moment, and for the quite foreseeable future, the current account deficit does not appear to be a problem. But current account deficits, in and of themselves, if prolonged indefinitely, engender the same type of problem that budget deficits do. When you have very large budget deficits, your interest payments go up, and unless curtailed, it is a progressive expansion of the deficit. Well, much the same arithmetic occurs in the current account deficit, that is, interest on foreign investment in the United States which is used to finance the deficit continues to rise.
We have had that for quite a long period of time. It has meant that our net international liabilities have risen. But it is pretty clear that the levels are small, that the overhang problems are not of considerable concern. It is something which, over the long run, is going to have to be resolved, but it doesn't have in it the type of short-term problems that the budget deficit created for us. It is something which we will have to address and resolve in the future, but it is not something which is an immediately urgent issue that has to be addressed in the same sense that the budget deficit did.
Page 73 PREV PAGE TOP OF DOC Mr. BACHUS. Thank you.
Chairman CASTLE. Thank you, Mr. Bachus.
Mr. BENTSEN. Thank you, Mr. Chairman. Mr. Jackson and I were concerned the expansion might be over by the time you got down to this end of the table, but apparently it is not.
Chairman Greenspan, first of all, I want to follow up on what Mr. Kanjorski was talking about. I have a number of questions, but just in reading your testimony, and where I think you were saying the Fed is at this point, is you were not going to make a rate changeor you don't anticipate making a rate change in the near future. The economy is operating at near capacity, the unemployment level is extremely low, it is effectively almost a white-hot economy, but you still don't see enough indices that would encourage you to make a rate change.
In the future, after Congress adopts a balanced budget agreement and a tax cut, as I anticipate that they will, is it conceivableor would it be appropriatethat in the Fed's consideration of future Fed fund rates and discount rates, that you would take into consideration the fact that we are cutting taxes and we might be adding fuel to a possibly overheated economy? Is that something that we should be thinking about, trying to get away from all the political theory? And, I appreciate the fact you don't want to engage in that. But, is that something you will take into consideration?
Mr. GREENSPAN. Congressman, let me first say that your characterization of my testimony is not exactly what I would say. I tried very hard, hopefully successfully, not to indicate what we might or might not do, and, indeed, that is a judgment for the Federal Open Market Committee to make, not for me to make. And we will make judgments one way or the other, depending on what is occurring in the economy at the particular time in which those judgments are made.
Page 74 PREV PAGE TOP OF DOC As I have said in the past when asked whether or not if budget deals were made, would that affect monetary policy, I said, ''Only to the extent that the budget deal itself, whatever it is, affects the economy. We respond to the economy.'' So, I can't say to you that we will react in any particular way, depending on the way the budget negotiations come out or the specific content of them. What we do respond to is what the economy is doing and, to the extent that whatever budget deal comes out of the Congress affects the economy, it is the economy which we will be responding to, not specifically to the elements in the budget package itself.
Mr. BENTSEN. I guess you would respond if there is a dramatic increase in monetary aggregates or in liquidity? Those would be factors that you would consider, or that the FOMC would consider at certain times?
Mr. GREENSPAN. Most certainly.
Mr. BENTSEN. Let me ask, we talked about the oil imports in the past, and in the Fed's most current analysis, you state that oil prices have come back down from their minor spike in 1996, and would appear in the out period of this year to be relatively stable. Last week in the Wall Street Journal, there was an article talking about the fact that the United States and Germany were both looking at selling some of their oil stocks, government oil stocks, and that demand was increasing at a fairly rapid rate.
Do you feel that this increase in demandthe SPR, I think, is probably not, in and of itself, a sale. A potential sale is not that great, but the increasing demand on an annual basis of two million barrels per day, I think, is what this article says. Is that a problem we ought to be concerned about in the long run, or is capacity there to deal with that?
Mr. GREENSPAN. For the moment what we are observing is production being in excess of consumption worldwide, because the level of inventories worldwide is rising. We had, as you may recall, a year or so ago, exceptionally low inventories and indeed we got down to a level at one point, which was really quite unprecedented and was creating, as they called it then, a ''just-in-time'' oil inventory system. As a consequence, the spot prices were selling over the forward prices in the futures market.
