[Joint House and Senate Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 108-667
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 21, 2004
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Robert F. Bennett, Utah, Chairman Jim Saxton, New Jersey, Vice
Sam Brownback, Kansas Chairman
Jeff Sessions, Alabama Paul Ryan, Wisconsin
John Sununu, New Hampshire Jennifer Dunn, Washington
Lamar Alexander, Tennessee Phil English, Pennsylvania
Susan Collins, Maine Adam H. Putnam, Florida
Jack Reed, Rhode Island Ron Paul, Texas
Edward M. Kennedy, Massachusetts Pete Stark, California
Paul S. Sarbanes, Maryland Carolyn B. Maloney, New York
Jeff Bingaman, New Mexico Melvin L. Watt, North Carolina
Baron P. Hill, Indiana
Donald B. Marron, Executive Director and Chief Economist
Wendell Primus, Minority Staff Director
C O N T E N T S
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Opening Statement of Members
Senator Robert F. Bennett, Chairman.............................. 1
Representative Jim Saxton, Vice Chairman......................... 3
Representative Pete Stark, Ranking Minority Member............... 3
Witness
The Honorable Alan Greenspan, Chairman, Board of Governors,
Federal
Reserve System................................................. 4
Submissions for the Record
Prepared statement of Senator Robert F. Bennett, Chairman........ 31
Prepared statement of Representative Jim Saxton, Vice Chairman... 31
Prepared statement of Representative Pete Stark, Ranking Minority
Member......................................................... 32
Prepared statement of The Honorable Alan Greenspan, Chairman,
Board of Governors, Federal Reserve System..................... 32
Written response to questions from Senator Paul S. Sarbanes.. 35
Written response to questions from Senator Susan M. Collins.. 37
Written response to questions from Representative Jennifer
Dunn....................................................... 39
THE ECONOMIC OUTLOOK
----------
WEDNESDAY, APRIL 21, 2004
Congress of the United States,
Joint Economic Committee,
Washington, DC
The Committee met, pursuant to notice, at 10:00 a.m., in
room SH-216 of the Hart Senate Office Building, the Honorable
Robert F. Bennett, Chairman of the Committee, presiding.
Senators present: Senators Bennett, Sununu, Alexander,
Collins and Sarbanes.
Representatives present: Representatives Saxton, Ryan,
Dunn, English, Putnam, Paul, Stark and Hill.
Staff present: Donald Marron, Natasha Moore, Chris Frenze,
Brian Higginbotham, Colleen J. Healy, Mike Ashton, Lucia
Olivera, Zach Jones, Wendell Primus, Chad Stone, Frank
Sammartino, and Matthew Solomon.
OPENING STATEMENT OF SENATOR ROBERT F. BENNETT,
CHAIRMAN
Senator Bennett. The Committee will come to order.
We meet this morning in fulfillment of one of our statutory
requirements, which is to hear from the Chairman of the Federal
Reserve on an annual basis.
Because of the interest in Chairman Greenspan's testimony,
we expect a large attendance at this particular hearing. And in
an effort to accommodate Chairman Greenspan, who has his own
schedule, I will lay down the ground rules.
We will have opening statements from the Chairman, the
Ranking Member, and the Vice Chairman. We ask other Members not
to give an opening statement, but to hold their comments until
we go to the question period.
I will recognize people in the order in which they come.
And I ask the staff to keep track of that order so that I don't
have to write everybody down as they come in.
But we'll observe the early bird rule and say those who
come first get to question first, regardless of their seniority
on the Committee.
I've asked Vice Chairman Saxton and Ranking Member Stark to
hold their opening statements to four minutes, and I intend to
set the example and do that myself, so that we can have maximum
time for Members in the question period. And we will try to
hold each questioner, each Member, to a five-minute period in
an effort to give everyone the opportunity to question Chairman
Greenspan and at the same time conclude the hearing in a timely
enough manner so that he can meet his other scheduled
requirements.
So with that, Mr. Chairman, we're pleased to have you here
today. We always appreciate your views on the current economic
situation, as well as your broad perspective on economic and
fiscal issues facing Congress.
One of the things that has impressed itself upon me since
I've been a Member of the Senate is that very few people in
public life have any kind of perspective beyond today's
headline or this afternoon's deadline.
And you are an outstanding exception to that rule, as you
can see things in a perspective that goes across not only
quarters and years, but decades. And I think that that kind of
perspective is very important to us.
We're grateful that you're willing to come share it with us
this morning.
You visit us at a time of good economic news. The economy
is growing rapidly and adding new jobs, thanks to well-timed
tax relief, an aggressive Fed policy over which you've presided
and, most importantly, the amazing resilience of the American
economy itself.
I can't help but notice what a difference a year makes.
When we were having this hearing a year ago, we talked a great
deal about deflation. But today, we meet amid speculation about
inflation.
Last week, we learned that consumer prices have been rising
faster than expected and commodity prices are much higher than
they were a year ago, due to the strengthening world economy
and the lower dollar. Higher commodity prices may eventually
lead to higher consumer and producer prices. We've already seen
that with gasoline. But the real question is whether they
signal broader price increases ahead.
In the sometimes topsy-turvy world of economics, the bond
market has treated recent gains in employment as bad news,
driving bond prices down and interest rates up. Employment
growth is, of course, an unmitigated good for the economy, but
it does sharpen the question of how long the Fed will be able
to maintain the current low interest rates and how and when the
Fed may move to a more neutral policy stance. And we, of
course, will welcome your insight on this issue.
I'd also like to indicate we'd be interested in your
thoughts on the housing market. Housing has been remarkably
strong in recent years. It's boosted the recovery, built wealth
for millions of American families, and low mortgage interest
rates have been key to housing strength. But the concomitant
result has been that home prices have been lifted in much of
the nation, raising the cost of living for new home buyers,
even as it creates a sense of wealth for existing home buyers.
We need to understand how rising home prices might contribute
to inflation. And looking ahead, we also need to understand how
rising interest rates might affect the housing market.
So those are the issues that are on my mind, Mr. Chairman.
We welcome you again and look forward to your testimony.
I now yield to the Vice Chairman, Mr. Saxton.
[The prepared statement of Senator Robert F. Bennett
appears in the Submissions for the Record on page 31.]
OPENING STATEMENT OF REPRESENTATIVE JIM SAXTON,
VICE CHAIRMAN
Representative Saxton. Thank you, Mr. Chairman. It gives me
great pleasure to join with you in welcoming Chairman Greenspan
once again before the Joint Economic Committee.
Let me just say that the evidence shows that the U.S.
economy has displayed an amazing resilience in recent years and
has now emerged from a painful adjustment process. The bursting
of the stock market and technology bubbles began in 2000. The
subsequent economic slowdown and recession, terrorist attacks,
and wars harmed the economy, but did not prevent the current
economic expansion, which began in November of 2001.
The economic data released in recent quarters indicate that
the U.S. economy continues to grow at a healthy rate. Over the
last half of 2003, economic growth adjusted for inflation was 6
percent. This recent pick-up in the economy was expected for
some time, but had been delayed by weakness in business
investment.
However, the long-awaited rebound in business investment is
now underway and has boosted the economy and has led to a more
balanced pattern of economic expansion. For example, in the
last two quarters of 2003, investment in equipment and software
increased at rates in excess of 15 percent. The increases in
investment have contributed to a strong recovery in
manufacturing activity.
Meanwhile, consumption and housing activity continue to
hold up well. Productivity is very strong and inflation is
under control. Recent data indicate that payroll employment
growth has resumed. Independent economists have noted that tax
relief and accommodative monetary policy have made important
contributions to the recent strength in the economy.
Finally, the Blue Chip Consensus forecast is that the U.S.
economy will grow at an inflation adjustment rate of nearly 5
percent this year. The return to sustained and healthy economic
growth is a tribute to the flexibility and resilience of the
American people and our free market economy.
Mr. Chairman, thank you, and I'll be delighted to hear from
Chairman Greenspan when you are ready.
[The prepared statement of Representative Jim Saxton
appears in the Submissions for the Record on page 31.]
Senator Bennett. Very good.
Mr. Stark.
OPENING STATEMENT OF REPRESENTATIVE PETE STARK,
RANKING MINORITY MEMBER
Representative Stark. Thank you, Mr. Chairman. And welcome,
Chairman Greenspan.
I know we all have questions, the same questions that are
in everyone's mind today--when? Which way? How much?
We're all waiting to see. Chairman Bennett and I will
become very wealthy if you'd whisper those things in our ear
and give us a heads-up.
But I don't think that will happen for us today.
Consumer prices went up. Some are fearing inflation. The
Fed has committed itself to be patient. My concerns still are
job growth. We haven't seen such persistent job losses since
the 1930s. And it wasn't much fun in the 1930s. I remember
that.
But we should talk about extension of unemployment
benefits. I know that you testified a month or so ago that you
would support extending unemployment benefits. I think it would
help. I think it would help the economy. And it would certainly
help 3 million unemployed workers to avoid financial ruin. Our
counties and states are less able than ever to provide public
assistance to these people who are out of work.
I don't think training is the answer, because I don't know
whether you can take an unemployed electrician and train him or
her to be a chiropractor. They're out of work because there
aren't jobs and not because they are unemployable.
In the House, extending unemployment benefits has become a
partisan battle. We passed extensions a couple of times, or
asked to pass them. The leadership in the House has dug in and
is not doing anything. The President and the Republican-
controlled Congress could pass an extension if they wanted to.
So I look forward to your statements today, Mr. Chairman,
about what you see, what kind of good news you may see ahead of
us for this spring and summer.
Thank you.
Thank you, Mr. Chairman.
[The prepared statement of Representative Pete Stark
appears in the Submissions for the Record on page 32.]
Senator Bennett. Thank you.
Chairman Greenspan, we appreciate your being here and look
forward to your testimony.
OPENING STATEMENT OF THE HONORABLE
ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM
Chairman Greenspan. Thank you.
Mr. Chairman and Members of the Committee, I'm pleased, as
always, to be here to offer my views on the outlook for the
U.S. economy.
