[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





       HOW FEDERAL RESERVE POLICIES ADD TO HARD TIMES AT THE PUMP

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON REGULATORY AFFAIRS,
               STIMULUS OVERSIGHT AND GOVERNMENT SPENDING

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2011

                               __________

                           Serial No. 112-50

                               __________

Printed for the use of the Committee on Oversight and Government Reform








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                      http://www.house.gov/reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

 Subcommittee on Regulatory Affairs, Stimulus Oversight and Government 
                                Spending

                       JIM JORDAN, Ohio, Chairman
ANN MARIE BUERKLE, New York, Vice    DENNIS J. KUCINICH, Ohio, Ranking 
    Chairwoman                           Minority Member
CONNIE MACK, Florida                 JIM COOPER, Tennessee
RAUL R. LABRADOR, Idaho              JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee          BRUCE L. BRALEY, Iowa
FRANK C. GUINTA, New Hampshire
MIKE KELLY, Pennsylvania














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 25, 2011.....................................     1
Statement of:
    Reinhart, Vincent R., resident scholar, American Enterprise 
      Institute for Public Policy Research; Robert P. Murphy, 
      economist, Institute for Energy Research; Dean Baker, co-
      director, Center for Economic and Policy Research; Greg 
      Wannemacher, president, Wannemacher Total Logistics; Karen 
      Kerrigan, president and chief executive officer, Small 
      Business and Entrepreneurship Council......................    15
        Baker, Dean..............................................    35
        Kerrigan, Karen..........................................    49
        Murphy, Robert P.........................................    22
        Reinhart, Vincent R......................................    15
        Wannemacher, Greg........................................    43
Letters, statements, etc., submitted for the record by:
    Baker, Dean, co-director, Center for Economic and Policy 
      Research, prepared statement of............................    37
    Jordan, Hon. Jim, a Representative in Congress from the State 
      of Ohio:
        Prepared statement of....................................     4
        Staff report.............................................    70
    Kerrigan, Karen, president and chief executive officer, Small 
      Business and Entrepreneurship Council, prepared statement 
      of.........................................................    51
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        Article dated May 24, 2011...............................     9
        Prepared statement of....................................    13
    Murphy, Robert P., economist, Institute for Energy Research, 
      prepared statement of......................................    24
    Reinhart, Vincent R., resident scholar, American Enterprise 
      Institute for Public Policy Research, prepared statement of    17
    Wannemacher, Greg, president, Wannemacher Total Logistics, 
      prepared statement of......................................    45

 
       HOW FEDERAL RESERVE POLICIES ADD TO HARD TIMES AT THE PUMP

                              ----------                              


                        WEDNESDAY, MAY 25, 2011

                  House of Representatives,
      Subcommittee on Regulatory Affairs, Stimulus 
                 Oversight and Government Spending,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:11 p.m., in 
room 2247, Rayburn House Office Building, Hon. Jim Jordan 
(chairman of the subcommittee) presiding.
    Present: Representatives Jordan and Kucinich.
    Staff present: Ali Ahmad, deputy press secretary; Joseph A. 
Brazauskas, counsel; Benjamin Stroud Cole, policy advisor and 
investigative analyst; Gwen D'Luzansky, assistant clerk; Tyler 
Grimm, professional staff member; Peter Haller and Kristina M. 
Moore, senior counsels; Christopher Hixon, deputy chief 
counsel, oversight; Justin LoFranco, press assistant; Jaron 
Bourke, minority director of administration; Claire Coleman, 
minority counsel; Ashley Etienne, minority director of 
communications; Jennifer Hoffman, minority press secretary; and 
Carla Hultberg, minority chief clerk.
    Mr. Jordan. The subcommittee will come to order.
    And let me first apologize to our witnesses. We just can't 
control the schedule, and we had, as you know, a number of 
votes on the floor. I particularly want to apologize to Mr. 
Wannemacher from the great Fourth District of Ohio for having 
to wait. Making constituents have to wait, that is even more of 
a problem.
    So we will get organized and start. We will do our quick 
opening statements and get right to your testimony. And the 
schedule is, now that we are postponed, we may have many 
Members who are unable to be with us today. Hopefully some will 
be able to join us. But we want to thank you all for being here 
for this hearing on such an important topic.
    Today's hearing of the Regulatory Affairs Subcommittee 
concerns two issues: how higher prices at the pump are hurting 
real people in their day-to-day lives and how a decline in the 
strength of the dollar, among many other factors, has had a 
significant role in adding to the price at the pump.
    In Ohio, the unemployment rate is still at 8.4 percent, and 
the average gas price hit an all-time high of $4.16 earlier 
this month. This has put unbelievable strain on families' 
budgets and forced painful sacrifices.
    For the millions of Americans without jobs, rising gas 
prices has compounded their already-tight financial situations. 
Just this week, in a story in the Chicago Tribune, they 
reported that higher gas prices have restricted the unemployed 
from looking for work beyond their immediate communities, which 
has, of course, limited their options.
    The trucking industry, which we have represented here 
today, has experienced the full blow of these price spikes. The 
average national cost of diesel fuel is $3.99 per gallon, and 
trucking companies are now being forced to implement a 
surcharge and higher rates to offset their cost increases.
    And while some industries have been hit harder than others, 
the effects ripple throughout our economy and are being felt by 
grocery stores, pharmacies, and in every other place that 
Americans spend their money.
    We are familiar with some of the factors driving up the 
price of oil, including fear of supply disruptions because of 
the turmoil in the Middle East and increased demand from 
developing nations. But one major factor often overlooked in 
the policy discussions is how the weakening of the dollar has 
caused the price of oil to rise, and, I would argue, frankly, 
the price of many commodities.
    Under Chairman Ben Bernanke, the Federal Reserve undertook 
an aggressive and unprecedented effort known as quantitative 
easing, while keeping interest rates at or below zero. Between 
December 2008 and March 2009, the Fed purchased $1.7 trillion 
of Treasuries and mortgage-backed securities. The goal of this 
first round of quantitative easing was to reduce unemployment 
and ensure, ``price stability.'' Yet, the results of QE1 proved 
lackluster.
    Nevertheless, the Fed pursued the old definition of 
insanity: doing the same thing over and over but expecting 
different results. Late last year, the Fed began purchasing 
Treasuries at a rate of about $75 billion a month and a second 
round of quantitative easing, known in the shorthand as QE2.
    Now, at the most basic level, quantitative easing is about 
printing money. And the most basic result is that the value of 
the dollar falls, commodity prices increase, and American 
consumers are hit with higher costs of goods and services they 
purchase. Unsurprisingly, this is precisely what has occurred. 
The Joint Economic Committee recently released a study that 
looked at the strength of the dollar since quantitative easing 
began and found that 57 cents of the current per-gallon price 
of gasoline is directly attributable to the dollar's decline.
    Today's hearing will attempt to lay bear the consequences 
of reckless monetary policy and highlight the need for 
corrective actions to foster a real and sustainable economy 
recovery.
    Since November 2008, the value of the dollar has declined 
by 14 percent, and it continues to fall. In fact, by the most 
widely used index of the dollar strength, the dollar is now at 
its weakest point on record.
    And while we may grant what the Federal Reserve vice 
chairman, Donald Kohn, noted earlier last year, that the 
Central Bank is in uncharted waters, experience with financial 
disruptions of the breadth, persistence, and consequences of 
the past several years, there is no denying that the Fed knew 
full well that such an undertaking in the realm of monetary 
policy could have a weakening effect on the dollar, which would 
mean an increase in the price of commodities bought and sold 
internationally.
    And, ironically, Chairman Bernanke testified a couple of 
months ago before the Senate Banking Committee that he knew 
that rising gas prices could negatively affect American 
consumers and hinder an economic recovery. He stated, 
``Sustained rises in the prices of oil or other commodities 
would represent a threat both to economic growth and to overall 
price stability.''
    It is the intent of this hearing to broaden the discussion 
about the causes and effects of higher gas prices so as to 
fully understand action the Federal Government can and should 
take to aid distressed American consumers and American small-
business owners.
    With that, I yield to the ranking member for an opening 
statement.
    [The prepared statement of Hon. Jim Jordan follows:]