Page 75 PREV PAGE TOP OF DOC That has turned all around and inventories are now accumulating. In part because OPEC is obviously producing over its published quotas, the world level of oil production is in excess of consumption, and inventories are beginning to move up. If you take a look at the United States system, from a very low level of distillate fuel oil inventories, we have risen quite significantly and we have a reasonably good balance now in most of our products and that is true worldwide.
It is true that demand has accelerated in the most recent period, but I would certainly say with the quite impressive changes in technology that we have seen, which has enhanced our ability to draw oil out of older wells and to build much higher levels of output outside of conventional OPEC channels, in my judgment, has not created a situation in which we are looking at the need to increase world supply by bringing down government stockpiles.
Whether or not we choose to do that is a fiscal policy question. I don't see it, myself, as an oil problem.
Mr. BENTSEN. And you don't seeyou feel fairly confident with the backup in inventory, at least in the near term, that we should not see any price fluctuation or spike in
Mr. GREENSPAN. Well, I mean, obviously, there are
Mr. BENTSEN. Right, other issues notwithstanding.
Mr. GREENSPAN. Sure, obviously.
All I can do is quote to you what the oil experts around the world are continuously saying, namely that the situation is not one in which inventories are being run down and product prices are rising. That is not the case.
Mr. BENTSEN. Thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Bentsen.
Mr. Jackson, the long- and patiently-waiting Mr. Jackson.
Page 76 PREV PAGE TOP OF DOC Mr. JACKSON. Thank you, Mr. Chairman, I appreciate it.
Thank you, Chairman Greenspan, for once again spending this time with us.
Mr. Chairman, I have two questions. I want to preface my questions before I read them, by saying that I am not a socialist and I have to associate myself with many of the remarks delivered by Mr. Sanders. I don't think that any of us on this panel are perfect vessels for the transmission of the truth. But each of us, in our own way, is trying as best as we possibly can to represent the people of our districts who consistently send us to this institution. I wouldn't want his concernswhich I think to be very legitimateto be written off because of the way he ascribes to a particular economic philosophy, no more than I want my questions to be ignored, just because I am the young, new, African-American guy who is sitting down there on the end, who has been waiting all day to have his question answered.
So, Mr. Chairman, with that in mind, we have heard much debate about the importance of the accuracy of the Consumer Price Index, the CPI, yet we have not heard similar calls for accuracy when it comes to calculation of the Nation's unemployment rate. While the official unemployment rate as of this June is about 5 percentor approximately 7 million people who receive unemployment compensation but hold no jobthe actual number of unemployed or underemployed people is closer to 15 to 20 million Americans. These numbers include those who are officially unemployed, persons working part-time jobs who would rather be working full time, underemployed persons who are working full-time jobs for which they are overqualified, those who have never had a job and those who have exhausted their unemployment benefits and have given up looking for a job. The official unemployment figure, widely reported, currently 5 percent, reflects only the officially unemployed category and, even here, the actual number of unemployed people is either not reported or not emphasized. As the work force expands, while the percentage may remain at 5 percent, the actual number of officially unemployed people is growing and, of course, all of the other categories are left out of the public debate.
Page 77 PREV PAGE TOP OF DOC In an economy where both Government and corporate employers are rewarded for downsizing, outsourcing and even streamlining, there are many Americans who are living on the brink of joining one of these categories. How does the Fed account for these uncounted Americans when calculating the tightness of the labor market for purposes of conducting monetary policy? Should the calculation, rather, be based on figures of a true full-employment economy, circumstances under which every able-bodied person willing to work is employed doing socially useful and necessary work and earning a livable wage?
Mr. GREENSPAN. Congressman, let me say that as I stipulated before, as I think you may have heard, I know that you were in the room, I disagree with most of what Congressman Sanders believes, but he raises the right questions. And I said previously, that it's important that that dialogue should be enhanced, because unless we continually raise the more fundamental questions which confront the organization of our society, we are subject to stagnation. I may disagree with him, but I applaud his voice in this Congress on the grounds that I think he enhances the level of dialogue. He may escalate the decibels from the Chairman of the Federal Reserve Board, but that is not bad, because these are important subjects.
With respect to the unemployment data, it is certainly the case that the official unemployment rate is 5 percent. Is that 7 million people?
Mr. JACKSON. I believe it is 7 million, Mr. Chairman.
Mr. GREENSPAN. There are an additional 5 million people who are not in the labor force who say they wish to have a job. They are not in the official data, largely because the official measure requires that the individual in the household stipulate that they are unemployed but have sought a job in the previous week. So there are 5 million people who say they want a job, but haven't been seeking one for a number of different reasons.
