[Congressional Record Volume 142, Number 17 (Wednesday, February 7, 1996)]
[Senate]
[Pages S1063-S1066]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
REPLACING FEDERAL RESERVE CHAIRMAN
Mr. HARKIN. Mr. President, I take the floor to speak on a matter of
great importance to this country, to me personally and to, I know,
every Senator here. A matter of great importance to
[[Page S1064]]
all the working men and women of America and to our future, for our
children.
This is the first time I am going to speak about it, but I am going
to speak about it on several occasions in the coming days and weeks.
I wanted to begin the process of talking about one of the most
important decisions that President Clinton will be facing during his
first term in office. That decision is pending right now. That decision
has to do with who will be the next Chairman of the Federal Reserve
System.
Will the President renominate Alan Greenspan? Or will the President,
consistent with his view that things must change and we must change the
way we do things in this country, begin the process of looking for new
leadership at the Federal Reserve System?
Mr. President, I believe President Clinton should begin to look for
new leadership to head the Federal Reserve System.
Raising the living standards and the real wages of ordinary Americans
is our primary economic challenge. But the policy of the Federal
Reserve under Chairman Alan Greenspan, I regret to say, stands in the
way. Mr. President, he should not be renominated.
Under the Full Employment and Balanced Growth Act of 1978, the
Federal Reserve is obligated to conduct monetary policies so as to
reconcile reasonable price stability with full employment and strong,
stable economic growth. That is the law.
But under the Greenspan Fed, job growth and the living standards of
average Americans have been sacrificed in the blind pursuit of
inflation control and the interests of the bond market. The Fed has
raised interest rates not when inflation was knocking at the door, but
when inflation did not even threaten. In 1994, in the midst of 7
straight rate increases, Chairman Greenspan himself acknowledged that
there was no evidence of inflation.
It is time for the Federal Reserve to pursue a more balanced policy,
based on raising economic growth and increasing jobs, alongside
continued vigilance against inflation. Outgoing Vice Chairman Alan
Blinder argued for just such a course.
With the downsizing of Government spending and its more limited
ability to stimulate the economy, the significance of the Federal
Reserve interest rate policies has grown even larger.
Chairman Greenspan is guided by a concept called the ``natural rate
of unemployment''--the principle that there is some definite rate of
unemployment below which workers' incomes will rise, leading to rising
inflation. And, obviously, Mr. Greenspan accepts statistical estimates
by some economists that tell him the rate is now at, or near, 6 percent
unemployment. In other words, if we fall below 6 percent unemployment,
inflation is going to, boom, go up. But unemployment has been just
below 6 percent for over a year, and inflation continues to fall.
Unfortunately, the Greenspan policy of slow growth and high interest
rates rests on one enduring doctrine--that high unemployment is good
for the economy. Today, unemployment stands at 5.8 percent. That is far
too high. And 7.7 million unemployed Americans is far too many.
But according to Greenspan Federal Reserve Board dogma, there just
may not be enough out-of-work Americans. Now, by contrast, Federal law
sets a goal of unemployment at 4 percent, a goal of 4 percent
unemployment.
Of course, I do not think anyone has all the answers, but it is time
we started using some plain common sense for some positive changes.
The first step to getting back on the right track is to set our
sights on a higher rate of economic growth and a lower rate of
unemployment. And the key to this is to lower interest rates and keep
them as low as reasonably possible.
Under new leadership, we could look forward to more growth, to lower
unemployment. But I daresay not under Alan Greenspan. His feet are
planted firmly in the past.
What about the fear of inflation? Well, we cannot perfectly predict
the future or rule out a rise in inflation sometime in the future, so
we have to continue to be vigilant and well-prepared. But most
forecasts are for continued low inflation.
Our economy is much more global and open to worldwide competition. We
have a new culture of mass discounting in retailing, cost efficiency in
manufacturing, some pretty ruthless economies in almost every branch of
trade. We have rapid technological changes, especially in computers,
which are playing a role, allowing for lower cost replacements for
goods whose costs rise. Oil supplies are high, relative to current
demand.
Well, what all of this really means is that we can now have fuller
employment without inflation--allowing our workers to fully benefit
from their higher productivity with higher incomes--that is, if we push
for fuller employment through our monetary policy. That is where it has
to come from.