The American economy appears to have emerged around the
middle of last year from an extended stretch of subpar growth
and entered a period of more vigorous expansion. After having
risen at an annual rate of 2\1/2\ percent in the first half of
last year, real GDP increased at an annual pace of more than 6
percent in the second half. Aided by tax cuts, low interest
rates, and rising wealth, household spending continued to post
sizable gains last year. In addition, an upturn in business
investment, which followed several years of lackluster
performance, and a sharp rise in exports, contributed
importantly to the acceleration in real GDP over 2003.
Although real GDP is not likely to continue advancing at
the same pace as in the second half of 2003, recent data
indicate that growth of activity has remained robust thus far
this year. Household spending has continued to move up, and
residential home sales and construction remain at elevated
levels. In addition, improvement in business activity has
become more widespread.
In the industrial sector, nearly two-thirds of the
industries that make up the index of industrial production have
experienced an increase in output over the past 3 months. More
broadly, indicators of business investment point to increases
in spending for many types of capital equipment.
And importantly, the latest employment figures suggest that
businesses are becoming more willing to add to their
workforces, with the result that the labor market now appears
to be gradually improving after a protracted period of
weakness.
Looking forward, the prospects for sustaining solid
economic growth in the period ahead are good. Monetary policy
remains quite accommodative, with short-term real interest
rates still close to zero. In addition, fiscal policy will
likely continue to provide considerable impetus to domestic
spending through the end of the year.
Importantly, the caution among business executives that had
previously led them to limit their capital expenditures appears
to be giving way to a growing confidence in the durability of
the expansion. That confidence has, no doubt, been bolstered by
favorable borrowing conditions, ongoing improvements in
efficiency, and rising profitability, which have put many firms
on a more solid financial footing.
Nevertheless, some of the strains that accompanied the
difficult business environment of the past several years
apparently still linger. Although businesses are replacing
obsolescent equipment at an accelerated pace, many managers
continue to exhibit an unusual reluctance to anticipate and
prepare for future orders by adding to their capital stock.
Despite a dramatic increase in cash flow, business fixed and
inventory investment, taken together, have risen only
moderately. Indeed, internal corporate funds exceeded
investment over the course of last year for the first time
since 1975.
Similar cautious behavior has also been evident in the
hiring decisions of U.S. firms, during the past several years.
Rather than seeking profit opportunities in expanding markets,
business managers hunkered down and focused on repairing
severely depleted profitability, predominantly by cutting costs
and restricting their hiring. Firms succeeded in that endeavor
largely by taking advantage of the untapped potential for
increased efficiencies that had built up during the rapid
capital accumulation of the latter part of the 1990s. That
process has not yet played out completely. Many firms seem to
be continuing to find new ways to exploit the technological
opportunities embodied in the substantial investments in high-
tech equipment that they had made over the past decade.
When aggregate demand accelerated in the second half of
2003, the pace of job cuts slowed. But because of the newfound
improvements in the efficiency of their operations, firms were
able to meet increasing demand without adding many new workers.
As the opportunities to enhance efficiency from the capital
investments of the late 1990s inevitably become scarcer,
productivity growth will doubtless slow from its recent
phenomenal pace. And, if demand continues to firm, companies
will ultimately find that they have no choice but to increase
their workforces if they are to address growing backlogs of
orders. In such an environment, the pace of hiring should pick
up on a more sustained basis, bringing with it larger
persistent increases in net employment than those prevailing
until recently.
Still, the anxiety that many in our workforce feel will not
subside quickly. In March of this year, about 85,000 jobless
individuals per week exhausted their unemployment insurance
benefits--more than double the 35,000 per week in September,
2000. Moreover, the average duration of unemployment increased
from 12 weeks in September, 2000, to 20 weeks in March of this
year. These developments have led to a notable rise in
insecurity among workers.
Most of the recent increases in productivity have been
reflected in a sharp rise in the pretax profits of nonfinancial
corporations from a very low 7 percent share of that sector's
gross value added in the third quarter of 2002 to a high 12
percent share in the fourth quarter of last year. The increase
in real hourly compensation was quite modest over the period.
The consequence was a marked fall in the ratio of employees
compensation to gross non-financial corporate income to a very
low level by the standards of the past three decades.
If history is any guide, competitive pressures at some
point will shift in favor of real hourly compensation at the
expense of corporate profits. That shift, coupled with further
gains in employment, should cause labor's share of income to
begin to rise toward historical norms.
Such a process need not add to inflation pressures.
Although labor costs, which compose nearly two-thirds of
consolidated costs, no longer seem to be falling at the pace
that prevailed in the second half of last year, those costs
have yet to post a decisive upturn. And even if they do, the
current high level of profit margins suggests that firms may
come under competitive pressure to absorb some acceleration of
labor costs. Should such an acceleration of costs persist,
however, higher price inflation would inevitably follow.
The pace of economic expansion here and abroad is evidently
contributing to some price pressures at earlier stages of the
production process and in energy markets, and the decline in
the dollar's exchange rate has fostered a modest firming of
core import prices. More broadly, however, although the recent
data suggest that the worrisome trend of disinflation
presumably has come to an end, still-significant productivity
growth and a sizable margin of under-utilized resources, to
date, have checked any sustained acceleration of the general
price level and should continue to do so for a time. Moreover,
the initial effect of a slowing of productivity growth is more
likely to be an easing of profit margins than an acceleration
of prices.
As I have noted previously, the federal funds rate must
rise at some point to prevent pressures on price inflation from
eventually emerging. As yet, the protracted period of monetary
accommodation has not fostered an environment in which broad-
based inflation pressures appear to be building. But the
Federal Reserve recognizes that sustained prosperity requires
the maintenance of price stability and will act, as necessary,
to ensure that outcome.
Thank you very much, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Chairman Greenspan appears in
the Submissions for the Record on page 32.]
Senator Bennett. Thank you, sir.
Your final comment that the Fed must act at some point to
deal with inflation, raises the question of how we should
measure inflation.
What are the best indicators of measuring inflation? You've
indicated previously that the CPI may be overstating inflation.
But a fellow who talked to me yesterday said that many families
do not perceive inflation to be low right now, a legitimate
question as to whether or not inflation indices correctly
incorporate housing prices. I referred to that a little bit in
my opening statement.
So could we talk about the CPI and other indicators and
could you give us some indication of what you look for when you
try to determine whether or not inflation is just over the
horizon?
I remember you saying to the Committee some years past, if
you wait until you have clear signs of inflation, it's too
late, and you ought to see what's over the horizon.
Well, as you look over the horizon, what are you looking
for and what indices do you pay attention to?
Chairman Greenspan. First, Mr. Chairman, let me indicate to
you that, as you've heard from, I presume, many witnesses, the
Consumer Price Index--that is, the regularly published index--
despite the fact that it has been improved immensely by the
Bureau of Labor Statistics, which has taken out a significant
part of the bias, is, nonetheless, still significantly biased,
largely because it's a fixed-weight index and doesn't reflect
the changing composition of consumer purchases.
And by the nature of its weighting, it inordinately weights
the housing sector far more than it should in the context of
the overall economy.
As a consequence, we have chosen what we perceive to be a
far more general view of consumer prices, which is the monthly
index which is published by the Bureau of Economic Analysis of
the Department of Commerce for the deflation of personal
consumption expenditures.
It uses virtually all of the individual prices that are in
the Consumer Price Index. Indeed, that's the basic source of
all data.
But it reweights them and estimates various different
components in ways which tend to create an index which has been
running below the Consumer Price Index.
That means it is less upward-biased than the CPI. But it is
still upward-biased.
And indeed, so is the CPI chain index, which also endeavors
to pick up implicitly the mix that is changing in the consumer
area. And that index is published every month by the BLS and,
in my judgment, is a far superior index to the existing one
that currently is published.
Now we look at all price indexes and we look at individual
prices. And I must say to you----
Senator Bennett. Including commodities?
Chairman Greenspan. Yes, including commodities, and
including the broadest index of all, which is the deflator for
the gross domestic product, which picks up capital investment,
government and other individual items which are not captured in
any of the Consumer Price Indexes.
With respect to the question of housing, that has always
been a very difficult issue to handle.
First of all, there is the much broader question as to
whether, in fact, you include prices only of goods and services
or whether you start to look at asset prices as well, or a
futures price.
In short, the debate on what the price environment is has
spread beyond the usual notions of single index.
We estimate the housing costs, or I should say, the BLS
does, essentially by, one, getting rental costs, obviously for
rental dwellings. But it imputes a price to homeownership by
effectively using the data that are picked up on rents and re-
adjusting them to try to capture what is the implicit foregone
rent of homeowners, on the grounds that shifting from being a
renter to a homeowner creates costs. They may be higher, they
may be lower. But a number of the costs involved in
homeownership are not captured in the sense that you're not
paying any rent.
And so, that is an adjustment which takes place. There are
very significant disputes on the appropriate handling of this
issue and we probably will find that there will be revision
after revision, as indeed, there has been for a number of
years.
Senator Bennett. Thank you.
I'd like to follow up, but I want to set the example of
staying within the time limit. We will do the early bird rule.
Mr. Saxton was here next and so we'll go to him, and then
we'll go to Ranking Member Stark.
Representative Saxton. Thank you, Mr. Chairman.
Let me follow up on your question. For many years, we have
tried to look over the horizon, and you've led a great example
for us, particularly with regard to trying to figure out what
inflation may be over that horizon.
In recent months, we have waited anxiously for growth to
take place in all sectors of the economy. And finally, we
appear to be there.
But wouldn't it be prudent to wait for more data before
making changes in the current accommodative stance of monetary
policy? That is a question which is obviously on the minds of
many Americans today and we're anxious and interested in your
response.
Chairman Greenspan. Well, obviously, those are issues which
the Federal Open Market Committee discusses at great length and
we are meeting in a couple of weeks and we will be discussing
the issue. And we'll be meeting periodically thereafter.
I can only speak for the Federal Open Market Committee when
they tell me I can speak for it.
So I'm not going to suggest to you that I can give you a
pattern of what we may or may not do over the next quarters and
potentially, years.
But what we do do is endeavor to look over the horizon. And
we have numbers of different scenarios which we believe are
credible more or less. And as a consequence of that, we have a
sense not only of what we might do in the near-term, but where
that eventually leads us, because there is no such thing as a
monetary policy which is ad hoc or what do you do next?
Unfortunately, on occasion, that has been our history and
it does not work for precisely the reasons the Chairman
mentioned earlier.