That number, however, has also gone down. It was, as I recall, 6.4 in early 1994. Indeed, I outline those figures in some detail in the written statement which will be submitted for the record.
Page 78 PREV PAGE TOP OF DOC So, the overall unemployment rate, no matter how measured, is coming down. But, there is still the issue, which you implicitly raise, that there are a very substantial number of Americans who want a job and don't have one.
Mr. JACKSON. Would the Chairman comment on part-time workers and those who are overqualified?
Mr. GREENSPAN. Yes, there are two kinds of part-time workers. One, those who do it voluntarily, which I think is not an issue. But those who would like to be employed full time, but are working part time for economic reasons. That number has also been declining. So, while it is certainly the case that there is a substantial number of people who, as you point out, are either officially unemployed, want a job, or have a job and are not working full time as they would like to, that number is not a small number. Nonetheless, it is a lower number than it was 3 or 4 years ago.
On the issue of whether people are underemployed, which is very important, we have very little data on that. I am sure that there are a lot of academics who make estimates of what that is on the basis of matching education and jobs, and one could presumably do that. I don't know what the number is.
Mr. JACKSON. Let me just ask a quick follow-up, Mr. Chairman, and then I do have an additional question. I would like to ask unanimous consent for this additional question.
Mr. Greenspan, I am a little confused then. You indicated the official unemployment rate is 5 percent, or about 7 million people, and I gather that is the calculation that the Fed actually uses in making some of its determinations. But now you are also indicating that there are other numbers about the employed, or the underemployed or the overqualified, that exist.
I am wondering, are they ever factored into the calculation in making a determination about the well-being of the economy, or are they just other numbers that are unofficial and you, kind of, never get around to them?
Page 79 PREV PAGE TOP OF DOC Mr. GREENSPAN. No, indeed, when you finally get a chance to get the detailed report, which you just received at 2:00, you are going to find that what we did, in fact, do, is to take the total working age population16 to 64and try to segregate the proportion of newly-employed into whether they were part of the growth in that working age population, or whether people went to being employed either from being unemployed, as defined in the official data, which a lot did, or from the second category. That is the group of 5 million people who are not in the labor force, but wanted a job. Because that number came down from 6.4 to 5 million. It meant that in 3 years, a million-and-a-half of those people, in net, went from that category to employment.
So, indeed, the issue is not only to evaluate the official unemployment rate, but also to look at what is happening to those who are not in the labor force. Unless we do that, I don't think we can get a good sense of what the state of the labor supply is.
Mr. JACKSON. I appreciate that, Mr. Chairman.
I ask the Chairman's indulgence for one quick question.
Traditionally in its stated policy, the Fed has been concerned about economic climates in which rising growth and falling unemployment coincide, that these factors pose somehow an inflationary threat. Yet, we are now clearly experiencing rapid growth and rising incomes for some sectors of our population while concurrently experiencing declining inflation and stagnant wages, obviously, for the least well-off and least well-educated.
I am interested in how you explain this new relationship between economic growth and inflation, in light of the fact that part of the population is doing well, but there may be segments that are stagnant?
Mr. GREENSPAN. That is the key question which is confronting all economists. Because, as you will hear in tomorrow's hearing, there are going to be a number of people who are very puzzled by this phenomenon and, indeed, it is certainly not unprecedented, but it is very unusual for this to occur and it is one of the major issues which we at the Federal Reserve are trying to resolve so that we can adapt our policy to a world that encompasses that particular phenomenon.
Page 80 PREV PAGE TOP OF DOC Mr. JACKSON. Thank you.
Chairman CASTLE. Thank you, Mr. Jackson.
I think we are going to be getting to votes here in just a very few minutes.
I have one very brief follow-up question. If other Members want to ask, what you can doyou have had a long day and if testifying was a long-distance race, you would be a winner for sure.
Mr. FRANK. There is no rule that questions have to be put in the same quarter in which the statement was made.
Chairman CASTLE. Let me just ask this question and let me, perhaps, preface it by saying that I am a cosponsor and active advocate for something we are going to be considering tomorrow called budget enforcement legislation. You already answered questions about the need to balance the budget. But my question, I will try to put it in a more general sense.