Real growth to strengthen our economy is essential. Over the last 20
years, our economic growth has fallen by about one-third over what it
was previously. That huge drop in our economic growth has cost our
economy in the neighborhood of $14 trillion. What that means is
stagnant incomes for average families, higher unemployment, and a lower
quality of life in America.
Mr. President, I have an article that appeared last year, but I
thought it summed it up pretty well. Patrick Gaughan, Director of the
New Jersey Economic Research Center said:
We blame Alan Greenspan. Seven interest rate increases are
taking their toll. Greenspan's statistics represent picking
up effects that are apparent in day-to-day living. People
listed as employed are working part-time jobs without
benefits. If you lost a six-figure job and got one back at
$30,000, you are treated the same in unemployment rates.
He goes on to say that he thinks the Fed is preoccupied with
inflation:
Whether inflation goes up 1 or 2 percent is far more
important in the eyes of Greenspan than whether a person has
a full-time versus a part-time job. The average person cares
more about having a full-time job than he does about paying a
nickel more for a loaf of bread. The Federal Reserve has
gotten so insulated it doesn't realize these things.
Let me say that last sentence again: ``The Federal Reserve has gotten
so insulated it doesn't realize these things.''
He is not the only one that has been critical. Jerry Jasinowski, head
of the National Association of Manufacturers said:
The Fed is fundamentally misreading the American economy.
They ought to get out from behind their desks and see what is
really happening in plants and on factory floors.
So it seems, Mr. President, that serious questions are not being
raised and being asked about the leadership of the Fed under Alan
Greenspan. I am not here to say that Mr. Greenspan is not a good and
decent man, and I am sure he wants what is best for his country. I am
just saying that his economic theories and his approach are out of
date. Maybe some time in the past, but not for today's economy. Not for
the rapid changes that are taking place in the world, for American
workers whose incomes are stagnant and who need to have their incomes
raised, because they can have higher productivity. We can have greater
growth in this country than 1 percent or 2 percent, and we can have
this growth without the fear of inflation.
As I said, Mr. President, I will repeat, over the last 20 years, our
rate of economic growth has fallen by a third over what it was
previously. That has cost us $14 trillion. That has an impact on
average families on unemployment, lower jobs, lower quality of jobs,
lower income.
The chairmanship of the Federal Reserve is up soon, next month, I
believe. Mr. President, it is time for a change. President Clinton has
the opportunity to bring about positive change by bringing in new
vision and new leadership to this position. America needs a forward-
looking Fed Chairman who recognizes the importance of expanding
opportunities for our economy and our people in today's global market.
We need strong leadership, committed to higher growth and higher
incomes, fuller employment, and lower, more stable interest rates, to
improve the quality of life for average Americans. Mr. President, Alan
Greenspan's time has passed. It is time for new leadership at the Fed.
Mr. President, I have an article here that appeared in the
International Economy in November-December 1995, by William Greider. I
ask unanimous consent that it be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:
[[Page S1065]]
[From the International Economy, Nov.-Dec. 1995]
Sleeping With the Devil
bill clinton will lose the 1996 election unless he changes his economic
strategy. dumping fed chairman alan greenspan would be a good start
(By William Greider)
The killer campaign issue of 1996 is the same old criterion
that usually determines the fate of incumbent presidents--
incomes and general prosperity--and by that measure Bill
Clinton looks like a goner. The financial economists at the
Federal Reserve and the White House congratulate themselves
for having tamed Americans' unruly appetites by engineering a
2-by-2 economy that appears quite satisfying when viewed as
abstract policy: 2 percent growth, 2 percent inflation. But
the political problem is that in the real world, where most
voters live, this slow-growth regime guarantees the
continuing erosion of wage incomes for most American
families.
The last peak in the median family income occurred in 1989,
followed by recession and a shrinkage of 7 percent. But
although the economy was again growing in 1995 after
expanding smartly during 1994, income levels had still not
regained the lost ground. Since Clinton's election, wages
have been flat or falling (discounted for inflation) for
everyone except the top 30 percent of women on the income
ladder and the top 20 percent of men. Such beneficiaries are
not exactly lunch-bucket Democrats.
Clinton's presidency is distinctive in these terms: Unlike
previous cycles, most people did not receive the usual bounce
in family incomes once the ``good times'' supposedly resumed.