So we try to be forward-looking and to think in terms not
only of whether we will move or not move on a particular date,
but what does that imply about a whole program of change, if
indeed we are changing.
And remember that the fact that we have done nothing with
respect to the federal funds rate for almost a year is a
program.
In other words, it's not that nothing has happened and
that, therefore, we saw no reason to make any changes. It's
been an active program, the conclusion of which is that where
we were is where we wanted to be.
So it's a process which we're still learning from.
In other words, we're still developing the means by which
we formulate policy and it's becoming more programmatic in the
sense that it thinks in terms of strategies rather than
individual, period-by-period developments.
And that, as you might imagine, is a rather difficult thing
to do--engaging 19 people who are members on the FOMC and none
of whom are reluctant to say what they believe.
Representative Saxton. Well, thank you very much, Mr.
Chairman.
Mr. Chairman, I'll yield to the next questioner and follow
your great example.
Senator Bennett. Thank you very much.
Mr. Stark.
Representative Stark. Thank you, Mr. Chairman.
I have three questions, Mr. Chairman. I'll just run through
them and you may whack away at them in any manner you see fit.
First, I would like to have your comment as to whether you
still believe, as you testified earlier, that it would be
sensible policy to extend unemployment benefits.
My next question deals with the recent proposal of FASB--
the Financial Accounting Standards Board--requiring recognizing
the cost of employee stock options.
Some of my colleagues would like to block that proposal and
I wonder whether you have any position on whether we should, in
fact, follow the FASB rules, or at least stay out of their
turf.
My third question deals with a topic that we're discussing
a good bit, and that is whether we should fix our tax code so
that it does not encourage U.S. firms to move capital and jobs
to foreign tax havens.
And I don't necessarily refer to just outsourcing, which
may go on where labor markets are attractive. But whether we
should, in fact, add to that by creating a tax incentive that
might encourage companies to move.
Those would be my three areas. If you'd have time to deal
with them, I'd appreciate it.
Chairman Greenspan. Mr. Stark, I indicated in my prepared
remarks that 85,000 a week of the unemployed are losing their
unemployment insurance, which is an exceptionally high number.
I'm of the belief that our unemployment insurance system
has been crafted and has evolved in a way which seems to me as
close to optimum as you can make such a system.
It does not encourage undue unemployment by creating excess
benefits, so that people don't seek jobs when they could. And
yet, its replacement rate on existing wages is--of course, it's
never adequate, but it's at a reasonable level.
We have extended, of course, unemployment insurance on
previous occasions when it was fairly clear that large numbers
of the unemployed were unemployed through no fault of their
own.
And as I indicated a month ago, which you are reporting on,
my view is that if we make the extension short, because it's
not going to be required very long, I do think it's a good idea
and I think it's a good idea largely because of the size of the
degree of exhaustions, which is, in a sense, almost a special
case.
With respect to stock options, I think it would be a bad
mistake for the Congress to impede FASB in this regard.
First of all, this is an accounting question. I've always
argued that accounting is for the purpose of determining
whether particular strategies of companies are profitable or
not profitable. The whole point of accounting is to tell
somebody whether a specific strategy is working or not.
The cost of worker input, labor cost, irrespective of the
form in which it's paid, is a critical determinant of the
production process and the determination of whether or not a
strategy is profitable.
In other words, in simple terms, if your output values are
greater than your input values, within certain limits, it's a
profitable strategy.
If you take one of the significant elements of input of
costs and take it off the table--if you don't expense stock
options--then you're getting a distorted view as to what the
profitability of a particular operation is and you will get a
distortion in the allocation of capital.
Now it may very well make individual firms look more
profitable than they are, and people don't like to change that.
But the point at issue is not whether it is more or less
profitable, but are the figures right?
And in this regard, as best I can judge, the FASB
recommendations with respect to accounting procedures strike me
as correct. And it's not clear to me what the purpose of
Congress is in intervening in this particular procedure.
With respect to the tax code question, that's a very
complex issue because the tax code, as it affects the
allocation of capital within a multinational firm, is never
simple. And every time you change one element, you change
something else.
And the presumption that you could essentially calibrate
taxes to somehow provide major incentives within a
multinational corporation to move employment from overseas to
domestic I'm not sure works.
I do not deny that you can set up taxes which would prevent
employment going abroad. But that doesn't mean that it's coming
back home. It just disappears.
Representative Stark. My question, Mr. Chairman, was
relative not to labor, which I don't think we can control with
the tax code. That will always be attractive to people who
choose to outsource.
But when you can retain profits overseas and not pay taxes
on them, that encourages a capital investment in addition to
what the normal labor market----
Chairman Greenspan. Well, you're referring to the issue of
bringing back capital and therefore, it would be invested in
the United States?
The evidence on that, Congressman, is that capital
investment in the United States is largely determined by the
potential rate of return in the United States relative to the
domestic cost of capital.
Our financial markets are sufficiently liquid and our
corporations in large measure are not limited for cash flows.
So it's quite conceivable that if you change the tax code
in a manner which induces a much larger flow of undistributed
earnings from abroad to domestic affiliates, it's going to have
very little effect on capital investment. It probably will
increase the payment of dividends to shareholders.
In other words, what will happen is that money will come
through the United States and go out to shareholders in
general.
There's very little evidence that I've seen, even though I
know that some of my friends have made calculations in this
regard. I frankly find them most unpersuasive.
Representative Stark. Thank you very much.
Thank you, Mr. Chairman.
Senator Bennett. Yes. Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman, for being here.
Mr. Chairman, I want to refer to your comments about hiring
as we look to the future. And I want to ask specifically about
up to 6 million or so people working in this country who I
don't think we're counting when we figure out who is working
and who is not working.
I'm referring to undocumented aliens or to illegal
immigrants.
We have two reports each month about who is working. The
employers' survey samples 400,000 people who are on payrolls,
as I understand it.
The household survey is a telephone question of up to
60,000 people, asking in many different ways, do you have a
job? Are you working?
And there's been a lot of discussion which Chairman Bennett
has participated in about which is more accurate. My question
is not that. My question is that in both these surveys, which I
gather we use to decide how many people are working and how
many are unemployed, I don't think we count about 6 million
people who are working in America, and those are illegal
immigrants.
Most estimates are that we have 8 to 10 million living in
America who are not legally here. Most estimates are that about
6 million of those people are working.
Now I'm assuming they're not counted in the payroll survey
because it's illegal to hire somebody who's illegally here.
So that's 6 million people who are not counted.
And I'm assuming they're not counted in the household
survey because if you're legally here and you've got a phone
call from the government, you're not likely to spend much time
answering the questions about anything.
And the reason I ask these questions is, if the report says
that we have 129 million people working in America today and
we're not counting people, 6 million people--or up to 6 million
people who are illegally here--what difference would that make
in your estimates and projections.
Or in the household survey, if we're saying that we have
7.8 million people unemployed in America, but we have 6 million
people illegally here, what does that say about our solutions
for those unemployed persons?
Are we to assume that if those 6 million illegal immigrants
were not here, that we'd have no unemployment in America? Are
we understating or overstating our jobs and unemployment
figures because we're not counting up to 6 million people who
are illegally here and who are working?
Chairman Greenspan. Well, Senator, this issue has bedeviled
statisticians--basically, the Bureau of Labor Statistics--for a
long period of time.
The issue gets down to a few facts. The base of the payroll
survey, which is monthly, as you point out, a survey of 400,000
establishments, is actually a quarterly posting of all
employment that is subject to the unemployment insurance
system, which we presume under the law is full coverage, but as
you point out, of legal coverage.
Now the question really gets down to, when the individual
companies submit their reports to the unemployment insurance
system, do they include all people whom they have hired? Or do
they include only those who they perceive to be legal?
The answer seems to be that they can't or shouldn't or
probably can't, in general, make that distinction. And so, you
have to assume that, presumably, people are working a plant, if
they are illegal aliens, are counted.
The question of the household survey really is a two-
pronged question. First, what the 60,000 sample does is
basically try to get the proportion of people working within
households as a percent of the non-institutional population,
age 16 and older. Now, when that figure is calculated, they
then multiply it by the estimate of the non-institutional
population, which the Census releases.
I assume we have perfect numbers on legal immigration. But
I have trouble finding them all the time. But, clearly, we are
guessing on illegal immigration.
So that the aggregate number of employees depends on, one,
the illegal immigration estimate in the population and two, the
answer to the issue that you raise--when people are called in
that 60,000 sample and there are illegal-employed people within
that household, do they say they're employed?
Now the problem is that, when you put all of these data
together, and you match the payroll data and the household
data, it is difficult to find the wedge of illegal immigrants.
In other words, it doesn't show up in a manner which you
can basically say, the reason why the household figure is this
or the unemployment rate is that is illegal aliens; the bottom
line is nobody knows for sure.
But the data are internally consistent, over the years,
between the payroll data and the household data, and give
roughly the same results.
And unless the illegal alien figure is not captured in
equal proportions in both of these surveys, then we have to
assume that the illegal aliens are being counted in large
measure.
But the bottom line, as I said, is we don't know that and I
think it would be a major advance in our statistical
understanding if we'd get a much better handle on that
question.
Senator Alexander. Thank you.
Senator Bennett. Mr. Hill.
Representative Hill. Thank you, Mr. Chairman.
Welcome, Chairman Greenspan. I would indicate that in the
past you have said that deficits matter. Yesterday you said
that they're not an immediate threat right now.
But you have also said that you have supported the idea of
budget enforcement rules like PAYGO.
You've also endorsed the concept of permanent tax cuts. How
do we get to the bottom of this deficit problem if you support
permanent tax cuts and PAYGO rules that apply both to spending
and tax cuts?
And I do have a second question that I would like to get
out there, and I'd just throw it out there now and let you
address yourself to it.
Back in February, when you were testifying before the
Congressional committee, you generated a lot of telephone calls
into my congressional office by suggesting that we cut Social
Security in order to rectify the growing budget crisis.
And I would like for you to address that as well, if you
would.
Chairman Greenspan. First of all, I argued strenuously and
ineffectively before the Congress in September, 2002, not to
allow the PAYGO rules and discretionary caps to expire because
I thought that over the previous decade they had worked
remarkably well, and indeed, were a major factor in
constraining deficit expansion and, indeed, contributed largely
to the contraction of the deficit.