That is, would you agree that there is a need for a mechanismor at least would it be helpful to have a mechanism in the Budget Reconciliation Act, which is the Balanced Budget Agreementto require action if spending targets are not met in future years? Conceptually, the concept of some sort of a budget enforcement act?
Mr. GREENSPAN. I used to be very skeptical about those types of devices but, in retrospect, the spending caps have worked remarkably well, surprisingly well. Hence, I would say some form of enforcement mechanismwhich I would have said 10 years ago, was worthless and would not workI am now more congenial toward that sort of mechanism. I do think that when you are dealing with the type of budgetary structure that we have, the caps serve a very useful purpose in containing the level of expenditures to the level of receipts or whatever balance the Congress decides. Without it, I think it is rather difficult.
Page 81 PREV PAGE TOP OF DOC Remember, the reason why these mechanisms came into place in the first place iscertainly before the Budget Act of 1974Congress really appropriated and then what you ended up with was added up, and that was the budget. Whether it was balanced or whether it wasn't balanced was an act of fate.
Chairman CASTLE. Thank you, Mr. Chairman, I hope to quote you extensively in the next 24 hours.
Mr. Frank, do you have a follow-up question?
Mr. FRANK. Yes. First, I do want to make a statement regarding the gentleman from Alabama's references to our colleague from Vermont. It certainly should be clear that when he was referring to the failure of socialism, I should be very clear. What happened in the Soviet Bloc is, of course, completely irrelevant to anything Mr. Sanders has ever stood for. I just want to make it very clear that when we talk about Mr. Sanders' ''socialism'', we would be referring to the model of Sweden, say, and I think we should be very careful and make it clear that there was no suggestion that he was, in any way, a fan of, or associated with, the failure of communism. I will yield to my friend if he wants me to yield.
Mr. BACHUS. And I was not saying that he did. And I was also
Mr. FRANK. I understand. I just want to make it clear.
Mr. BACHUS. I just
Mr. FRANK. I take back my time.
I just want toit wasn't clear. There were just references to the failure of socialism in general, and I just thought that ought to be clear.
Now, I just want to return to where we ended, Mr. Greenspan, becauseyes, I agree, skepticism is a very important philosophical position. My point is this. You and even more other membersand that's why I am glad we are going to have a chance tomorrow to talk to Mr. Meyer, who says he still believes in a nonaccelerating inflation rate of unemployment, Mr. McDonough from the New York Fed and some others.
Page 82 PREV PAGE TOP OF DOC I think there is an inequalityan intellectual inequality hereand that people are more inclined to believe the bad news than the good news. And there is a difference between openness and skepticism.
Let me read a sentence from your statement on page 15: ''As I indicated, demand growth does appear to have moderated, but whether that moderation will be sufficient to avoid putting additional pressure on resources is an open question.'' I accept that.
But, if you had said, ''But I am skeptical as to whether that moderation will be sufficient to avoid putting additional pressure on resources,'' I think you would agree that would have a different meaning. No one is more careful about nuance than you.
What I am saying is, I believe the general thrust is skepticism when openness is more appropriate. And let me say, then I will have you respond, I think my evidence for it is this: you and many others were unduly pessimistic in the past. You have acknowledged that. You were unduly pessimistic and, indeed, this is what bothers me, and let me formulate this exactly. As I read your statement, I see no evidence for the skepticism, and I suppose skepticism, by its nature, doesn't call for evidence. If you had evidence, you would be more than skeptical.
But here is the problem. The mind-set that led to undue pessimism over the last couple of years, appears to be all that you've got to talk in the future about: ''Well, gee, we are going to have to do something in 1998.'' I would ask you to comment to that, but just make one specific question.
Other than your skepticism that the good news could really be as good as it has been, is there any evidence that we are likely to need any kind of a rate increase to stave off excessive inflation in 1998, or is it justand this is what I hope it is notis it just the sense this is just going too well and there is too much employment and the economy is going too well and therefore we think that a year from now it may be inflationary, and we have to do something? What I see in your statement is that is the basis for talking about future need to tighten, rather than any specific evidence.
Page 83 PREV PAGE TOP OF DOC Mr. GREENSPAN. It is really, in a sense, neither. This particular testimony is my attemptand my colleagues' attemptto try to explain, as best we can, what we think is going on in the economy, and how it interfaces with monetary policy. Remember that when we make decisions, there is very little lead time necessary, because all we have to do is get together as a group and legally make changes in the Federal funds rate, or the discount rate, or the instruments that have been given to us by law.
