[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.

                          ____________________