    
    Mr. Kucinich. Mr. Chairman, I want to thank you for holding 
this hearing. And when you and I talked, we were both sharing 
our concerns about the high price of gasoline that is really 
quite devastating to families in our respective districts. So I 
think that this hearing will help draw much-needed attention to 
the plight of American businesses and families as they struggle 
to deal with the effects of high oil prices.
    And this hearing brings to us witnesses who are esteemed, 
and their presence here is quite appreciated. Thank you.
    Congress cannot continue to allow American consumers to 
bear the brunt of our energy policies, which grant oil 
companies massive tax deductions in exchange for the privilege 
of reaping an unimaginable profit from extraction from the 
earth. Despite the worst economic crisis since the Great 
Depression, oil companies are charging record-high gasoline 
prices, and they have continued to make the highest profits of 
any industry in the world.
    Low-income families across this country, including in my 
own district in Ohio, are especially harmed by high gas prices 
because they have a crippling effect on the price of food. 
While gas prices have recently come down a little, they are 
still too high for many Ohioans and Americans who have seen 
their incomes stagnate and decline. And I am very concerned 
that the burden gas prices place on American families and 
businesses could threaten any economic recovery.
    With gas prices sky-high, this hearing can play an 
important role in helping us understand the cause of oil price 
volatility. As my friend, Mr. Jordan, notes, we share a, to put 
it mildly, antipathy toward the Fed. And, at the same time, I 
am concerned that, on this particular case, that we may risk 
missing the forest for the trees. Because, in my research, I am 
still trying to determine what kind of control the Fed has in 
terms of key drivers of high oil prices.
    Now, the oil prices have soared recently, in part because 
of the rising demand in developing countries such as Brazil, 
China, and India. While consumption of oil in the United States 
may be slowing, global demand is at record levels, causing 
prices to soar. War, unrest in the Middle East countries, the 
oil-producing countries, has also driven up prices. The Fed 
doesn't have any control over these price-determinative 
factors. And it doesn't oversee the derivative market for oil 
that has really had a lot to do with fueling gas price spikes.
    We know the Commodity Futures Trading Commission does have 
something to do with it. And what has been happening is that 
speculators have been betting on the future price of oil, and 
they have contributed to the sharp increases in oil prices. And 
what they are doing is they are encouraging oil producers to 
hoard their commodity in the hopes they will be able to sell it 
later at a higher future price. So it is speculation in the 
commodity futures, in the oil commodities, that I think is 
something that is very important to focus on.
    The full committee released a report on Monday finding that 
excessive speculation could be inflating gas prices by as much 
as 30 percent. So, I mean, do the math. You know, we are paying 
over $4 in some regions. That is what the price has been. 
Yesterday, the CFTC charged five oil speculators with 
manipulating the price of crude oil in 2008 and making a $50 
million profit from the scheme.
    Mr. Chairman, I would like unanimous consent to enter into 
the record a New York Times and CNNMoney.com article reporting 
on the Commodity Futures Trading Commission enforcement 
actions.
    Mr. Jordan. Yeah, without objection.
    [The information referred to follows:]



    
    Mr. Kucinich. Thank you, Mr. Chairman.
    And stopping the manipulation of the market for the energy 
on which we are painfully dependent will have a significant 
impact on lowering gas prices. We have to ensure that the 
Commodity Futures Trading Commission has the resources and 
authority to implement the Dodd-Frank reforms passed last year 
to curb rampant oil speculation.
    Most fundamentally, volatility in oil and gas prices will 
continue to threaten American prosperity until we change our 
Nation's energy policy. We have to free ourselves from oil 
dependence, which has enriched oil companies and left Americans 
struggling to pay for gas to go to work. It has also left us 
with an environment that has been spoiled. The path to a 
sustainable energy future demands that we focus on energy-
efficient technologies and renewable energy resources for our 
energy supply.
    I want to thank the chairman and thank the witnesses. I 
look forward to your testimony. Thank you.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]




    Mr. Jordan. I thank the ranking member.
    Again, let me welcome our witnesses and apologize. With the 
change in schedule, we are going to have a lot of Members who 
are going to be unable to be here who would otherwise have been 
here at the 1 o'clock hour.
    We have Mr. Vincent Reinhart, formerly the director of the 
Division of Monetary Affairs at the Board of Governors of the 
Federal Reserve System. He is currently a resident scholar with 
the American Enterprise Institute.
    We have with us Dr. Robert Murphy. He is an economist with 
the Institute for Energy Research; Dr. Dean Baker is the co-
director of the Center for Economic and Policy Research; Mr. 
Greg Wannemacher is president of Wannemacher Total Logistics; 
and Ms. Karen Kerrigan is president and CEO of the Small 
Business and Entrepreneurship Council.
    It is the practice of this committee to swear witnesses in, 
so if you would just stand and raise hand and then just answer 
in the affirmative.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth? If you do, say, ``I do.''
    All right, thank you.
    Let the record show everyone answered in the affirmative.
    And we will go right down the list, starting with Mr. 
Reinhart from AEI.

 STATEMENTS OF VINCENT R. REINHART, RESIDENT SCHOLAR, AMERICAN 
  ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH; ROBERT P. 
 MURPHY, ECONOMIST, INSTITUTE FOR ENERGY RESEARCH; DEAN BAKER, 
  CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH; GREG 
  WANNEMACHER, PRESIDENT, WANNEMACHER TOTAL LOGISTICS; KAREN 
KERRIGAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SMALL BUSINESS 
                  AND ENTREPRENEURSHIP COUNCIL

                STATEMENT OF VINCENT R. REINHART

    Mr. Reinhart. Thank you, Chairman Jordan and Ranking Member 
Kucinich, for the opportunity to discuss monetary policy and 
the price of oil.
    I believe that this is an appropriate use of the 
subcommittee's time, as both the net rise and the volatility of 
oil prices over the past 9 months are partly a predictable 
byproduct of the Fed's expansion of its balance sheet in its 
policy known as quantitative easing.
    QE was essentially designed to give a nudge to risk-taking. 
Fed officials announced they would purchase riskless Treasury 
securities on the hope that investors would reinvest the 
proceeds in riskier assets, such as corporate equities and 
bonds. But not all the effects of QE has played out in 
financial markets. Since the Fed firmly signaled in August its 
intent to launch the latest round of QE, oil prices have risen 
from $76 a barrel to around $100 per barrel.
    Why does the Fed matter for oil prices? The producers of 
oil, as well as other commodities, typically sell their output 
in a worldwide market priced in U.S. dollars. Thus, they care 
about the current and expected future purchasing power of the 
dollar and how that will translate into goods and services back 
home. But QE has been associated with higher inflation and 
dollar depreciation, which combines to erode the purchasing 
power of the foreign producers of commodities. Thus, some of 
the rise in the nominal price of oil has been to catch up with 
that erosion.
    More important in shaping near-term oil price dynamics has 
been the nudge to investors from QE to move from safe to 
riskier investments. The commodity market has been one outlet 
for that reinvigorated search for yield. This has been 
reinforced by the Fed's policy of keeping short-term nominal 
interest rates near zero, which keeps it cheap to trade on 
borrowed funds. Such speculation can fuel spasms of enthusiasm 
or angst that trigger wide swings in prices, although, on net 
and over the longer term, speculators neither consume nor 
produce oil.
    This increase in the price of oil and its heightened 
volatility poses three distinct problems for the Fed and for 
the macro economy:
    First, a rise in energy costs of one-third takes a distinct 
bite out of Americans' budgets, working to restrain spending in 
an economy already burdened by lingering balance-sheet problems 
from the financial crisis. As of yet, the oil price shock is 
not as large as those associated with severe macroeconomic 
dislocations of the past half-century, though.
    Second, increases in the price of oil, as well as those of 
other commodities, have fueled an upsurge in inflation and a 
depreciation of the dollar on foreign exchange markets. Fed 
officials continue to believe that people are not likely to 
expect the prices of other goods and services to rise 
commensurately. If so, and if commodity prices do not continue 
to rise, then the level upshift in oil prices will ultimately 
pass out of inflation calculations.
    Third, in recent months, the world seems to be a much less 
safe place. This makes the near-term balance between oil demand 
and supply volatile. This could, to the Fed's regret, also make 
global investors more skittish and undercut some of the 
benefits in financial markets attributable to QE.
    On net, it is likely that the economy-wide effects of the 
energy shock are unpleasant but not derailing to economic 
expansion. But this is a gamble, and one that Fed officials 
must apparently have accepted when they decided to launch QE. 
We will live with the consequences of that judgment in coming 
quarters.
    [The prepared statement of Mr. Reinhart follows:]



    
    Mr. Jordan. Thank you, Mr. Reinhart.
    Dr. Murphy.