What we try to do is to deal with a complex situation which is very clearly changing, in the sense that things are happening today which don't follow the normal experience of the last 10 or 15 years, and which raise a flag, in that the models that one has been working with clearly are not producing the results which the real world is producing. Something is wrong, obviously it is not the real world.
The problem that you have to ask yourself though, is how much of the changes that you are looking at are so fundamental that those older models are completely worthless, or are you dealing with either minor or, say, moderately significant changes? And all I am saying to you, and I hope it is conveyed in this testimony, is that while there is no question that something different is happening, you cannot basically say that ''because something different is happening, therefore all history is irrelevant.'' Obviously, one wouldn't want to say that. So that the question is, ''What is the appropriate balance, in one's judgment, as to what are the forces currently driving the economy,'' and, therefore, how we, as central bankers, interface with those forces?
There are differences within the FOMC, as there always are differences in any committee. There are no differences with respect to the ultimate goal of monetary policy. There are no differences, as far as I can judge, in the general belief that low inflation or stable prices significantly contribute to, and are a necessary condition for long-term economic growth. There are differences in the committee on evaluating what is currently happening and how much of the historic model is still functioning and is not functioning. That is what the debate is currently about.
Page 84 PREV PAGE TOP OF DOC Mr. FRANK. I appreciate that. And I have only one last sentence. And here, for once, I think lawyers may have something to tell economists. They usually don't.
I agree that is the appropriate question. I just hope that you will decide it by a preponderance of the evidence, and not say that the good news has to prove itself beyond a reasonable doubt.
Mr. GREENSPAN. I couldn't agree with you more. It is not a good news/bad news; it is a preponderance of the evidence and the facts which I hope determine what we do. I can certainly tell you that is our purpose.
Chairman CASTLE. Dr. Paul.
Dr. PAUL. Thank you, Mr. Chairman.
Earlier on, several Members on that side made the point that ordinary people and poor people are having a tough time, and I think they are correct about this. I don't, of course, agree with some of the solutions they might propose, but I do not believe for a minute that adjustments, or an explanation of the CPI or price deflator will satisfy these people. There are a lot of people out there suffering. I think it is very real.
I think what we must remember is that the standard of living for many of these people has gone down in the period of time since we closed down the last monetary system in 1971. Fiat moneyby its very nature, a characteristic of fiat money is that the middle class eventually gets wiped out if you have runaway inflation. If you have insidious inflation, you will have the poor people nibbled away with. The early users of credit benefit, the late users have difficulty. So, the people who borrow, the bankers, the big business and governments are going to have advantages that the little guy won't have. So, I really agree with the concerns that they express and I think that we should continue to think about this and try to solve that problem.
I have a specific question dealing with central bank purchases of U.S. debt. On June 23, Hashimoto, Prime Minister of Japan, made a comment that made the news and stirred up the markets for approximately 24 hours and then it passed. He threatened, of course, that he would sell Treasury bills if we didn't fix the dollar/yen ratio to something more to his liking. But even before that statement, I noticed that there has been a significant change in what central banks have been doing.
Page 85 PREV PAGE TOP OF DOC Up until approximately 3 months ago, central banks have been accumulating our debt at sometimes up to a rate of 20 percent annualized rate and yet, in the last 3 months, we have seen a change where it has gone to a point where it is decreasing. Not only are they not buying as many, they have actually unloaded some of this debt. It may be way too early to tell, but it could be a trend.
At the same time the foreign central banks were holding a lot less of our debt, the Federal Reserve, our Federal Reserve, has increased its purchase and Federal Reserve credit has subsequently gone up 10 to 11 percent in that same period.
So my question is, how serious is this? Is this a major part to your policy, and what happens if, in the next year, the foreign central banks don't dump just $10 or $15 billion, or $20 billion, what if they dump a whole $100 billion? What kind of pressure does this put on you and what kind of pressure does it put on the interest rates, and do theyor could theyhold us hostage?
Mr. GREENSPAN. Let me just respond to the general question. If central banks decided to sell U.S. Treasury debt, somebody else is obviously buying it. So really, what it is, is a swap in which the central bank switches out of government debt into other securities and some other party is doing the opposite. So, somebody will be holding our debt. The question really is, would it significantly affect the price of the debt in the process of that exchange? In other words, would long-term interest rates in the United States go up as a consequence?