I still believe that we need, before we get involved in
budget negotiations, budget discussions, budget programming, to
restore those budget rules because there is no way, that I'm
aware of, which the Congress can appropriately allocate various
priorities in the way in which 535 Members of the Congress can
effectively come to a conclusion.
You have to have a mechanism to do that. And the best that
has been adduced in recent decades has clearly been PAYGO.
I reconcile the issue of taxes and PAYGO by stipulating
that, one, I visualize the PAYGO rules in place. But I would
like to see--I don't have a vote, so I'm just expressing my own
point of view--a lower level of spending, largely because we
are going to be confronted with a very major increase----
Representative Hill. Well, where would you cut?
Chairman Greenspan. I could give you a long list of cuts
that I would do, and I would submit to you that your telephone
bill would go up immensely.
[Laughter.]
First of all, that is the issue of why we have budget
committees and various different mechanisms by which the
Congress comes together to take the limited resources that we
have and effectively comes up with fitting some of the parts in
the total.
Now, is that easy?
No. But I do think that the point that I have been making
is that we have an unprecedented change occurring in the next
decade with a doubling of the number of retirees. And that is
going to have a huge impact on benefit payments and fiscal
pressures.
Now I have argued over the years that Social Security,
being a defined benefit program, requires change, but not a
great deal of change because we know within limits what type of
benefits will be paid under the existing statutes.
We don't have such confidence on Medicare. We cannot
anticipate the processes that are going to occur in medical
technology and in medical application so we do not have any
reasonable way to come at what the costs are going to be.
We have a standard procedure where we say, benefits per
retiree are going to rise X-percent faster than per-capita GDP.
That's not, frankly, very helpful, nor very informative.
Because of the fact that of that great uncertainty, I have
argued that it is essential that we have fiscal caution in this
regard.
With respect to the issue of my allegedly saying that we
ought to cut Social Security to fund the tax cuts, I object to
the tying of those. I never made such a statement.
I have argued in favor of changes in benefits for a
significant period of time wholly independently of whether the
tax cut is continued or not continued and, indeed, even before
the tax cut was enacted.
So to suggest that I am recommending cuts in Social
Security to fund tax cuts, I find a rather misplaced
conclusion.
All in all, I think the issue that is going to confront
this country, unless we come to a far more organized way of
looking at fiscal problems, is we're going to find that we get
up to the year 2008, 2009, and the pressures from the financial
markets are going to start to really begin to bite. And that's
a little late in the game to resolve this issue, which I must
say to you concerns me most because I don't believe that we can
assure the next generation that what we have promised under
current law, we can actually deliver in real terms.
And, if indeed, that is the case, it is incumbent on public
policy-makers to communicate that to those who will be retiring
in 10 years, so that they can plan in a manner which is far
more rational, rather than find that at the day they retire,
the government says, whoops, we miscalculated. We cannot give
you what we promised.
That's just unacceptable to me as public policy.
Senator Bennett. Mr. Paul.
Representative Paul. Thank you, Mr. Chairman.
Good morning, Chairman Greenspan. I find it interesting
that you, as the previous Chairman of the Federal Reserve--I
remember four, total--they've always advocated that we in the
Congress spend less.
And really, the advice hasn't been taken.
Currently, our national debt is going up over $700 billion,
and we're pursuing once again a policy of guns and butter and
nobody seems to have much concern.
But I think the Fed participates in this. As long as you
control the monopoly control over money and credit, and you can
accommodate the Congress--I mean, if we spend, and nobody's
going to buy those Treasury bills. We know if you want interest
rates at 1 percent, you're going to buy them.
So, in a way, you're complicit in what we do here in the
Congress. But I don't see that coming to an end with the
monetary system that we have.
I do have a question dealing with your statement in the
first paragraph about rising wealth contributing to the
recovery.
This last recession has been written about quite
extensively as being unique, that it came about not because you
raised interest rates as the traditional--as it is
traditionally for the Fed to raise rates. We go into a
recession. Then there's liquidation and debt is wiped off the
books. Then there's a restarting.
This time, it just stopped because people ran out of steam.
There wasn't enough consumer purchasing power and we had a
recession.
But you very, very quickly and efficiently came in and
lowered interest rates very aggressively and prevented the
conventional liquidation and the corrections that have come in
the previous recessions.
And Congress didn't hesitate for a minute to follow in its
Keynesian path and rapidly and excessively raise spending.
But in addition to this, we have this very unusual and
unique form of financing our houses which has caused tremendous
inflation in our housing prices through the financing of Fannie
Mae and Freddie Mac, which in some ways the Fed participates
and in many ways, the foreign central banks participate
extensively in this.
Anyway, we have a housing bubble. Housing prices go up and
that, I assume, participates in this wealth because the
consumer has gone and borrowed sometimes more than their
equity.
Of course, equity prices are soaring.
And that to me is like saying that we had great wealth when
the NASDAQ was 5,000. And all of a sudden, that great wealthy
dissipated rather quickly.
So I do not see how we can say that we have true wealth
without savings that's created artificially by the excitement
of easy money and easy credit and artificially rising prices.
And then people go out and get into further debt.
To me, it seems like the bubble leaked and you patched it
up quickly. So we're back on the same track again of very
excessive spending, excessive borrowing, and we never had the
liquidation.
What really are you thinking about when you're talking
about the rising wealth that has helped in this recovery?
Chairman Greenspan. The term ``wealth'' in this context is
a technical statistical term which is related solely to the
question of the market value of the net assets of households.
Now one can argue whether or not the market values that are
placed on claims on physical assets are high or low. Remember
that all judgments of wealth essentially are discounted values
of forward-expected returns, and that a people's sense of risk
aversion is a critical fact in determining where stock prices
are and, hence, where that wealth is.
But having said that, whatever it is does impact, by all of
the statistical analysis we are able to adduce, on consumer
expenditures. And the reason for that is that people, when they
become wealthier in paper terms as you would put it, do have
collateral to borrow against and to spend, and they do.
And that has indeed been an important factor in consumer
expenditures over the last decade.
Representative Paul. My question is, is it real collateral?
That's the question.
Chairman Greenspan. Well, the point at issue is, it gets to
the more fundamental question, if you're sitting out there with
a big steel plant and you say, that is wealth, the question is,
it's people's judgment as to the amounts of steel that will be
produced and sold, and the profitability that will be
engendered, that will determine the ongoing value of that steel
plant.
And people's views can change quite dramatically, even if
the physical plant doesn't change one iota, even if, indeed,
the amount of steel they're producing and selling doesn't
change.
So what I'm trying to get at here is that you're raising
the much broader question with respect to how are assets valued
in the market place. And we have rational and non-rational
procedures by which those evaluations are made.
Representative Paul. I'm afraid we're confusing debt with
assets. That's my contention.
Chairman Greenspan. Debt and assets are two wholly
different things. The Federal Reserve, I will say, does not
make that mistake.
[Laughter.]
Senator Bennett. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman. I want
to join you in welcoming Chairman Greenspan before the
Committee.
Mr. Chairman, I have a number of questions for you. I'll
try to be brief in asking them. And if you could be brief in
answering them, maybe we can run through the list, or come
close to completing it.
The IMF is apparently urging the Fed to prepare the economy
for higher rates so as to avoid financial market disruption,
both domestically and abroad.
What is the IMF referring to in this urging?
Chairman Greenspan. I'm sorry? What is the IMF doing?
Senator Sarbanes. What are they referring to with this
urging? What is the disruption both domestically and abroad
that they're referring to?
Chairman Greenspan. I think they're referring to two
things, although I don't know this because I haven't actually
seen the detail and they may explain it in more detail.
But in 1994, for example, when we moved 300 basis points,
we did create a lot of movement in the market place. And I
think that there is a concern that because in the last 10
years, the international financial system has expanded to such
a large extent, that we're now more inter-related than
previously. And obviously, any significant problem in the
United States' financial markets would inevitably spill over
into the rest of the world.
I don't know what the IMF is saying because I haven't read
what that is.
However, it's also important to understand that the degree
of sophistication that has emerged in the last decade in our
financial markets has induced all of the participants to
effectively make a judgment as to where they think interest
rates are going and to effectively hedge those positions.
So that whatever one may say about where they think Federal
Reserve policy is going or interest rates in general are going,
I will say to you that, for the average, it's effectively
hedged.
And the question has got to be whether markets move or less
than are currently being discounted.
Senator Sarbanes. Now as of this August, you will have been
Chairman of the Fed for 17 years, I believe. Looking back over
your 17-year tenure, once the Fed starts moving the rates up,
how long does that period usually last?
Chairman Greenspan. Well, first of all, there's an
implication that once we start, we continue for a protracted
period.
Senator Sarbanes. Is that not the case?
Chairman Greenspan. That is not the case. There have been
many occasions in which we have made one move and stopped.
But, on average----
Senator Sarbanes. Well, if you do a two-step, for how long
does it usually last?
[Laughter.]
Chairman Greenspan. I don't know. But, on average, if you
just look back over the period, when we've gone through
protracted moves in either direction, it's usually a year or
so.
But as I said in the very beginning, we do program
analysis, if I may put it in those terms, with respect to
strategies for moving rates in one direction or the other, and
there is no timeframe that we essentially associate with that.
Senator Sarbanes. And once you start moving rates beyond
the two-step, by about how much do you usually raise them up?
Chairman Greenspan. It varies.
Senator Sarbanes. What is the smallest amount by which you
have raised rates once you've started raising them in the
course of your tenure as Chairman?
Chairman Greenspan. I think it was 25 basis points, which
was the short----
Senator Sarbanes. I'm trying to eliminate the one-step
scenario.
Once you get to a two-step and you start raising them----
Chairman Greenspan. I have a general knowledge, but I'd
much prefer to answer that for the record to get it exact, if I
may.
Senator Sarbanes. Well, it would be helpful if you could
submit that to us, Mr. Chairman.
[The written response appears in the Submissions for the
Record on page 35.]
Would you regard the current levels of inflation as
extraordinarily unusual in historic terms, and therefore, the
economy has somehow been passing through a unique period?
Chairman Greenspan. I would, Senator.
Senator Sarbanes. What do you think is the more normal
inflation rate?
Chairman Greenspan. Well, it's not that there is a more
normal rate. I'm saying what we have gone through is a really
quite extraordinary process in the last 20 years to diffuse
inflation expectations in a way which I would have thought
would have been extraordinarily difficult to do, looking at it
from a 20 years ago viewpoint.