                 STATEMENT OF ROBERT P. MURPHY

    Mr. Murphy. Well, thank you for having me, and thank you 
for having this hearing. I think it is very important that the 
public realizes the possible role the Federal Reserve has been 
playing in high oil prices.
    Unfortunately, a lot of my prepared remarks are going to 
overlap with what Mr. Reinhart said, so I wish I had gone 
first, and then he would be copying me. But I will go ahead, 
and maybe I will say his same points in somewhat different 
language.
    So, of course, what everyone knows is that the Federal 
Reserve has expanded its balance sheet since the crisis set in 
by about $1.6 trillion, in terms of what is called the monetary 
base. So that is how much physical currency is in circulation, 
plus banks' checking account deposits with the Fed, as it were. 
So, to put that number in perspective, from the time the Fed 
was founded in late 1913 up until the fall of 2008, they hadn't 
put that much in. So the Fed has added more in the last 2\1/2\ 
years than the entire history of the Fed up until that point.
    Mr. Jordan. And that number was $1.6 trillion you said?
    Mr. Murphy. Right. About $1.6 trillion, yeah, is how much 
they have added since September 2008 to the monetary base. And 
up until that point, it was $932 billion, from 1913 to then.
    So when we say it was an unprecedented intervention, I 
mean, that is not hyperbole; it really is. And, of course, we 
know, at the same time period, the price of oil, depending on 
when you start and stop it, has almost tripled. So the question 
is, do the two have anything to do with each other or is it 
coincidence?
    So, in my written testimony, I gave the two main mechanisms 
by which Fed policy could be driving the increase in oil 
prices.
    The first one is what the Joint Economic Committee focused 
on in their recent report, and what they looked at was just the 
fall in the dollar against other currencies. Because, as Mr. 
Reinhart said, oil is an international fungible commodity, so 
oil prices basically have to be the same for everybody once you 
adjust for currency exchange rates.
    And so, if the dollars fall against other currencies, that 
means the oil price quoted in U.S. dollars is going to go up, 
everything else equal. So, in other words, Americans have seen 
oil prices go up more than the Japanese, for example.
    Mr. Jordan. Right.
    Mr. Murphy. All right. So if you look at--the JEC report 
looked at from, I guess, when QE1 was announced in November 
2008 up until whenever this report came out, and they said the 
dollar fell about 14 percent, looking at the index they used. 
And so, on those calculations, that is how they are coming up 
with the figure that, if the dollar had stayed as strong as it 
was when QE1 was announced up until today, then right now gas 
prices at the pump would be about 57 cents lower. OK?
    So that is the logic they are using to come up with that 
estimate, is they are saying the dollar has fallen since the 
announcement of QE1 and then QE2. And, hence, if the dollar 
stayed the same, then gas would be 57 cents cheaper at the pump 
right now. That is what their argument is.
    But there is a whole other possible mechanism that they 
didn't address, and that is, is it possible that the broad rise 
in commodities in general, regardless of the currency that you 
are using, could that also be influenced by Fed policy? And I 
would argue that it is, but it is hard to come up with a 
quantitative amount.
    Just for qualitative arguments, commodities in general have 
gone up, so it is not just that oil went up. It is commodities 
across the board. And even, like, for example, gold and silver, 
since the crisis and fall of 2008 until now, gold has gone up 
about 80 percent and silver something like 210 percent. All 
right?
    So I don't think that--I think it is very plausible to say 
at least some of that is due to people are afraid of the dollar 
being debased, and so they are rushing into the precious 
metals, you know, as an inflation hedge. It is not just that 
people in China are giving more jewelry as presents and that is 
why gold and silver are up so much. All right?
    So if you buy the logic there when it comes to gold and 
silver, it is not a stretch to say, well, maybe some 
investors--you know, there is lots of liquidity floating 
around. What are they going to do with their money? They are 
not going to put it in real estate, obviously. Maybe they don't 
want to put it in the stock market because the economy is bad. 
Maybe they are going to go into commodities, thinking, you 
know, surely wheat and oil are always going to have a demand, 
and so that is a way to protect my wealth in case there is 
future inflation.
    So that is the other possible mechanism by which Fed policy 
could be worked. So, you know, given whatever the world price 
of oil is if the dollar falls, that is one thing. But the other 
mechanism is maybe commodities, as part of that huge upswing, 
is people are trying to hedge themselves against inflation. So 
those would be the two----
    Mr. Jordan. And if I could interrupt you for a second. 
Would you say, so that is not--that is maybe just good, smart, 
practical investing versus any type of speculator driving the 
price up?
    Mr. Murphy. Well, yeah. I mean, it depends on your 
perspective. To me, that is like saying, you know, it is cold 
out because the thermometer is showing a low reading. I mean, 
if people think that something bad is going to happen, then 
they react. And that is the whole point, or one of the points, 
of having futures markets in the first place, is to anticipate 
future movements.
    Mr. Jordan. Right. We will give you 30 more seconds if you 
want, since I took some of your time.
    Mr. Murphy. That is fine.
    [The prepared statement of Mr. Murphy follows:]



    
    Mr. Jordan. All right. Thanks, Doctor.
    Dr. Baker.

                    STATEMENT OF DEAN BAKER

    Mr. Baker. Thank you, Chairman Jordan and Ranking Member 
Kucinich. I appreciate the chance to talk on this set of 
issues.
    I want to make three main points. First, what I am going to 
say is that the Fed's policies at most contribute a very small 
amount to the increase in the price of gas. Second, I am going 
to say that a decline in the dollar is both desirable and 
necessary. And then, very briefly, I will just say that most of 
the rise in the price of oil has been attributable to other 
factors, and the three obvious ones I think have all been 
mentioned here: one, the growth in the developing world; two, 
the instability in the Middle East; and the third, that there 
is certainly speculation in the oil market, which I would argue 
has had some effect on prices.
    OK, the first point, the quantitative easing policy, I find 
it hard to quarrel--I have been a critic of the Fed quite 
often, and often quite harsh--but I find it hard to quarrel 
with their policy here. We have had the worst downturn the 
country has seen since the Great Depression. It was a situation 
that called for a very aggressive response. And the Fed gave, 
to my mind, a relatively timid one, with its policy of 
quantitative easing, given the current circumstances.
    So the intention, of course, was, by buying large amounts 
of mortgage-backed securities and government bonds, that they 
would not just lower the short-term rate, which they had 
already pushed down to zero, but lower the long-term rate. And 
this would have three beneficial effects. On the one hand, it 
would give some boost to investment. Second, it would make it 
easier for people to refinance mortgages. We have 30-year 
mortgages at the lowest rate they have been in more than half a 
century. And, third, that it would actually lower the value of 
the dollar. That was quite deliberately one of the intentions, 
the idea being that would encourage net exports.
    It did, I would say, have somewhat of that effect, but I 
think the impact has actually been very limited. I think there 
is a real distortion in this discussion in the sense that there 
was a big run-up in the dollar in the fall of 2008. So if you 
go back and look at the history, the dollar rose by around 14 
percent between the summer of 2008 and the fall, which was a 
direct response to the financial crisis. There was a flight to 
safety. People have always gone to the dollar when there has 
been a flight to safety. That has led to a large increase in 
the value of the dollar.
    You could perhaps blame QE1 and QE2 for helping to 
stabilize world financial markets and, that way, getting over 
that fear, but we should have expected that run-up in the 
dollar would be reversed once we saw the economy stabilize to 
some extent.
    As it stands now, the dollar is just a little bit below 
where it was, I think about 2 percentage points below where it 
was before the run-up.
    And I should point out--I can come back to this--I think 
there is a misunderstanding about the broad index, which is 
what I assume you referenced in saying that it is at the lowest 
level ever. I think that, when you look at a measurement issue 
in there, it is really not. I can come back to that.
    But the other point I wanted to make in that respect is 
that the dollar had been falling. This is not something that 
just happened. So the dollar had been falling from 2002 until 
the financial crisis in 2008. And if we just envision we had 
continued on that downward trend, the current value of the 
dollar is still about 16 percent higher than what it would have 
been on that trend. So there is nothing new in this story.
    The second point, we need a lower-valued dollar. In a 
system of floating exchange rates, the dollar fluctuates to 
equalibrate trade. We have a very large trade deficit, 
currently about $600 billion. The only mechanism I can think of 
to get that down is a lower-valued dollar.
    As I said before, I take that was one of the main 
motivations of the quantitative easing policy because that is 
how you boost our net exports. You make our exports cheaper for 
people living in other countries. You make imports more 
expensive for people living in the United States. That is 
unpleasant, but there is no way around it.
    In the context of the price of oil, the way I would see it 
is that if we deliberately try to have an artificially high 
dollar, we run a high dollar policy even though it is leading 
to very large trade deficits, in effect what that means is we 
are borrowing money from foreigners to subsidize our 
consumption of imports. In this case, we are talking about the 
price of oil. We would all like cheaper gasoline. I would like 
to pay less at the pump, too. But I am not really sure it is a 
good policy to tell our kids that we are going to be borrowing 
huge amounts of money from abroad so that we could have cheaper 
gas today. That is what a high dollar policy means.
    The last point I was going to say is that, you know, it is 
easy to find the culprits, if we want to call them that, in 
terms of what is pushing up the price of oil. We have countries 
like China, which is now the second-largest consumer of oil, 
growing 10 percent a year; India coming up fast as well, also 
growing 10 percent a year. That is leading to rapid increases 
in demand for oil. There is no corresponding increase in the 
supply.
    Uncertainty--we all know about the situation in the Middle 
East. And we could certainly fairly easily tie the most recent 
run-up in the price of oil--it went from roughly $80 a barrel 
to over $100 a barrel when the civil war in Libya broke out in 
earnest.
    The last point, speculation. We know there is speculation 
in the market. Ranking Member Kucinich referred to the article 
in the New York Times today about SEC action against 
speculators that pushed the price of oil to $150 a barrel 
before the downturn. Clearly, there is some speculation again 
today.
    So, just to conclude, I would say that, you know, if we 
take a look at the Fed's actions, I'd say for the most part 
they have been, you know, largely on the right track. And 
insofar as they contribute to the higher price of oil, I really 
don't think there is anything we can or should think to do 
about that.
    Thank you.
    [The prepared statement of Mr. Baker follows:]



    
    Mr. Jordan. Thank you, Dr. Baker.
    Mr. Wannemacher.