It is conceivable in a very short-term sense that, for technical reasons, if you try to sell a lot of U.S. Treasury debt, the price of the bonds would go down and the interest rate would go up in part. But, over the longer runand that is probably a more modest shorter run, as you pointed out earlier Congressmanthe determination of the level of interest rates is essentially the real interest rate plus the inflation premium. Ultimately, that is what will prevail. The mere sale of the U.S. Treasury debt would not, in and of itself, alter either the inflation premium or the real interest rate. So that, over the longer run, that should not have a significant effect.
Page 86 PREV PAGE TOP OF DOC Dr. PAUL. OK. My concern, though, is what if there were not enough other parties to buy? It seems that the pressure would be put on you to buy, and it looks like you may have already done this, because what you have done in the last 3 months is more active than you did in the previous 3 months. The net sales on foreign central bank holdings have certainly changed. There has been a definite change in the last 3 months.
Mr. GREENSPAN. No, our policy has been directed strictly at the issue of maintaining a portfolio which is consistent with our announced Federal funds rate. So what we do is we equilibrate the system of Federal funds, the supply and demand within the banking system, and adjust our portfolio in a manner to maintain something closerelatively closeto that rate.
Our open market operations are not related to this particular phenomenon but net, effectively, directed toward the Federal funds rate target.
Chairman CASTLE. Dr. Paul. I would like to let the others ask questions, if you will. And we are going to be voting shortly. I am afraid we won't get a chance if we don't go on the others.
Mrs. MALONEY. Thank you.
Following up, really, on Barnie Frank's question, could you share with us what you and your colleagues look at, specifics, in determining if inflation is taking place? And second, following up on Mr. Castle's question on public policy, another public policy debate that we are having in this Congress is whether or not we should invest Social Security monies in the market and do you have any feelings on that particular issue?
Mr. GREENSPAN. I made a speech in Philadelphia about 9 months ago, or something like that, in which I addressed this particular issue and, rather than go into the details, may I just send you a copy?
Page 87 PREV PAGE TOP OF DOC Mrs. MALONEY. I would love a copy of the speech, but I would like to know the specifics that you look at in determining inflation.
Mr. GREENSPAN. At the moment, we try to look at the whole economy. Many years ago when our money supply targets were really working, in the sense that we could look at M2 as a proxy for the whole system, we didn't have to look at huge numbers of things, even though we did, just to be sure that M2 was working.
Now that money supply has not been giving the type of signal that it used to, indeed it broke down in the early 1990's and, as I say in my prepared remarks, there is some evidence that it may be coming back, but until that happens, we are forced to look at the total system.
We watch virtually all of the aspects of the economy with respect to the domestic production system, consumption, all of the financial variables and, indeed, to the extent that it affects us directly, what is going on in the international financial markets as well.
I can't give you a simple list because, frankly, it changes from one period to the next depending on which set of forces we believe are the key factors driving the economy and the financial system.
Mrs. MALONEY. Could you give us the key factors now that are driving, in your opinion, since this is constantly shifting?
Mr. GREENSPAN. Sure. I tried to develop that in the prepared remarks in which I say how this particular economy is, say, different from where it was in 1991, when we couldn't get banks to lend. Remember those headwinds and the credit problems we had? That was a different sort of phenomenon and we couldn't have cared less, at that particular point, about the issue of whether or not capacity was being strainedor even reachedbecause we weren't even close.
Today, it is a wholly different sort of phenomenon and so our general focus is not on the same issues we looked at 5 or 6 years ago, but mainly on issues of evidences of strain in the system. So we look at questions of factory overtime, lead times in the deliveries of materials, issues of shortages, pressures in commodity markets or in other markets, anything which is indicative of strain in the system. Because history tells us when the economy is under strain, inflationary imbalances surface and inevitably the distortions undermine economic growth. It is those types of things which we are fearful will prematurely end this extraordinary business expansion which we have been experiencing.
Page 88 PREV PAGE TOP OF DOC Chairman CASTLE. Thank you.
Mr. BACHUS. Thank you.
When you discussed inequities of incomes and stagnant wages, and I think it has been suggested that the Federal Reserve policy has at least contributed to some of these by some of my colleagues, I would like to submit to you and to the Members of the subcommittee that remain, that the largestat least large, and I think the largestgroup of such working poor, when you describe people with low, stagnant wages, long hours, often away from home, under dangerous circumstances, is actually the U.S. military, which this Congress, and not the Federal Reserve, could best address.