The wage declines persisted despite the modest recovery and
the healthier growth rate during 1994. Then the Federal
Reserve stiffed the president: 4 percent growth, it
announced, was dangerously inflationary, and it thus pulled
the plug on the Clinton recovery.
As in so many other matters, Clinton meekly deferred to the
wisdom of his elders. He made not a peep of protest as Alan
Greenspan raised interest rates and cast a heavy shadow over
his reelection prospects. The White House actually concurred
with this move and the president's principal economic
advisor, Laura Tyson, even boasted about the depressed labor
costs, which were rising in 1993 at one of the lowest annual
rates in three decades. ``We see a very well-behaved employee
compensation index,'' Tyson announced. Well, in 1996 the
president is going to see some very ill-behaved voters--
including many of the working-class Democrats who were among
his original electoral base of 43 percent.
Bill Clinton made his choices and now he has to live with
the results. Though elected as a Democrat by talking
eloquently about the crisis of declining wages, he opted for
a financial-market strategy for governing; trusting the Fed
and the bond market to reward him for enacting significant
deficit reductions by lowering interest rates. But both of
them ran out the door once Clinton had trashed his own
campaign promises to increase public investments. When
Republicans play to the bond holders, they employ superior
timing: They take the hit on the economy early in the
presidential term so things will be back on track and growing
robustly in time for the next election. The investment
bankers Clinton recruited as advisors seem quite naive about
electoral cycles (or perhaps indifferent to his fate).
My hunch is that Clinton cynically assumed he could get
around to helping the folks during the second half of his
term, pumping up their gratitude with new programs just in
time for his reelection. But that door slammed shut last
November when the Republicans took over Congress and
rediscovered fiscal prudence.
What's occurring is quite explosive for American polities
and threatening to both parties. The overall returns from
conventional economic growth are no longer being distributed
widely through out the society, but rather are skewed upward
to a fairly small group of citizens. The implications are
devastating for the president, but ultimately also for the
ascendant Republicans with their much-celebrated
``revolution,'' since they too have no answer to the wage
problem. If most American families continually lose ground
during the ``good times,'' is it any wonder national politics
is turning weird and unstable?
Of course, no president can be expected to singlehandedly
reverse the deeper wage trends, but it matters to people
whether a politician is pulling for them or against them.
Clinton's gravest political error was to sit passively while
Greenspan and the Federal Reserve Board knocked the steam out
of the economy. That decision effectively guaranteed that
wages for most people will continue to decline throughout his
presidency. By the summer of 1995, Clinton was delivering
soulful speeches lamenting the effects that the forces of
globalization were having on average American families. But
the words are unconvincing since he himself aligned with
those forces.
The iron law of presidential politics holds that an
incumbent needs robust, rising prosperity during his
reelection year to win a second term. If the reverse occurs,
as it now is, he loses. From Herbert Hoover to George Bush,
there have been no exceptions to this rule. Of course,
Clinton can perhaps somehow elude these fundamentals with
luck and a clever campaign, but it would require an historic
levitation of public opinion.
The key electoral indicator is real per capita disposable
personal income: the money people have left to spend after
taxes and inflation have taken their bites. When that
indicator is rising sharply it is a reliable ``feel good''
barometer for the nation even if it does not reflect the
gross maldistribution of incomes. Last year, disposable
income was expanding mildly at about 2 percent until the
fourth quarter, when it spurted by a very robust 6.4 percent,
due to the surging economic growth. If the economy had
continued growing by 4 percent a year, greater and greater
numbers of people would have gradually shared the benefits.
Instead, the Fed's brakes took hold and personal income
growth also began subsiding at an even more rapid pace.
By the spring quarter, disposable income was shrinking at a
rate of minus 2 percent. I don't know how Clinton's economic
wizards expect to reverse such a trend, but they must attempt
to do so quickly--or Clinton will join Bush and Jimmy Carter
in the one-termers' Hall of Fame.
To counter this reality, Clinton has an excellent campaign
issue sitting on his desk if he has the nerve to use it:
dumping Greenspan. The Federal Reserve chairman, a
conservative Republican economist first appointed by Ronald
Reagan and reappointed by Bush, completes his second term in
March. The smart money says Clinton will reappoint him to
another four-year term since--it is assumed--the Republican
Senate will refuse to confirm anyone else, especially anyone
burdened with such old-fashioned concerns as family incomes.
