Congressional Record, Volume 142 Issue 92 (Thursday, June 20, 1996)

[Congressional Record Volume 142, Number 92 (Thursday, June 20, 1996)]
[Senate]
[Pages S6549-S6582]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

Alice Rivlin

The third nominee causes me a great deal of difficulty, because, as I
said initially, I felt that Dr. Rivlin had good credentials and had
been a good economist that worked at various posts. However, my
experiences over the last several months, as we worked on the budget in
appropriations, have led me to have grave reservations.
We all know that the President submitted a budget that he says, under
CBO scoring, reaches a balance in 2002. It does reach a balance in 2002
if it includes the automatic trigger--the cuts of 10 percent in 2001
and 18 percent in 2002--that they established.
Well, some say the budget the President submitted includes
significant cuts even before that. I happen to chair the subcommittee
that handles the appropriations for the Veterans' Administration, EPA,
NASA, and HUD. When Secretary Brown of the Veterans' Administration
came before me, I asked him about the budget that the President had
submitted. This, Mr. President, is the budget that has been submitted
by the President for the Veterans' Administration. You will note on the
chart that, after going up nicely in 1997 during an election year, it
falls off precipitously, from over $17 billion to around $13 billion in
the year 2000. That is before any triggers occur. I asked the Secretary
of the VA, who has complained bitterly about having his budget held
flat, how he was going to live with those drastic draconian cuts. I was
stunned when he told me that he had been assured by the President and
his people that he did not need to worry about those cuts. In other
words, we did not have to worry, as we looked at the increases proposed
for this year, about what would happen when a quarter of the budget of
the Veterans' Administration would be cut out by the year 2000, and
they would not be able to build new hospitals and have new programs.
How were they going to do it? The Secretary of the VA told me he had
been assured that they were not going to make those cuts. I was
dumbfounded.

And then the head of NASA came before me, and I asked about the $3
billion dollar-plus cut in NASA budget. He said he had been told not to
plan on those cuts because he would not have to make them.
I got similar assurances from the Administrator of the EPA, Carol
Browner. She said, ``I have been assured that my agency is not going to
be cut.''
I went into another subcommittee and asked HHS Secretary Donna
Shalala how she would live with the cuts, and she outlined a whole list
of programs that would not be cut.
Well, Mr. President, nobody would own up to the fact that there had
to be cuts. When I presented this budget showing the Clinton budget
figures, a representative of the Office of Management and Budget was
quoted in a newspaper, the St. Louis Post Dispatch, saying that I was
misrepresenting their budget. Misrepresenting their budget? Mr.
President, these are the figures. These are the figures--unless the
Clinton administration has two sets of books. Under one set of books,
they would assure those of us who believe in the compelling need to
balance the

[[Page S6569]]

budget that they really are going to balance the budget. On the other
hand, there is another set of books that apparently is shown to
department directors and the interest groups they serve, in which they
assure them that there are going to be no cuts.
Which is it? I found this to be very troubling. The OMB is presenting
two sets of books. This is a shameless charade. The President says that
we are going to balance the budget. Yet, he says, no, we are not going
to make any cuts. We asked in a letter signed by my colleagues to Dr.
Rivlin whether they were going to follow the budget and make the cuts
necessary to balance the budget, or whether there was another set of
books. The letter that she responded to us with says that we are going
to work together and everything is going to come out all right, and we
will make the cuts.
Mr. President, I am deeply disappointed in Dr. Rivlin. She is willing
to subvert her professional judgment in submitting a budget to the
political directives of the White House to avoid any cuts. I regret to
say, and I am sorry to say, that I do not believe we can afford to have
someone willing to subvert their professional judgment to political
directives serving on the Federal Reserve Board. I must oppose her
nomination.
Mr. MACK. Mr. President, I yield 1 minute to the Senator from
Virginia, Senator Warner.
The PRESIDING OFFICER. The Senator from Virginia is recognized.
Mr. WARNER. Mr. President, I rise to speak on behalf of Mr. Greenspan
whom I have known for many, many years.
Today, particularly in this town, the word ``character'' is being
referred to very often. So I thought I would go to the Thesaurus,
Roget's Thesaurus. I will quote from Webster's and Roget's Thesaurus.
Webster's, of course, says, ``Moral or ethical quality; qualities of
honesty; courage, or the like; integrity; reputation.'' And the
Thesaurus says, ``Probity, rectitude, upright, integrity, honesty,
honor, worthiness,'' and right on down.
I will put the rest of them in.
But I can tell you. I have known Alan Greenspan very, very well for a
number of years. I cannot find any of the definitions relating to
``character'' in any of the leading sources that conflict in any way
with this man's own character. He is a monument to the definition of
``character.''
And I am privileged to vote to have him continue in the service of
this country.
I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. HARKIN. Mr. President, how much time remains?
The PRESIDING OFFICER. The Senator has 25 minutes.
Mr. HARKIN. Mr. President, I yield myself 15 minutes.
The PRESIDING OFFICER. The Senator is recognized.
Mr. HARKIN. Mr. President, first of all, I want to thank Senator
Daschle and Senator Lott for making sure that we had this time for
debate.
Some of my colleagues have said before--and I have said since this
nomination came down to us in March--that what we wanted was some time
to lay out the record and to debate monetary policy. I wish we did this
more often.
This is not a debate about personalities, or character. I have a
great deal of respect for my friend from Virginia. It is not a debate
about character at all. I and others happen to think that Mr.
Greenspan's performance at the Fed has left us wanting in this country;
and that his guidance and direction of the Fed is taking us in a slow
growth path that is robbing us of jobs and economic growth in this
country. It has nothing do to do with character.
I just happen to think that Mr. Greenspan happens to be wrong. I and
those of us who are taking this position are not alone in that
assessment.
I will read some quotes from a lot of people that believe that Mr.
Greenspan basically has the wrong concept of what is happening
economically in America today.
So what is this debate really about? Is this a lot of economic terms?
I have been guilty myself. I have thrown out ``NAIRU''; ``price
deflators''; and ``CBI's.'' And people's eyes tend to gloss over when
we talk about those things. Sometimes we have to get down to what this
debate is really about.
It is about working men and women; it is about small business; it is
about our farmers; it is about the middle class; it is about the impact
on their lives from a policy of high interest rates--a policy that says
that every time we have a spurt in growth the Fed raises its interest
rates and slams on the brakes. This debate is about growth in our
economy.
There are those who look at the last several years of Mr. Greenspan's
stewardship at the Fed and say, ``Well, we have had growth.'' Well,
yes. We have. It has been comparatively about a C average. If we are
happy with a C average in America, fine. I am not. I believe we can do
a B, or an A in America. I believe our workers can be even more
productive. I believe technological changes that are rapidly coming on
line are going to increase our productivity.
To say that we have reached some plateau of growth is like saying
that when the cavemen invented the wheel they said they did not need
anything else. I am sure they probably thought at that time that they
did not need anything else. They had reached their limits.
We have heard it time and time again--that somehow we have reached
our limits of growth in America. I do not buy that for a minute. And I
do not buy it--that we can only grow 2 or 2.5 percent when there are so
many indicators out there that we can grow at 3 or 3\1/2\ maybe as much
as 4 percent for a sustained period of time, and not just 1 year.
You look at Mr. Greenspan compared with the years before him. We look
at growth from 1959 to 1987 versus 1987-95. What do we find under Mr.
Greenspan? We find that in the previous year before Mr. Greenspan real
GDP averaged 3.4 percent growth. Under Mr. Greenspan it averaged only
2.2 percent growth.
Income per capita averaged 2.5 percent growth prior to Mr. Greenspan;
only 1.2 percent under Mr. Greenspan.
Payroll and jobs: 2.4 percent prior to Mr. Greenspan; 1.7 percent
under Mr. Greenspan.
And, productivity: Prior to Mr. Greenspan, our productivity went up
at an average rate of 2.3 percent per year; under Mr. Greenspan, it has
only been 1.1 percent.
So I guess, if you are happy with this kind of lackluster performance
in our economy and what the Fed has been doing, I submit that you
probably ought to vote for Mr. Greenspan because that is the direction
he is guiding and directing our Federal Reserve policy. I do not think
that is acceptable for America. I believe we can do better than that.
And it is monetary policy that is doing it. It has nothing to do with
our vote here in the Senate or in the Congress. It has to do with what
the Fed is doing with interest rates.
Again, I would say that this is not a debate as some have said
between high inflation and low growth, that somehow if we grow faster
we are going to have high inflation, and, therefore, we cannot have
that high growth because we want low inflation.
Mr. President, I refer my colleagues to chapter 9 of Lester Thurow's
new book called ``The Future of Capitalism.'' I am going to read
certain parts of it because I know that Mr. Thurow has done a very good
job in pointing out that the ``beast of inflation'' has indeed been
slain and that we are fighting old battles. As my friend from North
Dakota said, Mr. Greenspan is fighting a war that occurred back in the
1970's but we keep dredging it up all the time.
Here is what Mr. Thurow had to say. He said:

In the 1970s and 1980s fighting inflation became the
central preoccupation of the industrial world. . . . The
factors that produced inflation in the 1970s and 1980s simply
disappeared, and structural changes have occurred to make the
economies of the 1990s much more inflation-proof than those
of the 1970s and 1980s. . . . But as is often the case,
beliefs change more slowly than reality. Inflation is gone
but inflation fighting still dominates central bank policies.
. . .
The problem can be seen in the activities of the American
Federal Reserve Board in 1994 and 1995. At the beginning of
1994 the Fed saw an economy so inflation-prone that even what
was by historical standards a slow recovery from the 1991-
1992 recession (2.4 percent growth in 1993; 3.5 percent in
1994) represented an overheated economy. Because of

[[Page S6570]]

this belief, seven times in twelve months, from early 1994 to
early 1995, the American Federal Reserve Board boosted short-
term interest rates.

How much? One-hundred percent. To this day, when I tell audiences
that the Fed increased interest rates under Mr. Greenspan by 100
percent in 1 year, they do not believe me. But this is the fact. Since
February 1994, Federal funds rate, 3 percent; February 1995, 6 percent.
And what has happened since then? We have only come down three-quarters
of a point, and we are still at this very high level.
I am quoting now from Mr. Thurow's article:

Yet every time, the Chairman, Alan Greenspan, admitted that
the Fed could not point to a hint of inflation in the current
numbers. The Fed could not point to inflation because there
was no inflation. The broadest measurement of inflation, the
implicit price deflator for the gross domestic product, fell
from 2.3 percent in 1993 to 2.1 percent in 1994. In the third
quarter of 1995 it was running at the rate of .6 percent.

Mr. Thurow goes on:

If all of these factors are put together, the real rate of
inflation outside of the health care sector was undoubtedly
very low, perhaps even negative, during the entire period
when Alan Greenspan was worrying about inflation. Greenspan
could not see any inflation in the indexes because there was
no inflation to be seen.
By raising interest rates in 1994, the Fed killed a weak
American recovery that had yet to include many Americans and
slowed a recovery that was barely visible in the rest of the
industrial world.

Well, Mr. Thurow I think laid it out very clearly. As he said:

The numbers that have increased the Treasury bond rates and
30-year fixed mortgages are not because of inflationary
expectations. They reflect an uncertainty and hence the risk
premiums that investors must demand to protect themselves
from a Federal Reserve Board prone to seeing inflation ghosts
where they don't exist.