Mr. GREENSPAN. Well, I am surprised you say that, Congressman, because in an earlier incarnation, I was a member of the Commission on the All-Volunteer Army and my recollection is that the deliberations of that Commission addressed these particular types of issues and tried to create a standard of living for the military which would create sufficient incentives to attract people with skills to run a modern armed force. I can't say that I have kept up with it to the extent that I would have liked, but I am somewhat distressed to hear these problems reemerge, because, clearly, it is not to the advantage of the country as a whole.
Mr. BACHUS. Thank you. I appreciate you saying that. And I say that out of tremendous respect and admiration for our service men, as you do, both of us having served.
But, I think when we do express our concern over wage stagnation and living conditions, that is a large group that we could focus on. Thank you.
Chairman CASTLE. Thank you, Mr. Bachus.
Mr. JACKSON. Mr. Chairman, I just have one follow-up question really to follow up to my first question.
Page 89 PREV PAGE TOP OF DOC I am really interested in what the policy implications would be if the unemployment rate reflected a truer number, including the categories that you mentioned yourself?
Mr. GREENSPAN. It shouldn't change at all, Congressman. The reason, I hope, is that merely altering the categories doesn't change reality and reality is what it is. And I would hope that we look at the data that exist, operate according to what we think it is suggesting about the nature of reality and how the particular numbers are defined and what the unemployment rate officially is really shouldn't be a consideration
Mr. JACKSON. So, Mr. Greenspan, then I am to understand that if the number, for example, including the part-time workersor those who have given up looking for workwere not at 5 percent, but were roughly around 9 percent, and that was the reality, that it wouldn't trigger Fed action in terms of trying to expand the economy to increase employment opportunities for the increased number?
Mr. GREENSPAN. The answer is it shouldn't. And the reason I say that, is that in the past we used to have all sorts of different measures of unemployment or shortfalls of employment, and endeavored to see whether they altered the output of our various models. The answer is, there is no evidence that it does.
Mr. JACKSON. Mr. Chairman, then it is possible, sir, respectfully, to have 9 percent unemployment and still be doing well under the economic models?
Mr. GREENSPAN. We will be doing better than we were. The question of ''well'' always implies some form of standard and the question of the standard is something which reflects history.
So, we say now with the official unemployment rate under 5 percent, that is the lowest rate that we have seen in that figure for a quarter of a century and, in that context, by that limited standard, we say we are doing well. My suspicion is, although I haven't looked at the numbers directly, that if we looked at the broadest measure of unemployment, it too, would be lower than at any time in the last 25 years. And by that standard, we would be doing well.
Page 90 PREV PAGE TOP OF DOC Whether we are doing well enough is a different question. That really rests on an issue as to whether we could take, for example, the 9 percent unemployment rate, which would include those outside of the labor force, and say, ''is there a way in which we can significantly reduce that?''
Now, I would suggest we should not be asking that question whether or not the measured official unemployment rate is 5 percent or 9 percent. In other words, the data should not affect what policy is doing and it clearly doesn't reflect reality.
Mr. JACKSON. Thank you, Mr. Chairman.
Thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Jackson. We appreciate it.
We have come now to the time to close this. I have been informedI don't know what happened to wage rates or unemployment todaybut the stock market was up 155 points. My recollection is last time you were here, it was up a substantial amount too. You ran over to the Senate, when you went to the Senate before, it went down a little bit.
Mr. Frank suggested maybe we should have a hearing every day here, but I don't know if you would be ready for that.
We do appreciate you taking a lot of time to answer a lot of very diverse questions, and hopefully the formulation of all these questions and the answers will help all of us in developing policy.
Mr. GREENSPAN. Well, frankly, let me just say thanks to Congressman Frank, and if Congressman Sanders were here, I would thank him too. This has been, frankly, the most challenging hearing I have been at in quite a long time and I found it most interesting. I hope they have.
Chairman CASTLE. It has been the most challenging hearing I have attended in quite a long time also.
Page 91 PREV PAGE TOP OF DOC Thank you very much, Mr. Chairman. We do appreciate it.
[Whereupon, at 5:48 p.m., the hearing was adjourned.]