It's very apparent that globalization has been a very
important characteristic of this, and I have no doubt that the
ending of the Cold War and the opening up of many of the
markets, especially in Europe, have been factors here.
But something different and unusual has been going on. The
question that you're asking is, where do we go from here? And
there's a certain sense of normality.
I'm not sure that there is a normal inflation rate. As far
as we at the Fed are concerned, what we would like to see is
the normal inflation rate, is price stability.
Senator Sarbanes. I see that my time is up. If I could just
add one more question very quickly.
I notice that inflation-protected bonds are apparently
selling at a rate that anticipates inflation of about 2\1/2\ to
3 percent as we move forward.
Is that correct?
Chairman Greenspan. The difference between the TIPS, which
are inflation-indexed bonds, and the nominal Treasury rates,
are the numbers which you are suggesting.
The problem is that that is not necessarily a pure forecast
of price, largely because, as the liquidity in these inflation-
indexed bonds has increased, their yields have gone lower than
they would have gone and hence, the spread between the higher
nominal rate and the TIPS rate has opened up more than one
would expect is wholly the consequence of inflation.
We don't know what the size of that liquidity change is. We
do suspect, however, that there's an upward bias in that
measure of inflation expectation.
We use it and we evaluate it and we try to understand it.
We also use a lot of other indicators of underlying inflation
expectations. And when they all come together, we feel
comfortable. When they don't, we try to determine what are the
differences and what is likely to be the truth.
Senator Sarbanes. Thank you, Mr. Chairman.
Senator Bennett. Mr. English.
Representative English. Thank you, Mr. Chairman.
Chairman Greenspan, thank you very much for giving us this
opportunity today. I have two rather narrower questions that I
would like to pose and I will simply pose them and allow you to
take them wherever you wish.
The first of these, you note in your testimony the
importance of capital investment in the current recovery.
What I guess I would be curious to have you comment on is,
given the tax legislation that passed last year, and some of
the specific incentives for capital investment that were
included in them, do you feel comfortable making a causal
connection between a higher level of capital investment and
some of the incentives that were included in that bill?
And specially, if Congress were to act to continue those
incentives and make them permanent, would that have a
potentially beneficial impact on the economy?
My second question has to do with another side of the
recovery, specifically in manufacturing.
I think that the indicators right now, as you've noted, are
that manufacturing is recovering. But I am concerned about the
cost of some of the inputs for manufacturing.
Specifically, steel scrap, coke for some aspects of the
steel industry, and for manufacturing generally, the high cost
of energy.
And I wonder if you feel there is any evidence to suggest
that those higher costs potentially will have an impact on
manufacturing, have a potential to slow down the recovery. And
do you anticipate that those costs may come down?
And I'm particularly interested in any comment you would
feel comfortably offering on the issue of steel scrap.
And I thank you.
Chairman Greenspan. Congressman, the evidence does suggest
that the partial expensing element in the tax bill is having an
impact, in part because it's limited.
In other words, that it will come to an end, as I recall,
at the end of this year. But it's probably the most potent
factor involved.
Over the longer run, I suspect, although it is difficult to
prove, that the lower tax on dividends will ultimately flow
through into higher capital values which indirectly will impact
on capital investment.
So the answer to your general question is, yes, I think
there is evidence that capital investment has been affected.
With respect to the steel inputs, it's not that long ago
that we had the Mesabi Range operating at a fraction of its
capacity. Now, everything is going flat out and everybody wants
to buy everything they can.
And the one thing I have never thought we would have a
shortage of is coke. And coke prices, as you know, have moved
very materially.
And if you really wanted to get to the bottom of the heap,
what you would call scrap, which has really been the star price
performer, and essentially, what all of this does, both the
issue of iron requirements and steel scrap generally, is a huge
increase in metallic demands around the world, of which China
has been a very material element.
It's hard to tell what the level of actual consumption of
metallic materials is in China because we've had big surges in
prices not only in steel, but in aluminum, copper, and other
metals as well.
The rate of increase on the shipments strikes me as
unlikely to be matching a consumption pattern. History tells me
that there's some inventory building in that process.
And therefore, it's hard for me to believe that the surge
in steel scrap prices, which seems to be tilting over now,
incidentally, is one that's going to resume and continue
higher.
So my general view is that the underlying costs in the
steel industry have induced a lot of the producers, especially
those with electric furnaces, which essentially use scrap, to
put premiums on prices and create some significant problems for
metal-using industries.
And it has indeed induced the slow-down.
When you insert the natural gas issue on top of that, it's
really becoming a serious problem. And I do think it is an
element slowing down durable goods manufacturing over the long
run.
Fortunately, in the short run, things seem to be coming
back reasonably well. And as you know, the order books of the
steel companies are flat out. And indeed, recently, one of the
major motor vehicle manufacturers acquiesced in essentially
taking a premium price of steel, even though it wasn't in their
contract.
That tells me something very unusual is going on here.
Representative English. Thank you, Mr. Chairman.
Senator Bennett. Mr. Ryan.
Representative Ryan. Thank you. Well, Mr. English asked one
of the questions I wanted to ask. So I'm going to take a
different tack.
But I think if you take a look at the last year, over
monetary and fiscal policy, I think it's a good story that can
be told.
Number one, when the tax cuts were announced last January,
the markets responded favorably. When we got more into the
serious business of actually writing the legislation in the
spring, the markets clearly took that as a serious note. And
when they passed in July, I think we saw a great recovery where
we had the greatest quarter growth in 20 years.
Combine that with the fact that we had very accommodative
monetary policy with expansion of the monetary base, I think
what you saw last year was a great success story in economic
expansion to where we are today, where consumption is growing
well, where we have business capital expenditures growing at
double digits. We have exports growing at double digits.
To the point where we are today where the foretold
employment expansion to the household survey tells us a good
story. And even now, the employment survey has shown that we've
created 500,000 jobs since January, and to the point where we
now see that disinflation or deflation is off of the horizon.
My question to you, Mr. Chairman, is this. Now that we do
see that essentially, deflation is off the horizon, why does
the Fed seem to be ignoring sensitive market signals like gold,
commodities, and the steep, upward-sloping yield curve?
These signals have traditionally placed advanced warnings
of excess liquidity and inflation. Shouldn't the Fed at this
time be looking at normalizing the federal funds rate?
After all, having an economy that's growing an average of
about 5 percent and a Fed funds rate at 1 percent seems to be
an unsustainable posture over the long run.
Wouldn't it be prudent to have small adjustments now, say
before gold hits $500, so that we can avoid larger adjustments
in the future, such as what took place in 1994?
Chairman Greenspan. Congressman, I can't obviously
stipulate where the Federal Open Market Committee is going to
go or not go because, one, while I can guess, I'm not sure. And
in any event, if I could guess, I shouldn't say what I guess.
But the crucial difference between now and in the past is
an extraordinary productivity acceleration.
Remember that if you take the non-financial business
structure of our domestic economy, you can disaggregate it in a
manner to get the causes of price change.
In other words, we know that two-thirds of consolidated
costs are unit labor costs. We know what proportion are import
costs and if you take the non-energy part of our non-financial
business, we know what parts are energy costs.
So that we can see the structure of costs moving.
What is different from the past is that, in the past, we
had very little productivity gain and a very rapid response.
Here, what we are finding is that productivity is running
in excess of compensation of employment, or has been, which
means that unit-labor costs are falling.
To be sure, they're falling at a pace less than had been
the case last year, but they are still falling. And that means
that the price pressures are not anywhere near what they would
be under normal circumstances.
And when you look at the past, the issue of addressing a
particular potential inflation problem has got to take into
consideration all of the various elements involved in that
current situation. And remember that any particular monetary
policy that you embark upon has risks. And you have to balance
the risks against the benefits.
When you have the benefit of a very significant increase in
output per hour, it means that you can go in a much more
measured pace than you would be required to go in the past.
And the reason why we have stayed at a 1 percent federal
funds rate over all of this period is not that we thought that
inflation had gone away and that it was no longer a problem.
It's that we believe that given the underlying structure of
costs and prices and profitability, that the emergence of
inflation at a reasonably rapid pace, which would create great
concern on our part, was nowhere on the horizon.
And that, therefore, we could calibrate monetary policy in
a way that we did not have to take undue risks, which
invariably you do no matter what policy is. And that
essentially is what our recent history has been.
Where we go from here is an issue that the Federal Open
Market Committee will address in a couple of weeks and
thereafter.
Representative Ryan. Well, if and when you adjust or
increase the Fed rate this year, will you make that decision
based on the economy or based on the budget?
Chairman Greenspan. I'm sorry? On the economy or----
Representative Ryan. Or based on the budget that Congress
passes. The question is, some will try to link any potential
increase to what the budget deficit is or what the budget that
passes the Congress is versus whether or not you're going to
look at all the other things, the factors in the economy.
Chairman Greenspan. We look at the economy only. But to the
extent that the budget affects the economy, that then becomes
part. But we don't, as you put it, link monetary policy to
whatever the Congress does with respect to fiscal policy.
Representative Ryan. Thank you.
Senator Bennett. Senator Collins.
Senator Collins. Thank you.
Good morning, Mr. Chairman. I'd like to get your thoughts
on an issue that is very important to my home state of Maine.
And that is the loss of manufacturing jobs that we're seeing.
Over the past 3 years, Maine has seen some 18,000
manufacturing jobs disappear. It has really hurt our economy.
In fact, we've had the greatest loss on a percentage basis
of manufacturing jobs of any state.
The recent news on the jobs front has been very
encouraging, but it's unlikely to help a lot of these
individuals who worked in our paper mills and other factories
in Maine for many, many years.
And I want to point out that I realize that job losses in
the manufacturing sector are not a new phenomenon. If you look
back from World War II on, the percentage of employment in the
manufacturing sector has declined as a share of total
manufacturing. And in absolute terms, the number of American
manufacturing jobs has fallen each year since 1997.
Recognizing that the job losses in the manufacturing sector
reflects a long-term trend, I would welcome your thoughts on
what you see as the outlook for the American manufacturing
sector and what policy options you believe Congress should be
looking at to help stem the loss of jobs in this very important
sector.
And just one final comment.