Mr. President, I ask unanimous consent that this article by Mr.
Thurow be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

The Future of Capitalism

inflation: an extinct volcano

In the 1970s and 1980s, fighting inflation became the
central preoccupation of the industrial world. Wage and price
controls were tried in a number of countries, including the
United States, but empirically it seemed to be impossible to
control inflation without deliberately creating an
environment of slow growth and high unemployment. Inflation
was not conquered in this war. The factors that produced
inflation in the 1970s and 1980s simply disappeared, and
structural changes have occurred to make the economies of the
1990s much more inflation-proof than those of the 1970s and
1980s--just as the economies of the 1960s were much more
inflation-proof than those of the 1970s or 1980s.
But as is often the case, beliefs change more slowly than
reality. Inflation is gone but inflation fighting still
dominates central bank policies. They still believe that the
natural rate of unemployment--the rate of unemployment at
which inflation starts to accelerate--is so high that they
and the fiscal authorities must step on the monetary and
fiscal brakes long before tight labor markets can push wages
up.
The problem can be seen in the activities of the American
Federal Reserve Board in 1994 and 1995. At the beginning of
1994 the Fed saw an economy so inflation-prone that even what
was by historical standards a slow recovery from the 1991-92
recession (2.4 percent growth in 1993; 3.5 percent in 1994)
represented an overheated economy. Because of this belief,
seven times in twelve months, from early 1994 to early 1995,
the American Federal Reserve Board boosted short-term
interest rates.
Yet every time, the chairman, Alan Greenspan, admitted that
the Fed could not point to even a hint of inflation in the
current numbers. The Fed could not point to inflation because
there was no inflation. The broadest measure of inflation,
the implicit price deflator for the gross domestic products,
fell from 2.2 percent in 1993 to 2.1 percent in 1994. In the
third quarter of 1995 it was running at the rate of 0.6
percent.
Having fallen during the previous recession, the producer's
price index for finished consumer goods in December 1994 was
below where it had been in April 1993 and annual rates of
increase decelerated from 1.2 percent in 1993 to 0.6 percent
in 1994. In 1994 labor costs rose at the slowest rate since
records have been kept, and the core rate of inflation (the
rate of inflation leaving out volatile energy and food
prices) was the lowest rate recorded since 1965.
The OECD in its end-of-the-year 1994 report saw no
inflation ahead in the United States in 1995. Abroad in the
world's second biggest economy, Japan, wholesale prices were
8.5 percent below 1990 levels and were still falling in mid-
1995.
Officially, the rate of inflation in the consumer price
index (CPI) fell from 3.0 percent in 1993 to 2.6 percent in
1994, but Chairman Greenspan had himself testified to
Congress that the CPI exaggerated inflation by as much as 1.5
percentage points, since it underestimates quality
improvements in goods (in computers, for example, it has
performance rising at only 7 percent per year) and since it
both has poor coverage and gives no credit at all for quality
improvements in services. It is clear that service inflation
is much smaller than reported.
An official government commission, the Boskin Commission,
has estimated an upward bias of between 1.0 and 2.4
percentage points in the CPI. This is made up of 0.2 to 0.4
percentage points of bias, because the official index fails
to keep up with consumers as they shift to cheaper products;
0.1 to 0.3 percentage points of bias, since the official
index fails to keep up with consumers as they shift to
cheaper stores; 0.2 to 0.6 percentage points of bias, because
the index underestimates quality improvements; 0.2 to 0.7
percentage points of bias, since it lags behind in
introducing new products; and a formula bias of 0.3 to 0.4
percentage points, due to the mishandling of products that
come into the index at temporarily low prices.
If one is willing to assume that the sectors where quality
improvements are hard to measure are in fact improving
quality at the same pace as those sectors where quality is
easy to measure (and it is hard to think of why they should
be radically worse performers), the over-measurement of
inflation may be closer to 3 percentage points.
In addition, health care inflation cannot be controlled
with higher interest rates and slower growth. To know what is
going on in that part of the economy that is potentially
controllable with higher interest rates, health care
inflation rates have to be subtracted from the totals. Since
health care accounts for 15 percent of GDP and health care
prices are rising at a 5 percent annual rate, mathematically
another 0.75 percentage points of inflation (almost one third
of 1994's total inflation) can be traced to health care. In
reality, more than this amount can be traced to health care,
since some of health care inflation gets built into the price
indexes more than once. If states raise sales taxes to cover
the costs of their health care programs, for example, health
inflation shows up once as increased costs for health care
and once as a sales tax increase in the consumer price index.
If all of these factors are put together, the real rate of
inflation outside of the health care sector was undoubtedly
very low, perhaps even negative, during the entire period
when Alan Greenspan was worrying about inflation. Greenspan
could not see any inflation in the indexes because there was
no inflation to be seen.
Nor were there any private inflationary expectations at the
beginning of 1994. None of the standard private economic
forecasting services were suggesting that inflation would
accelerate either. The first unexpected increase in interest
rates in 1994 imposed hundreds of millions of dollars of
losses on some of the world's most sophisticated investors
(George Soros, Citibank), who had been betting that interest
rates would fall or remain constant. If they had believed
that there was any inflation over the horizon, they would not
have placed those bets.
Theoretically, there is no reason why inflation should
adversely affect capitalistic growth. Capitalists are smart
enough not to suffer from money illusion. Negative effects
only appear when inflation gets so high that speculation and
inflation avoidance become more profitable than normal
business activities and that requires hyperinflation before
it occurs. Empirically, there is no evidence that modest
rates of inflation hurt growth. Looking at the experience of
over one hundred countries for a thirty-year period, a study
for the Bank of England found no negative effects on growth
for countries that averaged less than a 10 percent per year
inflation rate and only very small effects for countries that
averaged much more than 10 percent.
An argument can also be made that capitalism works best
with something on the order of a 2 percent per year rate of
inflation. Anything lower starts to create problems. If
prices are falling, one can make money by holding one'e money
in the proverbial mattress. To stimulate people to take the
default risk of lending requires a positive money interest
rate of 2 or 3 percent. As a result, if inflation is
negative, real interest rates must be high. Real interest
rates reached 13 percent in 1933 because prices were falling.
Real interest rates cannot be very low unless there is a
modest rate of inflation, and without low real interest
rates, investment cannot be high.
In a dynamic economy some real wages need to fall to induce
labor to move from sunset to sunrise industries. Real-wage
reductions are very difficult and disruptive if they have to
take the form of lower money wages. Labor rebels. But real-
wage reductions are much easier to accomplish if the employer
is simply giving wage increases smaller than the rate of
inflation. The real reductions can be blamed on the amorphous
system rather than on himself.
The same is true for prices. In any economy it is always
necessary to change relative prices. If inflation is very
low, that can only happen if many sectors experience falling
money prices, but capitalism doesn't work very well with
falling money prices. With falling prices there is an
incentive to postpone. Why buy or invest today when tomorrow
everything will be cheaper? In a

[[Page S6571]]

world of deflation the pressure to act is sharply reduced.
Yet action is what causes economic growth. Zero is simply not
the right inflationary target in capitalistic societies
interested in growth.
When the Fed started raising interest rates in early 1994,
it stated that it had to have higher interest rates now to
stop inflation twelve to eighteen months into the future
because of the time lags in the economic system. Growth in
fact accelerated from 3.1 percent in 1993 to 4.1 percent in
1994 and was very close to what was expected at the beginning
of the year. By the end of the year neither had the economy
slowed down nor had the signs of inflation become more
visible than they had been twelve months earlier. By
September it was clear that 1994's inflation would be much
less than the low rates that were forecast at the beginning
of the year. The business press was proclaiming that ``the
inflationary `ogre' has been banished--maybe for good,
certainly for the foreseeable future.'' Nor was inflation
accelerating in 1995, even though monetary policies did not
bring about the expected slowdown in economic growth until
the second quarter of that year.
The Federal Reserve Board was chasing ghosts. Inflation was
dead but the Fed wasn't willing to admit it.
While the 1970s and the 1980s were inflationary decades,
the 1990s and the decades beyond are going to be very
different. Inflation died in the crash in asset values that
began in the mid-1980s with the collapse of the American
savings and loan industry. This was followed by a collapse in
property values that rolled around the world. A decade later
both purchase prices and rents were still far below their
previous peaks. The crash in the Taiwanese stock market was
followed by a crash in the Japanese stock market.
While capacity utilization rates were rising in the United
States during 1994, in a global economy it is world
unemployment and world capacity utilization rates that
count--not American rates by themselves. In 1994 the world
was awash in excess production capacity. The rest of the
industrial world was having a very slow recovery from the
earlier recession--at the end of 1994 Japanese growth was
strongly negative and European growth only marginally
positive.
As we have also seen in detail in the last chapter,
globally unemployment rates were at levels not seen since the
Great Depression. Labor shortages were not going to be
driving up wages for a long time to come.
U.S. measures of capacity and hence capacity utilization
are also out-of-date. They don't reflect the outsourcing that
has happened. Outsourcing means that effectively firms
increase their production capabilities without having to
invest themselves. But the capacity increases of their
supplies remain unmeasured, since the capacity indexes assume
that nothing has changed in the proportions of value added
contributed by component suppliers and original equipment
manufacturers (OEMs).
Investments in new information and computer technologies
have also made it possible to get more output out of the same
capital with fewer people. That is part of what downsizing is
all about, yet downsizing is not reflected in official
indexes of capacity.
The Fed also doesn't seem to understand that some important
structural changes have occurred that make it impossible for
inflation to arise from the grave. The addition of the
Communist world to the capitalist world and the effective
collapse of the OPEC oil cartel in the aftermath of the
Persian Gulf War means that a repetition of the energy, food,
or raw material shocks of the 1970s are simply impossible in
the 1990s. Oil prices are lower in real terms than they were
when the first OPEC oil shock happened in the early 1970s,
yet exploration and exports from the old Soviet Union have
barely begun and Iraq has yet to be brought back into world
oil markets.
The real-wage declines that began in the United States are
now spreading across the industrial world. The downsizing of
big firms with high wages and good fringe benefits continues
at an unrelenting pace. If anything, wage reductions are
going to be accelerating. The second world and the rest of
the third world will join the small parts of the third world
that were export oriented in the 1980s. Downward price and
wage pressures from these low-cost producers can only
accelerate. In 1994 unit labor costs declined by 2.9 percent
in manufacturing and rose by only 0.9 percent in nonfarm
businesses.
At the same time productivity growth is running at the
highest rates seen since the 1970s. In most of the 1970s and
1980s, service productivity was falling, but now it is
rising. Services just aren't going to provide an underlying
inflationary push as they did earlier. Wages down,
productivity up--that simply isn't the recipe for inflation.
All across America large firms are forging new supplier
arrangements such as those recently put in place at Chrysler.
The number of suppliers is dramatically reduced, suppliers
are guaranteed much larger sales, original equipment
manufacturers (OEMs) share information and technical
expertise with suppliers on design and manufacturing, but
suppliers in return commit to annual price reductions in the
components they supply to OEMs. The OEMs in turn pass some of
these reductions on to their customers to increase market
share.
The world is essentially back to the conditions of the
1960s, with much less inflationary-prone economies. Supply
elasticities were high then because of the recovery from
World War II and the economic integration forced by the cold
war. Now supply elasticities are high because of the
integration of the second world into the first world and the
decision of most of the third world to replace import
substitution with export-led growth.
Since World War II, American firms have typically held
prices constant, or even raised them, while distributing the
fruits of higher productivity in the form of higher wages or
higher profits. But under the pressure of international
competition, that system is rapidly eroding. In the 1990s
many more of those productivity gains are showing up as
falling prices and many less are showing up as rising
wages.
Knowing that governments have lost their ability to shorten
recessions also radically changes expectations. Producers
know that they cannot hold prices constant while waiting for
a quick recovery from cyclical downturns. The early 1990s
demonstrated that no government would come running to the
rescue with large fiscal and monetary packages designed to
stimulate demand during recessions. Instead, recessions will
be allowed to run their course and governments will simply
wait for a recovery. If downturns are sharper and longer,
business firms will have to reduce prices if they wish to
survive those downturns.
There are no ghosts in the attic. Inflation is not about to
rise from the dead.
By raising interest rates in 1994 the Fed killed a weak
American recovery that had yet to include many Americans and
slowed a recovery that was barely visible in the rest of the
industrial world. In just two and a half months after the Fed
initiated its actions, interest rates on thirty-year Treasury
bonds had risen 1.1 percentage points and those on thirty-
year fixed rate mortgages had risen 1.3 percentage points.
These rates did not soar because there was a sudden upward
adjustment in thirty-year inflationary expectations. These
numbers reflect the uncertainty, and hence the risk premiums,
that investors must demand to protect themselves from a
Federal Reserve Board prone to seeing inflation ghosts where
they don't exist.
If the battle against inflation is primary, central bankers
will be described as the most important economic players in
the game. Without it, they run rather unimportant
institutions. It is well to remember that in 1931 and 1932 as
the United States was plunging into the Great Depression,
economic advisers such as Secretary of the Treasury Andrew
Mellon were arguing that nothing could be done without
risking an outbreak of inflation--despite the fact that
prices had fallen 23 percent from 1929 to 1932 and would fall
another 4 percent in 1933. The fear of inflation was used as
a club to stop the actions that should have been taken.
Central banks are prone to see inflationary ghosts since they
love to be ghost busters. While no human has ever been hurt
by ghosts in real life, ghost busters have often created a
lot of real human havoc.
Since growth did not in fact slow down in the year in which
Alan Greenspan was raising interest rates, the question Why
worry? can be raised. The answer is of course that higher
interest rates often act like sticky brakes. The driver
pushes down on the brakes and initially nothing happens. So
she pushes harder. Suddenly the brakes grab and the car is
thrown off the road. And that is exactly what happened in the
second quarter of 1995. Growth effectively stopped.
If the economy's maximum noninflationary rate of growth is
2.5 percent (the Fed's announced target), surplus labor is
going to be pushing wages down. Even the manufacturers who
have to pay those wages think that a 3.5 percent growth rate
could be achieved without inflation.
Our societies tolerate high unemployment since only a
minority suffer from that unemployment. Most of the movers
and shakers in society know that they will not be affected.
Politically, high inflation is much more worrying to those in
or seeking office, since it seems to reduce everyone's
income. Economists can point out that every price increase
has to raise someone's income and that the balance between
gains and losses seems to indicate that very few are real-
income losers as long as inflation is less than 10 percent
per year, but all of that analysis is irrelevant. To the
voter it does not seem to be true. They merit wage increases
but are cheated by price increases.
The high unemployment necessary to fight inflation is one
of the factors leading to falling real wages for a large
majority of Americans, but this reality is too clouded by
other factors and too indirect to be seen as the cause.
Political power lies on the side of those who declare a holy
war against inflation. Yet those who do so are indirectly
advocating lower real wages for most Americans.
The inflationary volcano of the 1970s and 1980s is extinct,
but the mind-set produced by its eruptions lives on. As a
result, business firms in their planning have to
simultaneously plan for a world where there is no inflation,
but there will be periodic deliberate recessions designed to
fight imaginary inflations.
Labor will continue to live in a world where governments
talk about the need to restore real-wage growth but
deliberately create labor surpluses to push wages down. As a
result, no one should pay attention when they talk about
restoring a high-wage economy with growing real incomes.
Wages go up when there are labor shortages, not when there
are labor surpluses.

