[Congressional Record Volume 140, Number 118 (Friday, August 19, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 19, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    AT THE FED, DOUSING UNLIT FIRES

 Mr. SIMON. Mr. President, one of the more thoughtful writers 
in the field of economics in our country is Hobart Rowen of the 
Washington Post.
  Recently, he had a column touching on something that I rarely see 
referred to: the possibility of revising the Consumer Price Index.
  It is part of a criticism that he has of Alan Greenspan and the 
Federal Reserve Board.
  Overall, my impression is that the Federal Reserve Board has done a 
good job, and our problems are primarily not from monetary policy but 
from fiscal policy.
  But I also believe that interest rates have gone as high as they 
should go, unless we see inflation taking hold in a more meaningful way 
than is now suggested.
  What the column does not mention is that Congress has failed to 
follow the advice of Arthur Burns, Paul Volcker, and others, by 
indexing a great many things, including Social Security and income tax 
rates.
  We indexed income tax rates, for example, without having held a 
hearing of any committee. If we were to stop the indexing of income tax 
rates for even 1 year, the net savings over a 5-year period would be 
$36 billion.
  The really harmful effect of indexing is that it is, in and of 
itself, inflationary. And the Federal Reserve has to keep that in mind 
as it looks at the inflation problem. We have built, through indexing, 
a weakness that can start inflation snowballing, if we are not careful. 
So they are being prudent, sometimes perhaps too cautious.

  One of the ways to slow the inflationary impact of indexing is to 
take a good look at the index factors, as Hobart Rowen suggests.
  When I was in the House, I was startled to find that the Consumer 
Price Index ``Market Basket'' included the assumption that every 
American bought a new home every month. I don't know too many people 
who do that.
  No other country followed that path in indexing the housing 
components of their inflation index.
  So I introduced an amendment calling on the administration to change 
the index calculation for housing in the monthly ``Market Basket.'' 
That passed the House, and it was accepted in conference committee by 
the two houses.
  As a result of that, during the last month he was in office, 
President Jimmy Carter shifted the housing component in the Consumer 
Price Index to a rental equivalency. One economist called it the most 
significant step that President Carter took in the field of economics 
in his 4 years as President. Because the subject is so complex, the 
Carter move received virtually no attention. The amendment that I 
introduced and was adopted has literally saved billions of dollars for 
the Federal Government--as well as in the private sector--and my 
recollection is that a one-paragraph story in the Wall Stree Journal is 
the only thing that ever appeared about it. As my political mentor and 
a great U.S. Senator Paul Douglas, often told me: ``The more 
significant things you do in public office will receive almost no media 
attention.'' That is certainly true of this particular item.

  I hope the Federal Government and Members of Congress will take a 
look at how the Consumer Price Index is put together.
  Hobart Rowen's suggestion for a little more sophisticated Consumer 
Price Index is something that makes sense and could save the Federal 
Government many billions of dollars.
  I ask unanimous consent to insert the Hobart Rowen column into the 
Congressional Record at this point.
  The column follows:

                    At the Fed, Dousing Unlit Fires

                           (By Hobart Rowen)