                 STATEMENT OF GREG WANNEMACHER

    Mr. Wannemacher. Chairman Jordan, Ranking Member Kucinich, 
I really appreciate this opportunity to testify today regarding 
the impact of higher oil prices on the trucking industry.
    Oil prices have a dramatic effect on our business. Part of 
our business is a trucking operation. We operate 38 trucks; 33 
trucks operate in the mid-Atlantic and Midwestern States, and 5 
other trucks operate locally, shuttling loads to our various 
distribution centers and to our customers' plants, picking up 
customers' loads, and making local pickups and deliveries.
    The cost of fuel has risen to be our single largest expense 
item. When I took over our company in 1991, fuel expenses were 
only 6 to 7 percent of revenue. During the last 4 years, our 
fuel expenses were the following as a percent of revenue: 32 
percent in 2007; 41 in 2008; 29 in 2009, 31 in 2010. Now, in 
the first quarter of 2011, that expense was 36 percent of 
revenue.
    Over the years, we have tried various techniques to better 
control our exposure to the fluctuation in fuel costs. We have 
had our own fuel tanks until the EPA regulations made it 
uneconomical for a fleet our size. We tried hedging a portion 
of our anticipated purchases to lock in the pricing. We 
contract with fuel service providers to buy at a fixed rate 
over their cost or off the listed pump price. We have set our 
trucks' top speed at 65 miles per hour, installed onboard 
auxiliary power units to eliminate idling, gone to wide base 
tires with a system to keep the tires properly inflated at all 
times. And, of course, we have contracts with our customers 
that include fuel surcharges to help offset the fluctuation of 
fuel costs.
    For a fleet our size, hedging in contract fuel purchases 
are extremely challenging and very time-consuming. Small 
operations find themselves at a disadvantage, trying to find 
the time necessary to stay informed and educated on the 
constantly changing pricing structures and formulas the vendors 
try to institute.
    Fuel surcharges are the least cumbersome for us to manage. 
The biggest challenge with this is that customers want you to 
lock your rates in for a minimum of 1 year. Depending on how 
their business is doing and whether they will take the time to 
renegotiate annually can also be an impediment. Because of our 
small size, in some instances we do not provide enough impact 
on their capacity to get their attention.
    The fuel prices we are encountering today are having a huge 
impact. The best way to explain this is to illustrate how much 
profit we lose with fuel prices at the current levels. Let me 
explain how fuel surcharges are implemented.
    Fuel surcharges only apply to loaded miles. Our fleets run 
about 15 percent empty miles. Our average truck runs 2,700 
miles per week. The fleet average is 6.6 miles per gallon. 
Fifteen percent of the miles are equal to 405 miles per truck 
per week which we see no reimbursement for the increased cost 
of fuel.
    The impact from the average cost at $2.50 per gallon for 
fuel, last seen in the fall of 2009, to the recent average of 
$4 per gallon is $1.50 per gallon on the 62 gallons it takes to 
run the 405 miles. Roughly speaking, that is $92 in lost money 
per truck per week. Remember, I told you we run 38 trucks, so, 
therefore, that is almost $3,500 per week. At the current rate, 
it will be a loss of $180,000 for the year for our fleet.
    Now, if it weren't for the higher fuel prices, we would 
recognize four potential areas for those extra funds: First, we 
could invest in more trucks; second, we would look to increase 
technology; third, to increase our drivers' pay; and, finally, 
to reduce the debt on our equipment.
    Since 2008, many fleets have reduced the size of their 
operations, and significant amounts of others have simply gone 
out of business. Now we are starting to see a shortage of 
trucks. With the capacity shortage, we would utilize the extra 
money to increase the size of our truck fleet. This would 
create more jobs at our company. We could immediately grow our 
fleet 10 percent if the fuel prices were back down to $2.50 a 
gallon.
    A primary objective of our company is to look at and invest 
in new technologies and innovations that can help improve our 
fuel mileage. We do a cost-benefit analysis on any proposed 
improvements to justify any expenditure. It is imperative that 
the payback period is shorter than the useful life of the 
equipment and will not hinder the resale value at trade-in 
time.
    During the downturn in the economy, most trucks, including 
ourselves, found it necessary to reduce drivers' wages to 
remain competitive. If fuel costs could get back in line, I 
believe you would see an increase in drivers' wages across the 
board.
    Our final option would be to reduce the amount of debt we 
still have on our equipment. Solidifying the net worth of our 
company will enable us to secure better financing terms in the 
future. And it is certainly no secret that bankers today are 
taking a closer look at companies' debt-to-net-worth ratio.
    During the fuel spikes in 2008, we elected to gradually 
reduce our fleet down from 64 trucks to the current level of 38 
trucks. If pricing continues to vacillate, we will definitely 
reduce more to prevent losses. We certainly don't like to be 
put in this position, but we can't continue to put the 
remainder of our company at risk. Since it is our largest 
expense item, stabilization in the cost of fuel is extremely 
necessary and vitally important to provide the ability for 
trucking operations like ourselves across the country to remain 
in business.
    We have absorbed the cost increases due to regulations of 
EPA on our truck engines and fuel-storage facilities, as well 
as the escalation of other government regulations and enlarged 
payroll taxes caused by high unemployment in all sectors of the 
work force. We cannot continue on this wild ride created by 
speculators and some in our government holding back on drilling 
opportunities that would reduce our dependency on foreign oil. 
Not just trucking companies, but the American people need 
stabilization in fuel prices.
    Thank you for this opportunity to testify, Chairman Jordan.
    [The prepared statement of Mr. Wannemacher follows:]



    
    Mr. Jordan. Thank you, Mr. Wannemacher. We appreciate 
getting the small-business owner's perspective.
    Ms. Kerrigan.

                  STATEMENT OF KAREN KERRIGAN

    Ms. Kerrigan. Well, thank you. Good afternoon, Chairman 
Jordan and Ranking Member Kucinich. Thank you for hosting 
today's hearing and for inviting the views and concerns of 
small-business owners to be considered on this important issue.
    I have been asked to provide a general snapshot, if you 
will, regarding the impact of high gas prices on small-business 
owners and entrepreneurs. Needless to say, the high costs are 
making it very difficult for small businesses to compete, to 
grow, and even survive in what remains a very, very difficult 
economic environment.
    For many small-business owners, sales and revenues remain 
weak while business costs continue to move higher. Business 
owners, for example, are very, very concerned and continue to 
stay burdened with high health insurance costs, with employee 
benefit costs. At the same time, raw material costs continue to 
go higher. Supplies, shipping, etc., all these costs continue 
to go higher. And with weak revenues, this is squeezing small-
business owners.
    So, obviously, costs are a major issue for small-business 
owners, how to control them, how to contain them, how to deal 
with them and remain competitive in a very, very competitive 
global economy. Tight cash-flows, combined with slim profit 
margins, limit the flexibility that many small-business owners 
have in responding to higher costs, particularly unexpected 
ones.
    So, unquestionably, small-business owners are feeling the 
pinch of higher gas prices. The regular feedback that we 
receive from our members, as well as small-business owners 
across the country, point to significant effects that we 
believe are undermining the economic recovery.
    This feedback has been backed up by our latest 
``Entrepreneurs and the Economy'' survey that we released this 
week, which finds that the specific ways that business owners 
are dealing with higher gas prices could have profound 
consequences for our economy, and particularly if prices remain 
high. Seventy-four percent of business owners, according to 
that survey, report that higher gas prices are having an impact 
on their business. Forty-seven percent report that higher gas 
prices are affecting their plans to hire new employees. Forty-
one percent have raised prices due to higher gas prices. 
Twenty-six percent have had to cut employees or their hours 
worked. And, staggeringly, 38 percent believe if gas prices 
remain high or increase further, their business will not 
survive.
    Obviously, how business owners respond to higher gas prices 
not only impacts their own competitiveness and capacity to 
grow, but also impacts the overall health of the U.S. economy. 
If small-business owners are not hiring, if they are cutting 
hours or if they are cutting jobs, our entire economy suffers. 
Likewise, if small-business owners are putting fewer resources 
into investments and innovative projects, the vibrancy of the 
economy suffers along with the overall national 
competitiveness.
    So high gas prices are hitting the two major pain points of 
small-business owners. Obviously, higher gas prices are raising 
business costs, which is forcing many business owners to do 
things like raising prices that put them at a competitive 
disadvantage. Second, high gas prices are hurting sales, as 
customers have fewer disposable dollars to purchase the goods 
and services provided by small-business owners. And as I noted 
in my written testimony, a survey, DollarDays.com survey, found 
that 64 percent of business owners report lower sales due to 
higher gas prices.
    Especially as our Nation is working to emerge from the 
recession, it is more important than ever that small businesses 
operate in a more predictable environment. I think they 
continue to tell us that uncertainty pretty much rules their 
everyday operations. Without certainty, without predictability, 
small-business growth will be stunted and these firms simply 
will not be able to create the large-scale number of jobs that 
are desperately needed by our economy.
    Thank you again for hosting this hearing, and I look 
forward to your questions.
    [The prepared statement of Ms. Kerrigan follows:]