[[Page S6572]]

Officially, central banks always hold out the prospect that
if they just hold down inflation long enough, they will gain
anti-inflation ``credibility'' with the financial markets and
rapid noninflationary growth will resume. but it doesn't
work. If the German Bundesbank does not by now have
``credibility'' as an inflation fighter no central bank will
ever get this mythical status. Despite its anti-inflation
credibility West Germany has had a very slow growth rate--2.3
percent per year from 1981 to 1994. Rapid growth never
resumes.

Mr. HARKIN. So, yes, there is a lot of complicated economic terms,
statistics, and charts that we can put up here. Let us not get lost in
these complexities. We are talking about simple fundamental things--
real people, families trying to make a payment on their house, trying
to buy a new car, trying to work with their bank to get the funds to
put in next year's crops for our farmers, or to operate a small
business. We are talking about creating more and better jobs in
America, about growing our economy faster, about raising wages.
That is what this debate is about. After all, Mr. President, raising
the living standards and real wages of ordinary Americans should be our
No. 1 economic challenge, but time and again the policy of the Federal
Reserve under Mr. Greenspan has stood in the way. That should not be.
Under current law, the Federal Reserve is obligated to conduct a
balanced monetary policy to reconcile reasonable price stability with
full employment and strong economic growth and production. But under
the Greenspan Fed that balance has been lost.
In 1978, we passed the Humphrey-Hawkins bill which mandated that the
Federal Reserve take into account employment, full employment, and
production along with inflation in setting its policies. I see my
friend from Florida is in the Chamber. He has introduced a bill on the
Senate side, the Mack bill, that would remove that consideration from
the Federal Reserve, to consider full employment and production and
leave the Fed only to consider inflation. I respect his opinions on
that, his judgment. We happen to disagree on that. I think the Fed
ought to have in its considerations a balanced approach--inflation,
yes, but also full employment and production. I would point out that
Mr. Greenspan has come out in favor of the Mack bill, to take away from
the Federal Reserve requirements in law that we say they must take into
account, full employment and production, in their setting of monetary
policy. I think that is wrong. And for Mr. Greenspan to support that
policy indicates that he again has his eye only on inflation, the
``ghost of inflation,'' as Mr. Thurow says, and not on a balanced
policy.
So what has happened? Middle-class Americans have paid the price. We
have seen what has happened with interest rates. And we have higher
interest rates. Let me just say this very clearly, Mr. President. What
we have operating now in America on middle-class families is what I
call the Greenspan tax--yes, the Greenspan tax on American families.
Higher interest rates are nothing more than a tax on hard-working
middle-class families, farmers, and main street businesses.
One of my colleagues was in the Chamber last week and referred to
high inflation as an unfair tax on working families. That is true. But
high interest rates are also an unfair tax. We do not have any
inflation out there, there is none of it on the horizon, and yet we
have inordinately high interest rates. The real threat and the real tax
today on our middle class, our farmers, and our small businesses is
unnecessarily high interest rates. So we need a Fed Chairman who looks
at growth and jobs and wages and says we can do better, not saying, oh,
2.2 percent is fine. We can grow much faster than that. And we do it
without the threat of inflation. We live in a global economy, a time of
unprecedented competition, rapid technological change. All of this
means we can have fuller employment, higher productivity without
inflation.
We seem to be living in a world that if we begin to do better and our
economy begins to grow, that is bad for America, the Fed slams on the
brakes, and we cannot grow any faster than that. It is seen as a bad
thing. But faster growth and higher wages and more jobs and lower
interest rates should not be seen as obstacles. They should be sought
out as our goals.
In short, we need a balanced policy based on raising economic growth,
increasing jobs, the long-cited continued vigilance against inflation.
I do not believe we have gotten that under Mr. Greenspan, and we have
seen that common thread throughout his entire record, that all through
his entire time Mr. Greenspan has focused on inflation.

Start with 1974. Mr. Greenspan was Chair of President Ford's Council
of Economic Advisers. As I discussed in depth last week, in his zeal to
fight inflation to cure the recession of 1974, Mr. Greenspan prescribed
the wrong medicine. Unemployment skyrocketed, and the recession got
even worse.
This is how Jerry Terhorst, President Ford's press secretary,
recounted it:

To be blunt about it, the President has lost confidence in
the ability of his economic advisers to predict the economic
future. This fall, when he fashioned the anti-inflationary
package he presented Congress following the series of
economic summit meetings, Ford relied heavily on the
forecasts of his consultants, including Economic Council
Chairman Alan Greenspan. They assured him that rising prices
and production costs were the prime enemy of a healthy
America. He was advised that while a recession lurked
distantly on the horizon, it was not an imminent prospect
that would confront him immediately.

Well, what happened? The recession got worse, unemployment
skyrocketed. In two months, the unemployment rate increased by 1.2
percent.
The PRESIDING OFFICER. The Senator's 15 minutes have expired.
Mr. HARKIN. How much time do I have remaining?
The PRESIDING OFFICER. Nine minutes.
Mr. HARKIN. I yield myself 4 additional minutes.
Greenspan's prognosis of the Nation's economic ills in the 1970's did
not comport with what happened, the same way in the 1980's. And I
submit for the Record an article that appeared in Investors Business
Daily called ``Greenspan's Rotten Record.''
Let us take a look again at what happened to growth during the period
of time of former Chairman Volcker. We see growth of 6, 3.3, 4.4.
coming out of the recession in the early 1980's. Now, Mr. Volcker had a
2.5 percent growth rate average, but he had a 13 percent inflation rate
facing him when he came in. He brought inflation down in half and yet
he had still had a 2.5 percent growth during his term even while he
brought inflation down in half.
Mr. Greenspan comes in. The real growth during his period of time has
been 2.2 percent. Inflation was only 4.1 percent when he came in. It
has come down to 3.2 percent--a very small decrease in inflation and
yet very low growth. That is what we are talking about, the low growth
rate. And again, it has to do with Mr. Greenspan's rationale, what his
mindset is.
Last year, I believe it came out, perhaps in an unguarded moment. I
do not know. I will read from the hearing record so the record is
straight. I have told people before that Mr. Greenspan was in favor of
going back on the gold standard and people tell me that is not right.
Well, I do not know if it is right or not. I can only take Mr.
Greenspan at his own words.
Last year, 1 year ago, not 20 years ago, last year, Senator Sarbanes
says:

All right. Now, my next question is, is it your intention
that the report of this hearing should be that Greenspan
recommends a return to the gold standard?
Mr. Greenspan. I've been recommending that for years.
There's nothing new about that.
Senator Sarbanes. Okay. So, you'd like that. You want to
reaffirm that position.
Mr. Greenspan. I have always held that system of price
stability, which would come from any form of credible type of
non-inflationary environment, would be very beneficial to
financial system.
Senator Sarbanes. And you think we should go on to the gold
standard.
Mr. Greenspan. I, personally, would prefer it. That would
probably mean that there is one vote in FOMC for that, but it
is mine.

Again, Mr. Greenspan would like to go back on the gold standard. I
would like to see how many people would stand here on the Senate floor
and defend this and say we ought to go back to the gold standard. Maybe
a few. But that is where Mr. Greenspan is coming from.
Last, Mr. President, it is not just me and a few others on our side.
I ask unanimous consent a series of quotes from business leaders on Fed
policy be printed at this point in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[[Page S6573]]

Quotes From Business Leaders on the Fed Policies

``We don't see a connection between the numbers out there
and what we feel in our business. There is absolutely no
inflation. There's no pricing power at all.''--John Welch,
Jr., chairman, General Electric.
``There's no sign of pricing pressure anywhere . . . This
economy can grow more than 2 or 2\1/2\%, and we ought to let
it do it.''--John Welch, Jr., chairman, General Electric.
``This fixation of the Fed on 2.5% gross-domestic-product
growth doesn't reflect the enormous productivity gains of the
past five years and the fact that with the information age,
you can do things faster, better, and smarter. I don't know
if the rate of growth we could sustain without inflation is
3%, 3.5% or 4%, but I think we need to see if we can grow the
economy at a reasonable fashion.''--Tracy O'Rourke (male),
CEO of Varian Associates.
``This is the most disappointing recovery we have ever seen
. . . Each time we try to do a little better than 2.5%
growth, we get slapped down by tight monetary policy. The
recovery is lackluster and it shouldn't be.''--Kent ``Oz''
Nelson, CEO of United Parcel Service (UPS).
``I believe very strongly that the Fed should be leaning
more toward growth, and not be so concerned with the threat
of inflation. . .''--Dana Mead, CEO, Tenneco Inc.
``I would rather err on the side of stimulating the economy
and growth rather than dragging it.''--Dana Mead, CEO,
Tenneco Inc.
``There was a time when 2.8% would have been considered a
modest rate of growth; today it is considered dangerously
robust. Most corporate leaders don't agree with this notion
of dragging the anchor just as soon as the economy has wind
behind it. They understand how we can sustain high growth
based on muscular productivity improvements they are
generating in their own businesses.''--Felix Rohatyn.
``Inflation is not a threat in the United States. Nor is it
for the foreseeable future. It has been remarkably flat and
will remain so unless the Fed or the markets begin spurring
inflation with high interest rates. The old domestic
indicators, while perhaps important in gauging certain narrow
trends, no longer determine the broader inflation
outlook.''--James Robinson, former CEO of American Express.
``Inflation has begun to recede, despite the unemployment
rate remaining below earlier estimates of the NAIRU. The Fed
misinterprets the low unemployment rate as an indication that
the economy is operating at full potential and grudgingly
lowers its implicit assumption of the natural rate; in
contrast, I believe the low unemployment rate has occurred as
business investment and productivity gains have raised
potential output and capacity, while restrictive monetary
policy has constrained demand. That suggests inflation will
decline further.'' Mickey Levy, Chief Economist, NationsBank
Capital Markets, Inc.
``Monetary policy in this country is controlled by bond
traders who live in highrises and are completely out of touch
with reality.'' Jerry Jasinowski, president, Nat'l
Association of Manufacturers
``Growth in the 2 percent range is unacceptably low,
because the economy can sustain higher levels of growth
without inflation. The long-run growth rate consistent with
stable inflation is as high as 2.8 percent, using the new
chain-weighted GDP measure.'' Jerry Jasinowski, President,
Nat'l Association of Manufacturers
``Economists are fighting a nuclear war with conventional
weapons. My concern is that we are using data and statistics
and rules of thumb that come from a different business
environment than now exists.'' Robert Cizik, chairman and
chief executive, Cooper Industries
``At the Fed, the attitude is to avoid inflation at all
costs. But out in the real economy, our people are concerned
about the cost--the lost jobs, the lost profits and so on,
which over time can be considerable.'' Martin Regalia, chief
economist, Chamber of Commerce
`` . . . the No. 1 objective should be growth, not
[containing] inflation.'' Bernard Schwartz, chairman and CEO
of Loral Corporation
``The economy clearly has the brakes on now and
shouldn't.''--Joseph Schell, senior managing director of
Montgomery Securities.