Another reason that this is of such great concern to me is
the new jobs that are being developed, at least in my state,
pay far lower wages and have fewer benefits than the relatively
high-wage manufacturing jobs that we're losing.
Chairman Greenspan. Senator, as you point out quite
correctly, this is a long-term phenomenon and it's essentially
the result of two long-term very strong trends.
One is that this economy is inexorably becoming more
conceptual. That is, an ever greater proportion of our gross
domestic product is made up of ideas and less in the way of
physical things.
And obviously, transistor radios do what large Stromberg
Carlsons used to do in the 1930s. And there's all sorts of
miniaturizing and essentially eliminating physical things in
the value-added, in the sense that it's our ideas that have
created so much value.
For example, the identification of the possibility of the
transistor itself has induced a huge increase in wealth in the
sense of what it has reproduced.
On top of this, and I might add, as a consequence of this,
with less physical things, manufacturing per se has gradually
reduced its proportion of value-added in the total GDP.
More importantly, however, has been the extraordinary
advance in productivity in manufacturing. It is just awesome
what people have been able to do.
The regrettable secondary collateral damage, if I may put
it that way, of that process is that they need fewer and fewer
people to produce any particular level of output.
And that process will continue. But I must say that with
the turn-around in the economy, and we're beginning to see,
obviously, significant improvement in manufacturing in recent
months, we're fortunately in an up-cycle and I think that
things will improve over the longer run.
What public policy should be in this regard I think is a
very complex issue, and I don't think I could address it in any
way which, if I knew what to do, I could express it very
simply.
But not knowing, all I can do is give you various
alternatives. And I'd be glad to do that at some time if you'd
like.
Senator Collins. That would be very helpful. Thank you.
[The written response appears in the Submissions for the
Record on page 37.]
Senator Bennett. Thank you.
Ms. Dunn.
Representative Dunn. Thank you very much, Mr. Chairman. And
thank you, Mr. Chairman, for coming to meet with us today.
It's so useful to the perspective that we need to develop
as we handle some of these issues in Congress. And I've been
interested in what you've said on a number of the questions,
particularly your perspective on the unemployment compensation
problem that we now face.
I come from a part of the country where the economy is
rather fragile, where unemployment continues to stay higher
than in almost every other state in the nation, Washington
State.
I just want to make sure that I represent my area and urge
caution to the Fed as they consider raising the federal funds
rate.
It would hit our region I think very hard and perhaps put a
chill on what is beginning to bubble up in terms of an emerging
vitality that is far behind the rest of the country.
I'd like your thoughts on whether we should take a cautious
approach to raising interest rates at a time like this in my
state.
And secondly, every day when I wake up and listen to the
news, I hear about the number of jobs that have been lost or
the unemployment rate. Or recently, in the recent news, more
happy news--308,000 new jobs being created.
Because of our situation with rising productivity at the
same time that we're not increasing new jobs in the way that
many of us would like to be, do you think that we should no
longer be using the new jobs created measurement to indicate
the health of our economy?
And my last question is, once before when you were here, I
think in this very room, you talked to us about a way of
helping, not solving, but helping the outsourcing problem, but
also the job loss and manufacturing and in trade-related
industries. You talked about increasing TAA to help handle some
of this retraining.
And I'm wondering what you think about where we stand on
TAA, whether we should be covering services, whether you think
that we're at the proper point or we ought to pay more
attention to that.
Thank you.
Chairman Greenspan. Well, with respect to the issue of
trade assistance, I've gradually changed my view on this issue.
First of all, that we ought to assist those who, through no
fault of their own, happen to be in industries which are under
significant international competitive pressure, I think ought
to be a priority in this nation.
But I wonder whether we can actually, in any real sense,
identify the cause of a job that is lost, whether it is
productivity, imports, outsourcing, or a number of various
things.
And that's the reason why, I should think, policy ought to
be directed largely, so far as income support is concerned,
through the unemployment insurance system.
The issue of training is a different issue, largely because
as you get an ever-increasing pace of change in our economy, in
the world economy, the old notion of getting out of high school
or even college and having a job for the rest of your life is
no longer the credible option.
And as a consequence, that means that people have to have
broad general training in school which enables them to change
professions if necessary.
In other words, the nature of education is, of necessity,
changing, and the role of community colleges, which largely
tend to be focused on how do you go from one profession to
another, has undergone explosive growth.
And I think we are addressing the issue of the
instabilities that inevitably occur as a consequence of
creative destruction.
I would say the training aspects of trade assistance should
be integrated as best we can with other job loss training
programs.
In other words, to make training as a consequence of
imports different from what we do with people who lose jobs
because of increased technology, I think, is an awkward public
policy structure. And if we could consolidate the issue and
recognize a job loss is a job loss and that people have got to
get to the next job, it doesn't matter why they lost their job.
The main issue is what do we do as public policy. And I
would coordinate or even consolidate a lot of these various
programs to address them as a single issue, not as disparate
issues.
Representative Dunn. Then the question should be, would we
be using jobs created as a measure of the health of our
country?
Chairman Greenspan. Sorry, I forgot to mention that.
New jobs are a measure of the health of the economy. As I
pointed out in my prepared remarks, there seems to have been a
remarkable lack of anticipatory aggressiveness towards a change
in economic activity, which usually one associates with people
building new plant, hiring new workers in anticipation of
changes that are occurring.
There's been very little of that until perhaps very
recently. And if you're looking for a measure of vitality of a
growing economy, you'll often find that capital investment in
areas in which orders are not immediately on the horizon, and
the hiring of people, when you don't necessarily need them to
produce what's going to occur a month from now, are measures of
confidence, and in that regard, measures of the vitality of the
business process itself.
Senator Bennett. Thank you.
Senator Sununu.
Senator Sununu. Thank you, Mr. Chairman.
Chairman Greenspan, yesterday, you began giving testimony
to the Banking Committee a little bit after 2:30. And at that
point, the markets were nominally up for the day. And over the
next 45 minutes or so, the markets dropped about 125 points.
What types of assumptions were being made by those selling
off stocks? And do you think that their interpretations of your
remarks were appropriate?
Chairman Greenspan. As I read in the papers this morning,
the implication was that whatever I said, they interpreted as
at some point higher interest rates. And that one would presume
that, under the normal discounting procedures of forward
expectations of earnings, stock prices go down. Now, are they
right or wrong? I don't know.
[Laughter.]
Senator Sununu. That was good.
[Laughter.]
Is there any reason for us to be optimistic? Have you seen
any patterns or concrete steps in the last several months to
provide optimism that over the next 2 to 3 years, we will see a
substantive removal of capital controls on the Chinese
currency?
Chairman Greenspan. I do, Senator. I think that China has
moved remarkably from a centrally-planned system to certain
aspects of market capitalism which have turned out to be quite
vital. But they are still subject to a very significant amount
of central control. Obviously, their state-run enterprises are
still big issues there. They are finding that the dynamism, the
strictly free-market part of the system, is creating
distortions all throughout the remainder of the economy, which
is largely rigidified because of the central planning
characteristic.
To their credit, they're aware of this. One of the problems
they have, as you know, is that they have imposed capital
controls on the part of domestic residents of China on the
purchase of foreign assets. And that creates an upward bias in
the Yuan relative to the U.S. dollar to which it is effectively
pegged.
And at some point, that's going to break down and, indeed,
I think they're already engaged in processes to weaken those
capital controls. And at the end of the day, you really won't
know where the true value of the Yuan should be until those
controls are gone.
Senator Sununu. What are the most important next steps for
them to take in that process?
Chairman Greenspan. In my judgment, it would be basically
to gradually remove controls and see what happens to capital
flows as a consequence and be able to calibrate the degree of
their intervention in the marketplace, which has largely been
through the purchase of U.S. Treasury instruments to support
the suppressed value of their currency.
Neither of those paths are projectable over the longer run
and it's only a matter of time that the policies which they're
clearly embarked upon will lead them, as indeed they have said,
to a more flexible exchange rate structure.
Senator Sununu. There have been some discussions on both
the House and Senate side, in the respective banking
committees, about the federal role of regulating insurance.
The House has had a number of hearings on this and
recently, the Chairman of the House Banking Committee indicated
an interest in moving legislation that would set national
standards for regulating insurance, in particular, price and
form on insurance products.
There have also been proposals out that go a little further
to establish an optional federal charter for insurers,
insurance underwriters, along the lines of our optional federal
charter system for federal banks.
Do you think that that type of an optional federal charter
regulatory structure is appropriate for the insurance industry?
Chairman Greenspan. We at the Fed have not taken a position
on that, nor have I, largely because it's a very complex
question with respect to state versus federal regulation.
And I don't think we've got very much to add to that that's
not already in the public domain.
Senator Sununu. Mr. Chairman, since he didn't answer that
question, could I ask one shorter one?
Senator Bennett. Surely.
Senator Sununu. Chairman Greenspan----
Chairman Bennett. We've dwindled down to the precious few,
so I can be more lenient now than I was when we had the whole
panel here.
Senator Sununu. When you were asked about expensing of
stock options, the phrase that I wrote down that I believe you
used was that it would be a bad mistake for Congress to impede
FASB.
Now that struck me as a fairly unusual phrase. Typically,
you'd be more likely to express displeasure with words like
``awkward'' or ``unusual'' or ``poorly-timed,'' ``not optimally
timed,'' something like that. ``Bad mistake'' seemed a little
bit--well, refreshingly direct.
Did you err in choosing your words, and would you like to
elaborate on precisely what you meant by either ``bad'' or
``mistake''?
[Laughter.]
Chairman Greenspan. I chose my words appropriately and I
think the Congress would err in going forward in endeavoring to
impede FASB in its particular activities.
Senator Sununu. Thank you very much.
Senator Bennett. Thank you, Mr. Chairman.
And I thank the Members of the Committee who have heeded my
admonition to stay within their limits, so that we have, in
fact, acted a little more expeditiously than we might have
anticipated.
May I ask you a question perhaps stimulated by some of the
comments that have been made in the election season? But are we
in a wage recession, in your opinion?
Chairman Greenspan. You mean are wages going down in real
terms, in that sense?
Senator Bennett. Yes.
Chairman Greenspan. I think we have been in a period where
real compensation, and especially real wages, have been going
up very moderately, if at all.