    
    Mr. Jordan. Thank you, Ms. Kerrigan and all our witnesses.
    Mr. Wannemacher, you mentioned fuel costs went from 6 
percent, I think you said, 6 or 7 percent, to now somewhere in 
the last 3 years a range of 30 to 40 percent. Is that accurate?
    Mr. Wannemacher. Yes, sir.
    Mr. Jordan. Yeah, I mean, that is huge. And, obviously, it 
has had an impact on your industry and, I assume, every other 
trucking industry out there. But have you noticed your 
customers, that it is impacting them? If we listen to Ms. 
Kerrigan's testimony, obviously it is. But have you seen that 
in a firsthand way with your customers that you deal with?
    Mr. Wannemacher. Yes. The biggest impact is, you get the 
small companies that aren't--you know, the larger companies are 
familiar with fuel surcharges and are willing to absorb that. 
But it is the smaller companies that don't ship as many 
truckloads in a week that it really is alarming to them. And 
they try to absorb those things rather than try to pass them on 
to their customers.
    Mr. Jordan. Right. Right, right.
    And you have seen that, as well, Ms. Kerrigan? Relative to 
the surcharge issue, have you had any specific examples with 
your folks on the surcharge issue?
    Ms. Kerrigan. On being impacted by surcharges?
    Mr. Jordan. Yeah.
    Ms. Kerrigan. Shipping I think is a huge one, you know, 
where, you know, anything that they are receiving--florists. I 
think the florist industry, in particular, are receiving a fair 
amount of surcharges on shipping.
    Mr. Jordan. Uh-huh. The other thing you mentioned in your 
testimony, Ms. Kerrigan, was the other regulatory concerns, 
other regulations that are a concern to business owners. One of 
the focuses of this subcommittee is, you know, regulation and 
how that impacts business.
    Talk to me about some of the things--in addition to the gas 
price issue, we have other things that government is doing. 
Talk to me about some of the specific things that you think are 
negatively hurting job growth and economic growth right now.
    Ms. Kerrigan. Well, gosh, where do you start?
    Mr. Jordan. You or Mr. Wannemacher, either one.
    Ms. Kerrigan. Well, one big one, I think, is the health-
care issue and, you know, the concerns about what the health-
care reform bill, as it gets implemented, what it means for 
their health insurance costs. Because they don't see them going 
down; they continue to see them going up. You know, what the 
employer mandate is going to mean for their business, what the 
fines are going to mean.
    Mr. Jordan. Right. And it is this cumulative effect that 
concerns me and I think concerns many Members of Congress and 
obviously concerns--so it is not just--well, you can point to 
one, but it is one on top of the other. Now you throw in the 
gas price issue.
    Ms. Kerrigan. It is one on top of the other. I mean, there 
is the tax issue and uncertainty----
    Mr. Jordan. Right.
    Ms. Kerrigan [continuing]. Of what their taxes are going to 
be. I mean, there is the implementation of Dodd-Frank. What is 
it going to be in terms of their cost availability of capital 
and loans? It is all that.
    It is very difficult to get traction. And a business owners 
needs momentum, they need traction in order to grow and have 
the confidence----
    Mr. Jordan. Right.
    Ms. Kerrigan [continuing]. To do the things that they need 
in order to invest and to create jobs.
    Mr. Jordan. Mr. Wannemacher, can you comment on the 
cumulative effect that concerns so many of us?
    Mr. Wannemacher. You know, it is. It is just a compounding. 
When you have the EPA issues--for example, when the EPA changed 
the regulation on the truck engines, we ended up paying about--
the first round, it was about $6,500 for just the EPA 
regulations. The second round was an additional $8,000. And so 
it is just a compounding thing of those type of things.
    When we went to low-sulfur fuel, which gave us lower fuel 
mileage, higher-cost trucks, lower fuel mileage, and, you know, 
we can only pass on the fuel surcharge based on the price of 
fuel. So that was also a loss.
    And then what Ms. Kerrigan said, also, about the health 
care. I mean, that just creates such an instability in your 
mindset as far as going forward, those added-on costs of 
government regulations that really have no--really don't belong 
there, in a lot of instances.
    Mr. Jordan. Uh-huh. Great.
    Let me turn to our other guests, and we will do a second 
round here.
    I am just curious--and let me start with maybe Mr. 
Reinhart--in the last couple years--and I genuinely don't know 
the answer to this one--has the Fed been the largest purchaser 
of Treasuries? Are they the single largest purchaser and/or 
holder of Treasuries in the last, say, 2 years?
    Mr. Reinhart. No, actually. Here is a good comparison----
    Mr. Jordan. That surprises me. Because I think it is, like, 
$75 billion----
    Mr. Reinhart. So when the Fed----
    Mr. Jordan. So who is their largest holder? Is it----
    Mr. Reinhart [continuing]. Put QE2 on the table in August, 
since then it has expanded its balance sheet by $500 billion of 
extra Treasury securities.
    Mr. Jordan. OK.
    Mr. Reinhart. Over that same period, foreign official 
entities have increased their holdings of government securities 
held in custody at the New York Fed by $1 trillion.
    Mr. Jordan. OK.
    Mr. Reinhart. So, in some sense, as Dr. Baker noted, the 
net depreciation of the dollar has been pretty modest, so you 
can't say it contributes a lot to the rise in oil prices. But 
that actually masks two effects. The Fed has been buying 
Treasury securities with $500 billion of extra dollars, which 
would tend to move the dollar lower.
    Mr. Jordan. Sure.
    Mr. Reinhart. But, at the same time, foreign official 
entities have been buying a trillion dollars of Treasury 
securities with their own currencies, tending to offset what 
the Fed is doing.
    Mr. Jordan. OK, but you said foreign. So, total foreign 
holdings of Treasuries is bigger than the Fed----
    Mr. Reinhart. Oh, most certainly.
    Mr. Jordan [continuing]. Single biggest holder? Are they 
bigger than--so the single biggest entity holding Treasuries 
today, in the last few years, would be the Fed?
    Mr. Reinhart. The single biggest entity in terms of the 
stock holdings of government securities right now would be 
foreign official entities.
    Mr. Jordan. Combined?
    Mr. Reinhart. Yes. That is, the reserve managers, China, 
India, Russia, Brazil, and the like.
    Mr. Jordan. OK. Got it. And then would the Fed be second?
    Mr. Reinhart. The Fed would be second.
    Mr. Jordan. Ahead of other funds and individuals and etc.?
    Mr. Reinhart. Yes.
    Mr. Jordan. OK. OK.
    I will get back to that, but I want to get to our ranking 
member, and then we will do another round.
    The gentleman from Cleveland is recognized.
    Mr. Kucinich. Let me ask Mr. Reinhart just a quick 
followup. I was distracted for a second. I want to make sure I 
got your answer.
    Of the trillion dollars that is being purchased, did you 
say who is buying those from abroad? China, you said?
    Mr. Reinhart. So, all we know is that the Federal Reserve 
Bank of New York holds Treasuries--government securities in 
custody for foreign official accounts.
    Mr. Kucinich. Right. But----
    Mr. Reinhart. That went up a trillion dollars.
    Mr. Kucinich. OK. Got it.
    Mr. Reinhart. We don't know the composition of it.
    Mr. Kucinich. OK.
    Dr. Baker, in a March 2, 2011, Congressional Research 
Service report entitled, ``The U.S. Trade Deficit, the Dollar, 
and the Price of Oil,'' which I am going to ask unanimous 
consent be entered into the record----
    Mr. Jordan. Without objection.
    Mr. Kucinich. Thank you, Mr. Chairman.
    In this, CRS agrees with your assessment that the Fed's 
monetary policy actions have not been the main driver of higher 
oil and gas prices.
    Now, can a case, however, be made here that there is a 
tangential effect that the Fed has on these prices? I mean, 
some of our witnesses have made that. Would you comment on 
their analysis?
    Mr. Baker. Well, again, I would say--and the CRS report, of 
course, agrees that there was some impact in lowering the 
dollar. But, again, I think that was relatively modest, you 
know, and I think most of the evidence suggests that.
    The other issue is, I had said and the other witnesses I 
think suggested this, maybe put in a different way, but that 
the low-interest-rate environment does create a situation in 
which you are likely to see some speculative run-up in the 
price of oil and other commodities. And I think that has 
certainly been true. That was certainly true in the period in 
2007-08, when oil hit $150 a barrel. And it would be surprising 
to me that there is not some speculation there today. It just 
stands to reason that when there are sharp movements, almost 
invariably at least some of that is driven by speculation.
    Mr. Kucinich. OK. Is speculation driven by being able to 
trade with borrowed money?
    Mr. Baker. Of course. You know, speculators tend to--the 
way you make money as a speculator is you become heavily 
leveraged. And if you could do so cheaply, then it makes it 
easier to speculate.
    Mr. Kucinich. Let me ask you--well, first of all, just to 
preface, we can debate the causes of high oil and gas prices, 
but I think that, you know, just in my own opinion, we have to 
keep in mind that the U.S. ranks second in the world in fossil 
fuel consumption. And energy-producing companies have used our 
dependence on oil to enrich themselves and pollute the air and 
the land.
    It is clear to me what we are seeing is the result of a 
monopoly. And by that, I mean, when it comes to individual 
transportation, there is only one source--major source of fuel, 
and that is oil. Americans depend on it every day to get to 
work, get their kids to school, get groceries, conduct their 
daily lives. Businesses are dependent on it, as has been 
pointed out. So the demand for oil is fairly inelastic.
    When demand is inelastic, if there is a monopoly in supply, 
conditions are ripe for the kind of price manipulation that was 
documented in the minority report issued on Monday. And that 
led the Commodity Futures Trading Commission to charge five oil 
speculators with illegal price manipulation yesterday.
    Dr. Baker, can you talk a little bit about the effects of 
monopoly of oil on our economy and about the possibility that 
breaking that monopoly with alternative energy sources, what 
that would mean for our economy?
    Mr. Baker. Sure. I just realized, earlier I had made a 
reference to the Securities and Exchange Commission. In fact, 
it was the Commodity Futures Trading Commission that brought 
those charges. So, just to correct my earlier statement.
    Mr. Kucinich. Thank you.
    Mr. Baker. Yeah, I see it as a situation as, in effect, we 
are subsidizing oil consumption, part of that story being an 
overvalued dollar. So, in a situation where we are running a 
very large trade deficit, in effect what we are doing is 
borrowing money to get oil and other imports cheaper than would 
otherwise be the case if we had a dollar that was consistent 
with more balanced trade.