Mr. HARKIN. Some have been stated before by Senator Dorgan and
Senator Conrad:

Mr. HEFLIN. Mr. President, I rise today to support confirmation of
Alan Greenspan's nomination to serve another term as Chairman of the
Federal Reserve Board of Governors. Although I have not always been
completely agreeable with his policies, I think that, generally, he has
struck the proper balance in monetary policy in order to stabilize
prices and encourage growth short-term growth. In fact, combined with
the President's deficit reduction program, Chairman Greenspan's
policies helped the Nation out of its last recession.
When we consider this nomination, we must realize that the most
relevant indicator of Chairman Greenspan's accomplishment is the
success of the economy. Because of the number of factors and variables
involved in economic theory, we can stand and debate individual
arguments almost endlessly. However, we cannot ignore the fact that the
economy has exploded, while inflation has stabilized at its lowest rate
in more than a decade. In fact, the combined unemployment and inflation
rate is lower than it has been since 1968. This did not occur without
leadership, and Chairman Greenspan and President Clinton deserve our
applause.
One of the reasons for economic improvement is the recent deficit
reduction package. The deficit is an issue I have taken very seriously
over the years. When I came to the U.S. Senate, the first bill I
introduced was a constitutional balanced budget amendment, and I have
supported it ever since. Indeed, I believe that addressing the deficit,
and other fiscal problems, is the only way to cure the Nation's economy
in the long term.
Although I had reservations, and frankly I believe we can and should
do more in the area of deficit reduction, I supported the President's
1993 budget package. This measure is among the most important fiscal
steps the Congress has taken in the past decade. In fact, to use
Chairman Greenspan's words, this reduction was: ``An unquestioned
factor in contributing to the improvement in economic activity that
occurred thereafter.''
This improvement resulted in the creation of 9.7 million new jobs,
the vast majority of which are in the private sector. The last few
years have seen more construction job growth than any period since the
early fifties, and more auto job growth than any period since the early
sixties. Further, the unemployment rate has dropped to 5.6 percent--far
less than the rate during the early eighties. It is a testament to the
importance of a declining annual deficit and movement toward a balanced
budget.
However, due to the complexity of our economy, I do not believe that
the President's deficit reduction alone caused all of these
improvements. According to prevailing economic theory, monetary policy
is a more potent factor in the short-term growth of employment and
gross domestic product than fiscal policy. Therefore Alan Greenspan
does deserve a certain amount of recognition for his recession
policies. Maybe it is a credit to Chairman Greenspan, however, that he
has shown restraint; he has not failed to appreciate the consequences
of easing his monetary policy.
When the Federal Reserve Board decides to embrace an expansive
policy, the economy will grow for a while. However, a greater supply of
money leads to a lesser demand, or inflation. In the long term,
improvements are countered by higher costs and prices, and the economy
will again equalize at a reduced level, with higher inflation. In this
way, the end result is a negation of the apparent gain. Therefore,

[[Page S6574]]

monetary policy must strike the proper balance between expansion and
tightening. I think Alan Greenspan has always appreciated the
importance of this fundamental concept, and he has acted cautiously to
enact such a balance.
When the country fell into a recession in 1990, Chairman Greenspan
engineered a response to the crisis by initiating a series of interest
rate cuts from late 1990 to late 1991, keeping rates low through 1993.
Under his direction, the Fed cut the discount rate in half; this was
the lowest rate since 1962. In fact, real short-term interest rates
were near zero.
Chairman Greenspan said these reductions were necessary to spur
economic growth, and growth did follow. His judgment has thus far been
sound.
However, Mr. Greenspan rightly believes that the Federal Reserve's
most important goal is price stability. It is perhaps this fact which
has most fueled his critics.
The harshest criticism Chairman Greenspan has endured came in 1994,
when he raised interest rates seven times. Politicians and financial
markets concerned about continuing growth argued that Greenspan was an
alarmist. Critics maintained that the boon had been insufficient to
cause any serious inflation.
Even if we disagree, I think we must admit that his precautions have
proved reasonable. Although economic growth has slowed, Chairman
Greenspan has managed to stabilize inflation at its lowest rate in more
than a decade. He has also lowered interest rates again to adjust for
this slowed economic growth.
I would like to add that I do understand some of my colleagues
reservations about Greenspan's tight monetary policy. High interest
rates have been a difficult obstacle to many Americans--individuals and
businesses. In fact, they are closely tied to the Nation's housing
markets. They therefore affect homeowners, and they can damage
financial institutions, particularly savings and loans. They have
severely hurt such large businesses as Chrysler and Lockheed, and
notably, they can have a terrible effect on small entrepreneurs,
especially farmers, for whom I have a particular concern.
However, I think it is always important to keep things in
persecutive.
We might understand Mr. Greenspan's record better if we consider his
predecessor's efforts to reduce a staggering inflation during the early
1980's. Success came after the imposition of a seriously unpopular,
tight monetary policy--a policy which concerned me greatly.
When Paul Volcker took control of the Board in 1979, he convinced the
Federal Open Market Committee to emphasize control of the money
supply's growth, and to pay less attention to interest rates. Although
he was ultimately successful in bringing down inflation, his policy, in
part, caused interest rates to pass 20 percent in 1981. That was quite
a cost. It hurt homeowners and businesses across the country.
In fact, I became particularly concerned about the effects of these
rates of farmers, many of whom were devastated by the overhead of high-
interest loans. I fought to reschedule farm loans especially to
ameliorate the pains suffered by small, family farmers.
But at the time, I said that the Fed should not be condemned in its
policy, it should be assisted by administration and Congress alike in
seeking equitable remedies to fighting inflation. Inflationary controls
are, after all, the Fed's most important concern. Instead of
reactivity, I believed the Congress had to emphasize tax incentives,
and most important, work to balance its budget.
This idea has not changed in 15 years, I still believe that we must
not be reactive. We must also remember Chairman Greenspan's tenture has
been much less intense than Volcker's. Rather than raging total war on
inflation, he has only had to act preventatively. The country is doing
well, and we should not condemn the Fed--nor the man--now as we should
not have condemned them then.
Instead, the Congress must work to resolve its own fiscal dilemmas.
As I have always believed, we, and those who follow, must work toward
an enactment of sound policies that include, perhaps foremost, spending
within our limits.
Further, it absolutely should be considered that, although it is
independent of the Congress and the President, Greenspan does not
dictate absolutely over the Fed. Instead, he must achieve a consensus
at the Federal Open Market Committee votes. In this regard, he has been
called a genius; almost every vote during his chairmanship has been
unanimous. Apparently Greenspan's colleagues also consider his judgment
sound.
Mr. President, I believe that we should recognize Chairman
Greenspan's successes and acknowledge that he has done some good things
for the American economy. His efforts contributed to an enormous
recovery, and he kept inflation down during the rebound, as it his most
important goal.
Much to his credit, I think President Clinton recognizes Chairman
Greenspan's qualities, and I think he had some good reasons to nominate
him to another term. Perhaps the President's wisdom has once again led
him to understand that moderation is the route to sound policy. He did
not shy away from selecting a man lauded by Presidents Bush and Reagan
when he believed it was the right thing to do.
Mr. President, I believe the Senate should concur with President
Clinton's finding that Chairman Greenspan has done a good job and
confirm his nomination.
The PRESIDING OFFICER. The Senator from Florida.
Mr. MACK. I yield 3 minutes to the Senator from New Jersey, Senator
Lautenberg.
The PRESIDING OFFICER. The Senator from New Jersey is recognized.
Mr. LAUTENBERG. Mr. President, I want to first say that few here have
more of my respect and friendship than the distinguished Senator from
Iowa. We rarely disagree. When we do, sometimes it is a fairly forceful
disagreement. This is not in any way to challenge some of the
observations that the Senator from Iowa has made about growth. I
believe that more growth would be advisable, would be very helpful
right now. But I support the nomination of Alan Greenspan to be
Chairman of the Federal Reserve in his next term because I think what
we have is pretty darned good when you look at the results, and we see
indications of it every day, about how good this economy is relative to
where we might have been in terms of measuring the economic growth and
inflation at the same time.
Inflation is under control. It does not take much, in this former
businessman's view, to trigger off a round of inflationary growth that
we would not like to see in this country of ours.
When I see in today's papers, the Washington Post: Labor shortage may
be slowing economy, not enough people applying for jobs, bonuses being
offered to get people to apply for jobs. It does not say that we are
overburdened by unemployment.
Any unemployment is terrible in a society. But when you compare what
is happening in the United States to, now, the European market, we are
almost less than half of where they are. And inflation is very
carefully controlled.
Look at the response of what I may say are the knowledgeables, the
stock markets. The market keeps growing. Investors think there is value
there yet to be realized. We have a very comfortable view, in terms of
mortgages, in terms of money. If there is a shortage, it is because
much of the money supply that is out there is being absorbed by Federal
debt, and we are all determined to work to reduce that.
But I know Alan Greenspan on a personal basis, which has little to
do, frankly, with whether or not I would recommend him, except to say I
know him well. He served on the board of my company, ADP, until he came
to his position as Chairman of the Federal Reserve Board. I used to
hear Alan Greenspan's opinions about things. We had other very
distinguished business people on our board--by the way, Republicans
more than Democrats; that is just a coincidence; I wanted it the other
way, but it did not work that way--distinguished business people who
would listen carefully to Alan Greenspan's views on things, to his
analysis.
My ex-company--I hate to say that--my company sold the Greenspan
database. We used to deliver it. I was in

[[Page S6575]]

the computer business, and we would deliver that database throughout
the country. It was such a desirable piece of information that company
after company, institution after institution would be there, ready to
buy the services.
The fact of the matter is, Alan Greenspan, by all measures on the
record, has done a distinguished job as Chairman of the Federal Reserve
System. He deserves to be continued.
For these reasons, Mr. President, I support the nomination of Alan
Greenspan to serve his third term as Chairman, and of Alice Rivlin to
serve her first term as Vice Chairman, of the Federal Reserve Board of
Governors.
In fact, it is hard to meet Alan Greenspan without being impressed
with him. He is a very serious man who takes his work seriously, and
who understands the critical importance of the office he holds.
Alan Greenspan has ably served our country as Chairman of the Fed
since 1987. And in that time he has compiled a record that, by recent
historical standards, is impressive.
Mr. President, as I said, I have known Alan Greenspan for many years,
and have always had a tremendous amount of respect for him. Before I
came to the Senate, I ran a data processing company known as ADP. Alan
Greenspan was on our board of directors. And it was in that capacity
that I came to appreciate his intellect, his extensive knowledge of
business and economics, and his integrity. Inflation today is at 2.9
percent. Unemployment is at 5.6 percent. Not long ago, many respected
economists would have scoffed at the likelihood that both these figures
could be held down to these levels. Many assumed that unemployment and
inflation fluctuated in an inverse relationship. Yet that has not been
true in recent years, and Alan Greenspan probably deserves some credit
for that.
Mr. President, steering monetary policy is an extremely difficult job
that involves a delicate balancing of competing economic
considerations. I cannot stand here and say that Chairman Greenspan has
never made a mistake. And I understand the views of some of my
colleagues that the Federal Reserve ought to adopt a looser, more
aggressive monetary policy.
But when you compare the economy's performance with the expectations
of the pre-Greenspan era, it is hard to argue against Chairman
Greenspan's record.
It is also hard to dispute that Chairman Greenspan's work has won him
broad respect and support in the financial community.
Mr. President, Alan Greenspan is one of the most thoughtful and
deliberate people I have ever met. He does not speak glibly. He knows
what he is talking about, and he chooses his words carefully.
This deliberate approach has served him well as Chairman. And it has
contributed to a greater sense of stability and predictability in our
financial markets.
That predictability is important if our economy is to function
effectively.
So I hope my colleagues will support his nomination. And I trust they
will, by a very strong margin.
I end up asking unanimous consent that the piece in the Washington
Post yesterday, an op-ed piece by Robert Samuelson, and the article
related to employment in the Washington Post be printed in the Record.
There being no objection, the articles were ordered to be printed in
the Record, as follows:

[From the Washington Post, June 19, 1996]

Greenspan's Good Economy

(By Robert J. Samuelson)

Probably no government agency has recently performed better
than the Federal Reserve. Through short-term interest rates,
it influences the economy, and the results seem to speak for
themselves. The economy's expansion is now in its sixth year,
and since it started, employment has grown by 9 million jobs.
Annual inflation remains at about 3 percent, which is where
it was in 1991. Alan Greenspan, the Fed's chairman, ought to
be basking in acclaim. President Clinton has renominated him
to another four-year term. Yet Greenspan still faces a loud
chorus of critics.
The complaint is that the Fed is so obsessed with fighting
inflation that it has smothered strong economic growth. ``The
Fed has pursued policies that have limited . . . growth to
levels not much more than 2 percent,'' gripes Sen. Tom Harkin
(D-Iowa), who has insisted on a full Senate debate on
Greenspan's nomination. Growth could be higher by a
percentage point, he says. Some economists and corporate
executives agree. In a decade, the extra growth would raise
the average American's disposable income another $2,500. What
should we make of this?
Not much. It's true that, compared with the past, the
economy's growth has slowed. Here are the numbers. Between
1960 and 1973, gross domestic product (the economy's output)
increased at an annual rate of 4.2 percent. Since 1973, GDP
growth has averaged only 2.5 percent. But it's hard to blame
the Federal Reserve, because long-term economic growth stems
from two factors--expansion in the work force and
improvements in productivity--that the Fed hardly influences.
Both have weakened.
Productivity (output per worker hour) grew almost 3 percent
a year between 1960 and 1973. Average workers produced that
much more--in everything from steel to air travel--each hour
than the year before. Since 1973, increases average slightly
more than one percent. No one knows what caused the drop.
Labor force growth has also slackened because ``baby boom''
workers are no longer surging into jobs. The Fed can't offset
these changes. It can't create more workers or order
companies to be more efficient. (Indeed, it's possible that
statistics miss some productivity gains; if so, economic
growth is underestimated.)
Perhaps a simpler tax system, better schools and
streamlined regulations would improve growth, but no one
knows by how much--and these matters aren't the Fed's
responsibility. Harkin and like-minded critics also forget
the 1960s and 1970s, when the Fed tried to spur faster
economic growth. The result was a disaster: two episodes of
double-digit inflation (culminating in 12.3 percent inflation
in 1974 and 13.3 percent in 1979); two crushing recessions
(those of 1973-75 and 1981-82) to suppress the inflation; and
huge increases in interest rates and real estate speculation
that fostered the savings and loan crisis.
As a practical matter, the best the Fed can do is to nudge
the economy toward its production potential while resisting
higher inflation. Its tools for doing this are fairly crude.
It can change only one market interest rate--the so-called
Federal Funds rate, which is the rate at which banks make
overnight loans to each other. All other interest rates
(those on mortgages, car loans or corporate bonds) respond
only indirectly and imprecisely to Fed policies. Even so,
there's not much evidence that excessively high interest
rates have hurt economic growth.
The Fed Funds rate is now 5.25 percent. Assuming inflation
is 3 percent, the ``real rate'' is about 2.25 percent--a
level critics think too high. It isn't, says economist
William Dudley of the investment banking firm Goldman Sachs.
Since 1980, Dudley finds, the ``real'' Fed Funds rate has
averaged 3.3 percent. True, it was lower in the 1970s and,
indeed, was often negative (that is, the interest rate was
less than inflation). But it was this policy of easy credit
that spawned double-digit inflation.
Dudley also points out another flaw in the argument. If
interest rates were crushing, then credit-sensitive sectors
of the economy--business investment, car sales--would be
languishing. Well, they aren't. In 1996, sales of cars and
light trucks are running 6 percent ahead of 1995. As for
business investment, it has boomed. Between 1991 and 1995,
annual spending increased 31 percent. For computers,
spending jumped 183 percent; for transportation equipment,
it rose 44 percent.
Where Greenspan's Fed has succeeded best is in smoothing
economic growth by shifts in the Fed Funds rate. To spur
recovery from the 1990-91 recession, the rate was cut, to a
low of 3 percent in September 1992 and kept there until early
1994. Then the Fed began raising the rate gradually to
prevent a growing economy from worsening wage and price
inflation. By early 1995 the Fed Funds rate was up to 6
percent. Since then it's been dropped three times to sustain
growth.
Even some occasional Fed critics have been impressed by the
success of these maneuvers. ``I think [Greenspan's] done a
superb job--better than I expected,'' says economist William
Niskanen of the Cato Institute. ``at the end of 1994, I
thought he was too tight and that there would be a recession
in the fall of 1995.'' There wasn't. Economic growth slowed
and then picked up.
Sooner or later, of course, there will be another
recession. The Fed isn't all-powerful or all-wise. Long
economic expansions generate excesses: overborrowing,
overinvesting, speculation, inflation. There are some signs
of these now. Stock prices seem to many observers, foolishly
high. The American Bankers Association recently reported that
credit card delinquencies in early 1996 were at a 15-year
peak. It's impossible to keep the economy expanding in a
simple, straight line. Still, Greenspan's performance merits
another term.
Perhaps the Fed is simply a convenient scapegoat for all
manner of economic anxieties. There's nothing wrong with
debate if it illuminates important truths. The most important
truth here is just the opposite of the critics' complaints.
It is that the temptation to spur a little more economic
growth at the risk of a little more inflation is self-
defeating. it risks higher inflation, higher interest rates
and a more unstable economy. The Fed has absorbed this
lesson; so should everyone else.

[[Page S6576]]

[Washington Post, June 20, 1996]

Labor Shortages May Be Slowing Economy

(By John M. Berry)

Signing bonuses are nothing new for basketball players and
Wall Street traders. But hamburger flippers?
Some fast-food restaurants in St. Louis are now paying as
much as $250 in signing bonuses for new hires, according to
the latest Federal Reserve survey of regional economic
conditions released yesterday.
Companies all over the country are going to extra lengths
to attract workers, the Fed reports, in the latest sign that
the pool of unemployed workers has shrunk to the point that
it is limiting economic growth. Unemployment nationally has
hovered around 5.5 percent for the past 18 months and in more
than half the states this spring it is below 5 percent.
A Minneapolis company is offering a chance at free
vacations in Las Vegas for employees who recruit new hires.
Temporary employment agencies in Chicago say more employers
are snaring their workers for permanent positions. Banks in
Salt Lake City are having a hard time finding tellers.
According to the Minneapolis Federal Reserve Bank, a
growing number of firms wanting to hire skilled workers have
stopped advertising because they got no responses. ``Perhaps
we should call them `discouraged employers,' '' one Minnesota
state official quipped.
In Minnesota, one of 10 states with a jobless rate of 3.9
percent or less, economic development officials say that
businesses are looking more at whether people will be
available to work at a new plant than at whether the
company can get incentives or tax breaks to build there,
according to the Minneapolis Fed. ``This parallels the
dilemma that eastern South Dakota has faced for some time:
It is difficult to attract new industry when labor seems
short,'' the report said.
Many Fed officials have expressed surprise that, with the
unemployment rate so low, there have not been more problems
on the inflation front, with wages rising to attract workers.
But the Fed's latest survey turned up only scattered
instances in which tight labor markets were causing wages
overall to increase rapidly.
Economists and government policymakers aren't exactly sure
why labor cost haven't begun to rise more rapidly in response
to the nation's low unemployment rate. Some analysts say the
best explanation is twofold: Heightened concern among workers
about job security in a world of corporate downsizing has
made them squeamish about asking for raises. That's coupled
with strong resistance by employers to raise overall wages
because they know that in a low-inflation economy, it is
difficult to raise prices to cover higher costs.
So even though some companies are having to increase their
offers of starting wages to get workers, in the aggregate,
pay hikes are still modest by historic standards.
And companies aren't going begging for workers everywhere
in the country. Indeed, in places such as the District, New
York and New Jersey, a southern tier of states stretching
from Mississippi west through Texas to New Mexico and most
import, California, finding workers isn't as tough as it is
elsewhere. Joblessness in California, whose recovery has
lagged that of the rest of the nation, is 7.5 percent. Only
West Virginia at 7.7 percent and the District at 8.4 percent
have higher rates.
To many economists, this is a picture of a nation
essentially at full employment. That means that going
forward, the economy can grow only as fast as its capacity to
produce goods and services grows.
How fast that growth can occur is the subject of much
debate these days. Indeed, Sen. Tom Harkin (D-Iowa) delayed
the full Senate's vote to confirm Fed Chairman Alan Greenspan
to a third term until today so he could hold a public
discussion on the subject. Harkin believes the economy could
grow much faster if Greenspan would only lower interest and
stop worrying so much about inflation. ``A turtle makes
progress only when it sticks its neck out, even though
that is when it is most vulnerable,'' Harkin said in an
interview. He said that the Fed cannot be sure the jobless
rate can't be pushed down to 5 percent or 4.5 percent
without making inflation worse.
Few people in official Washington agree with Harkin,
though. The Clinton administration, the Congressional Budget
Office and many private economists all peg the economy's
capacity to grow at a little above 2 percent.
According to White House economist Martin Baily, the
administration's estimate of 2.3 percent a year ``is based on
supply-side factors,'' meaning labor supply and productivity.
If the economy is at full employment, additional labor is
largely a matter of how fast the population is growing,
including immigrants. When the post-World war II baby boomers
were entering the work force in the 1960s and 1970s, labor
supply was increasing roughly 2 percent a year.
Now it is increasing only about 1 percent a year. All other
things equal, that difference means the economy's capacity to
grow is a full percentage point lower than it used to be.
And gains in productivity slowed sharply after 1973 for
reasons economists still can't explain fully. But over the
past year, output per hour worked at private nonfarm
businesses rose 1.3 percent, exactly the pace the
administration foresees for coming years.
At a recent conference on economic growth sponsored by the
Boston Federal Reserve Bank, Baily said that Fed policy
doesn't directly affect either of these determinants of
growth. ``I don't think monetary policy in the United States
is seen as a significant restraint on economic growth in the
next few years,'' Baily told the conference.
Thomas Hoenig, president of the Kansas City Federal Reserve
Bank, said in a recent interview that in his district, where
the average unemployment rate is not much above 4 percent,
business executives aren't complaining about Fed policy.
The complaint Hoenig hears most frequently, he said, is,
``I can't get enough of the type of help I need. I have heard
no one say, I could grow faster if you lowered interest
rates.''