I think that's about to change, as I indicated in my
prepared remarks, because the consequence of that has been that
virtually all of the gains in productivity have ended up in
rising profit margins and hence, in a decline in the portion of
the national income going to compensation of employees.
History tells us that the range in which the proportions of
profits versus compensation move are reasonably narrow and
without any significant long-term trend.
And I suspect that what we're about to find is that, with
margins now up to fairly high levels, competition is going to
start to move in because, remember, with wages moderate and
profits reasonably high, the mark-up from wages, which is the
major cost, to profits, suggests a fairly considerable amount
of opportunities on the part of business management for
profits.
And the way that happens historically is businesses start
to hire and bid up wages in the process, and that's the process
by which compensation of employees rises relative to the
national income, and eventually starts a new cycle.
So I don't know whether I'd use the term ``wage recession''
but whatever one terms what has been going on, it is about to
change.
Senator Bennett. We are faced here in the Congress with the
decision as to whether or not to make the President's tax cuts
permanent. And you've indicated support for that, that they
should be made permanent.
But let us suppose we are unable to do that. Do you have
any feelings or forecast as to what might happen if, in fact,
the tax cuts did expire this year?
Chairman Greenspan. Obviously, if the tax cuts have been
helpful, which I think they have been, it will have some
negative effect.
But there are other forces in the economy which have been
developing and I would presume and hope that in the event that
the tax cuts are not extended, that the momentum of the economy
will be enough to carry us into next year at a reasonably good
pace.
But while we can seek to look over the horizon, it doesn't
necessarily follow that we can see all that far. Economists
tend to be fairly explicit in making long-term forecasts 2, 3
and 4 years out.
We are fortunate in that there is no service out there
which collects all these forecasts and reports them back to us
2 years later.
It would be a major embarrassment to most of us
forecasters, probably all, if I may put it exactly.
Senator Bennett. I once was told, and often repeat, that
the way to be a competent forecaster is give them a date or
give them a number. But never give them both.
[Laughter.]
Chairman Greenspan. That is sage advice, Mr. Chairman.
Senator Bennett. My own expectation is that the markets
generally have assumed that the tax cuts will, in fact, stay in
place and that there would be a negative reaction in the
markets if that assumption were to prove not to be the case.
Is that a reasonable position?
Chairman Greenspan. Well, certainly, if the markets are, in
fact, presuming they remain in effect, if they do not, I think
you do, by definition, get a market reaction.
Senator Bennett. One last question for an issue that you
raised the last time you were here.
I was a little surprised that you raised it, because it's
not something one expects from the Fed, but that I'm very glad
that you raised it, because I think it is something that will
impact the economy to a degree that requires the kind of
visibility that your testimony gave it.
You got into it a little in your exchange with Mr. English.
This is the impact of higher energy prices, specifically
natural gas.
Natural gas has become the fuel of choice everywhere. And
we cannot repeal the law of supply and demand. So that the
price of natural gas has become elevated and looks like it will
continue to rise if we can't somehow relieve the pressure on
the demand by going to alternative fuels such as nuclear to
generate electricity, or some other form.
We are now, perhaps in response to the comments you made,
we are now changing our ports to allow the importation of
liquefied natural gas. You made the point that if we were going
to import this particular fossil fuel, we had to do it from
Canada or Mexico because that's the only place where we can get
it in by pipeline.
Now we're making a significant capital investment at a
number of ports to allow the importation of LNG. But we have
significant natural gas in the United States on our public
lands and elsewhere, with a particularly large supply up in
Alaska that we don't seem to be able to get down here.
Could you once again address the question of the shortage
of natural gas? Or rather, the increased demand for natural gas
and therefore, the increased prices of natural gas and what you
see that might do in the economy?
Chairman Greenspan. Well, Mr. Chairman, you're quite
correct. One of the reasons why we took a look at natural gas
is that if our mandate is to look at the economy overall, it's
important that we know where the pressure points are and try to
identify them because it's only by evaluating those pressure
points that we get a full context of what the economy is likely
to do over a year, 2 years, or 3 years, where our policy
processes focus.
Natural gas growth in the United States, as you know, has
been quite significant and in part, as you point out, because
it's the fuel of choice for so many different reasons, and it
will continue to be so, largely because electric generation
turbines--the ones on the order books--are exceptionally heavy
users of natural gas.
So we know that that's what the demand is going to be out
there.
Despite fairly extensive drilling in the United States, the
reservoirs continue to decline fairly significantly, in part
because the technology is so good. So we're having trouble
increasing the net marketed production in this country.
When we had that problem in oil, we had the capability of
very quickly importing either crude or products from all over
the world because the trade in oil and oil products is about
twice the volume relative to world consumption that it is for
natural gas.
And it occurs to me that looking at the various supply and
demand forces here, the only flexible alternative that we have
got is to look at these so-called vast reservoirs of stranded
gas around the world and find ways to import it into the United
States in liquefied natural gas form, which gives us a safety
valve, in effect, for the shortages that periodically occur and
shortages which create sharp spikes in natural gas prices with
great significant problems.
People constructed industrial facilities in this country
largely on the expectation that gas prices would stay in the
area of $2 per million BTU. And indeed, long-term futures
markets exhibited that price.
And the overall structure of industries which use natural
gas pre-suppose that that price would prevail over the long
run. Now we, of course, are aware that the spot price is up in
the $5 area. But more importantly, the 6-year futures price has
doubled. And this suggests that the shortages which we are
gradually beginning to get a sense of are now projected longer
term.
And that's going to mean that the structure of the gas-
using industry in the United States is going to change. And
what we need to do is get in place as soon as we can the
capability of fairly substantial imports that enable our
manufacturers who use natural gas to compete internationally.
We are losing a lot of business, especially in the
chemical-related areas, because we can't compete at these
prices. And we've got to find a way to bring down the price of
gas. And the only way that I know of is essentially to open us
to the world supplies, which are substantial and whose prices
are well below our prices.
Senator Bennett. Thank you very much. I will continue to
push for the pipeline in Alaska for natural gas, however,
because I think we've got a lot up there that we're not
getting.
Ms. Dunn, you have been the most persistent in hanging in
there. Do you have a last question for the Chairman before we
leave?
Representative Dunn. I do have one, if the Chairman is
willing to take one more question. It has to do with trade.
In your testimony, you say that the sharp rise in exports
contributed importantly to the acceleration of real GDP over
2003.
And I think my worry right now is that there seems to be a
mood in the Congress against free trade. I'm worried about it.
It has to do with outsourcing. It has to do with invasion of
sovereignty. It has to do with manufacturing jobs.
And I just think that we have to figure out a way to
explain to people why free, and fair, trade is important to our
economy.
I wonder if you have any thoughts on that.
Chairman Greenspan. What is remarkable is that the abstract
idea of free trade, which developed basically amongst the so-
called classical economists of the latter part of the 18th
century and early 19th century, showed that they began to
understand a process embodied in Adam Smith's ``Wealth of
Nations,'' which is a tribute to how ideas can be spread.
And it's a very complex and a very difficult idea to push.
But American society has essentially accepted free trade.
To be sure, in recent years, there have been growing
concerns about it, in part because of the fact that trade has
opened up so dramatically, so that furthering the expansion of
trade is not that easy to do. And the way I'd like to put it is
that the low-hanging fruit of trade negotiations has already
been picked. And it is difficult to find new avenues to
continue to expand. And there's lots of friction, because by
the very nature of the process, there are winners and losers.
And we've got to, as I indicated earlier, find a way to
address the problems that are associated with those who lose
jobs or are disadvantaged in business as a consequence of this
very dynamic process which we characterize as global free trade
and of which the United States has been the largest
beneficiary.
It has been a major factor in the extraordinary increase in
American standards of living since the end of World War II.
And one of the things that the statistics tell us is that
our economy has been capable of maintaining a very high job
input in a sense that, on average, we've employed more than 94
percent of our work force decade-in and decade-out, and real
wages have increased inexorably decade after decade.
And this has occurred irrespective of whether or not we
have trade surpluses or trade deficits, or whether outsourcing
was high or low.
There are more fundamental forces in our economy which
create increased standards of living. And free trade has been a
very major facilitator of those forces.
And our ability to basically engage in increasing
specialization of labor has, decade after decade, created ever
higher standards of living for American households.
When I was very young and just got into business, my
recollection was that little more than half the households
owned a car, and none to speak of owned more than one.
Now there are as many cars and trucks in households as
there are people of driving age. And this is an extraordinary
change. And you can go product by product. This is the result
of our ability to engage the world as a whole and come up with
great benefits as a consequence.
Representative Dunn. Thank you, Mr. Chairman.
Senator Bennett. Thank you very much, Mr. Chairman. We
appreciate your candor and your wisdom.
The hearing is adjourned.
Chairman Greenspan. Thank you very much, Mr. Chairman.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]
Submissions for the Record
=======================================================================
Prepared Statement of Senator Robert F. Bennett, Chairman
Good morning and welcome to today's hearing. We are pleased to have
as our guest today Chairman Alan Greenspan of the Federal Reserve. We
always appreciate your views on the current economic situation, as well
as your broad perspective on the economic and fiscal issues facing
Congress.
Mr. Chairman, today you visit us at a time of good economic news.
The economy is growing rapidly and adding new jobs, thanks to well-
timed tax relief, aggressive Fed policy, and the amazing resilience of
the American economy.
What a difference a year makes. A year ago, Mr. Chairman, you
appeared before this committee, and we talked a great deal about
deflation. Today, we meet amid speculation about inflation.
Last week we learned that consumer prices have been rising faster
than expected. Moreover, commodity prices are much higher than they
were a year ago, due to the strengthening world economy and a lower
dollar. Higher commodity prices may eventually lead to higher consumer
and producer prices--as we have already seen with gasoline--but the
real question is whether they signal broader price increases ahead.
In the sometimes topsy-turvy world of economics, the bond market
has treated recent gains in employment as bad news, driving bond prices
down and interest rates up. Employment growth is, of course, an
unmitigated good for the economy, but it does sharpen the question of
how long the Fed will be able to maintain such low interest rates and
how and when the Fed may move to a more neutral policy stance. We
welcome any insight you can provide on this issue.