    And, obviously, when you have a situation where there is a 
number of relatively small number of oil companies, they are in 
a position to take advantage of shortages, temporary shortages. 
It makes it a more volatile environment because, as you say 
quite correctly, at least in the short term, demand is very 
inelastic. When you have a relatively small number of 
suppliers, supply can be very inelastic as well.
    Mr. Kucinich. Let me ask you something. I have about a 
half-minute. How would you explain to my constituents simply--I 
mean, we are talking about some, you know, fairly high-level 
extractions there, in terms of money supply, the role of the 
Fed. How would you explain this, in layman's terms, to the 
average motorist who is paying $4 to $5 a gallon about why is 
this happening? Put it in layman's terms.
    Mr. Baker. Well, I guess I would say there are two parts to 
that story. One is, you know, certainly the short-term story, 
where I think the price has gone up more than would be 
justified by the fundamentals due to the fact that you have 
speculators that are pushing up the price. So you have 
speculators who are thinking prices will be higher in the 
future or at least for a short period of time. They are hoping 
to get in----
    Mr. Kucinich. So speculators are driving up the price. That 
is one factor.
    Mr. Baker. That is one factor.
    Mr. Kucinich. OK. And the other factor?
    Mr. Baker. The other is simply the long-term story, that 
oil is a commodity in relatively limited supply. Demand is 
increasing very rapidly in the developing world, and it is 
almost certainly going to outstrip the rate of growth of 
supply. And the only way you can reconcile more demand and 
relatively limited increase in supply is with a much higher 
price.
    Mr. Kucinich. So, even without speculation--thank you, Mr. 
Chairman--even without speculation, based on the supply demands 
that you are talking about, you are saying that the price of 
oil--if nothing else changes in terms of alternative sources, 
the price of oil is going to go up. Is that what you are 
saying?
    Mr. Baker. Exactly. I don't see any story where, if we look 
out 5 years from now and let's say there are no speculators, 
you know, we are just looking at what the world economy looks 
like, possible projections of growth, I don't see any story in 
which the price of oil is not considerably higher than it is 
today.
    Mr. Kucinich. OK.
    Mr. Chairman, thank you for your indulgence on that.
    Mr. Jordan. No problem.
    Mr. Baker, you said earlier about subsidizing oil 
consumption. What was the statement you made earlier, that we 
were--when we were doing that and what----
    Mr. Baker. That, in effect, by having a large trade 
deficit, which is associated with an overvalued dollar, we are 
subsidizing our consumption of oil and all imports and paying 
for that with money that we have borrowed from foreigners. That 
corresponds to a trade deficit.
    Mr. Jordan. Which, I think, raises the question. So do you 
think rising fuel costs are a good thing?
    Mr. Baker. I think that they are an inevitable thing. That 
is part of the----
    Mr. Jordan. I didn't ask you that. Do you think they are a 
good thing, do you think they are a positive thing?
    Mr. Baker. I think there are positive--I mean, I am not 
trying to be evasive--there are positive aspects to it. I mean, 
it will----
    Mr. Jordan. In light of what we just heard from a small-
business owner?
    Mr. Baker. There are negative aspects as well, of course. 
None of us want to pay more for gas. Businesses are going to be 
very harmed. Some businesses will go out of business.
    On the other hand, exporters are going to do very well 
because the dollar will fall. So we are going to get a lot of 
jobs created in export industries. Also, in import competing 
industries, because imports are now more expensive, there are 
going to be more jobs there.
    Mr. Jordan. Let me get back to Dr. Murphy.
    You made a point earlier. You said, I believe, added to the 
monetary base $1.6 trillion since September 2008 to today; from 
1913 to 2008, $932 billion. So, in 3 short years, or less than 
3 years, more than we did in--I didn't do the math, but what is 
that? Almost 80-some years, or 90--80-some years.
    And Mr. Baker, I think, called that ``timid'' in his 
opening statement, that the Federal Reserve's approach to this 
was timid. I assume you disagree with that.
    Mr. Murphy. Right, I disagree strongly. And, I mean, it 
probably is the difference in our perspective as to what the 
appropriate policy response is. I believe that the problem was 
that Chairman Alan Greenspan had interest rates too low after 
the dot-com crash, and that fueled the housing bubble----
    Mr. Jordan. Uh-huh.
    Mr. Murphy [continuing]. And so that was the wrong thing to 
do. That caused mal-investments. And so, to me, what Chairman 
Bernanke has done is just doubled down on the wrong policies 
that Chairman Greenspan put into place.
    Mr. Jordan. Yeah.
    Mr. Murphy. But I think Dr. Baker is coming from a 
different perspective, obviously. And so, right, so they would 
say it is timid because, look, it didn't work fully, so we need 
to put more medicine in; whereas I am saying, no, that is 
poison, just pumping in extra money that you are creating out 
of thin air----
    Mr. Jordan. Yeah.
    Mr. Murphy [continuing]. To use a colloquialism.
    Mr. Jordan. Do me this. Maybe you and Mr. Reinhart then 
second. Rank order--I mean, look, because we got supply and 
demand concerns, we got turmoil in the Middle East, we got 
those who say speculators, and then we got the Fed and 
quantitative easing and devaluing of the dollar.
    So, rank order--and let's just, as a starter, say all have 
some influence on the price of fuel and, ultimately, the price 
of gasoline. But rank order them, which one has the biggest, 
which is second, which is third, and which is fourth.
    And I would also--well, I will get to that article in a 
second. But do that first, and then we will go to Mr. Reinhart.
    Mr. Murphy. Sure. I mean, I think we should just be humble 
and say nobody knows for sure. We would have to turn back time 
and do the alternate universe to see what actually happens. So 
this is all speculative, no pun intended.
    I personally think that the Fed has not fixed the problem. 
OK? So it is true, as Dr. Baker was saying, you could argue, 
well, no, the Fed averted a catastrophe, and so, therefore, 
even though--we are, in a sense, both agreeing the Fed caused 
oil prices to go up. And he is saying that is, you know, 
arguably a good thing in one perspective. But I don't think we 
are out of the woods yet. I think, you know, years from now we 
are still going to look back and say, when is the economy going 
to get better? So, in that sense, I think the Fed is--I 
personally would say it is the Fed.
    Now, in terms of speculators, again, that is sort of a 
loaded term, but, I mean, if people are worried that the dollar 
is going to depreciate strongly----
    Mr. Jordan. Right, my first question to you.
    Mr. Murphy. Yeah. That is partly what they are supposed to 
do.
    Mr. Jordan. Normal behavior, yes.
    Mr. Murphy. A futures market is supposed to allow that.
    Mr. Jordan. But you would say the Fed's actions are the 
number-one reason that the price of gasoline for families and 
business owners went up, more so than turmoil in the Middle 
East, more so than rising demand from countries and rising 
demand, period, you know, more so than supply and demand 
concerns?
    Mr. Murphy. From the fall of 2008 until now, yes. I think, 
if you are saying--like, the last 6 months, the Middle East, I 
think, is a far bigger influence of what is going on.
    Mr. Jordan. But over the last 3 years.
    Mr. Murphy. Right, if I had to pick one.
    Mr. Jordan. Mr. Reinhart, could you comment, the rank order 
in question?
    Mr. Reinhart. So, one thing I do want to make clear is the 
distinction between the relative price of oil and the nominal 
price of oil and, similarly, the real exchange rate and the 
nominal exchange rate.
    We need real exchange rate depreciation to adjust the trade 
accounts. Maybe we should think about a way of getting that 
without as much domestic inflation. Global supply and demand is 
such that the real price of oil is going to be going up over 
time, but Fed policy will determine how much of that real price 
increase turns into nominal price increases.
    And I think, over the longer history of the Fed--that is, 
over the last couple decades--the very high nominal price of 
oil relates to the Federal Reserve's failure to achieve price 
stability. And so, if you are looking for the big picture, why 
are oil prices so high over the last two decades, it has to be 
about Fed policy, because the Fed is responsible for the 
nominal prices everywhere.
    Mr. Jordan. Right.
    Mr. Reinhart. OK. Now, if you are asking in the last year 
or so, or over the whole profile of quantitative easing, I 
would say that it is mostly something about the balance of real 
supply and demand; the Fed comes second. And I would put third 
speculation. There has been a bit of discussion about the 
CFTC's----
    Mr. Jordan. Right.
    Mr. Reinhart [continuing]. Ongoing case. And it is not 
appropriate to opine on an open case, but I think you would 
have to remember three important points. And the first is, in 
the futures market, almost nothing settles in a cash 
transaction. That is, the futures market is very large relative 
to the cash market. So trying to manipulate cash to affect the 
futures market is the tail wagging the dog.
    But second, in a very short period, the tail can wag the 
dog. Even in the CFTC's press release of yesterday, they say it 
was a strategy designed to first raise, then lower oil prices. 
So, in the short run, speculation can matter. But the short 
run, it can be, you know, relatively short.
    But, third, we do have to worry about speculation in the 
market because it raises volatility of prices, and that is just 
a deadweight loss for everybody. It is just more expensive to 
use those markets efficiently for hedging.
    Mr. Jordan. OK. Thank you.
    The gentleman from Cleveland.
    Mr. Kucinich. I have heard the witnesses talk about the 
role of the Fed here, and that is what has made this hearing 
very instructive. Because all of--you know, including Dr. 
Baker, all talk about the Fed has some role here. You know, 
there might be some debate about what kind of role, about where 
it falls in the hierarchy of economic effects on the price of 
oil. You know, you talked about supply and demand, then the 
Fed, and then speculation.
    Mr. Reinhart, am I right in that? OK.
    And we are talking about the Fed's policy since 2008, you 
know, the role that has had on the price.
    But what hasn't been discussed here and what I would like 
to ask you to consider and maybe just give me some quick 
response on is the fact that, in 1913, when the Federal Reserve 
was created, it actually created the transition away from the 
Article I, Section 8 responsibilities that were 
constitutionally vested in Article I to Congress for the 
purpose of coining money or controlling the money supply. That 