alice m. rivlin

Mr. LAUTENBERG. Mr. President, I wish to comment on the nomination of
Alice Rivlin, our current Director of the Office of Management and
Budget.
Mr. President, Alice Rivlin also has enjoyed a long and distinguished
career in public service. She played a major role in building the
Congressional Budget Office, and establishing CBO as a highly respected
institution in this city.
She has had a distinguished career as an economist and policy
analyst. And she has served admirably as Director of the Office of
Management and Budget.
Mr. President, few objective observers would question the commitment
of Alice Rivlin to fiscal responsibility. Her reputation as an advocate
for fiscal integrity has been well established for many years.
She also has a reputation as someone who tells the truth. Alice
Rivlin is not afraid to tell truth to power. And she is more than
willing to ruffle a few feathers in the process. She has done so in the
past. And I'm sure she would continue to do so at the Federal Reserve.
Mr. President, Alice Rivlin is a public servant, not a politician.
That's the kind of person I would think all Americans should want at
the Federal Reserve.
So, Mr. President, I urge my colleagues to support Alice Rivlin's
nomination to the Federal Reserve Board. And I hope she can be
confirmed by a strong, bipartisan vote.
Mr. SHELBY. Mr. President, I rise today in full support of the
renomination of Alan Greenspan to the Chairmanship of the Federal
Reserve Board. First nominated in 1987 by President Ronald Reagan,
Chairman Greenspan has reduced the consumer price index from almost 7
percent then to about 2.6 percent now. In fact, inflation was below 3
percent in 1995, for its fifth consecutive year, marking the first
sustained period of low inflation since the Kennedy administration.
Alan Greenspan has been renominated for a third term as Chairman of
the Federal Reserve because he has earned the respect of his peers with
a strong record of low inflation and economic stability. Indeed, Mr.
Greenspan is currently leading us through a volatile transition from an
overheated economy to one operating near capacity without inflation. To
understand the importance of this transition, one must know that such a
transition has never been achieved in the postwar period.
It has been said the highest honor a man can receive is recognition
among his peers. Chairman Greenspan has received just that:
Thomas Juterbock of Morgan Stanley has said, ``The market sees
Greenspan as the last gatekeeper of rational macroeconomic policy that
will preclude inflation.''
Allan Meltzer, a professor at Carnegie Mellon University and a well-
known Fed watcher, has said, ``He's the best chairman the Fed has ever
had.''
Lawrence Lindsey, a current Fed Governor, has stated, ``If the curve
you're grading on is `What's attainable by mortals,' he certainly
deserves an A.''
Indeed, former Vice-Chairman of the Fed, Princeton professor, and
Clinton nominee, Allan Blinder, recently said of Greenspan's policies,
``This is perhaps the most successful episode of monetary policy in the
history of the Fed.'' In fact, Mr. Blinder voted with Chairman
Greenspan through a long series of rate increases in 1994.
With such high regards, a sound record, and possibly the strongest
and safest banking system in history, I believe the renomination of
Alan Greenspan as Chairman of the Federal Reserve is imperative to the
continuity of monetary policy and certainty of financial markets.

[[Page S6577]]

I continue to believe the best monetary policy a country can have is
one that strives for price stability and zero inflation. Inflation is a
tax, plain and simple. Americans are taxed too much already and should
not have the purchasing power of their $1 stolen from them. Hard-
working Americans deserve to bear the fruits of their labor, and a
strong, sound independent bank is essential to that goal.
Some claim that the Federal Reserve is not accountable to Congress.
Some Members in the Senate have even suggested that we politicize the
Federal Reserve Bank. I believe that would be the biggest mistake we
could ever make. Congress and the President cannot even agree on a
balanced budget deal, much less the rate of growth of monetary
aggregates or the correct Federal funds rate. Monetary policy should
not be subject to the whims of the political cycle.
Without qualification, the Federal Reserve Bank should maintain its
independence.
Mr. Greenspan has always been mindful and considerate of Congress,
but he has never let the political process manipulate him or the
Federal Reserve. His expertise and strong will are needed at the
central bank and we should show our appreciation of his diligent work
by reconfirming his nomination to the Chair of the Federal Reserve
Board.
I believe, Mr. President, these criticisms of the Federal Reserve are
nothing more than an excuse not to adopt sound fiscal policies like a
balanced budget and a pure flat tax. These criticisms are not based on
an understanding of macroeconomic principles. I have not heard any
discussions based on the purchasing-power-parity theory, interest-rate-
parity theory, or even the rise in commodity prices. It is clear to me
Mr. Greenspan is being made a scapegoat for individuals who will not
adopt sound fiscal policies.
Lastly, I want to voice my support for the confirmation of Laurence
Meyer as a Federal Reserve Governor. He has a sterling academic record
as well as a demonstrated professional record as an economic forecaster
and will have a great deal to offer the Board.
Mr. GRASSLEY. Mr. President, last week I said that the reappointment
of Alan Greenspan is good news for jobs and the economy. Nothing that I
have heard during the intervening time has changed my mind.
If we are truly interested in helping the American economy expand. If
we truly intend to lower interest rates, then we must balance the
budget. We must remove the Federal Government from the head of the line
when it comes to borrowing money. It is that simple.
Being Chairman of the Federal Reserve is not an easy job. But Alan
Greenspan has more than measured up to that job. He has been on the
front line fighting the results of big Government spending. It is this
spending that drives up interest rates. It is this spending that hurts
ordinary Americans. It is this spending that is our responsibility to
bring under control.
Until it is under control, it is Alan Greenspan's responsibility to
try to keep the economy stable. It is his responsibility to bring
confidence to the marketplace. It is his responsibility to keep
inflation in check. He is doing this job well.
Earlier, I used agriculture as an example of the benefit of a
balanced Federal budget. According to studies, if the Federal budget is
balanced by 2002, the yearly benefit to agriculture would be $2.3
billion due to interest rate reductions. Additionally, increased
agricultural cash flow from increased economic activity would be $300
million yearly. This adds up to an increase of $2.6 billion per year
for the farm economy if we balance the budget. These studies are based
on Congressional Budget Office estimates that short-term interest rates
would decrease 1.1. percent and that long-term interest rates would
decline 1.7 percent.
This is real interest rate reduction.
Looking at a balanced budget from another point of view, homeowners
with an average 30-year home mortgage of $75,000 would have $37,000
over the life of the loan. This would occur with a balanced budget and
subsequent interest rate drop of 2 percent.
Or a family with a 4-year car loan of $15,000 would save $900.
It is clearly better to reduce interest rates through congressional
action on a balanced budget than a regulatory action by the Federal
Reserve. The benefits will be much longer lasting.
In a recent article in the Institutional Investor, Federal Reserve
Governor Janet Yellen, a Clinton administration appointee, asks several
questions which go to the heart of what Alan Greenspan's opponents are
saying. First she asks, if productivity is really increasing to the
degree that growth advocates insist and current monetary policy is too
restrictive, why is not unemployment rising?
Second she asks, if unemployment is above its natural rate and the
potential growth rate is substantially higher than real growth, why is
not inflation falling further? She answers these questions with this
statement: ``The fact that inflation has been relatively stable for the
past two years suggests an economy operating in the neighborhood of it
potential output.''
How well put.
I would also point out that among the Governors of the Federal
Reserve who have or are serving with Alan Greenspan there has been no
fundamental disagreement about monetary policy. There would be
dissention at the Fed if Mr. Greenspan's opponents had any credibility
to their arguments at all.
I compliment Chairman Greenspan on his ability, in the light of the
fiscally irresponsible Congresses of the past, to give stability to our
economy. We have only to look at the record number of new highs that
are being achieved by the stock market. This is real economic growth.
As I said last week, if we want to encourage economic growth we have
no farther to look than ourselves. Balancing the Federal budget will
promote and ensure real economic growth. And balancing the budget is
our responsibility, not that of the Federal Reserve. It is time that we
accept that responsibility and not try to look for scapegoats.
Let us start by continuing our efforts to bring the budget into
balance and by confirming Alan Greenspan as Chairman of the Federal
Reserve.
Mr. MACK. Mr. President, this afternoon, the Senate will vote whether
or not to confirm Alan Greenspan for a third term as Chairman of the
Federal Reserve's Board of Governors. I have listened to the debate
about his performance as Chairman, and the claims that his policies
have permitted annual economic growth of only 2.5 percent. Chairman
Greenspan's critics say that his pursuit of price stability has
compromised the growth of the economy, and they're trying to make him
the scapegoat for today's slow growth.
My colleagues are right about one thing, slow economic growth hurts
all Americans. It leads to stagnating incomes, fewer job opportunities
and widespread insecurity about the future. You should hear the
complaints I have been hearing from my constituents in Florida. They
are frustrated. They do not understand why America--the greatest
country in the world--a country with unlimited opportunity--is falling
behind. It is frustrating to me, too, because I know we can do better.
But I think some of my colleagues have seriously misdiagnosed the
problem. It is vitally important for us to understand why this
economy's performance is so lackluster, and what policies can help it
reach its full potential. In my estimation, Alan Greenspan is not the
problem. Bad economic policies enacted by the Clinton administration
and previous Congresses are.
Since 1978, the Humphrey-Hawkins Act has demanded that the Federal
Reserve simultaneously promote full employment, maximum production, and
price stability. In other words, the Fed is being told to try to
finetune the economy. The failures and problems caused by this divided
focus have lad many observers to conclude that an important first step
on the road to meaningful economic growth is to have the Fed
concentrate solely on what it can actually achieve: price stability.
Let me quote former Federal Reserve governor Wayne Angell, who wrote:

It is completely appropriate to give our government
multiple policy goals, including lowering unemployment,
promoting economic growth, and maintaining stable prices. All
of these goals contribute to the well-being of our people.
There is much to lose, however, in charging the Federal
Reserve with all these tasks.

The reason why the Fed can not achieve multiple goals is simple: it

[[Page S6578]]