But instead of acceding to this scenario, Clinton ought to
discard the old pieties about the supposedly independent
Federal Reserve, ignore his own advisors and make a noisy
fight of it: ``I am replacing Alan Greenspan because his
slow-growth economic policies are hurting average American
families.'' If Bob Dole wants to defend the Federal Reserve's
noose on the American economy, let him. If Wall Street
financial analysts freak out, all the better. If Republican
senators refuse to approve a new chairman, Clinton can run on
the issue all year long. The central bank will run just fine
with a temporary chairman, while politicians debate the gut
issue of American politics: the prospects for economic
growth.
Politics aside, here are three substantive reasons to shake
up the central bank:
1. Greenspan is an appropriate symbol of the wage disorders
and the larger economic debate that ought to engage the
nation in 1996. The immediate question for candidates is
this: Do you agree with the Federal Reserve's gloomy
assumption that the U.S. economy must not grow faster than 2
percent to 2.5 percent a year? If the American economy is
permanently constrained to 2 percent growth, forget all the
other issues that politicians propose, since most families
are certain losers in such a scenario. Which side are you on?
2. Greenspan's intellectual explanations for why the Fed
had to squelch the [economic] recovery are quite lacking and
will not withstand serious scrutiny by intelligent graduate
students, much less rank-and-file citizens. ``The chairman
has proposed a simple-minded rule for determining what he
calls ``the maximal growth of a nation's well-being.'' (Note:
He does not say ``maximal economic growth'' or explain whose
``well-being'' will be maximized by his policy.) His rule is
that, since the labor force expands by 1.1 percent and
productivity by 1.4 percent, that adds up to 2.5 percent
growth and that's it. Anything more, he opines, ``would in
the end do more harm than good.''
What's wrong with his numbers? Usual ideological arguments
over growth and inflation aside, the Federal Reserve assumes
the economy is already at full employment--that there are no
willing workers left to employ. Anyone who spends a few
minutes examining the reality knows this is fraudulent: it
excludes the millions of involuntary part-time workers and
the millions more who are simply not counted. It presumes a
static perfection in job markets that will seem ludicrous to
anyone who talks to young people looking for jobs (or to the
older people who have been restructured out of theirs).
Greenspan's 2 percent solution is terrific for the bond
holders but terrible for the future security of most
families.
The Greenspan logic, oddly enough, also excludes the global
economy--the competition of low-priced imports that serve as
a market restraint on U.S. wages and prices, the gross
overcapacity in the worldwide production base and the ability
of the multinationals to shift their output from country to
country, adjusting to the cycles of supply and demand. The
country needs a larger debate on all such matters but it will
not receive one as long as politicians defer to the opaque
reasoning of the Fed.
3. Another strong reason to dump Greenspan is that he has
been highly political despite the supposed non-partisan
nature of the independent central bank. This Fed chairman has
been mucking around in all sorts of political issues far
beyond the ken of monetary policy, usually in ways that will
injure broad ranks of citizens. First cozying up to Clinton,
he is now sucking up to the new Republican majority in
Congress. He pushed Clinton to drop his original jobs agenda
and instead deal with the deficits. Now Greenspan is
collaborating with Republicans so they too can break their
promises.
Greenspan provided the stimulus for a devious game that is
underway to cut Social
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Security and raise income taxes--both of which the Republicans promised
not to do in their celebrated ``Contract With America.''
Greenspan personally began the proceedings early in 1995 when
he announced the Fed's conclusion that--eureka!--the Consumer
Price Index overstates inflation by as much as 1.5 percent.
Never mind the obvious contradiction this asertion posed for
the chairman's own arguments about inflationary dangers and
the need to stifle the economy.
Greenspan's purpose was to suggest that by adjusting the
CPI Congress could lop more than $20 billion from Social
Security and other benefit programs and add a similar amount
in higher tax revenues. The CPI is used to calculate annual
cost-of-living increases for a variety of entitlement
programs and to protect taxpayers from being pushed into
higher tax brackets by inflation. Adjust it downward and
Congress can find $40 billion or $50 billion. Look, no
hands--we're cutting Social Security and raising taxes and
nobody can see us doing it. This is the type of sleight-of-
hand that Americans have come to expect from Washington and
it is the reason both parties are loathed. If Republicans try
to speak this into legislation late at night. I hope the
voters catch them.