was taken away. You know, the Fed ends up with the 
responsibility.
    So my question to you is, if we see that the variable 
effect and sometimes the adverse effect which the Fed has in 
the management of these things, the question becomes, what 
about having the Fed being put back in the control of the 
government, as the Founders intended? For example, being put 
under Treasury.
    Would you comment on that? You know, if we are really 
talking about the Fed as something that we really have very 
limited control over, what do you think of that?
    Mr. Reinhart. So, I see the Federal Reserve Act as a 
delegation of congressional authority given to it in the 
Constitution to an independent agency, the Federal Reserve. 
Fundamental to that was the implicit belief that independence 
would lead to better monetary policy over the long run. Because 
there are short-run and long-run considerations, something 
decided in the Congress lends itself to a short-term gain and 
not enough assessment of the long-term benefit. The idea was 
giving the Fed independence so it can take account of the 
longer-run benefits of price stability.
    I think the record is not good for the Federal Reserve in 
taking account of that longer-run responsibility.
    Mr. Kucinich. Dr. Murphy, would you say the record is not 
good over the long haul here, or what would you say?
    Mr. Murphy. Well, right, I mean, the Fed was created to get 
rid of the ups and downs, and then after they formed it there 
was a Great Depression. So, I mean, the Fed has not had a great 
track record over its history.
    As far as your broader question--and I am speaking on my 
own; this isn't an IER position on monetary policy, obviously--
but I don't think the issue is, well, should it be Ben Bernanke 
right now making Fed policy or Treasury Secretary Geithner? I 
don't--you know, I think if you are going to----
    Mr. Kucinich. Well, I mean, there is some question about 
the structures here of whether or not there is public 
accountability, responsibility. If you can print, you can use 
quantitative easing to print an unlimited amount of money and 
basically, until recently, in a nontransparent way, give it to 
banks who are too big to fail, they can park their money, gain 
interest on it, and at the same time you got businesses 
starving for cash in my area, there are some public policy 
questions.
    Go ahead.
    Mr. Murphy. Well, right. My point was, a lot of people--and 
I would subscribe to this view--would say that there should be 
no such entity that can just create a trillion dollars out of 
thin air and hand it to rich people. That, you don't need to 
say, well, who should run this organization? There wasn't 
always a Fed. So, you know, if you are going to start 
questioning it, just go the full way.
    Mr. Kucinich. Dr. Baker, do you have any comment on that?
    Mr. Baker. Yeah, I mean, the Fed was set up almost a 
hundred years ago, and I think its structure reflects both the 
power of the financial sector and also the politics of 1913. I 
mean, it is sort of striking, we have 12 regional Fed banks and 
two of them are in Missouri. I don't think anyone would set it 
up that way today.
    The idea that you would give the financial industry, the 
banking industry, a major, direct say in monetary policy--which 
the structure of the Fed does. It is not just that they have 
advice; they basically appoint 12 of the 19 people who sit on 
the Fed's Open Market Committee, 5 of the voting members--I 
think that is really hard to justify.
    So I think having the entity that controls monetary policy, 
whether it is the Fed or we give a different name to it, I 
think having that directly answerable to Congress certainly 
makes sense. And, you know, again, one could think of how best 
to structure that.
    I, for one, wouldn't say I necessarily want, as much 
respect as I have for the members of the committee, I don't 
want the Members of Congress directly setting interest rate 
policy. But the analogy I would make is to the Food and Drug 
Administration, that, you know, we expect that they are 
answerable to Congress.
    Mr. Kucinich. But I would tell you, back home, people have 
skepticism and businesses have skepticism about letting the Fed 
pass out, you know, free money to certain interest groups while 
businesses on Main Street are starving. I mean, you know, 
that--thanks. My time has run out. Thanks.
    Mr. Jordan. I just have one more question, but then I will 
give the ranking member another round if he would like.
    But in yesterday's Wall Street Journal, Mr. Ronald McKinnon 
from Stanford University, the Stanford Institute for Economic 
Policy Research--are you guys familiar with Mr. McKinnon? Yeah. 
He wrote what I thought was an interesting piece. I actually 
read it last night. He thinks stagflation is coming, maybe 
here. And he makes the comment, which I think strongly 
reinforces what Dr. Murphy and Mr. Reinhart said, ``The Federal 
Reserve is the prime contributor to the current bout with 
stagflation.''
    So I would just like your--we will go down the line here, 
too--your thoughts on the piece Mr. McKinnon had in the Journal 
yesterday. And do you think that is where we are--this 
stagflation concept, do you think we are headed back there?
    Mr. Reinhart. My wife Carmen and I wrote a paper in August 
for the Fed Reserve-Kansas City's Jackson Hole Symposium 
called, ``After the Fall.'' And what we documented was, after a 
severe financial crisis, economies grow more slowly than before 
for the entire decade--a point and a half slower in the decade 
after a crisis than before the crisis.
    So the real macroeconomy is going to probably be growing 
only around the rate of growth of its potential. It is going to 
take a long time for the unemployment rate to come down. In 
that environment, we are probably in for a spell of subpar 
economic performance.
    Mr. Jordan. Uh-huh.
    Mr. Reinhart. To the extent that we also lose the anchor of 
price stability, then that would be a double dose of problems.
    I don't think right now the Fed will--that will necessarily 
happen. The Fed can be responsible for price stability. I think 
it could have been more effective in its program of 
quantitative easing, but I am not quite as pessimistic as 
Professor McKinnon.
    Mr. Jordan. Well, in Mr. McKinnon's article, he points to 
the same thing Dr. Murphy mentioned in his testimony, the 
tripling of the money base. And I don't see it offhand, but he 
makes some of the same arguments.
    Dr. Murphy, your comments on Mr. McKinnon's piece?
    Mr. Murphy. I actually haven't read that particular piece 
yet. But, yeah, I mean, I have been for a while very concerned 
about stagflation, that the policies, both the Federal Reserve 
and Federal Government policies, the last few years would slow 
real economic growth and also add inflationary fuel.
    One thing I should have said before about speculators, if I 
could just say one thing very briefly, is, I just want to 
remind people that it can go both ways. For example, when 
President Bush, back in I think it was July 2008, announced 
that he was going to end the executive branch's moratorium on 
offshore drilling, apparently oil prices dropped $9 during the 
speech itself. OK?
    Mr. Jordan. Yeah.
    Mr. Murphy. So that is what I mean, that when people think 
that there are future events that are going to affect the 
supply of oil, that can drive prices.
    Mr. Jordan. And if the Congress of the United States would 
pass legislation saying we are going to expand dramatically 
drilling and exploration and get the resources out there, most 
likely that would have an impact on the price of oil, not in 
the 8 to 10 years that people say it takes to get the product 
to market, but when it is actually done, when the bill is 
passed.
    Mr. Murphy. Right. And the way that happens, it is not that 
there is a time machine, it is that--if U.S. policymakers 
expedite and give the green light so people think that U.S. 
production is going to be higher in the future----
    Mr. Jordan. It sends a message.
    Mr. Murphy [continuing]. Right, then current producers with 
access capacity, like Saudi Arabia, they increase current 
output.
    Mr. Jordan. Just like if we would actually cut spending and 
cap spending and send a message to the market, that might 
actually help maybe PIMCO get back in the Treasury market and 
Standard & Poor's change their outlook, right?
    Mr. Murphy. Right. So, yeah.
    Mr. Jordan. It sends a message. I mean, it is of critical 
importance. Thank you, Dr. Murphy.
    Mr. Baker, we have to get back to my first question, Mr. 
McKinnon's analysis.
    Mr. Baker. Yeah, I have to say, I haven't read the piece. 
But I have to say, I am not very concerned about the prospect 
of the inflation side of the stagflation. I mean, if you look 
at the inflation data, it almost all shows very low inflation. 
And in terms of market expectations, we actually know that 
because we have futures, we have inflation-indexed Treasury 
bonds. And those suggest that the markets are anticipating 1\1/
2\ to 2 percent inflation well into the future.
    So I am not concerned on the inflation part. I am very 
concerned about bad policy giving us slow growth. And in the 
short term, I don't see any alternative to the deficits 
boosting the economy, because the private sector is not about--
I certainly don't see any evidence----
    Mr. Jordan. Mr. Baker, let me ask you a question. If big 
government spending were going to get us out of this mess, 
don't you think we would have been out of it a while ago? In 
light of the fact that, for the last 3 years, that is all the 
Congress, all the administration has done--more spending, more 
spending, almost 25 percent of GDP, record levels, haven't been 
there since World War II, quantitative easing policy, the 
tripling of the Fed's balance sheet--don't you think it would 
have done a little better job than it has, if that was the 
answer?
    Mr. Baker. Well, I think it has done a job. I think that, 
if you look at the size of the----
    Mr. Jordan. Yeah, the job it has done is that we still have 
8 percent unemployment in Ohio.
    Mr. Baker. And I think it would probably be 10 or 11 
without those actions.
    Mr. Jordan. It was.
    Mr. Baker. Well, it would still be, absent those actions.
    We lost on the order of $1.2 trillion in annual demand with 
the collapse of the housing bubble, between construction and 
the lost consumption due to the disappearance of equity, home 
equity. So that is what we are trying to counter with that.
    The other part of the story, of course, when you look at 
trying to rebalance the economy, the only way I see to do that 
in the long term is with net exports, which involves a falling 
dollar. I don't know any other way to do that.
    Mr. Jordan. I ran over my time three times in a row.
    Mr. Ranking Member, this will be the last round, but you 
can take as long as you need.
    Mr. Kucinich. I want to----
    Mr. Jordan. Can I interject?
    Mr. Kucinich. No, go ahead.
    Mr. Jordan. I need to enter the Committee on Oversight and 
Government Reform report, the majority report, for the record. 
Thank you.
    [The information referred to follows:]