only controls one monetary policy tool--the amount of money in the
economy. This ability to create money and operate through the monetary
base means that the Fed can control inflation. Sure, the Fed can also
stimulate economic growth and create demand in the short run by
printing additional money, but such growth is not without cost.
Because, in the long run, printing excess money always leads to
inflation, and thereby diminishes whatever economic gains were realized
during the short run.
The Fed can only encourage long-run economic growth if Congress
repeals the Humphrey-Hawkins Act. Therefore, I have introduced the
Economic Growth and Price Stability Act, to focus the Fed solely on
stable prices. This bill would serve to hold down the inflation premium
part of interest rates, so that buying a home or a car, or taking out a
student loan will be more affordable.
But even if the Fed, and its Chairman, achieve the goal of price
stability, that is still no guarantee that Americans will see robust
long-term economic growth. Do not get me wrong, price stability is
absolutely necessary for growth, but by no means is it sufficient. The
presence of harmful fiscal policy can render even the most beneficial
monetary policy useless. That is part of the reason American families
are feeling such anxiety today: the growth of Government is paralyzing
the growth of the economy. In short, the Clinton administration's
misguided fiscal policies have put working families in a bind.
Just look at how President Clinton's policies of high taxes and
bigger Government have led to this weak economy. Let us compare growth
under President Clinton to historical averages, reaching back to the
end of World War II. The results are astonishing:
Since Bill Clinton became President, GDP growth has only averaged 2.4
percent at an annual rate. Compare that to the growth rate he
inherited: in 1992, the economy grew at a robust 3.7 percent. During
the entire decade before President Clinton took office, annual economic
growth averaged 3.2 percent. During the last five periods of economic
expansion growth averaged 4.4 percent, and economists--believe it or
not--call today's economy an expansion. Finally, if you look at
economic growth rates all the way back to the end of World War II:
growth has averaged 3.3 percent.
President Clinton and his policies have simply failed to measure up.
It is what some people call the Clinton growth gap or the Clinton
crunch--the difference between the growth America has experienced under
the Clinton administration and what we should reasonably have been able
to expect, given historical trends. The Clinton growth gap has meant a
lower standard of living for every child, every woman, and every man in
America. We can do better. We must do better.
We can reverse this trend by balancing the budget, lowering taxes,
cutting regulations and generally getting Washington off the backs of
the American people. The key to achieving strong economic growth is our
remarkable entrepreneurial spirit. The economy can grow faster, but
Government needs to step out of the way. Bottom line, it is not the
Federal Reserve and Chairman Greenspan who are causing today's economic
problems; it is the harmful economic policies of President Clinton, his
administration and previous Congresses.
Chairman Greenspan knows what needs to be done. He remains committed
to price stability, and agrees that fighting inflation should be the
Fed's only focus. But he has been hamstrung by counterproductive fiscal
policies and a mandate to make the Federal Reserve all things to all
people. He has been asked to do the impossible, and then some people
turn around and blame him for the economy's anemic growth rate. That's
unfair, and it's simply wrong. President Clinton and his allies here in
Congress cannot rationally expect to keep taxing and regulating and
spending, while the Fed indulges them by printing more and more money
to feed their excess.
Therefore, I wholeheartedly support Alan Greenspan's nomination to a
third term as Chairman of the Federal Reserve. I encourage my
colleagues to stop looking for a convenient scapegoat for failed
economic policies he had nothing to do with. I hope you will join me in
voting for his renomination. And we can work together to enact
meaningful pro-growth economic policies that will give Americans the
kind of robust economic growth they deserve.
I say to my distinguished colleague from Iowa, I had the opportunity
last week, as he knows, to listen to his presentation, and I think he
is absolutely right in a couple of senses.
The first is that this is a very important debate. Unfortunately,
again, you are right in the sense that a lot of this has been discussed
on the basis of things really other than the role of the Federal
Reserve. There has been a lot of discussion about character and
personality. I happen to think a great deal of Chairman Greenspan, but
that is not the point. The real issue here is what is the role of
monetary policy.
The second point that we agree upon, at least--but it does kind of
point out, I think, a difficult position for the administration--is you
and I agree completely that it is unacceptable to reach a point in this
country that we somehow have to believe that 2.5 percent real growth is
something we ought to be proud of. Frankly, we are not going to be able
to provide the opportunities to future generations, to our children and
our grandchildren if we are going to accept the notion that this
country can only grow at 2.5 percent real growth.
What will happen to working families? What will happen to farmers?
What will happen to small businesses? What will happen to our families?
What will happen to our retirees? I say to my distinguished colleague
that I happen to be one of those individuals who, too, was affected by
what happened in the 1970's.
I remind him that it was not just the seventies. Economies of all
countries have been fighting this battle against inflation ever since
there was the invention of money. But I remember those town meetings in
the early 1980's when the folks in my part of the State of Florida were
telling me of the destruction they experienced of their savings; that
they lost, in essence, one-third of everything they had set aside and
worked for throughout their entire lives, disappeared in a matter of 3
or 4 years because of inflation being out of control.
So I think it is important, in fact, I believe that the only
objective of the Federal Reserve should be to maintain price stability.
I have heard my colleague, Senator Harkin, say that there ought to be
a balanced approach with respect to the Federal Reserve. I am going to
give you my interpretation of what that means to have a balanced
approach.
There are those who suggest that the Congress and the administration
can be engaged in a series of economic policies that ought to be offset
or balanced, if you will, by the Federal Reserve--have higher taxes,
more Federal spending, more Washington interference in the workplace,
in businesses in America. The end result of that is it slows down
economic activity, it reduces productivity, and these same businesses
are no longer able to produce at the level that they were prior to the
intervention of fiscal policy.
So the theory is, let us have a balanced approach, let us see that
the Federal Reserve, in essence, offsets bad fiscal policy. What we get
is right back to where we were in the late 1970's, which is referred to
as ``stagflation.'' Most people would understand it as too many dollars
chasing too few goods, and that drives up inflation.
So what I will say to my colleague, this is a very important debate,
because we ought to be focusing in on what is the role of the Federal
Reserve, and I suggest probably in the months ahead, we will probably
be engaged in a debate about the Humphrey-Hawkins Act. I think it is
wrong to give the Federal Reserve a series of objectives. It is like
having two bosses, if you will, or multiple bosses.

I see that the Chair is about to announce to me that the time has
expired. I wonder if I can ask unanimous consent--
The PRESIDING OFFICER. The Senator's time has expired.
Mr. MACK. I ask unanimous consent for 5 additional minutes.
The PRESIDING OFFICER. Is there objection?
Mr. HARKIN. How much time remains on both sides?

[[Page S6579]]

The PRESIDING OFFICER. The Senator from Iowa has 3\1/2\ minutes.
Mr. MACK. I ask unanimous consent for 3\1/2\ minutes.
Mr. HARKIN. Let's do 5 for both.
Mr. MACK. I ask unanimous consent that we both be given 5 minutes,
for a total of 5 minutes each.
The PRESIDING OFFICER. There will be 5 minutes for both sides.
Without objection, it is so ordered.
Mr. MACK. Mr. President, as I was saying, I think we will get
ourselves engaged in a debate at some future time with respect to what
is the central role of the Federal Reserve. But as I indicated a moment
ago, it is interesting to me to listen to my colleague from Iowa talk
about his dissatisfaction, which I happen to share, with the growth in
the economy.
I believe that, with the reassessment of the economic growth in the
last quarter from 2.8 percent to 2.3 percent, the growth rate during
the Clinton years is somewhere around 2.3, 2.4 percent. But what is
interesting about the debate is the fact that President Clinton, during
his State of the Union Address before a joint session of the Congress,
said that this is the strongest economy that we have experienced in
three decades.
So, I am not real sure where the President is heading with this. If
he is satisfied with 2.5 percent real growth, I find that shocking, and
I think that the workers in America, the families of America who are
telling me that they are extremely anxious about their future, about
whether jobs are going to be available to them, would reject the notion
that somehow or another we should be satisfied with 2.3 or 2.4 percent
real growth.
Again, I agree with the Senator from Iowa that the whole purpose of
economic policy is to increase the growth rate, to provide jobs,
provide opportunity and increase the standard of living for all
Americans. The question is how do we do it. Where we differ, frankly,
is, I believe that raising taxes, adding burdens to American business,
increasing their costs, overregulating, Washington interference slows
down that economic activity and reduces opportunity. To have passed a
series of policies that do those things and then say on top of that we
want the Federal Reserve to compensate it is the worst of all worlds.
You slow down economic growth, you slow down production, you increase
the money supply and you drive inflation. That is, in my opinion, just
the wrong approach to take.
Again, I remind my colleagues that in the late 1970's, one-third of
everything that someone had worked for through their entire lives--and
I am now talking about the retirees in the State of Florida who have
talked to me about this issue, who lost one-third of everything they
had earned throughout their entire lifetime and, I might add, a number
of those being farmers from the Midwest who had spent their entire life
toiling in the field, setting aside money for the day when they might
retire--and in a 3- or 4-year period, one-third of everything they had
saved disappeared.
So I happen to believe that the Federal Reserve is on the right
course, the Federal Reserve should maintain its commitment to price
stability, because with price stability, you have created an
environment, if we put in place the right kind of fiscal policy, where
we can get this country moving again. We can do better, and we must do
better.
With that, Mr. President, I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. HARKIN. Mr. President, I yield myself the remainder of the time.
I thank my colleague from Florida. He is a good friend of mine. He is
someone who has paid a lot of attention to this issue. Quite frankly, I
agree with him on this whole issue of growth. I think we ought to have
more debates on how we go about it. I think it is a legitimate area of
debate for this Senate to engage in. I hope this debate today--in fact,
I intend this not to be the end but the beginning of a process of
debating this issue further this year and going on into next year,
because it is too important an issue to just sort of shove aside how we
go about increasing our growth.
The Senator from Florida is absolutely right. I agree with him. To
sit back and say 2.5 percent growth is fine, that is condemning future
generations of Americans, and our kids, to low growth, to terrible
jobs, to not being able to buy their own homes and to having a good
quality of life. I think it condemns America to a lower place among the
nations.
We do not have to accept that 2.5 percent growth. I agree with the
Senator from Florida. It is way too low. And whether it is the
President or whether it is the Fed, whether it is the President's
Council of Economic Advisers, his inner circle, or whether it is Mr.
Greenspan and the people at the Fed saying that, they are both wrong. I
think we ought to think about how we can have higher growth. And I
believe we can.
Where perhaps my friend from Florida and I begin to diverge is here.
My friend from Florida says that perhaps by decreasing interest rates,
we will drive up inflation. He refers time and time again to the
1970's. Economist after economist, business leader after business
leader will point to the fact that this is not the 1970's. The world
has changed dramatically in the last 20 years. We have a world economy
like we did not have 20 years ago. We have jobs offshore. We have
production offshore. We have mass wholesaling and pricing in this
country, that Wal-Mart experience, as I often call it, that we did not
have 20 years ago.
So the whole world has changed. The factors that led to the inflation
in the 1970's are not there today. The economy's ability to resist
inflation is greater. Economists point to that time and time again.
Just as I believe we spent untold billions of dollars refighting World
War II during the 1950's and 1960's--I will not get into that--which
led to some of the mistakes we made in Vietnam when that war was
passed, I think we are spending untold billions of dollars now in taxes
on the middle class because we are fighting the inflation war of the
1970's. But it is not there. There is no inflation there.
In fact, some economists will say, if you look at the U.S. economic
history from World War II to the present, there really has not been
much core inflation. What happened in the 1970's was energy shock. That
is the largest factor that drove up inflation. Once we got over that we
got back on course again.
So those threats are not there now. The threats that are there now is
what, again, was in the paper this morning. People talked about the
labor shortages, that they are bidding for jobs. Yes, in certain parts
of the country, that is true. There was another story by the same
writer in the paper this morning about the ``Economy's Growth Gets
Right Down to the Bottom Line.'' What did he point out? That more and
more of the growth is going to corporate profits, not to wages. What
has that led to, in part? This story in the New York Times this
morning, ``Income Disparity Between Poorest and Richest Rises.'' That
is what it boils down to.
High interest rates are taxes, just as inflation is a hidden tax on
those who have saved. High interest rates are hidden taxes on those who
are working today. Are our working families trying to buy a car,
educate their kids, buy a home? It is a hidden tax on our farmers. It
is a hidden tax on our small businesses. That is why I argue for a
balanced approach. We need balance between the concern for inflation
and the need to maximize both employment and production.
A 1-percent increase in interest rates means the payment on the
average home mortgage on a house costing about $115,000 is about an
additional $1,000 a year. That is a tax. For the average Iowa farmer, a
1-percent increase in interest rates is an extra $1,500 in interest
payments every year. That is a tax. For the average Iowa restaurant,
the cost is $1,000 a year for a 1-percent increase in interest rates.
That is where we are. It is sucking the lifeblood out of our small
businesses, our farmers, our working families.
Let us get back to fundamentals. Who likes high interest rates? Well,
if I have the money to loan, I like high interest rates.
The PRESIDING OFFICER. The Senator's time has expired.
Mr. HARKIN. Mr. President, I ask unanimous consent for 2 more minutes
per side.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. HARKIN. But, Mr. President, if you are on the side of working
families,

[[Page S6580]]

and small businesses that have to borrow money to expand, or on the
side of manufacturers that need new plants and equipment, or on the
side of farmers who need to borrow money to get ahead and to provide
for that growth in our economy, you need lower interest rates than what
we have right now.