Clinton could use all of these arguments to explain why he
is replacing the Federal Reserve chairman, though I concede
it would be out of character for him to do something so
provocative and independent of the conventional wisdom. But
think of the bumper sticker:
``Dump Greenspan. He's Good for Bonds/Terrible for Wages.''
``Dump Greenspan: The Guy is Standing on Your Paycheck.''
``Dump Greenspan: He Stopped the Party Before You Got Any
Punch.''
If Clinton doesn't rewrite his hair shirt economic message,
he will be stuck in about the same place that Jimmy Carter
was in 1980, telling voters: ``Sorry about the economy,
folks, but this is about as good as it's going to get.''
Rational voters, given that choice, will usually opt for
something else--anything else--even a fairly loopy or nasty
alternative.
I Remember the Gipper's favorite question: ``Are you better
off now than you were four years ago?'' Next year, I expect
Republicans to ask that question again, with devastating
effect, Once again, they will be able to grab the high ground
from the Democratic Party by calling for faster economic
growth. Speaker Gingrich occasionally opines that the economy
can grow at a 5 percent rate, through he does not explain
how, given the obvious contradictions with the austerity
provisions of the GOP agenda and the Federal Reserve's
assumption that 2 percent growth is ``maximal.''
In other words, if the Greenspan era continues for another
term, the political questions about economic growth will not
go away. The same contraditions--the broad deterioration of
incomes and the central bank's doleful logic--will confront
Republicans if they win the White House. The Republicans are
leaning on the same frail reed that failed Clinton: a vague
hope that the Federal Reserve and the bond market will help
them by lowering interest rates. They should get Greenspan to
put this in writing.
The dilemma of the economy's growth rate is at the center
of American politics but is seldom directly debated, since
almost everyone assumes that faster is better. Even the
antigovernment conservatives promote various proposals, such
as a capital-gains tax cut or regulatory decontrols, based on
the same premise: The measure will produce faster economic
growth. But how can they do so, if the Fed insists 2 percent
is the most the nation can handle? if voters and politicians
ever grasp the contradiction, it may well be triumphant
Republicans, not Democrats, who finally have to take on the
Fed.
Mr. HARKIN. As I said, Mr. President, I will be discussing this issue
at greater length in the days and weeks to come. I guess we are on
recess now. I guess the Senate will be in again later this week and I
guess next week. I do not know when. But I hope to take some more time
on the Senate floor to discuss the Federal Reserve System and why what
they are doing and the course of action they are taking is not
consistent with the real world. It is what is happening in the global
economy, with what is happening to real competition, with what is
happening to the need, and not only the need, but the possibility of
real economic growth in this country.
The growth rate that seems to be acceptable to Mr. Greenspan I do not
believe is acceptable to the rest of this country. From February 1994
to February 1995 under Chairman Greenspan interest rates were raised
seven times--seven times in 1 year, three percentage points. It went
from 3 percent to 6 percent in the year that ended in February 1995.
Now, we do have to be vigilant about keeping inflation in check. But
even Mr. Greenspan said there was no inflation. Inflation has not been
threatening, certainly not in the last year, Mr. President. But you
would think if that is the case, interest rates would come down. But
since February of last year, the Fed has lowered interest rates only
three-quarters of a point. So he can raise interest rates 3 percent in
1 year, but in the next year he can only lower them three-quarters of a
point. The recent small reductions may make people feel a little good.
But they are still not down to where they were in February 1994.
I find it more than passing strange that interest rates can go up 3
percent in a year but they can only come down three-quarters of a point
in the following year when there is no inflation threatening at all. I
think it is very important to talk about this because of the
significant impact it has on our economy and the income of average
Americans.
I know there are other Senators who feel as I do. I know that Senator
Dorgan also wants to take the floor to speak about this issue and about
the need for a new policy, for new policy directions at the Federal
Reserve System.
Mr. President, I wanted to take the floor to alert my colleagues that
I will be putting more information in the Record and I will be
discussing this at length in the days and weeks to come. As I said, I
certainly hope that President Clinton will see the necessity for new
leadership, and through guidance at the Federal Reserve System, appoint
someone with a new vision, someone with new vigor and energy who
understands the real world as it is out there and who is not just
locked into outdated, outmoded and time-worn economic philosophies that
have no bearing or no real relationship to the real world as we see it
today.
I am publicly calling on President Clinton to bring new leadership to
the Federal Reserve System next month. I yield the floor.
____________________