    
    Mr. Kucinich. I want to just begin by letting the chair 
know how much appreciate the fact that you called this hearing, 
because what I note is interesting is, you know, while the 
witnesses may have some differences of opinion, the fact that 
there is concurrence suggests that there may be the potential 
for an alliance between conservatives in the House and those 
who are not conservative, or even liberal, on some of these 
economic issues, especially with respect to the role of the 
Fed. That is not a small matter. And I appreciate that you 
called this.
    Dr. Baker, could you take a few minutes to explain the 
relevance of price inflation here and explain to us the 
relationship between the price Americans see at the gas pump 
and the supply of money? Do you have any thoughts on that?
    Mr. Baker. Well, in principle, what you can expect is that, 
in ordinary circumstances, gas prices rise with other prices. 
That is clearly not the sort of story that we are seeing today. 
So a conventional story of inflation driven by the money supply 
is that we throw out a lot of money, which we have done, and 
then, in response--and this has not happened--you would see all 
prices rising more or less at the same rate. You shouldn't 
expect to see changes in relative prices.
    So we see gas, depending what we want to use as our 
starting point, but let's say we go back to $2.50 a gallon and 
now we are at $4, we seeing an increase on the order of 50 
percent in the price of gas. We don't see anything like that 
almost anywhere else in the economy. We don't see that with 
rents, we don't see that with medical services, we don't see 
that with video equipment. I mean, pick whatever you want to 
look at, we don't see that.
    So that suggests that something qualitatively different, 
something that has really very little to do with the supply of 
money is affecting the price of gas.
    Mr. Kucinich. Well, pull that out. So what does that 
suggest to you, then? I mean, I know you have said this before, 
but----
    Mr. Baker. So what I am saying is that, on the one hand, 
you have sort of the fundamentals of the market playing a very 
important role; that you have had rapid growth in the 
developing world that is increasing demand for oil. That is 
going to continue.
    The second issue is the instability, which has, to some 
extent, affected the supply; it hasn't hugely affected it, but 
to some extent affected the supply. The instability in the 
Middle East, that could turn out to be a major factor in terms 
of actually affecting the supply if it were the case, for 
example, that Libya's oil were to come off world markets, that 
we would lose the supply from there, or one of the other major 
producers in the Middle East.
    And then the third factor is simply that we clearly have 
some speculation in the market. People are betting that prices 
will be higher, and they are trying to take advantage of that 
and pick up the gains. And that, at least temporarily, pulls 
oil off the market, pushes up the price.
    Mr. Kucinich. I want to thank the chair for--and thank the 
witnesses for testifying. Those who represent trucking and 
businesses, you know, we appreciate your presence here. I think 
the chair has created a forum here for an important hearing.
    And I look forward to working with you as we continue to 
try to find ways of letting our constituents know exactly what 
is going on and, you know, what we can do about it to try to 
take a new direction.
    And, you know, finally, one of the things that I have 
advocated immediately with respect to the extraordinary profits 
that these oil companies are getting in this climate--for 
example, you know, Exxon, I think they had a $10.7 billion 
profit in a single quarter--extraordinary--like, a 69 percent 
increase over the previous year, which is already pretty high--
is to think about a windfall profits tax. You know, people have 
to make money, I got that. But when you are gouging people, you 
shouldn't get away with it.
    So we should look for ways--and that wouldn't be at the 
pump. It would be on the profits. That is the difference. To 
try to find a way to try to discipline the oil companies so 
they aren't stealing from our constituents.
    So, I appreciate the chair's opportunity to be here, and I 
look forward to continuing to work with you. Thank you.
    Mr. Jordan. I appreciate the ranking member's comments and 
input and help with the committee.
    Just a quick response to the windfall profits suggestion. 
Probably not going to go there, as you would expect. But I have 
yet to figure out how raising taxes is going to lower gas 
prices. I just don't see how that is going to help Mr. 
Wannemacher in his business. I don't see how it is going to 
help the small-business owners Ms. Kerrigan represents.
    Mr. Kucinich. By not raising the price at the pump.
    Mr. Jordan. I just don't see how that is going to help our 
economy.
    But I do want to thank our witnesses, particularly Mr. 
Wannemacher and Ms. Kerrigan coming in and giving us the small-
business perspective, and our others on the Fed role and on the 
broader economic concerns. Thank you for being with us. I 
apologize again for having you have to stick around this late 
in the afternoon. But thank you for being here today and giving 
us this valuable testimony.
    And we are adjourned.
    [Whereupon, at 4:30 p.m., the subcommittee was adjourned.]

                                 
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