That really is the fundamental issue we are coming down to. The
disparity between the rich and the poor grow. The middle class is
paying more and more in interest rates. Check how much debt has gone up
in our country. I mean privately held debt. People are paying too much
on interest charges. To the extent that the Fed keeps that interest
rate high, it is an unfair tax on our people. We cannot have the kind
of growth we need with the kind of policies at the Fed.
This debate has been healthy. It has nothing to do with
personalities, but it has a lot to do with monetary policy. As I have
said before, Mr. President, the Federal Reserve System is not an entity
unto itself. It is not a separate branch of Government. It is a
creature of Congress. Congress has the right, the duty, and the
obligation, I believe, to answer the real needs of our people and to
provide for growth in our economy.
If that means we need changes at the Fed, then we ought to make those
changes, whether it is an individual who leads it or in the way that it
is structured and the way that it runs. We here in Congress ought to be
making those changes so it can provide for more real growth in our
economy.
I thank the President, and I thank my friend from Florida. It has
been a good debate. I look forward to more of these as we go through
the remainder of the year.
Mr. MACK addressed the Chair.
The PRESIDING OFFICER. The Senator from Florida.
Mr. MACK. First, I thank the Senator for his comments. I look forward
to the debate as well. I yield 1 minute to Senator Bennett.
The PRESIDING OFFICER. The Senator from Florida has 1\1/2\ minutes
left.
Mr. BENNETT. Mr. President, I am interested to find out that Alan
Greenspan and the Fed are now responsible for the disparity between the
rich and poor, according to this morning's paper.
The fact is, Mr. President, there are fundamental economic laws that
have operated in the 1950's, the 1970's, the 1990's, and will operate
into the next century. The most fundamental of these is: You cannot
repeal the law of supply and demand. Attempts to artificially repeal
the law of supply and demand by artificial fiat make us feel good in
the short run, but they get us into trouble in the long run. The most
significant thing the Fed can do is control the money supply in such a
way as to keep prices stable so markets can operate.
When we try to fiddle with markets by Government fiat, we get into
all kinds of trouble and end up paying tremendous prices for that later
on. I support Chairman Greenspan's nomination, and I support his
stewardship at the Fed. I am proud to be a cosponsor with my friend
from Florida of the bill to change the Humphrey-Hawkins Act so that the
primary focus of the Fed becomes price stability.
Mr. SIMON addressed the Chair.
The PRESIDING OFFICER. The Senator from Florida has 1 minute.
Mr. MACK. Mr. President, I yield that minute to Senator Simon.
Mr. SIMON. Mr. President, I ask unanimous consent that I may address
the Senate for 5 minutes.
The PRESIDING OFFICER. Is there objection?
Mr. HARKIN. I did not hear the Senator.
Mr. SIMON. To address the Senate for 5 minutes.
Mr. HARKIN. Mr. President, I ask unanimous consent that I be given an
additional 5 minutes.
Mr. MACK. Reserving the right to object, and it is not my intention
to do so, I was going to allow the time to expire really, but I ask
unanimous consent just for 2 minutes for myself, and then 5 minutes for
Senator Simon, and 5 minutes for Senator Harkin.
Mr. BENNETT. Reserving the right to object, Mr. President, I had
planned to speak in relation to Alice Rivlin once all the time had
expired. If the agreement is going to extend time, then I want to be
included. If time is going to be allowed to expire, I will await my
time and ask for unanimous consent in the due course of events. I ask
the Senator from Florida to decide whether he wants to go for that or
let me take my chances.
Mr. MACK. If I could add Senator Bennett for 5 minutes as well. I ask
unanimous consent to do so.
The PRESIDING OFFICER. Is there objection?
Mr. HARKIN. Reserving the right to object, my friend from Utah, this
is just to talk about Ms. Rivlin and not the Fed policy? Is the Senator
going to talk about Fed policy?
Mr. BENNETT. No. I think we said all we need to say about Fed policy.
I do wish to reserve my right at some point to comment about Alice
Rivlin.
Mr. HARKIN. What is the unanimous-consent request?
Mr. MACK. The unanimous-consent request is 2 minutes for Senator
Mack, 5 minutes for Senator Simon, 5 minutes for Senator Harkin, and 5
minutes for Senator Bennett.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
The PRESIDING OFFICER. Who yields time?
Mr. SIMON addressed the Chair.
The PRESIDING OFFICER. The Senator is recognized for 5 minutes.
Mr. SIMON. I do not agree with Alan Greenspan on everything, but I
think he has served this Nation well. I think it would be a great
mistake to turn down his nomination. Where I differ with him is when we
talk about full employment. The Fed tends to believe that, in and of
itself, is inflationary. The reality, I think, is if you have people
working and being productive, that can be deflationary, rather than
inflationary.
But our principal problem--there are really two problems.
The Federal Reserve has nothing to do with either of these problems.
Indirectly, in terms of interest, when the interest rates are down,
that does help, but the problem is fiscal policy. We get our deficits
down and interest rates will come down. The Wharton econometric model
says if we balance the budget, we are going to have a 3\1/2\ percent
lower crime rate in this country. Otto Eckstein's old group, I forget
the name, says 2\1/2\ percent. Everybody says interest rates will be
lower if we get the deficit down.
We have a very practical illustration. Mr. President, 30-year T
bonds, January 15, 1993, 7.43 percent, and rumors are starting about a
Clinton budget; February 12, after the proposal for reduction of the
budget is known, interest rates go down to 7.18 percent; February 17,
he announced his plan--something is wrong with the dates I have here;
it must be February 7--down to 7.07 percent; July 16, it hit 6.58
percent; August 6, Congress passes the legislation, and interest rates
are down to 5.9 percent, a 1\1/2\ percent drop because of a change in
fiscal policy.
Let me just add, it is debt, not only the Federal Government but
corporate debt and individual debt, too. We are just not a saving
people. The phrase ``no downpayment'' is almost uniquely an American
phrase that we do not find used in other countries. Corporate debt, our
taxes, are structured in such a way that we encourage corporate debt. I
have a bill I hope someday will pass that says corporations can deduct
80 percent on interest but 50 percent on dividends, so you encourage
equity financing rather than debt financing. It is a wash in terms of
the Federal Treasury. There are ways we can reduce the fiscal problems.
The second problem is one I do not hear talked about here, but one
that the Federal Reserve has to be keenly aware of. That is, we have
indexed a great many things. Indexation is in and of itself
inflationary. Most nations have not indexed like we have, Social
Security being the prime example. So if you have any kind of inflation,
indexation feeds the inflation. When, in fact, we have inflation, we
ought to be cutting back on expenditures, we will be making more
expenditures. I do not care whether it is Alan Greenspan, Lester
Thurow, Alice Rivlin, whoever it is, if we do not deal with indexation
and fiscal policy, we are not going to have low interest rates that we
ought to have.
Finally, Mr. President, I cannot think of anything that would be more
disconcerting to the financial markets and cause interest rates to go
up more

[[Page S6581]]

than if we were to reject Alan Greenspan. I think it is important that
we confirm the President's appointment. I think it is the right
appointment. I think Alan Greenspan has served this Nation well. My
vote will be a resounding yes to confirm him.
Mr. MACK. Mr. President, I want to say to my colleague from Iowa,
again, the fundamental debate does need to take place about monetary
and fiscal policy. This is a debate that right now, frankly, is
something that really concerns me. It has been something that has
concerned me ever since I came to the Congress 14 years ago, that
somehow or another the Congress would have more control over the
Federal Reserve. My fear is that Congress has made a mess of fiscal
policy. If Congress gets more involved in monetary policy, it would be
a disaster for the country. So I start with that premise.
Again, I make reference to what Senator Simon made reference to
earlier, that when there was an impression that we were going to get
our fiscal house in order, long-term interest rates, in fact, started
to come down. It was not until the President vetoed the Balanced Budget
Act that we saw long-term interest rates start to go up. There is a
major, major role in this with respect to fiscal policy. It seems to me
those individuals who have for years supported more Government, higher
taxes, more regulation, more Washington interference, are now trying to
say that because the economy is growing at 2.3 percent, somehow or
another it is the Federal Reserve's fault. I fundamentally disagree
with that.

Mr. DORGAN. Will the Senator yield?
Mr. MACK. If the Senator would allow me, we have had limited time.
The fundamental issue underlying this debate is taking
responsibility. Again, I think that there are a number of individuals
who want to shift the blame to create Alan Greenspan as the scapegoat
for this economy. The reality is, the responsibility is with the
Congress. It is what the Congress has done over the last number of
years--again, increasing taxes, increasing Washington's interference,
more regulation--that has slowed the economy down. The worst thing we
can do now is to put more money into the system which creates
inflation.
I yield the floor.
The PRESIDING OFFICER (Mr. Kyl). The Senator from Iowa.
Mr. HARKIN. I understand I have 5 minutes. I will take 30 seconds. I
want to respond to my friend from Florida by saying in 1993 the
President offered and we passed a deficit reduction package. It went
into effect October 1993. We began reducing the deficit, and the
deficit has been coming down ever since. The deficit is now 60 percent
lower than when President Clinton took office.
What did Alan Greenspan do? He raised interest rates. I thought it
was supposed to be axiomatic, as we reduce the deficit, interest rates
will come down. They will only come down if you have a Fed chairman
that correctly corresponds Fed policy with monetary policy, with the
fiscal policy of America. We have been reducing the deficit. Interest
rates are going in the opposite direction. Please, somebody explain
this anomaly.
Last, I want to say we have 7.5 million unemployed, 1 million not
counted, 4 million part-time workers in America. These are people that
can enter the work force. We can have labor growth and we can have that
kind of growth without increasing inflation.
I yield the balance of my time to the Senator from North Dakota.
Mr. DORGAN. Mr. President, I wish to make a couple of final points.
One I wanted to make to the Senator from Florida, he is absolutely
correct about what has happened to long-term rates as the market
assesses what might or might not happen in fiscal policy. The point I
wanted to make, there are a whole lot of folks who are not financing
long term--farmers, business people, and others--and borrow from their
banks in short- or intermediate-term credit. Every system is charging
higher interest rates than they ought to because the Federal funds rate
is above where it ought to be, by everyone's expectation, above where
it ought to be where it has historically been, above where it ought to
be, given the inflation rate. And as a result, every loan for every
farmer and consumer bears a higher interest rate, because the
Federal Reserve Board, as a matter of deliberate strategy, says, ``We
want higher interest rates on these moneys.'' Why? Because their desire
is to slow down the American economy.

The place where we would disagree is the Senator from Florida and
others say if we would simply have fiscal policy in order, somehow we
would have a higher growth rate. There will not be a higher growth rate
in this economy under any condition, period, as long as the Federal
Reserve Board decides they will limit growth rates to 2.2 or 2.4
percent. If they start getting nervous, and they start wanting to jump
out windows because they see 3 percent growth rates, and they say,
``Gee, our economy cannot sustain that robust rate,'' which would not
have been considered robust a few years ago; now it is considered a
rate that will overheat the economy, then we will not have that rate.
The one thing the Fed is good at is putting the brakes on the
economy. The only question I ask as we conclude this debate is why do
we have such low expectations of this economy? Why such low
expectations? Why should we not expect our economy, as productivity is
improving, as the deficit is being reduced, why should we not have an
expectation of this economy to be able to grow at a reasonable rate?
The answer is we should. Do not sell the capability of this country
short. Do not sell the capability of American workers or American
businesses short. Let us allow this country to have a reasonable growth
rate which can be done without further fueling the fires of inflation.
I say one other thing to my friends who allege this. This is not a
case of some people wanting the Congress to run monetary policy. I do
not believe Congress ought to make monetary policy. The Federal Reserve
Board makes monetary policy. I happen to fundamentally disagree with
the kind of policies at this point that they propose and pursue. But I
will suggest some changes to the Federal Reserve Board. I think a
little disinfectant with some sunlight would be very helpful to the
dinosaur that meets mostly in secret, and imposes higher interest rates
on every person in America. So I will impose changes, but not those
that put Congress in the captain's chair on monetary policy. It is
enormously healthy. We have not had a circumstance where we allowed
some in the Congress to say we must reconfirm Mr. Greenspan for a
second term with no debate by unanimous consent. That is not a healthy
thing to do. I have great respect for Mr. Greenspan and have not said
an unkind word about him. I fundamentally disagree with his
policies. But I admire him as a person. I am not going to vote for him
because I have disagreements with the direction of the Federal Reserve
Board. But it is very healthy for us to start talking a bit about what
kind of monetary policy will give this country the opportunity to be
the kind of country it can be in the future with jobs and growth.

You know, there are two areas where there is almost no discussion on
the floor of the Senate--trade policy and monetary policy, both of
which have a profound impact on the lives of ordinary Americans. Try to
talk about any of them and people say, you know, it is not something we
want to talk about.
This is a very healthy thing for us to do. Some say, let us get the
Government out of all of this. I say that the Government had to bail
out--to the tune of a half-trillion dollars--a savings and loan
industry, as all of us understand. They got involved in the junk bond
fever of the 1980's and developed schemes by which they could park junk
bonds at S&L's. Then they became nonperforming, and the American
taxpayers paid the costs. And you want to keep Government out of all of
this mess? No. It was created by those not looking over the shoulders
of those in that industry.
The PRESIDING OFFICER. All time has expired.
Mr. DORGAN. I thank the Senator from Iowa. I will not conclude my
thought. I hope we have another debate to talk about the twin goals of
this country--stable prices and full employment, and how we can work
with the monetary and fiscal policies to achieve those goals.
Mr. BENNETT addressed the Chair.
The PRESIDING OFFICER. The Senator from Utah is recognized.

[[Page S6582]]

Mr. BENNETT. Mr. President, I am tempted to go on with this debate,
but I think it has probably been exhausted sufficiently on both sides.
I will use the time granted to me under the UC agreement to discuss
another issue.

____________________