We also welcome your thoughts on the housing market. Housing has
been remarkably strong in recent years, boosting the recovery and
building wealth for millions of American families. Low mortgage
interest rates have been key to housing's strength, lifting home prices
in much of the nation, but also raising the cost of living for new home
buyers. We need to understand how rising home prices may contribute to
inflation. And looking ahead, we also need to understand how rising
interest rates may affect the housing market.
With that, we welcome you, Chairman Greenspan, and look forward to
your testimony.
__________
Prepared Statement of Representative Jim Saxton,
Vice Chairman
It gives me great pleasure to join in welcoming Chairman Greenspan
once again before the Joint Economic Committee.
The evidence shows that the U.S. economy has displayed amazing
resilience in recent years, and has now emerged from a painful
adjustment process. The bursting of the stock market and technology
bubbles began in 2000. The subsequent economic slowdown and recession,
terrorist attacks, and wars harmed the economy, but did not prevent the
current economic expansion, which began in November of 2001.
The economic data released in recent quarters indicate that the
U.S. economy is growing at a healthy rate. Over the last half of 2003,
economic growth adjusted for inflation was 6 percent. This recent pick-
up in the economy was expected for some time, but had been delayed by
weakness in business investment.
However, the long-awaited rebound in business investment is now
underway, and has boosted the economy and led to a more balanced
pattern of economic expansion. For example, in the last two quarters of
2003, investment in equipment and software increased at rates in excess
of 15 percent. The increases in investment have contributed to a strong
recovery in manufacturing activity.
Meanwhile, consumption and housing activity continue to hold up
well. Productivity is very strong and inflation is under control.
Recent data indicate that payroll employment growth has resumed.
Independent economists have noted that tax relief and accommodative
monetary policy have made important contributions to the recent
strength of the economy.
The Blue Chip Consensus forecast is that the U.S. economy will grow
at an inflation-adjusted rate of nearly 5 percent this year. The return
to sustained and healthy economic growth is a tribute to the
flexibility and resilience of the American people and economy.
__________
Prepared Statement of Representative Pete Stark,
Ranking Minority Member
Thank you, Chairman Bennett. I want to welcome Chairman Greenspan
and thank him for testifying here today.
In January, the Federal Reserve's Open Market Committee signaled a
willingness to consider hiking interest rates. The questions on
everyone's minds here today are: When will interest rates rise, by how
much, and how quickly? We will all be reading between the lines of your
statement for the clues that will answer these questions.
Consumer prices rose sharply last month, sparking inflation fears
in some quarters. The Fed has committed itself to ``be patient'' in
considering rate hikes. Certainly, it will take more than a month's
worth of data to know if the inflation threat is real. It seems to me
that the labor market is still weak enough that the Fed can afford to
be very patient. But I am interested in hearing more from Chairman
Greenspan today about the inflationary pressures we face.
Concerns about a blip in inflation shouldn't distract us from the
critical task of putting people back to work and keeping the economy
growing. l hope, Chairman Greenspan, that you will be able to reassure
us that the Fed is committed to getting the economy back to full
employment as quickly as possible, and avoiding the danger of fighting
phantom inflation.
Job growth has only recently shown some signs of recovery and wage
growth has been stagnant. Although the recession officially ended
nearly 2\1/2\ years ago, we still have a payroll employment gap of 1.8
million jobs since President Bush took office. We haven't seen such
persistent job loss since the 1930s.
Leading forecasters, including the Federal Reserve, expect the
economy to post solid economic growth this year, with inflation
remaining relatively low. However, that growth is not expected to be
enough to substantially reduce the unemployment rate. The unemployment
rate edged up slightly to 5.7 percent in March--more than 8 million
Americans remain unemployed, with 2 million out of work for 6 months or
more. While 308,000 payroll jobs were created last month, this was the
first significant job gain of the entire Bush presidency.
We are still in a deep hole and we can't really talk about a jobs
recovery until we see robust job creation for several months. In the
meantime, Congress can do something now to help the long-term
unemployed. Even though jobs grew last month, long-term unemployment
rose again. An extension of unemployment benefits has gained support
from bipartisan majorities in both houses of Congress. Chairman
Greenspan, you testified again last month that you support such an
extension, as you have in the past, ``in times like this.''
But House Republicans have thwarted efforts by Democrats to help
nearly three million unemployed workers and their families avoid
financial ruin by extending temporary federal jobless benefits for the
next six months and retroactively for the past three months. The
Republican leadership has made this the ``do-nothing for unemployed
workers'' Congress. The long-term jobless deserve additional
unemployment benefits now--the President and the Republican-controlled
Congress should just do it.
I look forward to Chairman Greenspan's testimony today.
__________
Prepared Statement of Honorable Alan Greenspan, Chairman,
Board of Governors, Federal Reserve System
Mr. Chairman and members of the committee, I am pleased to be here
today to offer my views on the outlook for the U.S. economy.
The economy appears to have emerged around the middle of last year
from an extended stretch of subpar growth and entered a period of more
vigorous expansion. After having risen at an annual rate of 2\1/2\
percent in the first half of last year, real GDP increased at an annual
pace of more than 6 percent in the second half. Aided by tax cuts, low
interest rates, and rising wealth, household spending continued to post
sizable gains last year. In addition, an upturn in business investment,
which followed several years of lackluster performance, and a sharp
rise in exports contributed importantly to the acceleration in real GDP
over 2003.
Although real GDP is not likely to continue advancing at the same
pace as in the second half of 2003, recent data indicate that growth of
activity has remained robust thus far this year. Household spending has
continued to move up, and residential home sales and construction
remain at elevated levels. In addition, the improvement in business
activity has become more widespread. In the industrial sector, nearly
two-thirds of the industries that make up the index of industrial
production have experienced an increase in output over the past three
months. More broadly, indicators of business investment point to
increases in spending for many types of capital equipment. And
importantly, the latest employment figures suggest that businesses are
becoming more willing to add to their workforces, with the result that
the labor market now appears to be gradually improving after a
protracted period of weakness.
Looking forward, the prospects for sustaining solid economic growth
in the period ahead are good. Monetary policy remains quite
accommodative, with short-term real interest rates still close to zero.
In addition, fiscal policy will likely continue to provide considerable
impetus to domestic spending through the end of this year.
Importantly, the caution among business executives that had
previously led them to limit their capital expenditures appears to be
giving way to a growing confidence in the durability of the expansion.
That confidence has, no doubt, been bolstered by favorable borrowing
conditions, ongoing improvements in efficiency, and rising
profitability, which have put many firms on a more solid financial
footing.
Nevertheless, some of the strains that accompanied the difficult
business environment of the past several years apparently still linger.
Although businesses are replacing obsolescent equipment at an
accelerated pace, many managers continue to exhibit an unusual
reluctance to anticipate and prepare for future orders by adding to
their capital stock. Despite a dramatic increase in cash flow, business
fixed and inventory investment, taken together, have risen only
moderately. Indeed, internal corporate funds exceeded investment over
the course of last year for the first time since 1975.
Similar cautious behavior has also been evident in the hiring
decisions of U.S. firms, during the past several years. Rather than
seeking profit opportunities in expanding markets, business managers
hunkered down and focused on repairing severely depleted profitability
predominately by cutting costs and restricting their hiring. Firms
succeeded in that endeavor largely by taking advantage of the untapped
potential for increased efficiencies that had built up during the rapid
capital accumulation of the latter part of the 1990s. That process has
not yet played out completely. Many firms seem to be continuing to find
new ways to exploit the technological opportunities embodied in the
substantial investments in high-tech equipment that they had made over
the past decade.
When aggregate demand accelerated in the second half of 2003, the
pace of job cuts slowed. But because of the newfound improvements in
the efficiency of their operations, firms were able to meet increasing
demand without adding many new workers.
As the opportunities to enhance efficiency from the capital
investments of the late 1990s inevitably become scarcer, productivity
growth will doubtless slow from its recent phenomenal pace. And, if
demand continues to firm, companies will ultimately find that they have
no choice but to increase their workforces if they are to address
growing backlogs of orders. In such an environment, the pace of hiring
should pick up on a more sustained basis, bringing with it larger
persistent increases in net employment than those prevailing until
recently.
Still, the anxiety that many in our workforce feel will not subside
quickly. In March of this year, about 85,000 jobless individuals per
week exhausted their unemployment insurance benefits--more than double
the 35,000 per week in September 2000. Moreover, the average duration
of unemployment increased from twelve weeks in September 2000 to twenty
weeks in March of this year. These developments have led to a notable
rise in insecurity among workers.
Most of the recent increases in productivity have been reflected in
a sharp rise in the pretax profits of nonfinancial corporations from a
very low 7 percent share of that sector's gross value added in the
third quarter of 2001 to a high 12 percent share in the fourth quarter
of last year. The increase in real hourly compensation was quite modest
over that period. The consequence was a marked fall in the ratio of
employee compensation to gross nonfinancial corporate income to a very
low level by the standards of the past three decades.
If history is any guide, competitive pressures, at some point, will
shift in favor of real hourly compensation at the expense of corporate
profits. That shift, coupled with further gains in employment, should
cause labor's share of income to begin to rise toward historical norms.
Such a process need not add to inflation pressures. Although labor
costs, which compose nearly two-thirds of consolidated costs, no longer
seem to be falling at the pace that prevailed in the second half of
last year, those costs have yet to post a decisive upturn. And even if
they do, the current high level of profit margins suggests that firms
may come under competitive pressure to absorb some acceleration of
labor costs. Should such an acceleration of costs persist, however,
higher price inflation would inevitably follow.
The pace of economic expansion here and abroad is evidently
contributing to some price pressures at earlier stages of the
production process and in energy markets, and the decline in the
dollar's exchange rate has fostered a modest firming of core import
prices. More broadly, however, although the recent data suggest that
the worrisome trend of disinflation presumably has come to an end,
still-significant productivity growth and a sizable margin of
underutilized resources, to date, have checked any sustained
acceleration of the general price level and should continue to do so
for a time. Moreover, the initial effect of a slowing of productivity
growth is more likely to be an easing of profit margins than an
acceleration of prices.
As I have noted previously, the federal funds rate must rise at
some point to prevent pressures on price inflation from eventually
emerging. As yet, the protracted period of monetary accommodation has
not fostered an environment in which broad-based inflation pressures
appear to be building. But the Federal Reserve recognizes that
sustained prosperity requires the maintenance of price stability and
will act, as necessary, to ensure that outcome.
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