       As Alan Greenspan and his Federal Reserve Board have raised 
     interest rates another notch--the fifth time this year--
     evidence is accumulating not only that inflation is not a 
     threat but also that the way inflation is measured by 
     official agencies may overstate the danger.
       The inflation rate in the past three months has been only 
     3.1 percent and in the past year, a mere 2.3 percent. But 
     even these tolerable levels--which should not be triggering 
     higher interest rates--probably have at least a mild upward 
     bias, according to recent studies at the Fed itself.
       They show that the monthly Consumer Price Index (CPI), as 
     constructed, does not reflect all of the quality improvements 
     now available in a range of products and services and 
     therefore exaggerates the real degree of inflation.
       But Greenspan and the Fed are doggedly determined to wipe 
     out inflation before it is a real threat, operating on the 
     theory that it's better to take preventive action than wait 
     until it's too late. So the federal funds rate was raised 
     Tuesday to 4.75 percent and the discount rate to 4.0 percent.
       What Greenspan won't admit is that he may be acting too 
     early, cutting off the economy at the knees. There is 
     considerable evidence that the Fed's interest rate boosts 
     this year, prior to the latest boost, have already deflated 
     the housing and auto booms that led economic expansion until 
     mid-1994.
       There are many good reasons why the Fed should be following 
     a different course. The central bank appears to be caught in 
     a time warp, acting as though this were not the 1990s but the 
     1970s, when the economy was prone to runaway inflation.
       Today, there are vast differences. As Greenspan has 
     publicly acknowledged, the United States is now part of a 
     global economy in which international competition and global 
     excess capacity provide a powerful counter-inflationary 
     force.
       David Levy of the Jerome Levy Institute of Bard College 
     cites three examples of why the 1990s are less prone to 
     runaway inflation:
       Pay raises are modest. Twenty years ago, unions were able 
     to ratchet wages well above the CPI. Today, most unions 
     aren't able to get their employees more than a 3 percent 
     annual pay increase.
       Productivity is up instead of down. In the 1970s there was 
     a rapid, 2.9 percent growth in the labor force, reducing 
     average productivity. In the 1990s labor force is expected to 
     grow only 1.3 percent annually, with productivity rising.
       Companies are ``lean and mean.'' By trimming the fat they 
     enjoyed in the 1970s, American firms are responding to, 
     instead of ignoring, foreign competition.
       But Greenspan, like his predecessors Paul A. Volcker and 
     Arthur F. Burns, displays the central banker's traditional 
     bias that risks cutting off recovery too soon, even if 
     recession results. That's too bad, because it would be better 
     for the nation as a whole to err on the side of a small 
     inflation, rather than a small deflation, which costs jobs 
     and spells misery for thousands of lower-income families.
       Then there is the nagging question, newly raised, of how 
     accurate the CPI is in the first place. Not everybody agrees 
     that there is an upward bias. Jack Triplett of the Department 
     of Commerce, an expert on this issue, contended in 1988 that 
     ``the CPI has, if anything, understated inflation in the last 
     several years.''
       But a paper just published by Mark A. Wynne and Fiona D. 
     Sigalla of the Federal Reserve Bank of Dallas `` 
     guesstimates'' that the CPI probably does overstate inflation 
     ``by no more than 1 percent annually.'' And a 1992 Washington 
     Fed staff study also concludes there is an upward bias to the 
     CPI, which under ``extreme assumptions'' could be 
     exaggerating inflation by as much as 1.8 percent a year.
       The main reason that the CPI may overstate inflation is 
     that as the economy gets more complicated, the Bureau of 
     Labor Statistics' job of pricing the items in the ``market 
     basket'' of goods and services urban consumers are buying 
     gets more difficult.
       Example: Home users of computers and word processors get 
     vastly increased power and utility from their machines than 
     they did five years ago. Not only do today's computers do 
     their jobs more efficiently, but they also do some tasks that 
     were beyond their scope five years ago. Prices have gone 
     down, but quality has gone up.
       Greenspan acknowledged the possibility of an upwardly 
     biased CPI in congressional testimony last week. ``On 
     balance, imprecision in the measurement of key economic 
     magnitudes does complicate the job of policy-making,'' he 
     said. But Greenspan counseled not to worry, because he said 
     the Fed can consult a variety of sources besides the CPI for 
     a true reading on any inflation threat.
       That doesn't quite satisfy me, inasmuch as the central bank 
     these days is disposed, as it did Tuesday, to take preemptive 
     strikes against inflation by boosting interest rates in 
     advance. If a more precisely calibrated CPI were available, 
     the Fed would have less of an excuse to put out a fire that 
     doesn't yet burn.

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